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As filed with the Securities and Exchange Commission on January 27, 2010
Registration No. 333-164216
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
Form F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
IFM Investments Limited
(Exact Name of Registrant as Specified in its Charter)
Cayman Islands | 6531 | Not Applicable | ||
(State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
26/A, East Wing, Hanwei Plaza
No.7 Guanghua Road, Chaoyang District
Beijing 100004, People’s Republic of China
(86-10) 6561-7788
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 664-1666
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Edmund C. Duffy, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, NY 10036 (212) 735-3000 | Jon L Christianson, Esq. Peter X. Huang, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 30th Floor, Tower 2, China World Trade Center No. 1 Jianguomenwai Avenue Beijing, China 100004 (8610) 6535-5500 | David T. Zhang, Esq. Allen C. Wang, Esq. Latham & Watkins 41st Floor, One Exchange Square 8 Connaught Place, Central Hong Kong (852) 2522-7886 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
CALCULATION OF REGISTRATION FEE
Title of each class of securities | Amount to be registered(1)(2) | Proposed maximum offering price per share(1) | Proposed maximum aggregate offering price(1) | Amount of registration fee | |||||
Class A ordinary shares, par value US$0.001 per share(3) | 215,409,375 | US$0.5333 | US$114,885,000 | US$8,192 | (4) |
(1) | Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act. |
(2) | Includes (a) Class A ordinary shares represented by American depositary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the share are first bona fide offered to the public, and (b) Class A ordinary shares represented by American depositary shares to be sold upon the exercise of the underwriters’ option to purchase additional Class A ordinary shares. These Class A ordinary shares are not being registered for the purposes of sales outside the United States. |
(3) | American depositary shares evidenced by American depositary receipts issuable upon deposit of the Class A ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 (Registration No.333-164239). Each American depositary share represents fifteen (15) Class A ordinary shares. |
(4) | Previously paid. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.
Subject to completion
Preliminary prospectus dated January 27, 2010
12,487,500 American Depositary Shares
IFM Investments Limited
Representing 187,312,500 Class A Ordinary Shares
This is our initial public offering. We are offering 12,487,500 American depositary shares, or ADSs, each representing fifteen (15) of our Class A ordinary shares, par value US$0.001 per share. No public market currently exists for our Class A ordinary shares or ADSs.
We currently anticipate the initial public offering price of our ADSs to be between US$7.00 and US$8.00 per ADS. We have received an approval for listing our ADSs on the New York Stock Exchange under the symbol “CTC.”
Investing in our ADSs involves a high degree of risk. See “Risk Factors” beginning on page 13.
Per ADS | Total | |||
Public Offering Price | US$ | US$ | ||
Underwriting Discount | US$ | US$ | ||
Proceeds, before expenses, to Us | US$ | US$ |
We have granted the underwriters a 30-day option to purchase up to 1,873,125 additional ADSs at the initial public offering price less the underwriting discount and commission.
Delivery of our ADSs will be made on or about , 2010.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Goldman Sachs | Morgan Stanley |
William Blair & Company | Oppenheimer & Co. |
The date of this prospectus is , 2010.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA | 39 | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 42 | |
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98 | ||
OUR RELATIONSHIP WITH REALOGY AND RELATED PARTY TRANSACTIONS | 100 | |
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F-1 |
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus may only be used where it is legal to offer and sell these securities. Unless otherwise indicated, the information in this document may only be accurate as of the date of this document.
Until , 2010, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.
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You should read the following summary together with the entire prospectus, including the more detailed information regarding us, the ADSs being sold in this offering, and our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should consider carefully, among other things, the matters discussed in the section entitled “Risk Factors.” Unless the context indicates otherwise, all share and per share data in this prospectus give effect to a 10-for-1 share split that became effective on January 4, 2010.
Our Company
We are a leading comprehensive real estate services provider with the largest network of real estate sales offices in China. We are the exclusive franchisor in China for the CENTURY 21® brand, one of the world’s most recognized brands in the real estate industry. As of September 30, 2009, our CENTURY 21® China network covered 34 major cities with more than 1,000 sales offices, employed approximately 14,900 sales professionals and staff and maintained approximately 4.7 million property listings. In the first half of 2009, based on transaction volume, we ranked among the top three market leaders in over 90% of the cities in which we operate and were the market leader in more than 30% of those cities. We primarily focus on China’s fast-growing and highly fragmented secondary real estate market, which we expect to outgrow the primary market, especially in more economically prosperous cities.
We operate under three different but closely related business lines: company-owned brokerage services, mortgage management services and franchise services. We have deployed a unique business model that has allowed us to rapidly scale our company-owned operations by leveraging the in-depth market knowledge and human capital developed from our franchise network.
We started our franchise services business in 2000 and have rapidly expanded our franchise network and our brand. Our franchise services business grants regional franchise rights for the CENTURY 21® brand to regional sub-franchisors in China who, in turn, open their own sales offices or grant third parties the right to open sales offices within their region. We generate revenue from our franchise services by collecting initial franchise fees and ongoing service fees from these regional sub-franchisors. Our franchise network has provided us with valuable information to gauge market maturity and identify potential opportunities to establish and grow our company-owned brokerage services business. Until we launched our company-owned brokerage services business in 2006, we generated our net revenues solely from our franchise services business. We started our company-owned brokerage services business in Beijing and Shanghai in 2006 and in Shenzhen in 2008, and have quickly expanded our company-owned sales office network in these cities through organic growth and acquisitions of sales offices owned by third parties. As of September 30, 2009, we had approximately 280 company-owned sales offices, representing approximately 26.1% of our CENTURY 21® China network. Our company-owned brokerage services business owns and operates regional sub-franchisors and sales offices in the CENTURY 21® China network. We generate revenue from our company-owned brokerage services primarily through commissions earned from home buyers, sellers, lessors and lessees. In 2008 and the nine months ended September 30, 2009, our company-owned sales offices contributed approximately 75.4% and 91.9% respectively, of our total net revenues.
In 2008, we launched our independent mortgage management services in Beijing and Shanghai, providing services to customers both inside and outside our CENTURY 21® China network. Our mortgage management services business provides mortgage advisory services to home buyers and home owners and interim guarantee services to commercial banks. We generate revenue from our mortgage management services primarily through commissions earned from commercial banks in consideration of our advisory services and
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interim guarantee services. Our mortgage management services business is well positioned to take advantage of referrals from our extensive network of company-owned sales offices. In the first nine months of 2009, a substantial majority of the transactions handled by our company-owned brokerage services in which mortgages were utilized made use of our mortgage management services. We have provided services for home mortgages with an aggregate loan amount of approximately RMB6.1 billion since we launched our mortgage management service business through September 30, 2009. Our contingent guarantee obligations associated with our interim guarantees as of September 30, 2009 was RMB829.3 million.
Our rapid growth is supported by our information systems and training programs. Our information systems provide real-time and in-depth management and sales information, support our network of sales offices, and drive our marketing efforts. We strongly believe in training members of our management team, who are generally required to complete quarterly training courses. Additionally, all of our sales professionals are required when they join us to complete training courses that we conduct in-house, and are also required to complete monthly refresher or new skills courses.
We have experienced substantial growth since we commenced operations in 2000. Our total net revenues increased from RMB38.4 million in 2006 to RMB273.4 million in 2008, representing a compound annual growth rate of 166.8%, and from RMB208.9 million in the nine months ended September 30, 2008 to RMB443.7 million in the same period in 2009, representing an increase of 112.4%. After incurring net losses of RMB72.8 million and RMB131.9 million for the years ended December 31, 2007 and 2008, respectively, we became profitable during the nine month period ended September 30, 2009 with a net income of RMB88.3 million (US$12.9 million). We have received numerous awards and recognitions for our service quality and business achievements, including the “Highly Appraised Franchisor Award” by the China Chain Store and Franchise Association in 2008 and 2009, “Prominent Real Estate Services Provider” by Sina.com in 2008, and “Most Reputable Real Estate Services Provider” by Sohu.com in 2009.
Industry Background
The PRC economy has grown significantly since the PRC government introduced economic reforms in the late 1970s. This growth has accelerated since China entered the World Trade Organization in 2001. China’s economic growth, together with an increase in disposable incomes, a rise in urbanization levels, the emergence of a mortgage lending market and government housing reforms, have driven the expansion of China’s real estate market. The secondary residential property market in China has grown significantly as home inventory increases and the turnover rate for existing homes rises. However, the secondary residential property market in China is still at a relatively early stage of development. The ratio between secondary and primary residential property transaction volumes in the first half of 2009 in Beijing and Shanghai was only 1.30 times and 1.94 times, respectively, compared to 13.15 times in the U.S. and 5.16 times in Hong Kong.
The real estate services industry in China, which includes primary brokerage services, secondary brokerage services, mortgage management services and leasing services, has become increasingly specialized as it has grown in size and complexity. Secondary residential property brokerage services include brokerage services for existing home sales, leases and related services. An important aspect of China’s secondary residential property brokerage industry is the predominance of open listings, under which property listings can be marketed simultaneously by multiple agents. As a result, brokerage firms in China rarely share listing information with their competitors and large-scale players in the industry generally have a competitive advantage over their smaller counterparts. The secondary residential property brokerage industry in China is highly fragmented. We believe that industry consolidation will become an increasingly prevalent trend. As the residential mortgage market increases in size and sophistication, specialized mortgage management agents are becoming important channels for commercial banks to distribute their real estate financing products. Amounts of
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outstanding residential mortgages in China grew from RMB825 billion as of December 31, 2002 to RMB2.98 trillion as of December 31, 2008, representing a compound annual growth rate of 23.9%.
Our Strengths and Strategies
We believe that the following strengths differentiate us from our competitors and have enabled us to capture a leading position in the rapidly growing real estate services industry in China:
• | We leverage one of the world’s most recognized real estate service brands to drive our leadership in China; |
• | We have a unique business model that allows us to rapidly scale our distribution network and expand our product and service offerings; |
• | We are the leader in the faster growing and more sustainable secondary real estate brokerage market; |
• | We utilize our nationwide network to maintain a growing database of property listings that draws new customers and provides opportunities for future growth; |
• | We have developed world class, standardized information systems and training systems to support the scalability of our business model; and |
• | We have an experienced and stable management team. |
Our aim is to further widen our leadership as China’s largest real estate service provider, through the following strategies:
• | Strengthen our distribution network; |
• | Expand existing product lines; |
• | Enhance brand awareness; and |
• | Invest in human capital management. |
Our Challenges and Risks
The successful execution of our strategies is subject to certain challenges and risks that may materially affect us, including:
• | Fluctuations in China’s real estate market; |
• | Uncertainty in the further development and expansion of the real estate services industry in China; |
• | Governmental regulations of the real estate industry in China; |
• | Our ability to receive dividends from, and to make loans to and direct investment in, our operations in China as an offshore holding company; |
• | Our aggregate net losses of RMB204.7 million for the two years ended December 31, 2008, which were partially offset by net income of RMB88.3 million for the nine months ended September 30, 2009; and |
• | Adverse developments in general business, economic and political conditions globally and in China. |
In addition to the foregoing, under Rule 2720 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc., Goldman Sachs (Asia) L.L.C. is technically deemed to have a conflict of interest in connection
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with this offering because one of its affiliates will beneficially own approximately 28.4% of our outstanding ordinary shares immediately prior to the completion of this offering. Accordingly, Morgan Stanley & Co. International plc is acting as the qualified independent underwriter, as defined under such rule, and has participated in the preparation of this prospectus and exercised the usual standards of due diligence in respect of this offering.
Please see “Risk Factors” and other information included in this prospectus for a detailed discussion of these challenges and risks.
Corporate History and Structure
We became the exclusive franchisor of the CENTURY 21® brand in China on March 22, 2000 through IFM Company Limited, or IFM Co., a Cayman Islands company controlled by one of our founders, Donald Zhang. We incorporated our company, IFM Investments Limited, in the Cayman Islands on November 30, 2005. We underwent a reorganization in 2006. Upon the effectiveness of our reorganization on August 24, 2006, we became the holding company of our various subsidiaries, including IFM Co. From 2006 to 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued a total of 311,367,270 preferred shares to a number of private equity investors and Realogy Corporation, or Realogy, the owner of the CENTURY 21® brand.
Our principal subsidiaries include:
• | IFM Co., which holds the exclusive franchise rights for the CENTURY 21® brand in China; |
• | Beijing Anxinruide Real Estate Brokerage Co. Limited, or Beijing Anxin, which owns our company-owned sales offices in Beijing; |
• | Shanghai Ruifeng Real Estate Investments Consulting Co. Limited, or Shanghai Ruifeng, which owns our company-owned sales offices in Shanghai; and |
• | CIR Real Estate Consultant (Shenzhen) Co. Limited, or Shenzhen CIR, which owns our company-owned sales offices in Shenzhen. |
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The following diagram illustrates our anticipated shareholding and corporate structure with our principal subsidiaries immediately following this offering(1):
(1) | Represents economic ownership of our Class A and Class B ordinary shares. Immediately prior to this offering, IFM Overseas Partners, Goldman Sachs Strategic Investments, GL Asia Mauritius II and Realogy each owned 52.1%, 28.4%, 18.4% and 1.1%, respectively, of our ordinary shares. |
(2) | Consists of 61,108,179 Class A ordinary shares and 80,502,938 Class B ordinary shares, which have substantially the same rights as Class A ordinary shares except that they are not entitled to vote as further described in “Description of Share Capital — Classes of shares.” |
Corporate Information
Our principal executive office is located at 26/A, East Wing, Hanwei Plaza, No.7 Guanghua Road, Chaoyang District, Beijing 100004, People’s Republic of China. Our telephone number at this address is (86-10) 6561-7788 and our fax number is (86-10) 6561-3321. Our registered office in the Cayman Islands is located at the offices of Trident Trust Company (Cayman) Limited, Fourth Floor, One Capital Place, P.O. Box 847GT Grand Cayman, Cayman Islands. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website ishttp://www.century21cn.com.The information contained on our website is not part of this prospectus.
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Conventions That Apply to This Prospectus
Unless otherwise indicated, references in this prospectus to:
• | “we,” “us,” “our” and “our company” refer to IFM Investments Limited, a Cayman Islands company, and its predecessor entities and its subsidiaries; |
• | “ADSs” are to our American depositary shares, each of which represents fifteen (15) Class A ordinary shares; |
• | “ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs; |
• | “China” and the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau; |
• | “Shares” or “ordinary shares” are to our ordinary shares, par value US$0.001 per share which include both Class A ordinary shares and Class B ordinary shares; |
• | “RMB” and “Renminbi” are to the legal currency of China; and |
• | “US$” and “U.S. dollars” are to the legal currency of the United States. |
Unless otherwise indicated, references to our principal subsidiaries in this prospectus are specified as follows:
• | “Beijing Anxin” is to Beijing Anxinruide Real Estate Brokerage Co. Limited, a company incorporated in the PRC; |
• | “IFM Beijing” is to Beijing Aifeite International Franchise Consultant Co. Limited, a company incorporated in the PRC; |
• | “IFM BJ Broker” is to Beijing IFM International Real Estate Brokerage Co. Limited, a company incorporated in the PRC; |
• | “IFM Co.” is to IFM Company Limited, a company incorporated in the Cayman Islands; |
• | “IFM SH” is to Shanghai Yaye Real Estate Brokerage Co. Limited, a company incorporated in the PRC; |
• | “MMC BJ” is to Beijing Kaishengjinglue Guarantee Co. Limited, a company incorporated in the PRC; |
• | “MMC SH” is to Shanghai Kaiyi Investment Consultant Management Co. Limited, a company incorporated in the PRC; |
• | “Shanghai Ruifeng” is to Shanghai Ruifeng Real Estate Investments Consulting Co. Limited, a company incorporated in the PRC; and |
• | “Shenzhen CIR” is to CIR Real Estate Consultant (Shenzhen) Co. Limited, a company incorporated in the PRC. |
Unless otherwise indicated, information in this prospectus assumes that:
• | the underwriters do not exercise their option to purchase additional ADSs; and |
• | all outstanding preferred shares are converted into 158,339,339 of our Class A ordinary shares and 80,502,938 of our Class B ordinary shares upon the closing of this offering. |
This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. All translations from Renminbi to U.S. dollars were made at the noon buying rate in New York City for cable
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transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the translation of Renminbi into U.S. dollars has been made at the noon buying rate in effect on September 30, 2009, which was RMB6.8262 to US$1.00. We make no representation that the Renminbi or dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On January 22, 2010, the noon buying rate was RMB6.8270 to US$1.00.
This prospectus contains references to compound annual growth rate, which represents the rate of return on an annualized basis over the relevant time period.
CENTURY 21® is a registered trademark owned by a subsidiary of Realogy Corporation.
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The Offering
ADSs offered by us | 12,487,500 ADSs. |
Offering price | We estimate that the initial public offering price will be between US$7.00 and US$8.00 per ADS. |
ADSs outstanding immediately after this offering | 12,487,500 ADSs (or 14,360,625 ADSs if the underwriters exercise their option to purchase additional ADSs in full). |
Ordinary shares outstanding immediately after this offering | 605,651,839 Class A ordinary shares and 80,502,938 Class B ordinary shares (or 633,748,714 Class A ordinary shares and 80,502,938 Class B ordinary shares if the underwriters exercise their option to purchase additional ADSs in full). |
ADSs | Each ADS represents fifteen (15) Class A ordinary shares, par value US$0.001 per ordinary share. The ADSs will be evidenced by American depositary receipts, or ADRs. |
The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADR holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time.
You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.
We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.
To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” You should also read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.
Option to purchase additional ADSs | We have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 1,873,125 additional ADSs at the initial public offering price, less underwriting discounts and commissions. |
Use of proceeds | We estimate that we will receive net proceeds of approximately US$83.6 million from this offering (or US$96.7 if the underwriters exercise their option to purchase additional ADSs in full), after deducting the underwriting discounts, commissions and estimated offering expenses payable by us and assuming an initial public offering price of US$7.50 per ADS, being the mid-point of the estimated range of the initial public offering price shown on the front |
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cover of this prospectus. We intend to use the net proceeds from this offering to fund the development of our company-owned brokerage services business through selected strategic acquisitions, by opening additional company-owned sales offices and investing and upgrading our information and operations systems and to fund general corporate purposes. |
See “Use of Proceeds.” |
Listing | We have received an approval for listing our ADSs on the New York Stock Exchange under the symbol “CTC.” Our ordinary shares will not be listed on any exchange or quoted for trading on any automated quotation system or any over-the-counter trading system. |
Lock-up | We have agreed with the underwriters to a lock-up of our shares for a period ending 180 days after the date of this prospectus. In addition, each of our existing shareholders has also agreed with the underwriters to a lock-up of their shares for a period of 180 days after the date of this prospectus. See “Shares Eligible For Future Sale” and “Underwriting.” |
Risk factors | See “Risk Factors” in this prospectus beginning on page 13 and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in our ADSs. |
Depositary | JPMorgan Chase Bank N.A. |
Payment and settlement | We expect our ADSs to be delivered against payment on or about , 2010. |
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
You should read the summary consolidated financial information and operating data in conjunction with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
The following summary consolidated financial information and operating data for the periods and as of the dates indicated should be read in conjunction with our audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our summary consolidated statement of operations data for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2009 and summary consolidated balance sheet data as of December 31, 2007 and 2008 and September 30, 2009 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our summary consolidated statement of operations data for the nine months ended September 30, 2008 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial data. The unaudited selected financial data include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary for a fair presentation of the financial position and the results of operations for the interim unaudited period. Our summary consolidated statement of operations data for the year ended December 31, 2006 and summary consolidated balance sheet data as of December 31, 2006 have been derived from our financial statements not included in this prospectus. Our audited and unaudited consolidated financial statements have been prepared and presented in accordance with accounting principles generally accepted in the United States of America, or US GAAP. The historical results are not necessarily indicative of results to be expected in any future period.
For the Year Ended December 31, | For the Nine Months Ended September 30, | |||||||||||||||||
2006 | 2007 | 2008 | 2008 | 2009 | ||||||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | (RMB) | (US$)(1) | |||||||||||||
(in thousands, except for share and per share data) | ||||||||||||||||||
(unaudited) | ||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||
Revenue | ||||||||||||||||||
Net revenues | 38,425 | 189,029 | 273,359 | 208,877 | 443,691 | 64,998 | ||||||||||||
Costs and Expenses | ||||||||||||||||||
Commissions and other agent related costs | (4,620 | ) | (82,866 | ) | (151,550 | ) | (116,250 | ) | (197,978 | ) | (29,003 | ) | ||||||
Operating costs | (9,914 | ) | (79,886 | ) | (146,457 | ) | (110,889 | ) | (85,183 | ) | (12,479 | ) | ||||||
Selling, general and administrative expenses | (40,285 | ) | (94,471 | ) | (102,952 | ) | (76,456 | ) | (70,278 | ) | (10,295 | ) | ||||||
Total costs and expenses | (54,819 | ) | (257,223 | ) | (400,959 | ) | (303,595 | ) | (353,439 | ) | (51,777 | ) | ||||||
(Loss) / income from operations | (16,394 | ) | (68,194 | ) | (127,600 | ) | (94,718 | ) | 90,252 | 13,221 | ||||||||
Interest income | 848 | 1,708 | 4,441 | 2,708 | 1,575 | 231 | ||||||||||||
Interest expense | (1,299 | ) | — | — | — | — | — | |||||||||||
Foreign currency exchange loss | (1,537 | ) | (5,485 | ) | (5,526 | ) | (4,458 | ) | (480 | ) | (70 | ) | ||||||
(Loss) / income before income tax and share of associates’ losses | (18,382 | ) | (71,971 | ) | (128,685 | ) | (96,468 | ) | 91,347 | 13,382 | ||||||||
Income tax | (799 | ) | (394 | ) | (2,076 | ) | (1,780 | ) | (2,821 | ) | (414 | ) | ||||||
Share of associates’ losses | (373 | ) | (409 | ) | (1,126 | ) | (1,050 | ) | (193 | ) | (28 | ) | ||||||
Net (loss) / income | (19,554 | ) | (72,774 | ) | (131,887 | ) | (99,298 | ) | 88,333 | 12,940 | ||||||||
Non-controlling interest | 1,524 | (1,347 | ) | (431 | ) | (431 | ) | — | — | |||||||||
Net (loss) / income attributable to IFM Investments Limited | (18,030 | ) | (74,121 | ) | (132,318 | ) | (99,729 | ) | 88,333 | 12,940 | ||||||||
Net (loss) / income per Share | ||||||||||||||||||
Basic | (0.07 | ) | (0.31 | ) | (0.57 | ) | (0.43 | ) | 0.13 | 0.02 | ||||||||
Diluted | (0.07 | ) | (0.31 | ) | (0.57 | ) | (0.43 | ) | 0.13 | 0.02 | ||||||||
Net (loss) / income per ADS | ||||||||||||||||||
Basic | (1.12 | ) | (4.69 | ) | (8.54 | ) | (6.43 | ) | 2.00 | 0.29 | ||||||||
Diluted | (1.12 | ) | (4.69 | ) | (8.54 | ) | (6.43 | ) | 1.96 | 0.29 | ||||||||
Weighted average number of ordinary shares used in | ||||||||||||||||||
Basic | 260,000,000 | 260,000,000 | 260,000,000 | 260,000,000 | 260,000,000 | 260,000,000 | ||||||||||||
Diluted | 260,000,000 | 260,000,000 | 260,000,000 | 260,000,000 | 264,262,500 | 264,262,500 |
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(1) | Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. |
(2) | On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 each, 20,000,000 Series A preferred shares of par value US$0.01 each and 11,136,727 Series B preferred shares of par value US$0.01 each were divided into 260,000,000 ordinary shares of US$0.001 par value each, 200,000,000 Series A preferred shares of par value US$0.001 each and 111,367,270 Series B preferred shares of par value US$0.001 each, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760. The share split has been retroactively reflected for all periods presented herein. |
As of December 31, | As of September 30, | ||||||||||||||||||
Actual | Actual | Pro Forma As Adjusted(2) | |||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2009 | |||||||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | (US$)(1) | (RMB) | (US$)(1) | |||||||||||||
(in thousands) | |||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | 110,505 | 331,216 | 176,977 | 263,176 | 38,554 | 834,102 | 122,178 | ||||||||||||
Restricted cash | 6,793 | 14,497 | 17,213 | 21,565 | 3,159 | 21,565 | 3,159 | ||||||||||||
Accounts receivable, net | 6,437 | 9,965 | 13,633 | 60,030 | 8,794 | 60,030 | 8,794 | ||||||||||||
Amount due from related parties | 80,789 | 44,068 | 38,110 | 6,210 | 910 | 6,210 | 910 | ||||||||||||
Property and equipment, net | 5,822 | 42,467 | 42,954 | 41,076 | 6,017 | 41,076 | 6,017 | ||||||||||||
Intangible assets, net | 27,943 | 26,317 | 29,796 | 28,318 | 4,148 | 28,318 | 4,148 | ||||||||||||
Total assets | 255,750 | 513,187 | 360,895 | 462,792 | 67,796 | 1,033,628 | 151,420 | ||||||||||||
Accrued expenses and other current liabilities | 38,535 | 52,234 | 53,597 | 97,450 | 14,276 | 97,450 | 14,276 | ||||||||||||
Total liabilities | 106,073 | 145,647 | 111,356 | 123,660 | 18,115 | 123,660 | 18,115 | ||||||||||||
Convertible redeemable preferred shares | 172,131 | 469,971 | 501,892 | 514,162 | 75,322 | — | — | ||||||||||||
Total shareholders’ (deficit)/equity | (22,454 | ) | (102,431 | ) | (252,353 | ) | (175,030 | ) | (25,641 | ) | 914,883 | 134,025 | |||||||
(1) | Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. |
(2) | Our consolidated balance sheet data as of September 30, 2009 is adjusted to give effect to the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering, and the issuance and sale of ADSs by us in this offering, assuming an initial public offering price of US$7.50 per ADS (the mid-point of the estimated initial public offering price range) after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A US$0.50 increase (decrease) in the assumed initial public offering price of US$7.50 per ADS would increase (decrease) the amounts representing cash and cash equivalents, total assets and total shareholders’ deficit by US$5.8 million. |
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For the year ended or as of December 31, | For the nine months ended or as of September 30, | ||||||||
2007 | 2008 | 2008 | 2009 | ||||||
(unaudited) | |||||||||
Other Financial and Operating Data: | |||||||||
Company-owned brokerage services | |||||||||
Net revenues (in thousands of RMB) | 151,692 | 206,076 | 153,703 | 407,937 | |||||
Average number of operating sales offices(1) | 143 | 279 | 296 | 233 | |||||
Average monthly net revenues per operating sales office (in thousands of RMB) | 88.4 | 61.6 | 57.7 | 194.5 | |||||
Mortgage management services | |||||||||
Net revenues (in thousands of RMB) | — | 10,650 | 7,903 | 22,467 | |||||
Loan amount of referred mortgages (in thousands of RMB) | — | 1,879,500 | 1,369,000 | 4,171,000 | |||||
Franchise services | |||||||||
Net revenues (in thousands of RMB) | 37,337 | 56,633 | 47,271 | 13,287 | |||||
Number of regional sub-franchisors as of the period end | 23 | 28 | 27 | 28 |
(1) | Equals the sum of the number of operating sales offices that existed at the end of each month in the applicable period, divided by the number of months in such period. |
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You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before you decide to buy our ADSs. Any of the following risks could have a material and adverse effect on our business, prospects, financial condition and results of operations. In any such case, the trading price of our ADSs could decline, and you could lose all or part of your investment.
Risks Related to Our Business
Our business is susceptible to fluctuations in the real estate market in China, and the property market in China is volatile and at an early stage of development, which could have a material and adverse effect on our business, financial condition and results of operations.
We conduct our real estate services business primarily in China, and our business depends substantially on the conditions of the real estate market in China. The real estate market in China remains at an early stage of development, and social, political, economic, legal and other factors may affect its development. For example, the lack of a mature and active secondary market for private properties and the limited amount of mortgage loans available to individuals in China may result in fluctuations in residential real estate markets. Although demand for private residential property in China has grown rapidly in recent years, this growth has often been coupled with volatile market conditions and fluctuations in property prices. For example, the rapid expansion of the property market in major provinces and cities, such as Beijing, Shanghai and Shenzhen, in the early 1990s, led to an oversupply in the mid-1990s and a corresponding fall in property values and rentals in the second half of the decade. We believe our business has been affected by fluctuations in the real estate market in China. For instance, our average monthly net revenues per operating sales office decreased by 36% and 23% in Beijing and Shanghai respectively, from 2007 to 2008. We believe this decrease was partially due to the weakness of the real estate market in China in 2008. On the other hand, our average monthly net revenues per operating sales office increased by 416.6% and 167.4% in these cities during the nine months ended September 30, 2009 compared to the same period in 2008. We believe such increase was partially due to the recovery of real estate market in China during 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.” The PRC property market may experience, and transaction volume may be impacted by, undersupply or oversupply and property price fluctuations caused by economic, social, political and other factors. Any future overdevelopment in the property sector or other adverse changes in the economic, political or social environment in China may result in an oversupply of properties and a decrease in property prices and overall transaction activities, which could materially and adversely affect our business, financial condition and results of operations.
In addition, as all of our company-owned sales offices are strategically located in large metropolitan areas in Beijing, Shanghai and Shenzhen, any decrease in demand or any other adverse developments in these regions may materially and adversely affect our business, financial condition and results of operations.
Adverse developments in general business and economic conditions could have a material and adverse effect on our business, financial condition and results of operations.
Our business and operations are sensitive to general business and economic conditions globally and in China. These include short-term and long-term interest rates, inflation or deflation, fluctuations in debt and equity capital markets, consumer confidence and the general condition of the PRC and world economies. Certain recent adverse developments in the global financial markets have impacted the global economy. These developments include, among others, a general slowdown of economic growth in China, the U.S. and elsewhere globally, and substantial volatility and tightening of liquidity in financial and real estate markets. Numerous general business and economic factors could contribute to a real estate market downturn and adversely affect our business, including: (1) any systemic weakness in the banking and financial sectors; (2) any substantial declines in the stock markets or continued stock market volatility; (3) any increase in levels of unemployment; (4) a lack
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of available credit and lack of confidence in the financial sector; and (5) any general economic downturn in China or the global economy. Adverse developments in these general business and economic conditions could have a material and adverse effect on our business, financial condition and results of operations.
Our business could be materially and adversely affected by any government measures influencing China’s real estate industry.
The real estate market in China is typically affected by changes in government policies affecting the financial markets and related areas. In the past, the PRC government has adopted various administrative measures to restrain what it perceived as unsustainable growth in the real estate market, particularly when the real estate market in China has experienced rapid and significant growth. In 2007, home sales and prices in China rose rapidly to unprecedented levels, culminating in a housing downturn beginning in late 2007 due to the PRC government’s intervention in the real estate market to stabilize market prices and reduce market speculation. Although home sales and prices in China recovered in 2009, the PRC real estate market could experience a prolonged downturn in the future, which could have a material and adverse impact on our business, financial condition and results of operations. Any of the following could cause a decline in home sales and prices or the related revenue we generate from our business:
• | any contractionary monetary policy adopted by the PRC government, including any significant rise in interest rates; |
• | any adverse development in the credit markets and/or mortgage financing markets resulting from PRC government policies; |
• | any significant increase in transaction costs as a result of changes in PRC government policies regarding real estate transaction taxes, such as the recent announcement regarding the reinstatement of a sales tax on residential property sales by individuals within five years of purchase; |
• | any adverse change in PRC government policies regarding the acquisition and/or ownership of real estate property; |
• | any adverse change in PRC national or local government policies or practices regarding brokerage, referral or franchise business or related fees and commissions; or |
• | any other PRC government policies or regulations that burden real estate transactions or ownership. |
We experienced net losses for the years ended December 31, 2007 and 2008, and there is no assurance that we will be profitable in the future.
During the years ended December 31, 2007 and 2008, we experienced net losses of RMB72.8 million and RMB131.9 million, respectively, primarily due to expenses arising from the addition of a significant number of company-owned sales offices and, to a lesser extent, in 2008, the effects of the global economic downturn on the real estate industry in China. Consequently, our accumulated deficit was RMB268.0 million and RMB179.7 million as of December 31, 2008 and September 30, 2009, respectively. We expect to continue to increase costs and operating expenses as we implement initiatives to continue to grow our business, particularly our company-owned brokerage services business. If our net revenues do not increase to offset any expected increases in costs and operating expenses, we will not be profitable. You should not consider our revenue growth in recent periods as indicative of our future performance. Net revenues in future periods could decline or grow more slowly than we expect. Although we had net income of RMB88.3 million for the nine months ended September 30, 2009, we cannot assure you that we will be profitable in the current year, or that we will be able to maintain profitability in the future.
We do not own the CENTURY 21® brand and our right to use the CENTURY 21® brand is subject to risks and limitations.
Realogy owns the CENTURY 21® brand and system. Through our wholly owned subsidiary IFM Company Limited, or IFM Co, we hold the exclusive right to franchise, manage and operate the CENTURY 21®
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franchise network in China. Our interests and business strategies could be different from those of Realogy. See “Our Relationship with Realogy and Related Party Transactions.” Any adverse development in our relationship with Realogy could have a material and adverse effect on our business, financial condition and results of operations.
Our rights to use the CENTURY 21® brand are set forth in our master sub-franchise agreement with Realogy. The master sub-franchise agreement has a term of 25 years starting on March 2000, extendable at our election for additional terms of 25 years upon payment of renewal fees. As contractual rights, our rights to use the CENTURY 21® brand remain subject to the risks and limitations customarily associated with contractual relationships, including but not limited to, a party’s right to terminate the agreement in the event the other party materially breaches the agreement, a party’s right to terminate in certain specified circumstances, and the risk that the contract may be voided if either party were to enter bankruptcy or a similar restructuring process. An agreement could be rejected in connection with a bankruptcy of another party thereto if, in the business judgment of a trustee of a party, as debtor-in-possession, rejection of the contract would benefit a party’s estate. A bankruptcy by our licensor or any owner of the CENTURY 21® trademarks or system know-how could impede our right to use the CENTURY 21® brand and system. Any such adverse development could result in, among other things, an inability to use the CENTURY 21® brand and system, incurrence of material expenses in connection with building our brand or acquiring another brand to support our company-owned brokerage business and franchise services business, payment of fees or compensation relating to settlements with the regional sub-franchisors or franchisees that terminate their franchise relationships with us, or diminished market recognition, any or all of which could have a material and adverse effect on our business, financial condition and results of operations.
If the value of the CENTURY 21® brand or image diminishes, it could have a material and adverse effect on our business, financial condition and results of operations.
We believe the CENTURY 21® brand is associated with leadership in integrated and high quality real estate services among real estate market participants in China. The CENTURY 21® brand is important to our operations. Our continued success in maintaining and enhancing the CENTURY 21® brand and our image depends on our ability to satisfy customer needs by further developing and maintaining the quality of our services across our operations, as well as our ability to respond to competitive pressures. If we were unable to satisfy customer needs or if our public image or reputation were otherwise diminished, our business transactions with our customers or the commission or franchise fees that we charge could decline, and we could face difficulties in attracting and retaining regional sub-franchisors, franchisees or sales professionals. If the value of the CENTURY 21® brand diminishes globally or in China, our business, financial condition and results of operations may be materially and adversely affected.
Any failure to protect our brand, trademarks and other intellectual property rights could have a negative impact on our business.
We believe the CENTURY 21® brand owned by Realogy and the trade secrets, copyrights and other intellectual property rights owned by us are important to our success. Any unauthorized use of these intellectual properties could harm our competitive advantages and business. Historically, China has not protected intellectual property rights to the same extent as the United States and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized use is difficult. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application and enforcement of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks. If we are unable to adequately protect the intellectual property rights that we own or use, we may lose these rights and our business, financial condition and results of operations may be materially and adversely affected.
Our continuing reliance on our information systems, which include our proprietary Sales Information System, or SIS, and our Human Resource and Commission Information System, or HCIS, each of which is
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copyright protected, depends in large part on retaining our proprietary rights to these information systems. We have also imposed contractual obligations on employees and consultants and taken other precautionary measures to maintain the confidentiality of our proprietary information, and have restricted the use of that proprietary information other than for our company’s benefit. If the copyrights for our information system are infringed, or our sales professionals, staff and consultants otherwise do not honor their contractual obligations and misappropriate our information systems, databases or other proprietary information, our business, financial condition and results of operations may be materially and adversely affected.
Competition in the real estate brokerage business in China is intense and may adversely affect our business, financial condition and results of operations.
Competition in the real estate brokerage business in China is intense, especially in the densely populated areas. We primarily compete with Centaline (China) Property Consultants Limited in the Beijing, Shanghai and Shenzhen markets for secondary real estate brokerage business, and to a lesser extent, with E-house (China) Holdings Limited in these cities for primary real estate brokerage business. We also compete with regional competitors in each of the regions where we own and operate sales offices. Some of these companies may have greater financial resources than we do, including greater marketing budgets and technological advantages. In addition, the secondary real estate brokerage industry has low capital commitment requirements for small operations, lowering the barriers to entry for new participants, especially participants pursuing alternative methods of marketing real estate, such as internet-based listing services. Real estate brokers compete for sales and marketing business primarily on the basis of the services offered, reputation, brand recognition, personal contacts, local expertise and brokerage commission rates. Any decrease in the market average brokerage commission rate may adversely affect our net revenues and profits. We also compete for the services of qualified sales professionals. Such competition could reduce commissions retained by our company after giving effect to the split with sales professionals and could increase the amounts that we spend on recruiting and retaining sales professionals.
We face competition in the franchise services business.
For our franchise services business, our products consist of our brand name and the support services we provide to our regional sub-franchisors and franchisees. We compete with regional and local real estate brokerage brand franchisors. In addition, other international real estate services brand franchisors, such as Coldwell Banker, have entered or plan to enter into the China market. Upon the expiration of a franchise agreement, a franchisee may choose to obtain a franchise from one of our competitors or operate as an independent broker. Competitors may offer our regional sub-franchisors and franchisees whose franchise agreements are expiring similar or better products and services at rates lower than what we or our regional sub-franchisors charge. To remain competitive in the sale of franchises and to retain our existing regional sub-franchisors and franchisees, we may have to reduce the fees we charge our regional sub-franchisors or franchisees.
We face competition in the mortgage management services business.
We face competition in the mortgage management services business from in-house mortgage management teams of our competitors in the brokerage business, commercial banks and specialized mortgage management services providers. Additionally, there may be adverse changes in national or local mortgage and banking practices, such as a recent agreement among certain commercial banks in Shanghai to collectively cease to pay mortgage referral commissions in connection with secondary real estate transactions. Any increase in the level of competition or any negative development described above could materially and adversely affect our business, financial condition and results of operations.
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If our company-owned or franchised sales offices fail to obtain or maintain licenses or permits necessary to engage in the real estate brokerage business, our business, financial condition and results of operations could be materially and adversely affected.
Our company-owned sales offices and franchised sales offices are required to obtain and maintain certain licenses and permits to engage in the real estate brokerage business. We and our regional sub-franchisors also need licenses and permits to operate our CENTURY 21® franchise network in China. These licenses and permits are typically required to be renewed every one or two years. We are also subject to numerous national, provincial and local laws and regulations specific to the services we provide. If we or our regional sub-franchisors or franchisees fail to obtain or maintain the licenses and permits for conducting our company-owned brokerage or franchise services businesses required by law, the relevant governmental authorities may order us to suspend relevant operations or impose fines or other penalties. There is no assurance that we, our company-owned sales offices or our franchised sales offices will be able to obtain or renew these licenses in a timely manner, or at all.
Regional sub-franchisors and franchisees could take actions that could harm our business.
We do not own or control certain of our regional sub-franchisors and franchisees. These regional sub-franchisors and franchisees may not operate their business in a manner consistent with our standards, or may not hire and train qualified sales professionals and other employees. If these regional sub-franchisors or franchisees were to provide a diminished quality of service to their customers, our brand, reputation and goodwill may suffer. Additionally, our regional sub-franchisors and franchisees may engage in or be accused of engaging in unlawful or tortious conduct. Such conduct, or the accusation of such conduct, could harm our brand image, reputation or goodwill. Any of these incidents could in turn materially and adversely affect our business, financial condition and results of operations.
Our regional sub-franchisors and franchisees owned by independent business operators may from time to time disagree with our interpretation of our respective rights and obligations under the franchise agreements or fail to make timely service fees payments thereunder. This has led to disputes among the regional sub-franchisors, the franchisees and us in the past. We expect such disputes to occur from time to time in the future as we continue to offer franchise rights to third parties. To the extent we have such disputes, the attention of our management and our regional sub-franchisors or the franchisees will be diverted and our reputation may suffer as a result. Any of the aforementioned situations could have a material and adverse effect on our business, financial condition and results of operations.
The loss of any members of our senior management or other key sales professionals and staff could adversely affect our financial performance.
Our success depends on the continued service of our key executive officers, particularly Mr. Donald Zhang and Mr. Harry Lu. We do not carry key man life insurance on any of our personnel. The loss of the services of one or more members of our senior management team could hinder our ability to effectively manage our business and implement our growth strategies. If we lose the services of any of our key executive officers, we cannot assure you that we will be able to appoint or integrate adequate replacement personnel into our operations in a timely manner. Our failure to do so could in turn disrupt our operations and the growth of our business.
Our success largely depends on the efforts and abilities of our senior management team and the management teams of regional sub-franchisors and sales offices owned and operated by us. Our ability to retain our management teams is generally subject to numerous factors, including the compensation packages we offer and our ability to maintain a cohesive company culture and other factors. Any prolonged downturn in the real estate market and any cost cutting measures we implement could result in significant attrition among our current managers. If any member of our senior management team or other key sales professionals and staff joins a competitor or forms a competing company, we may lose customers, key sales professionals and staff, and we
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may not be able to promptly fill their positions with comparably qualified individuals without a significant increase in costs. Any of the foregoing adverse developments could materially and adversely affect our business, financial condition and results of operations.
We are subject to risks related to litigation filed by or against us, and adverse litigation results may harm our business and financial condition.
We have been, and may in the future be, a party to litigation and other proceedings filed by or against us, including actions relating to intellectual property, franchise or sub-franchise arrangements with our regional franchisors or franchisees, or vicarious liability based upon the conduct of our individual sales professionals and staff or agents. For example, we have occasionally resorted to litigation against certain of our regional sub-franchisors with whom we have terminated our relevant sub-franchise relationship for the sub-franchisor’s material breach of the regional sub-franchise agreement. In addition, we have litigated against third parties who have infringed the CENTURY 21® trademark. Although we have historically been successful in such litigation, we cannot predict the cost of such proceedings or their ultimate outcome, including any remedies or damages that may be awarded, and adverse results in such litigation and other proceedings may harm our business, financial condition and results of operations.
We are subject to risks related to the interim guarantees that we provide to our mortgage management services customers in Beijing.
As is customary in the mortgage management industry in Beijing, we provide interim guarantees to commercial banks in respect of the mortgage loans they extend to property buyers prior to the time when the mortgage registration certificate is issued to the bank by the applicable property registry. See “Our Business – Our Services – Mortgage Management Services.” If a bank fails to obtain the mortgage registration certificate or the property buyer defaults on his payment obligations during the term of an interim guarantee, we may be required to pay the amount of the delinquent mortgage payments or any measurable loss suffered by the bank. If multiple home buyers default on their payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to recover the amounts paid with respect to our guarantees, we will suffer financial losses. As of December 31, 2008 and September 30, 2009, the contingent guarantee obligation in connection with our provision of interim guarantees amounted to RMB227.8 million and RMB829.3 million, respectively. Although we have not experienced any losses associated with our interim guarantees for the years ended December 31, 2007 and 2008, we have accrued RMB0.5 million for the nine months ended September 30, 2009 for the estimated loss associated with our interim guarantees. If substantial and widespread defaults by our customers occur at the time when the real estate market deteriorates rapidly and for a sustained period and we are called upon to honor our guarantees, our financial condition and results of operations will be materially and adversely affected.
We rely on our information systems to operate our business and maintain our competitiveness, and any disruption to it could harm our business.
Our business depends upon the use of information systems, including systems providing real-time and in-depth management and sales information and support to our network of sales offices and marketing efforts. We rely significantly on our in-house information technology team with support from third-party outsourcing firms, to develop, maintain and regularly upgrade our information systems. In addition, some operations of these information systems depend upon third party technologies, systems and services. We cannot assure you that we will continue to have access to the products or services provided by our third party providers on commercially reasonable terms, or at all. We also cannot assure you that we will be able to continue to effectively operate and maintain our information systems, or to effectively retain our key personnel for the maintenance and management of our information systems.
In addition, we expect to refine and enhance our information systems on an ongoing basis, and we expect that advanced new technologies and systems will continue to be introduced. We may not be able to
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replace our existing information systems or introduce new information systems as quickly as our competitors or in a cost-effective manner.
In addition, our information systems are vulnerable to damage or interruption from various causes, including (1) natural disasters, war and acts of terrorism, (2) power losses, computer system failures, internet and telecommunications or data network failures, operator error, losses and corruption of data, and similar events and (3) computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information and other physical or electronic breaches of security. While we maintain certain disaster recovery capabilities for critical functions in most of our businesses, these capabilities may not successfully prevent a disruption to or material and adverse effect on our businesses or operations in the event of a disaster or other business interruption. Any extended interruption in our information systems could significantly reduce our ability to conduct our business and generate revenue. Additionally, we do not carry business interruption insurance for any losses that may occur.
If we cannot manage our growth, our operating results or profitability could be materially and adversely affected.
We have experienced substantial growth since we began operations in 2000. Our net revenues amounted to RMB38.4 million in 2006, RMB189.0 million in 2007, RMB273.4 million in 2008, and RMB443.7 million in the nine months ended September 30, 2009. We intend to continue to expand our operations, which will continue to place substantial demands on our managerial, operational, financial, technological and other resources. Our planned expansion will also place significant demands on us to ensure that our brand does not suffer as a result of any decreases, whether actual or perceived, in the quality of our services. In order to manage and support our growth, we must continue to improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain additional qualified sales professionals as well as other administrative and sales and marketing personnel, particularly as we expand into new markets. We may not be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new expansion into our operations. During our expansion, we may also face other difficulties as a result of a number of factors, many of which are beyond our control, such as any general unfavorable conditions in the real estate market, cost overruns due to price increases by third party vendors or delays or denials of required approvals by relevant government authorities. As a result, our operating results or profitability could be materially and adversely affected.
We may not be successful in our business expansions through future acquisitions.
We have established our company-owned brokerage services business in Shanghai and Shenzhen through acquisitions. In territories where we do not have company-owned sales offices, one of our expansion strategies is to establish our own brokerage services business by acquiring existing chains of sales stores or regional sub-franchisors when their operations become mature and profitable. However, our experience in Shanghai and Shenzhen may not be replicable in other areas of China. The success of our acquisition strategy will also depend upon our ability to negotiate with acquisition targets on favorable terms, and to finance and complete these transactions.
We also need to effectively integrate newly-acquired brokerage businesses into our existing operations, which may involve complex operational and personnel-related challenges, including rectifying possible inconsistencies in standards, controls, procedures and policies, maintaining important business relationships, overcoming local cultural differences, and controlling unanticipated expenses related to such integration. We may also incur material costs relating to such integration. A prolonged diversion of management’s attention and any delays or difficulties we encounter in connection with the integration of any business that we have acquired or may acquire in the future could prevent us from realizing the anticipated cost savings and revenue growth from our acquisitions.
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We may be unable to obtain adequate financing to fund our capital requirements.
We expect that over the next several years, a substantial portion of our cash flow will be used to finance the expansion of our company-owned brokerage services business to increase our market share in existing markets and to expand our geographical presence. Although we anticipate that our available funds and expected cash flows from operations will be sufficient to meet our cash needs for at least the next twelve months, this assumption is based on management’s ability to successfully execute its business plan, which includes increasing sales, generating positive operating cash flows and obtaining additional funding to support longer term capital requirements. We cannot assure you that we will obtain such financing at a reasonable cost or at all. Our inability to finance our planned capital expenditures or future acquisitions could materially and adversely affect our business, financial condition and results of operations.
We may not be able to successfully execute our business development strategy, which could have a material and adverse effect on our business, financial condition and results of operations.
We plan to continue to expand our business into new geographical areas in China and to enter into new businesses to diversify our portfolio of products and services. Because China is a large and diverse market, home buying trends and demands may vary significantly by region, and our experience in the markets in which we currently operate may not be applicable in other parts of China. As a result, we may not be able to leverage our experience to expand into other parts of China or to enter into businesses with respect to new products or services. When we enter new markets, we may face intense competition from companies with greater experience or an established presence in the targeted areas or from other companies with similar expansion targets. In addition, our business model may not be successful in new and untested markets. Therefore, we may not be able to successfully execute our business development strategy, which could have a material and adverse effect on our business, financial condition and results of operations.
We may not maintain sufficient insurance coverage for the risks associated with our business operations.
Risks associated with our businesses and operations include but are not limited to claims for wrongful acts committed by our sales professionals, disputes with our regional sub-franchisors or franchisees that we do not own, the loss of intellectual property rights or the failure of information technology systems crucial to our operations, the loss of key personnel and risks posed by natural disasters. Any of these risks may result in significant losses. We maintain insurance coverage we consider customary in China for the industry in which we operate and in compliance with the insurance requirements imposed on us by our master sub-franchise agreement with Realogy. However, we cannot assure you that our insurance coverage is sufficient to cover any losses that we may sustain, or that we will be able to successfully claim our losses under our existing insurance policy on a timely basis or at all. If we incur any loss not covered by our insurance policies, or the compensated amount is significantly less than our actual loss or is not timely paid, our business, financial condition and results of operations could be materially and adversely affected.
When preparing our consolidated financial statements for the years ended December 31, 2007 and 2008, we noted one material weakness in our internal control over financial reporting. If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately report our financial results may be impaired, which could adversely impact investor confidence and the market price of our ADSs.
Prior to this offering, we have been a private company with limited accounting and other resources with which to adequately address our internal controls and procedures. When preparing our consolidated financial statements for the years ended December 31, 2007 and 2008, we noted one material weakness in our internal control over financial reporting relating to a lack of sufficient resources to perform period-end financial reporting procedures, address complex accounting issues under US GAAP and prepare and review financial statements and related disclosures under US GAAP. This material weakness resulted in adjustments to the company’s
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consolidated financial statements for the years ended December 31, 2007 and 2008. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting” for a detailed discussion.
If the material weakness is not remedied or recurs, or if we identify additional weaknesses or fail to timely and successfully implement new or improved controls, our ability to assure timely and accurate financial reporting may be adversely affected, we may be required to restate our financial statements, and we could suffer a loss of investor confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs, result in lawsuits being filed against us by our shareholders, or otherwise harm our reputation.
Seasonality in the real estate market could adversely affect our business.
The real estate brokerage business is subject to seasonal fluctuations. Historically, real estate brokerage revenues and transaction volumes have generally been low during January and February as well as the late summer months in China. However, many of our expenses, such as those relating to leasing, administrative or sales and marketing efforts, are fixed and cannot be reduced during a seasonal slowdown. As a result, our operating results have fluctuated from quarter to quarter. These fluctuations are likely to continue and operating results for any period may not be indicative of our performance in any future period. If our operating results for any quarterly period fall below investor expectations or estimates by securities research analysts, the trading price of our ADSs may decline.
Our corporate actions are substantially controlled by Mr. Donald Zhang and Mr. Harry Lu.
Immediately following this offering, Mr. Donald Zhang, our chairman and chief executive officer, and Mr. Harry Lu, our vice chairman and president, will beneficially own approximately 37.9% of our outstanding shares or 36.4% if the underwriters exercise their option to purchase additional ADSs in full. Accordingly, Messrs. Zhang and Lu will have significant influence in determining the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, the election of directors and other significant corporate actions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering.
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain New York Stock Exchange corporate governance standards applicable to U.S. issuers, including the requirements that a majority of an issuer’s directors consist of independent directors. This may afford less protection to our holders of ordinary shares and ADSs.
Section 303A of the Corporate Governance Rules of the New York Stock Exchange requires listed companies to have, among other things, a majority of its board members be independent and a nominating and corporate governance committee consisting solely of independent directors. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee. Since a majority of our board of directors will not consist of independent directors as long as we rely on the foreign private issuer exemption, fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result.
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An occurrence of a widespread health epidemic or other outbreaks could have a material and adverse effect on our business, financial condition and results of operations.
Our business could be adversely affected by the effects of Influenza A virus subtype H1N1, or A (H1N1), Severe Acute Respiratory Syndrome, or SARS, avian influenza or other epidemics or outbreaks on the economic and business climate. A prolonged outbreak of A (H1N1), any recurrence of SARS, avian influenza or other adverse public health developments in China or elsewhere in the world could have a material and adverse effect on our business operations. Such outbreaks could significantly impact the real estate market and cause a temporary closure of our facilities. Such impact or closures would severely disrupt our operations and adversely affect our business, financial condition and results of operations. Our operations could be disrupted if any of our sales professionals, staff or customers were suspected of having A (H1N1), SARS or avian influenza, since this could require us to quarantine some or all of our sale professional and staff or disinfect our facilities and may deter our customers or potential customers from visiting our sales offices. In addition, our business, financial condition and results of operations could be adversely affected to the extent that A (H1N1), SARS, avian influenza or other outbreak harms the global or Chinese economy in general.
Risks Related to Doing Business in China
Adverse changes in economic and political policies of the PRC government could have a material and adverse effect on overall economic growth in China, which could materially and adversely affect our business.
We conduct substantially all of our business operations in China. As the real estate sector is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Accordingly, our business, financial condition, results of operations and prospects depend to a significant degree on economic developments in China. China’s economy differs from the economies of most other countries in many respects, including with respect to the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has experienced significant growth in the past 30 years, this growth has remained uneven across different periods, regions and among various economic sectors. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since late 2003, the PRC government has implemented a number of measures, such as increasing the People’s Bank of China’s statutory deposit reserve ratio and imposing commercial bank lending guidelines, which had the effect of slowing the growth of credit availability. In 2008 and 2009, however, in response to the global financial crisis, the PRC government has loosened such requirements. Any future actions and policies adopted by the PRC government could materially affect the Chinese economy and slow the growth of the real estate market in China, which could materially and adversely affect our business.
We rely principally on dividends and other distributions on equity paid by our subsidiaries in China to fund our cash and financing requirements, and any limitation on the ability of our subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.
We are an offshore holding company, and we rely principally on dividends from our subsidiaries in China for our cash requirements, including for the service of any debt we may incur. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries 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 payments to us. Any limitation on the ability of our subsidiaries to distribute dividends or other
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payments to us could materially and 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.
PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries.
We may make loans to our PRC subsidiaries. Any loans to or investments in our PRC subsidiaries are subject to approval by or registration with relevant governmental authorities in China. We may also decide to finance our subsidiaries by means of capital contributions. According to the relevant PRC regulations on foreign-invested enterprises in China, depending on the total amount of investment, capital contributions to our PRC operating subsidiaries may be subject to the approval of the PRC Ministry of Commerce or its local branches. We may not obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
Fluctuations in the value of the RMB may have a material and adverse effect on your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Since July 2008, however, the Renminbi has traded stably within a narrow range against the U.S. dollar.
There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against foreign currencies. Our revenues and costs are mostly denominated in the Renminbi, and a significant portion of our financial assets are also denominated in the Renminbi. Any significant fluctuations in the exchange rate between the Renminbi and the U.S. dollar may materially and adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our ADSs in U.S. dollars. Any fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.
Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from State Administration of Foreign Exchange by complying with certain procedural requirements. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. This could affect the ability of our PRC subsidiaries to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us. The PRC government may
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also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC domestic residents may subject our PRC resident beneficial owners to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
China has regulations that subject our PRC subsidiaries to additional restrictions if we have beneficial owners of our company who are PRC residents that have not properly filed with authorities in China. See “Regulations—Regulations on Foreign Exchange Registration of Offshore Investment by PRC Residents.” Currently, we do not have beneficial owners whom we know to be PRC residents. However, we cannot provide any assurances that any PRC resident who becomes our beneficial owner in the future will be able to comply with relevant State Administration of Foreign Exchange of the PRC, or SAFE regulations in a timely manner, or at all. Any failure or inability of our PRC resident beneficial owners to comply with the registration procedures may subject such PRC resident beneficial owners to certain fines and legal sanctions, restrict our cross-border investment and financing activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign exchange-denominated loans.
As it remains uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval processes with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our business, financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject our PRC stock incentive plan participants or us to fines and other legal or administrative sanctions.
In December 2006, the People’s Bank of China promulgated Administrative Measures for Individual Foreign Exchange, or the Individual Foreign Exchange Rules, setting forth the requirements for foreign exchange transactions by PRC individuals under either the current account or the capital account. In January 2007, SAFE issued Implementing Rules for the Individual Foreign Exchange Rules, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures. We and our PRC sales professionals and staff who have been granted stock options are subject to the Stock Option Rule. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.
Any change in the preferential tax treatment we currently enjoy in the PRC may have an adverse impact on our business, financial condition and results of operations.
Our PRC subsidiaries are subject to the corporate income tax with the tax rate of 25% except for Shanghai Ruifeng, Shanghai Anshijie Real Estate Consultant Co., Ltd. and Shenzhen CIR which enjoy a
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preferential tax rate of 20% in 2009, and Beijing Huachuangxunjie Technology Co., Ltd, or Huachuang, which enjoys a corporate income tax exemption in 2009. We expect that our tax payments will increase in 2010 and will further increase following the expiry of the above preferential tax treatment in 2013. See “Management’s Discussions and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Taxation.”
Various local governments in China have provided discretionary preferential tax treatments to us. However, these local governments may decide to reduce or eliminate these preferential tax treatments at any time. Furthermore, these local implementations of tax laws may be found to violate national laws or regulations and we may be subject to retroactive imposition of higher taxes as a result. Starting from the year 2007, we are required to accrue taxes for these contingencies and other uncertain tax positions taken by us. The change in accounting requirement for reporting tax contingencies, any reduction or elimination of these preferential tax treatments and any retroactive imposition of higher taxes could have an adverse effect on our business, financial condition and results of operations.
Dividends payable to us by our PRC subsidiaries and gain on sale of our shares may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income and dividends distributed to our investors may be subject to PRC withholding taxes under the new CIT Law.
Under the new Corporate Income Tax Law, or CIT Law and its implementation rules, all domestic and foreign invested companies are subject to a uniform enterprise income tax at the rate of 25% and dividends from PRC subsidiaries to their foreign shareholders that are “non-resident enterprises” and any gain realized on the transfer of ADSs or shares by such shareholders will be subject to a withholding tax at the rate of 10% unless a treaty otherwise provides.
It is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the CIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises” or individuals, or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ordinary shares or ADSs may be materially and adversely affected. With the newly imposed 5% or 10% PRC dividend withholding tax, depending on the tax jurisdiction of the receiver, we will incur incremental PRC tax liabilities when PRC profits are distributed to ultimate shareholders.
In addition, under the CIT Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore may be subject to PRC enterprise income tax at the rate of 25% on their worldwide income. See “Taxation—People’s Republic of China Taxation.” If we become a PRC resident enterprise under the new PRC tax system and receive income other than dividends, our profitability and cash flow would be adversely impacted due to our worldwide income being taxed in China under the new CIT Law.
Foreign ownership of real estate agency and brokerage businesses in China is restricted under recent PRC regulations. This may limit our ability to establish our new PRC operating entities or to increase the registered capital of existing entities in the future.
On October 31, 2007, the PRC National Development and Reform Committee of China and the Ministry of Commerce of China jointly promulgated the amended Foreign Investment Industrial Guidance Catalogue, or the Catalogue, which came into effect on December 1, 2007. According to the Catalogue, real estate agency companies and real estate brokerage companies are classified to be in the restricted category of foreign investment industries.
Our PRC legal counsel, Jun He Law Offices, is of the opinion that only new real estate agency and brokerage businesses established after December 1, 2007, or any existing real estate agency and brokerage
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businesses that require new approvals from the Ministry of Commerce or its local branch in order to increase their registered capital or conduct an equity transfer, would be effected by the Catalogue. It may be difficult or take a long time for us to obtain any approvals from the Ministry of Commerce or its local branch in order to establish our new PRC operating entities or to increase the registered capital of existing entities in the future. We cannot assure you that, if we are required to seek such approvals in the future, we will be able to obtain them from the Ministry of Commerce or its local branch on a timely basis, or at all.
Uncertainties with respect to the Chinese legal system could have a material and adverse effect on us.
The PRC legal system is based on written statutes. Unlike under common law systems, decided legal cases have little value as precedents in subsequent legal proceedings. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general, and forms of foreign investment (including wholly foreign-owned enterprises and joint ventures) in particular. These laws, regulations and legal requirements are relatively new and are often changing, and their interpretation and enforcement involve significant uncertainties that could limit the reliability of the legal protections available to us. We cannot predict the effects of future developments in the PRC legal system. We may be required in the future to procure additional permits, authorizations and approvals for our existing and future operations, which may not be obtainable in a timely fashion or at all. An inability to obtain such permits or authorizations may have a material and adverse affect on our business, financial condition and results of operations.
The implementation of the PRC Labor Contract Law and the Implementation Regulation for the PRC Labor Contract Law may increase our operating expenses and may materially and adversely affect our business, financial condition and results of operations.
As the PRC Labor Contract Law, or Labor Contract Law, and its Implementation Regulation for the PRC Labor Contract Law, or Implementation Regulation, have been enforced for only a very short time, substantial uncertainty remains as to its potential impact on our business, financial condition and results of operations. See “Regulations — Regulations of Labor Contracts”. The implementation of the Labor Contract Law and the Implementation Regulation may increase our operating expenses, in particular our human resources costs and our administrative expenses. In the event that we decide to significantly modify our employment or labor policy or practice, or reduce the number of our sales professionals and staff, the Labor Contract Law may limit our ability to effectuate the modifications or changes in the manner that we believe to be most cost-efficient or otherwise desirable, which could materially and adversely affect our business, financial condition and results of operations.
If we fail to satisfy the regulatory requirements for provision of interim guarantees, our business, financial condition and results of operations could be materially and adversely affected.
On February 3, 2009, the State Council issued theNotice on Further Specifying the Supervisory Functions for Financing Guarantee Business, which authorized several PRC governmental bodies, led by the China Banking Regulatory Commission, to study and adopt regulatory policies and rules for the development of financing guarantee businesses in China. The provincial governmental bodies in China are authorized to adopt local regulatory rules for financing guarantee businesses within their respective jurisdictions. As of September 30, 2009, no specific rules regulating guarantee businesses have been adopted. However, we cannot assure you that we will be able to satisfy or comply with any new regulatory requirements adopted by the PRC government or provincial governmental bodies in the future. Our business, financial condition and results of operations could be materially and adversely affected by our failure to do so.
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Risks Related to Our ADSs and This Offering
There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.
Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We have been approved to list our ADSs on the New York Stock Exchange. Our ordinary shares will not be listed or quoted for trading on any exchange. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected. The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.
We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or ordinary shares to significant adverse tax consequences.
Based on our current income and assets and taking into consideration this offering, we presently do not believe that we should be classified as a passive foreign investment company, or PFIC, for the current taxable year. While we do not anticipate becoming a PFIC in future taxable years, the composition of our income and our assets will be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation – United States Federal Income Taxation”) would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a non-United States corporation that does not distribute all of its earnings on a current basis. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. For more information see the section titled “Taxation – United States Federal Income Taxation – Passive Foreign Investment Company Considerations.”
The market price for our ADSs may be volatile.
In addition to the volatility in the price of our ADSs which could be caused by the materialization of any of the risks described in this section, the securities markets in the United States, China and elsewhere have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.
Goldman Sachs (Asia) L.L.C. may have a conflict of interest with respect to this offering.
Immediately prior to the completion of this offering, Goldman Sachs Strategic Investments (Asia) L.L.C., or Goldman Sachs Strategic Investments, an affiliate of Goldman Sachs (Asia) L.L.C., or Goldman Sachs Asia, will beneficially own approximately 28.4% of our outstanding ordinary shares. Therefore, Goldman Sachs Asia, a representative of the underwriters in this offering, will be deemed to have a “conflict of interest” with us under Rule 2720 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc.
Rule 2720 requires that a “qualified independent underwriter” (as such term is defined by Rule 2720) participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence. Accordingly, Morgan Stanley & Co. International plc is assuming the responsibilities of acting as the qualified independent underwriter in this offering. Although the qualified independent underwriter has participated in the preparation of the registration statement and prospectus and exercised the usual standards of
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due diligence, we cannot assure you that this will adequately address any potential conflicts of interest related to Goldman Sachs Asia and Goldman Sachs Strategic Investments. Immediately at the completion of this offering, Goldman Sachs Strategic Investments will beneficially own approximately 20.6% of our outstanding ordinary shares or 19.8% if the underwriters’ option to purchase additional ADSs is exercised in full. See “Our Relationship with Realogy and Related Party Transactions – Related Party Transactions – Private Placements” and “Underwriting.”
You will experience immediate dilution in the net tangible book value of ADSs purchased.
When you purchase ADSs in the offering, you will incur immediate dilution of approximately US$4.71 per ADS, representing the difference between the purchase price per ADS in this offering of US$7.50, being the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, and our net tangible book value per ADS as of September 30, 2009 after giving effect to the automatic conversion of all our ordinary and preferred shares into Class A and Class B ordinary shares and this offering. See “Dilution.” In addition, you may experience further dilution in the net tangible book value of the ADSs purchased to the extent that additional ordinary shares are issued upon exercise of outstanding options and options we may grant from time to time.
We may need additional capital, and the sale of additional ADSs or other equity securities or incurrence of additional indebtedness could result in additional dilution to our shareholders or increase our debt service obligations.
Historically, we have relied principally on our operational sources of cash, as well as external sources of financing to fund our operations and capital expansion needs. We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity, equity-linked or debt securities or enter into a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.
Substantial future sales of our ADSs in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.
Additional sales of our ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Immediately upon completion of this offering, we will have 686,154,777 ordinary shares outstanding or 714,251,652 ordinary shares if the underwriters exercise their option to purchase additional ADSs in full. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. 498,842,277 ordinary shares outstanding after this offering will be available for sale, upon the expiration of the applicable lock-up period, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act. The lock-up restrictions on each of our existing shareholders in this offering will expire 180 days from the date of this prospectus. Any or all of these shares can be released prior to expiration of the lock-up period at the discretion of the representatives of the underwriters for this offering. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline.
In addition, certain holders of our ordinary shares after the completion of this offering will have the right to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.
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Our articles of association contain anti-takeover provisions that could have a material and adverse effect on the rights of holders of our ordinary shares and ADSs.
Our amended and restated articles of association limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could deprive 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 our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges and relative participating, optional or special rights and their qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms which may delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.
Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs evidenced by the ADRs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems doing so expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and all of our officers reside outside the United States.
We are incorporated in the Cayman Islands. We conduct substantially all of our operations in China through the subsidiaries in China directly or indirectly owned by us. All of our officers reside outside the United
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States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an original action against us or against these individuals in a Cayman Islands or PRC court if you believe that we or our officers have infringed your rights under the U.S. federal 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 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. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”
Our corporate affairs are governed by our amended and restated memorandum and articles of association and by the Companies Law (2009 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, 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 precedents in the United States. In particular, the Cayman Islands have a less developed body of securities laws as compared to the United States, and provide significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
Our management will have considerable discretion as to the use of the net proceeds from this offering.
We intend to use a significant portion of the net proceeds of this offering for general corporate purposes. However, we have not allocated the net proceeds we will receive from this offering to any specific purpose. As such, our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.
We will incur additional costs as a result of becoming a public company.
As a public company, we will incur significant legal, accounting and other expenses that we did not have as a private company prior to this offering. In addition, new rules and regulations relating to information disclosure, financial reporting and control and corporate governance, which could be adopted by the SEC, the New York Stock Exchange and other regulatory bodies and exchange entities from time to time, could result in a significant increase in legal, accounting and other compliance costs and to make certain corporate activities more time-consuming and costly, which could materially affect our business, financial condition and results of operations.
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This prospectus contains forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements 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, performances or achievements expressed or implied by the forward-looking statements.
Forward-looking statements typically are 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 or the negative of these words or expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:
• | our anticipated growth strategies; |
• | our future business development, results of operations and financial condition; |
• | expected changes in our net revenues and certain cost or expense items; |
• | our ability to attract clients and further enhance our brand recognition; and |
• | trends and competition in the real estate services industry. |
The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. 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 prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.
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We estimate that we will receive net proceeds of approximately US$83.6 million from this offering, or US$96.7 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting the estimated underwriting discount and offering expenses payable by us. For the purpose of estimating net proceeds, we are assuming an initial public offering price of US$7.50 per ADS, the mid-point of the estimated range of the initial public offering price. A US$0.50 increase (decrease) in the assumed public offering price would increase (decrease) the net proceeds to us from this offering by US$5.8 million.
We intend to use the net proceeds of this offering for the following purposes:
• | approximately US$40 million to fund the development of our company-owned brokerage services business to enter new cities through selected strategic acquisitions to enter new cities; |
• | approximately US$20 million to fund the development of our company-owned brokerage services business in existing cities by opening additional company-owned sales offices; |
• | approximately US$10 million to invest and upgrade our information and operations systems; |
• | the balance to fund general corporate purposes, including our working capital needs. |
As of the date of this prospectus, we cannot specify with certainty the particular uses for all of the net proceeds we will receive upon the completion of this offering. The foregoing represents our current intentions with respect to the use and allocation of the net proceeds of this offering based upon our present plans and business conditions. Accordingly, our management will have significant discretion in applying the net proceeds we will receive from the offering. The occurrence of unforeseen events or changed business conditions could result in application of the net proceeds of this offering in a manner other than as described in this prospectus.
As of the date of this prospectus, we believe that the estimated net proceeds of this offering, along with existing cash balances and ongoing operating cash flows, will provide necessary capital for our contemplated expansion plans. Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations.
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We have never declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and expand our business.
As we are a holding company, we rely, in part, on dividends paid to us by our subsidiaries in China for our cash requirements, including funds to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. In China, the payment of dividends is subject to limitations. PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, our subsidiaries in China are required to set aside a certain amount of their accumulated after-tax profits each year, if any, to fund certain statutory reserves. These reserves may not be distributed as cash dividends. Further, if our subsidiaries 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 payments to us.
Our board of directors has sole discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that they may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ADSs, if any, will be paid in U.S. dollars.
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The following table shows our capitalization as of September 30, 2009:
• | on an actual basis; and |
• | on a pro forma basis to give effect to the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering; and |
• | on a pro forma as adjusted basis to reflect the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering, and the issuance and sale of 12,487,500 ADSs by us in this offering, assuming an initial public offering price of US$7.50 per ADS (which is the mid-point of the estimated initial public offering price range) after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
You should read this table in conjunction with our consolidated financial statements and related notes included in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
As of September 30, 2009(1) | ||||||
Actual | Pro Forma | Pro Forma As Adjusted(2) | ||||
(in thousands of RMB, except share numbers) | ||||||
Preferred shares: | ||||||
Series A preferred shares, US$0.001 par value, 200,000,000 shares authorized, issued and outstanding on an actual basis and Series B preferred shares, US$0.001 par value, 111,367,270 shares authorized, issued and outstanding on an actual basis (None outstanding on a pro-forma or pro-forma as adjusted basis as of September 30, 2009) | 514,162 | — | — | |||
Shareholders’ deficit: | ||||||
Class A ordinary shares, US$0.001 par value, 1,013,746,760 shares authorized, 260,000,000 shares issued and outstanding on an actual basis, 3,133,000,000 shares authorized, 418,339,339 shares issued and outstanding on a pro-forma basis, and 605,651,839 shares issued and outstanding on a pro-forma as adjusted basis as of September 30, 2009 | 2,152 | 3,233 | 4,512 | |||
Class B ordinary shares, US$0.001 par value, 100,000,000 shares authorized, 80,502,938 shares issued and outstanding on a pro-forma basis, and on a pro-forma as adjusted basis (None authorized, issued and outstanding on an actual basis as of September 30, 2009) | — | 550 | 550 | |||
Additional paid-in capital | 2,496 | 519,942 | 1,089,499 | |||
Accumulated deficit | (179,680) | (184,595) | (184,595) | |||
Non-controlling interest | 2 | 2 | 2 | |||
Total shareholders’ (deficit) / equity | (175,030) | 344,047 | 914,883 | |||
Total capitalization | 339,132 | 344,047 | 914,883 | |||
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(1) | On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 per share, 20,000,000 Series A preferred shares of par value US$0.01 per share and 11,136,727 Series B preferred shares of par value US$0.01 per share were divided into 260,000,000 ordinary shares of US$0.001 par value per share, 200,000,000 Series A preferred shares of par value US$0.001 per share and 111,367,270 Series B preferred shares of par value US$0.001 per share, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760. The share split has been retroactively reflected for all periods presented herein. |
(2) | A US$0.50 increase (decrease) in the assumed initial public offering price of US$7.50 per ADS would increase (decrease) each of pro forma as adjusted additional paid-in capital, total shareholders’ equity and total capitalization by RMB39.7 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs. |
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If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after the offering. Dilution results from the fact that the per ordinary share offering price of our ADSs is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.
Our net tangible book value at September 30, 2009 was US$44.2 million, or US$0.17 per ordinary share and US$2.55 per ADS. Net tangible book value represents total consolidated tangible assets less total consolidated liabilities.Our pro forma net tangible book value at September 30, 2009 was US$44.2 million, or US$0.09 per ordinary share and US$1.33 per ADS. Pro forma net tangible book value adjusts net tangible book value to give effect to the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering.
Without taking into account any other changes in such net tangible book value after September 30, 2009, other than to give effect to (i) the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering, and (ii) our sale of12,487,500 ADSs in this offering at the initial public offering price of US$7.50 per ADS (which is the mid-point of the estimated initial public offering price range) and after deducting the underwriting discounts and commissions and estimated offering expenses, ourpro forma as adjusted net tangible book value as of September 30, 2009 would have been US$127.8 million, or US$0.19 per share and US$2.79 per ADS. This represents an immediate increase in pro forma net tangible book value of US$0.10 per ordinary share, or US$1.47 per ADS, to existing shareholders and an immediate dilution of US$0.31 per ordinary share, or US$4.71 per ADS, to investors purchasing ADSs in this offering. Dilution is determined by subtractingpro forma as adjusted net tangible book value per ADS after this offering from the amount of cash paid by a new investor for one ADS. The following table illustrates this per share dilution:
Assumed initial public offering price per ordinary share | US$0.50 | ||
Net tangible book value per ordinary share as of September 30, 2009 | US$0.17 | ||
Pro forma net tangible book value per ordinary share as of September 30, 2009 | US$0.09 | ||
Increase in pro forma net tangible book value per ordinary share attributable to this offering | US$0.10 | ||
Pro forma as adjusted net tangible book value per ordinary share after giving effect to this offering | US$0.19 | ||
Dilution per ordinary share to new investors | US$0.31 | ||
Dilution per ADS to new investors | US$4.71 | ||
Dilution to new investors (percentage)* | 62.8 | % |
* | Calculated based on the dilution per ADS to new investors as a percentage of the per ADS initial public offering price of US$7.50 per ADS. |
A US$0.50 increase (decrease) in the assumed public offering price of US$7.50 per ADS would increase (decrease) our net tangible book value after giving effect to the offering by US$5.8 million, the pro forma as adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by US$0.01 per ordinary share and US$0.13 per ADS and the dilution per ordinary share and per ADS to new investors in this offering by US$0.02 per ordinary share and US$0.37 per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses. The pro forma and pro forma as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.
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The following table summarizes, on a pro forma as adjusted basis as of September 30, 2009, the differences between existing shareholders and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per share and the average price per ADS, each paid before deducting the underwriting discounts and commissions and our estimated offering expenses, assuming our sale of ADSs in this offering at the initial public offering price of US$7.50 per ADS, being the mid-point of the range set forth on the cover of this prospectus. The total number of ordinary shares does not include the ordinary shares underlying the ADSs to be sold upon the exercise of the option granted to the underwriters to purchase additional ADSs from us. The pro forma as adjusted information discussed above is illustrative only.
Shares purchased | Total consideration | Average price per share | Average price per ADS | |||||||||||
Number | Percent | Amount | Percent | |||||||||||
(in thousands of US$, except per share and per ADS data) | ||||||||||||||
Existing holders | 498,842 | 72.7 | % | 68,166 | 42.1 | % | 0.14 | 2.05 | ||||||
New investors | 187,313 | 27.3 | % | 93,656 | 57.9 | % | 0.50 | 7.50 | ||||||
Total | 686,155 | 100.0 | % | 161,822 | 100.0 | % | 0.24 | 3.54 | ||||||
A US$0.50 increase (decrease) in the assumed initial public offering price of US$7.50 per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ADS paid by all shareholders by US$6.2 million, US$6.2 million and US$0.14, respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and before deducting the underwriting discounts and commissions and our estimated offering expenses.
The discussion and tables in this section assume no exercise of outstanding stock options. As of September 30, 2009, there were stock options outstanding to purchase a total of 43.8 million ordinary shares, with a weighted average exercise price of US$0.13 per share. To the extent that any of these stock options are exercised, there will be further dilution to new investors.
If the underwriters’ option to purchase additional ADSs is exercised in full, investors purchasing ADSs in this offering from us will hold 30.2% of the total number of our ordinary shares outstanding after this offering.
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Our business is primarily conducted in China, and all of our revenues and expenses are denominated in Renminbi. Unless otherwise noted, all translations from Renminbi to U.S. dollars have been made at a rate of RMB6.8262 to US$1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on September 30, 2009. We do not represent that Renminbi or U.S. dollar amounts could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates below or at all.
The following table sets forth, for the periods indicated, information concerning exchange rates between the Renminbi and the U.S. dollar based on the noon buying rate in New York City for cable transfers of Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.
Noon Buying Rate | ||||||||
Period (Year ended December 31) | Period End | Average(1) | Low | High | ||||
(RMB per US$1.00) | ||||||||
2004 | 8.2765 | 8.2768 | 8.2774 | 8.2764 | ||||
2005 | 8.0702 | 8.1826 | 8.2765 | 8.0702 | ||||
2006 | 7.8041 | 7.9579 | 8.0702 | 7.8041 | ||||
2007 | 7.2946 | 7.5806 | 7.8127 | 7.2946 | ||||
2008 | 6.8225 | 6.9193 | 7.2946 | 6.7800 | ||||
2009 | ||||||||
July | 6.8319 | 6.8317 | 6.8342 | 6.8300 | ||||
August | 6.8299 | 6.8323 | 6.8358 | 6.8299 | ||||
September | 6.8262 | 6.8277 | 6.8303 | 6.8247 | ||||
October | 6.8264 | 6.8267 | 6.8292 | 6.8248 | ||||
November | 6.8265 | 6.8271 | 6.8300 | 6.8255 | ||||
December | 6.8259 | 6.8275 | 6.8299 | 6.8244 | ||||
2010 | ||||||||
January (through January 22) | 6.8270 | 6.8270 | 6.8295 | 6.8258 |
Source: Federal Reserve Bank of New York
(1) | Annual averages are calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are calculated by using the average of the daily rates during the relevant month. |
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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The following selected consolidated financial information and operating data for the periods and as of the dates indicated should be read in conjunction with our audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our selected consolidated statement of operations data for the years ended December 31, 2007 and 2008 and the nine months ended September 30, 2009 and selected consolidated balance sheet data as of December 31, 2007 and 2008 and September 30, 2009 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our selected consolidated statement of operations data for the nine months ended September 30, 2008 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial data. The unaudited selected financial data include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary for a fair presentation of the financial position and the results of operations of the interim unaudited period. Our selected consolidated statement of operations data for the year ended December 31, 2006 and selected consolidated balance sheet data as of December 31, 2006 have been derived from our financial statements not included in this prospectus. Our audited and unaudited consolidated financial statements have been prepared and presented in accordance with accounting principles generally accepted in the United States of America, or US GAAP. The historical results are not necessarily indicative of results to be expected in any future period.
We underwent a reorganization in 2006 to become the holding company of our various subsidiaries. Our reorganization became effective on August 24, 2006. Prior to the reorganization, we managed our franchise services business through a number of companies owned by our founders. We have not included financial information for the years ended December 31, 2004 and 2005, as such information is not available on a basis that is consistent with the consolidated financial information for the years ended December 31, 2006, 2007 and 2008. As our company was not created until 2006 in connection with the reorganization as described in this prospectus, the preparation of consolidated financial information for our company prior to such date would require the preparation of consolidated financial information on a predecessor entity basis for the various companies comprising the operations of our company at that time. Such group would include two companies incorporated in the Cayman Islands and seven companies incorporated in the PRC. No financial accounts were prepared in accordance with US GAAP for our company or our subsidiaries, nor were consolidated accounts prepared for our company for 2004 and 2005. Although accounts were prepared for each of the companies incorporated in the PRC on a basis to comply with PRC tax reporting laws and regulations, or PRC Statutory Accounting, given that it would be inappropriate to prepare accounts for the non-PRC companies on the basis of PRC Statutory Accounting, in order to fairly present consolidated financial information for 2004 and 2005, our company would need to adopt uniform US GAAP accounting conventions for all nine entities, which would differ significantly from PRC Statutory Accounting.
As such, our consolidated financial statements cannot be provided on a US GAAP basis or home-country GAAP basis without unreasonable effort or expense. Furthermore, we believe that the omission of selected financial data for those years would not have a material impact on a reader’s understanding of our financial results and condition, and related trends.
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For the Year Ended December 31, | For the Nine Months Ended September 30, | |||||||||||||||||
2006 | 2007 | 2008 | 2008 | 2009 | ||||||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | (RMB) | (US$)(1) | |||||||||||||
(unaudited) | ||||||||||||||||||
(in thousands, except for share and per share data) | ||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||
Revenue | ||||||||||||||||||
Net revenues | 38,425 | 189,029 | 273,359 | 208,877 | 443,691 | 64,998 | ||||||||||||
Costs and Expenses | ||||||||||||||||||
Commissions and other agent related costs | (4,620 | ) | (82,866 | ) | (151,550 | ) | (116,250 | ) | (197,978 | ) | (29,003 | ) | ||||||
Operating costs | (9,914 | ) | (79,886 | ) | (146,457 | ) | (110,889 | ) | (85,183 | ) | (12,479 | ) | ||||||
Selling, general and administrative expenses | (40,285 | ) | (94,471 | ) | (102,952 | ) | (76,456 | ) | (70,278 | ) | (10,295 | ) | ||||||
Total costs and expenses | (54,819 | ) | (257,223 | ) | (400,959 | ) | (303,595 | ) | (353,439 | ) | (51,777 | ) | ||||||
(Loss)/Income from operations | (16,394 | ) | (68,194 | ) | (127,600 | ) | (94,718 | ) | 90,252 | 13,221 | ||||||||
Interest income | 848 | 1,708 | 4,441 | 2,708 | 1,575 | 231 | ||||||||||||
Interest expense | (1,299 | ) | — | — | — | — | — | |||||||||||
Foreign currency exchange loss | (1,537 | ) | (5,485 | ) | (5,526 | ) | (4,458 | ) | (480 | ) | (70 | ) | ||||||
(Loss)/Income before income tax and share of associates’ losses | (18,382 | ) | (71,971 | ) | (128,685 | ) | (96,468 | ) | 91,347 | 13,382 | ||||||||
Income tax | (799 | ) | (394 | ) | (2,076 | ) | (1,780 | ) | (2,821 | ) | (414 | ) | ||||||
Share of associates’ losses | (373 | ) | (409 | ) | (1,126 | ) | (1,050 | ) | (193 | ) | (28 | ) | ||||||
Net (loss)/income | (19,554 | ) | (72,774 | ) | (131,887 | ) | (99,298 | ) | 88,333 | 12,940 | ||||||||
Non-controlling interest | 1,524 | (1,347 | ) | (431 | ) | (431 | ) | — | — | |||||||||
Net (loss)/income attributable to IFM Investments Limited | (18,030 | ) | (74,121 | ) | (132,318 | ) | (99,729 | ) | 88,333 | 12,940 | ||||||||
Net (loss) income per Share | ||||||||||||||||||
Basic | (0.07 | ) | (0.31 | ) | (0.57 | ) | (0.43 | ) | 0.13 | 0.02 | ||||||||
Diluted | (0.07 | ) | (0.31 | ) | (0.57 | ) | (0.43 | ) | 0.13 | 0.02 | ||||||||
Net (loss) income per ADS | ||||||||||||||||||
Basic | (1.12 | ) | (4.69 | ) | (8.54 | ) | (6.43 | ) | 2.00 | 0.29 | ||||||||
Diluted | (1.12 | ) | (4.69 | ) | (8.54 | ) | (6.43 | ) | 1.96 | 0.29 | ||||||||
Weighted average number of ordinary shares used in per share calculations(2): | ||||||||||||||||||
Basic | 260,000,000 | 260,000,000 | 260,000,000 | 260,000,000 | 260,000,000 | 260,000,000 | ||||||||||||
Diluted | 260,000,000 | 260,000,000 | 260,000,000 | 260,000,000 | 264,262,500 | 264,262,500 |
(1) | Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. |
(2) | On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 per share, 20,000,000 Series A preferred shares of par value US$0.01 per share and 11,136,727 Series B preferred shares of par value US$0.01 per share were divided into 260,000,000 ordinary shares of US$0.001 par value per share, 200,000,000 Series A preferred shares of par value US$0.001 per share and 111,367,270 Series B preferred shares of par value US$0.001 per share, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760. The share split has been retroactively reflected for all periods presented herein. |
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As of December 31, | As of September 30, | ||||||||||||||||
Actual | Actual | Pro Forma As Adjusted(2) | |||||||||||||||
2006 | 2007 | 2008 | 2009 | 2009 | |||||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | (US$)(1) | (RMB) | (US$)(1) | |||||||||||
(in thousands) | |||||||||||||||||
Balance Sheet Data: | |||||||||||||||||
Cash and cash equivalents | 110,505 | 331,216 | 176,977 | 263,176 | 38,554 | 834,102 | 122,178 | ||||||||||
Restricted cash | 6,793 | 14,497 | 17,213 | 21,565 | 3,159 | 21,565 | 3,159 | ||||||||||
Accounts receivable, net | 6,437 | 9,965 | 13,633 | 60,030 | 8,794 | 60,030 | 8,794 | ||||||||||
Amount due from related parties | 80,789 | 44,068 | 38,110 | 6,210 | 910 | 6,210 | 910 | ||||||||||
Property and equipment, net | 5,822 | 42,467 | 42,954 | 41,076 | 6,017 | 41,076 | 6,017 | ||||||||||
Intangible assets, net | 27,943 | 26,317 | 29,796 | 28,318 | 4,148 | 28,318 | 4,148 | ||||||||||
Total assets | 255,750 | 513,187 | 360,895 | 462,792 | 67,796 | 1,033,628 | 151,420 | ||||||||||
Accrued expenses and other current liabilities | 38,535 | 52,234 | 53,597 | 97,450 | 14,276 | 97,450 | 14,276 | ||||||||||
Total liabilities | 106,073 | 145,647 | 111,356 | 123,660 | 18,115 | 123,660 | 18,115 | ||||||||||
Convertible redeemable preferred shares | 172,131 | 469,971 | 501,892 | 514,162 | 75,322 | — | — | ||||||||||
Total shareholders’ (deficit)/equity | (22,454 | ) | (102,431 | ) | (252,353 | ) | (175,030) | (25,641) | 914,883 | 134,025 | |||||||
(1) | Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. |
(2) | Our consolidated balance sheet data as of September 30, 2009 is adjusted to give effect to the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering, and the issuance and sale of ADSs by us in this offering, assuming an initial public offering price of US$7.50 per ADS (the mid-point of the estimated initial public offering price range) after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A US$0.50 increase (decrease) in the assumed initial public offering price of US$7.50 per ADS would increase (decrease) the amounts representing cash and cash equivalents, total assets and total shareholders’ deficit by US$5.8 million. |
For the year ended or as of December 31, | For the Nine Months Ended or as of September 30, | ||||||||
2007 | 2008 | 2008 | 2009 | ||||||
(unaudited) | |||||||||
Other Financial and Operating Data: | |||||||||
Company-owned brokerage services | |||||||||
Net revenues (in thousands of RMB) | 151,692 | 206,076 | 153,703 | 407,937 | |||||
Average number of operating sales offices(1) | 143 | 279 | 296 | 233 | |||||
Average monthly net revenues per operating sales office (in thousands of RMB) | 88.4 | 61.6 | 57.7 | 194.5 | |||||
Mortgage management services | |||||||||
Net revenues (in thousands of RMB) | — | 10,650 | 7,903 | 22,467 | |||||
Loan amount of referred mortgages (in thousands of RMB) | — | 1,879,500 | 1,369,000 | 4,171,000 | |||||
Franchise services | |||||||||
Net revenues (in thousands of RMB) | 37,337 | 56,633 | 47,271 | 13,287 | |||||
Number of regional sub-franchisors as of period end | 23 | 28 | 27 | 28 |
(1) | Equals the sum of the number of operating sales offices that existed at the end of each month in the applicable period, divided by the number of months in such period. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Information and Operating Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Overview
We are a leading comprehensive real estate services provider with the largest network of real estate sales offices in China. We are the exclusive franchisor in China for the CENTURY 21® brand, one of the world’s most recognized brands in the real estate industry. As of September 30, 2009, our CENTURY 21® China network covered 34 major cities with more than 1,000 sales offices, employed approximately 14,900 sales professionals and staff and maintained approximately 4.7 million property listings. In the first half of 2009, based on transaction volume, we ranked among the top three market leaders in over 90% of the cities in which we operate and were the market leader in more than 30% of those cities. We primarily focus on China’s fast-growing and highly fragmented secondary real estate market, which we expect to outgrow the primary market, especially in more economically prosperous cities.
We have significant experience providing professional services in the real estate services industry, and have experienced substantial net revenues growth in recent years. We entered the real estate services market in 2000 as a pioneer of the franchise model in China and, from our base in Beijing, have grown our network of sales offices, including our company-owned sales offices and franchised sales offices, to 34 cities. In late 2006, we launched our company-owned brokerage services business. We subsequently launched our mortgage management services which we began managing as a separate segment in 2008. We are now a market leader in Beijing and Shanghai in both of these business lines.
Factors Affecting Our Results of Operations
Our operating results are subject to general conditions typically affecting the real estate services industry, including changes in PRC government policies and laws with respect to real estate and real estate financing, mortgage interest rates, economic growth, seasonality, demographic changes and demand for residential property in China, particularly in the secondary market. In addition, our operating results may be affected by competition from other real estate services companies and increases in operating costs and expenses due to inflation and other factors. Unfavorable changes in any of these conditions could negatively affect our transaction volume and the transaction value of the properties for which we facilitate sales and otherwise adversely affect our results of operations. For a description of the factors affecting the Chinese real estate and real estate services industry, see “Our Industry.”
Our operating results are also affected by company-specific factors, including our revenue growth and ability to effectively manage our operating costs and expenses. We describe certain of these specific factors affecting our statement of operations below.
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Net Revenues. We generate revenue by providing company-owned brokerage services, mortgage management services and franchise services. Our net revenues are presented net of PRC business taxes, discounts and related surcharges. The following table sets forth the net revenues generated by each of our business lines, both as an amount and as a percentage of total net revenues for the periods indicated:
For the Year Ended December 31, | For the Nine Months Ended September 30, | |||||||||||||||||
2007 | 2008 | 2008 | 2009 | |||||||||||||||
RMB | % | RMB | % | RMB | % | RMB | US$ | % | ||||||||||
(unaudited) | ||||||||||||||||||
Net Revenues: | (in thousands, except for percentages) | |||||||||||||||||
Company-owned brokerage services | 151,692 | 80.2 | 206,076 | 75.4 | 153,703 | 73.6 | 407,937 | 59,761 | 91.9 | |||||||||
Mortgage management services | - | - | 10,650 | 3.9 | 7,903 | 3.8 | 22,467 | 3,291 | 5.1 | |||||||||
Franchise services | 37,337 | 19.8 | 56,633 | 20.7 | 47,271 | 22.6 | 13,287 | 1,946 | 3.0 | |||||||||
Total net revenues | 189,029 | 100.0 | 273,359 | 100.0 | 208,877 | 100.0 | 443,691 | 64,998 | 100.0 | |||||||||
Company-Owned Brokerage Services. Our company-owned brokerage services accounted for 80.2% and 75.4% of net revenues for the years ended December 31, 2007 and 2008, and 73.6% and 91.9% of net revenues for the nine months ended September 30, 2008 and 2009, respectively. Net revenues from our company-owned brokerage services grew substantially in 2008, after we made a strategic decision to expand our business into company-owned brokerage services in Shanghai and Beijing as these markets mature. We further expanded into Shenzhen in mid-2008 aiming to capture the growth potential in the secondary real estate market there. We expect that our company-owned brokerage services will continue to constitute the majority of our net revenues in future periods.
We generate revenue in our company-owned brokerage services primarily through commissions earned from home buyers, sellers, lessors and lessees, principally with respect to the middle to high grade residential properties in the secondary real estate market. We have also recently created new teams dedicated to the primary and commercial real estate sales markets and expect to generate additional revenue from these areas. Most of our agency contracts specifies a commission rate expressed as a percentage of sales or monthly rental price of a particular property. Commissions are generally payable upon the signing of a real estate sales and purchase agreement or rental agreement, at which time we recognize revenue.
Net revenues from our company-owned brokerage services are significantly affected by transaction volume, our commission rates and the average transaction value of the properties that we assist in selling, purchasing and leasing, as follows:
• | Transaction volume. Transaction volumes are largely affected by general real estate market conditions in China and local market conditions, our brand recognition, our network of company-owned sales offices and sales professionals, our ability to market and sell our services to a substantial number of purchasers, sellers and lessors of properties, our ability to obtain information on potential sales or rental leads, and the quality of our services. We have grown transaction volumes by increasing the number of company-owned sales offices and by increasing the productivity per existing sales office as measured by average monthly net revenues per operating sales office. We seek to drive our revenues in future periods by maximizing the productivity per existing sales office as we expand our network of company-owned sales offices. We typically experience a ramp-up period after opening a sales office for it to achieve break-even profitability. The length of the ramp-up period depends on various factors, such as the location of each office, the number of competitors and the maturity level of the relevant local market. In addition, we expect the length of this ramp-up period to decrease as the experience of our sales professionals grows, the number of our listings increases and we achieve greater economies of scale. Subject to market conditions, we intend to have at least 500 company-owned sales offices by the end of 2010. |
• | Commission rates. Our commission rates are regulated by the PRC and provincial governments, which set maximum rates that vary from city to city. Commissions range up to an aggregate 3% of |
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transaction value for sales and purchases, and up to one month’s rent in the case of rentals. The rates set by the PRC government have not changed significantly and therefore our commission rates have not changed materially during the two years ended December 31, 2008 or the nine months ended September 30, 2009. |
• | Average transaction value. The average transaction value for the transactions in which we are involved varies based upon general real estate market conditions in China and local market conditions. Transaction values are impacted by government polices and laws with respect to real estate and real estate financing, bank lending policies and interest rates, and economic growth and demand for residential property in China (particularly in the secondary market), among other factors. |
Mortgage Management Services. We began managing our mortgage management services as a separate segment in 2008. Our mortgage management services accounted for 3.9% of net revenues for the year ended December 31, 2008, and 3.8% and 5.1% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively.
We generate revenue in our mortgage management services primarily through commissions earned from commercial banks in consideration of our advisory services to home buyers and home owners and interim guarantee services to mortgage banks. These services principally consist of introducing home mortgage products made available by various commercial banks to home buyers and arranging property financing, valuation services and title transfers. The commissions we receive in consideration for providing such referral services are based upon the amount of the home mortgage entered into by the customer that we refer. In addition, as is customary in the real estate brokerage industry in Beijing, we provide interim guarantees to commercial banks with respect to the mortgage loans they extend to our customers prior to the registration of the mortgage of the property to the bank. We provide these mortgage management services in Beijing and Shanghai under the trade name of Kaisheng.
Revenues from our mortgage management services are significantly affected by transaction volume, commission rates and the average loan amount of the home mortgage sought by our customers. The number of persons seeking home mortgages in connection with the purchase of a property significantly impacts the number of applications for home mortgages for which we can advise or offer services. In this regard, we cross-sell our mortgage management services to clients of our company-owned sales offices. In 2009, a substantial majority of the transactions handled by our company-owned brokerage services in which mortgages were utilized made use of our mortgage management services.
Franchise Services. Our franchise services accounted for 19.8% and 20.7% of net revenues for the years ended December 31, 2007 and December 31, 2008 and 22.6% and 3.0% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively.
We generate revenue in our franchise services primarily by granting regional franchise rights for the CENTURY 21® brand in China to regional sub-franchisors in various cities. The regional sub-franchisors, in turn, are authorized to grant individual sales office franchise rights to franchisees in their cities. In consideration for such rights, we collect from each regional sub-franchisor an initial franchise fee and ongoing service fees based on the higher of a percentage of the franchisees’ gross income or a fixed monthly amount. Similarly, a regional sub-franchisor collects from its franchisees an initial franchise fee and ongoing service fees.
Revenues from our franchise services are significantly affected by the number of new regional sub-franchisors, the number of new franchisees and ongoing service fees.
• | Number of new regional sub-franchisors. Revenues from the initial franchise fees paid by new regional sub-franchisors upon joining the CENTURY 21® franchise have constituted the substantial majority of our revenue generated by our franchise services. The number of new regional |
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sub-franchisors with whom we are able to enter into regional sub-franchisor agreements significantly impacts the initial franchise fees we generate in any particular period. |
• | Number of new franchisees. Similarly, the number of new franchisees with whom we or our regional sub-franchisors are able to enter into franchise agreements significantly impacts the amount of initial franchise fees the regional sub-franchisor receives and, correspondingly, the franchise fees we are able to generate in any particular period. |
• | Ongoing service fees. Ongoing service fees are based on the higher of a percentage of the franchisees’ gross income or a fixed monthly amount. Regional sub-franchisors generally agree on these percentages or fixed amounts at the outset of the franchise relationship with a third party, but increases or decreases in the percentage amount or the fixed amount would significantly impact the amount of franchise fees that we are able to generate in any period. |
Commissions and other agent related costs.Our commissions and other agent related costs primarily include salaries, benefits and commissions paid to our sales professionals, other staff and management for company-owned brokerage services and, to a lesser degree, for mortgage management services and franchise services. Compensation for our sales professionals and managers consists of a fixed salary and benefit package, together with a variable incentive-based component that is expected to comprise a majority of the sales professional or manager’s compensation. We believe such a commission based system aligns the interests of our sales professionals with our interests, and allows us to control expenses if transaction volumes or property values decline. Commission and other agent related costs amounted to 43.8% and 55.4% of net revenues for the years ended December 31, 2007 and December 31, 2008 and 55.7% and 44.6% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively.
Operating costs.Our operating costs primarily include store rental, equipment and utility costs and ongoing service fees. These expenses primarily consist of leasing costs, for which we typically execute written leases with terms of up to five years, and costs associated with supporting each sales office, including computer, telephone, electricity, office supplies and related expenses. Ongoing service fees refer to the ongoing service, or royalty, fees, that we must pay in connection with our right to use the CENTURY 21® brand.
Operating costs amounted to 42.3% and 53.6% of net revenues for the years ended December 31, 2007 and December 31, 2008 and 53.1% and 19.2% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, in each case, respectively. The majority of these operating costs are incurred in relation to our company-owned brokerage services, which accounted for 90.2% and 90.5% of operating costs for the years ended December 31, 2007 and December 31, 2008 and 90.1% and 93.1% of operating costs for the nine months ended September 30, 2008 and September 30, 2009, in each case, respectively.
Selling, general and administrative expenses.Our selling, general and administrative expenses primarily include back office and support staff expenses for our company-owned sales offices, advertising and promotions and share-based compensation. Expenses related to back office and support staff primarily consist of compensation and benefits expenses for administrative personnel, including accounting, human resources, transaction support, legal, information technology, employee training, customer service and other similar functions. Advertising and promotions expenses primarily consist of marketing and advertising costs, including contributions to our National Advertising Fund, or NAF.
Selling, general and administrative expenses amounted to 50.0% and 37.7% of net revenues for the years ended December 31, 2007 and December 31, 2008 and 36.6% and 15.8% of net revenues for the nine months ended September 30, 2008 and 2009, respectively. Expenses relating to our company-owned brokerage services accounted for 50.5% and 51.3% of selling, general and administrative expenses for the years ended December 31, 2007 and December 31, 2008, respectively and 54.2% and 54.0% of selling, general and administrative expenses for the nine months ended September 30, 2008 and September 30, 2009, respectively. Expenses relating to franchise services accounted for 18.8% and 13.4% and 11.5% and 12.7% and non-allocated
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costs accounted for 30.7% and 29.9% and 28.6% and 25.7% of selling, general and administrative expenses for the years ended December 31, 2007 and 2008 and the nine months ended September 30, 2008 and 2009, respectively. Non-allocated costs consist primarily of costs and expenses associated with our headquarters. We expect that our selling, general and administrative expenses will increase in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business and with being a publicly traded company.
Share-based compensation expenses were RMB43,549 and RMB730,453 for the years ended December 31, 2007 and December 31, 2008 and RMB535,504 and RMB1,257,174 (US$184,169) for the nine months ended September 30, 2008 and September 30, 2009, respectively. As of September 30, 2009, there was US$624,613 (approximately RMB4,264,000) of total unrecognized compensation cost related to non-vested share-based compensation granted under the plan. The cost is expected to be recognized over a weighted average period of 2.0 years. As a result of a modification to our Series A Preferred Shares terms on January 27, 2010 as described in Note 22(f) to our consolidated financial statements, we expect to recognize a compensation charge of approximately RMB4.9 million (US$720,000) in January 2010.
Taxation. We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands. Dividends from our PRC subsidiaries are subject to a withholding tax at the rate of 10% except Shenzhen CIR, whose dividends are subject to a withholding tax at the rate of 5%. Our current holding structure does not provide for any further treaty relief. Dividends from our Hong Kong subsidiary are exempt from withholding tax as long as after-tax profits are distributed.
Our subsidiaries in China are subject to business tax and related surcharges by various local tax authorities at rates ranging from 5.0% to 5.5% on gross revenues generated from providing real estate services.
Prior to January 1, 2008, pursuant to the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws, the enterprise income taxes of PRC entities were generally assessed at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax.
The CIT Law, under which foreign invested enterprises, or FIEs, and domestic companies would be subject to enterprise income tax at a uniform rate of 25%, became effective on January 1, 2008. In accordance with the CIT Law, there will be a transition period for enterprises that currently receive preferential tax treatments granted by relevant tax authorities. Enterprises subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the CIT Law.
IFM Beijing, Beijing Anxin and IFM SH are subject to the income tax rate of 33% for periods before 2008 and 25% thereafter in accordance with the CIT Law.
As Shanghai Ruifeng and Anshijie are both registered in Shanghai Pu Dong New Area and Shenzhen CIR is registered in Shenzhen special economic zone, they are subject to the preferential income tax rate of 15% according to the Foreign Investment and Foreign Enterprise Income Tax Law before 2008. From January 1, 2008 onwards, the income tax rate is increased progressively from 18% to 25% from 2008 to 2012, respectively, according to preferential treatments granted by the PRC central and local governments.
In October 2009, Beijing Huachuangxunjie Technology Co., Ltd, or Huachuang, obtained a Software Enterprise Certification which entitles it to exemption from corporate income tax for the first two years in which it has taxable income and a 50% reduction in corporate income tax for each of the following three years.
Under the CIT Law, dividends from our PRC subsidiaries out of earnings generated after January 1, 2008, are subject to a withholding tax which may be as high as 20%, although under the detailed implementation rules promulgated by the PRC tax authorities, the effective withholding tax is currently 10%. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax. Dividend payments are not subject to withholding tax in the British Virgin Islands or the Cayman Islands.
Under the CIT Law, enterprises established under the laws of foreign countries or regions and whose “de facto management bodies” are located within the PRC territory are considered PRC resident enterprises, and
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will be subject to the PRC enterprise income tax at the rate of 25% on their worldwide income. Under the implementation rules of the CIT Law, “de facto management bodies” are defined as the bodies that have material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. We cannot assure you that we will not be deemed to be a PRC resident enterprise under the PRC CIT Law and be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income. See “Risk Factors — Risks Related to Doing Business in China — Dividends payable to us by our PRC subsidiaries and gain on sale of our shares may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income and dividends distributed to our investors may be subject to PRC withholding taxes under the new CIT Law.”
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
For the Year Ended December 31, | For the Nine Months Ended September 30, | ||||||||||||||
2007 | 2008 | 2008 | 2009 | 2009 | |||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | (US$)(1) | |||||||||||
(unaudited) | |||||||||||||||
(in thousands) | |||||||||||||||
Revenue | |||||||||||||||
Net revenues | 189,029 | 273,359 | 208,877 | 443,691 | 64,998 | ||||||||||
Costs and Expenses | |||||||||||||||
Commissions and other agent related costs | (82,866 | ) | (151,550 | ) | (116,250 | ) | (197,978 | ) | (29,003 | ) | |||||
Operating costs | (79,886 | ) | (146,457 | ) | (110,889 | ) | (85,183 | ) | (12,479 | ) | |||||
Selling, general and administrative expenses | (94,471 | ) | (102,952 | ) | (76,456 | ) | (70,278 | ) | (10,295 | ) | |||||
Total costs and expenses | (257,223 | ) | (400,959 | ) | (303,595 | ) | (353,439 | ) | (51,777 | ) | |||||
(Loss) / income from operations | (68,194 | ) | (127,600 | ) | (94,718 | ) | 90,252 | 13,221 | |||||||
Interest income | 1,708 | 4,441 | 2,708 | 1,575 | 231 | ||||||||||
Foreign currency exchange loss | (5,485 | ) | (5,526 | ) | (4,458 | ) | (480 | ) | (70 | ) | |||||
(Loss) / income before income tax and share of associates’ losses | (71,971 | ) | (128,685 | ) | (96,468 | ) | 91,347 | 13,382 | |||||||
Income tax | (394 | ) | (2,076 | ) | (1,780 | ) | (2,821 | ) | (414 | ) | |||||
Share of associates’ losses | (409 | ) | (1,126 | ) | (1,050 | ) | (193 | ) | (28 | ) | |||||
Net (loss) / income | (72,774 | ) | (131,887 | ) | (99,298 | ) | 88,333 | 12,940 | |||||||
Non-controlling interest | (1,347 | ) | (431 | ) | (431) | — | — | ||||||||
Net (loss) / income attributable to IFM Investments Limited | (74,121 | ) | (132,318 | ) | (99,729) | 88,333 | 12,940 |
(1) | Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. |
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Selected financial information and operational data relating to each of our business lines is set forth below for the periods indicated:
For the Year Ended December 31, | For the Nine Months Ended September 30, | |||||||
2007 | 2008 | 2008 | 2009 | |||||
Company-owned brokerage services | ||||||||
Net revenues (in thousands of RMB) | 151,692 | 206,076 | 153,703 | 407,937 | ||||
Beijing | 62,666 | 75,543 | 50,196 | 187,077 | ||||
Shanghai | 89,026 | 126,830 | 101,752 | 200,414 | ||||
Shenzhen | — | 3,703 | 1,755 | 20,446 | ||||
Average number of operating sales offices(1) | 143 | 279 | 296 | 233 | ||||
Average monthly net revenues per operating sales office (in thousands of RMB) | 88.4 | 61.6 | 57.7 | 194.5 | ||||
Mortgage management services | ||||||||
Net revenues (in thousands of RMB) | — | 10,650 | 7,903 | 22,467 | ||||
Loan amount of referred mortgages (in thousands of RMB) | — | 1,879,500 | 1,369,000 | 4,171,000 | ||||
Franchise services | ||||||||
Net revenues (in thousands of RMB) | 37,337 | 56,633 | 47,271 | 13,287 | ||||
Number of regional sub-franchisors as of period end | 23 | 28 | 27 | 28 |
(1) | Equals the sum of the number of operating sales offices that existed at the end of each month in the applicable period, divided by the number of months in such period. |
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net revenues. Our net revenues increased RMB234.8 million, or 112.4%, from RMB208.9 million for the nine months ended September 30, 2008 to RMB443.7 million (US$65.0 million) for the nine months ended September 30, 2009, primarily due to a significant increase in net revenues generated by our company-owned brokerage services. Our net revenue growth was also partly attributable to the increase in net revenues from our mortgage management services and partially offset by a decrease of net revenues from our franchise services.
Company-Owned Brokerage Services. Net revenues from our company-owned brokerage services increased RMB254.2 million, or 165.4%, from RMB153.7 million for the nine months ended September 30, 2008 to RMB407.9 million (US$59.8 million) for the nine months ended September 30, 2009. This increase was primarily due to a substantial increase in the number of sale and purchase transactions in which we were involved from 4,396 for the nine months ended September 30, 2008 to 12,976 for the nine months ended September 30, 2009. We believe the increase in the number of transactions in which our company-owned brokerage services were involved was primarily attributable to a recovery in China’s real estate market. The increase in the number of transactions was also partially due to the number of transactions we brokered in Shenzhen, a market we entered in the second half of 2008. We have achieved this robust growth in sales volume despite a significant reduction in the number of operating sales offices in Beijing and Shanghai. In Beijing, we decreased from an average of 140 operating sales offices for the nine months ended September 30, 2008 to an average of 101 operating sales offices for the nine months ended September 30, 2009. In Shanghai, we decreased from an average of 148 operating sales offices for the nine months ended September 30, 2008 to an average of 109 operating sales offices for the nine months ended September 30, 2009. These decreases were primarily due to streamlining of our operations in response to the weakness of the real estate market in China in 2008.
Average commission rates remained relatively stable in the nine months ended September 30, 2009 compared to the same period in 2008. However, our average monthly net revenues per operating sales office in Beijing increased by RMB165,967 or 416.6%, from RMB39,838 for the nine months ended September 30, 2008 to RMB205,805 (US$30,149) for the nine months ended September 30, 2009, and our average monthly net revenues per operating sales office in Shanghai increased by RMB127,906, or 167.4%, from RMB76,390 for the nine months ended September 30, 2008 to RMB204,296 (US$29,928) for the nine months ended September 30,
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2009. We believe that these increases were primarily due to improved operational efficiency and the recovery of the real estate market in China during the first nine months of 2009.
Mortgage Management Services. Revenues from our mortgage management services increased RMB14.6 million, or 184.8%, from RMB7.9 million for the nine months ended September 30, 2008 to RMB22.5 million (US$3.3 million) for the nine months ended September 30, 2009, primarily due to a substantial increase in the number of home mortgages for existing homes that utilized our mortgage management services. For the nine months ended September 30, 2009, we provided services for home mortgages for existing homes with an aggregate loan amount of approximately RMB4.2 billion (US$615.3 million) as compared to RMB1.4 billion for the nine months ended September 30, 2008.
Franchise Services. Revenues from our franchise services decreased RMB34.0 million, or 71.9%, from RMB47.3 million for the nine months ended September 30, 2008 to RMB13.3 million (US$1.9 million) for the nine months ended September 30, 2009. This decrease resulted primarily because we did not grant any new regional sub-franchises in the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008, during which period we recognized RMB35.5 million in initial franchise fees from seven newly granted regional sub-franchises. Since September 30, 2009, we have granted two additional regional sub-franchises.
Commissions and other agent related costs. Our commissions and other agent related costs accounted for 55.7% and 44.6% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively and increased RMB81.7 million, or 70.3%, from RMB116.3 million for the nine months ended September 30, 2008 to RMB198.0 million (US$29.0 million) for the nine months ended September 30, 2009, primarily due to RMB81.5 million net increase in costs associated with our company-owned brokerage services. This net increase was primarily due to a RMB95.7 million increase in commission expenses as a result of higher net revenues, and was partially offset by an RMB14.0 million decrease in non-commission, payroll and benefit expenses for our sales professionals as a result of the decrease in the number of company-owned sales offices and sales professionals in the nine months ended September 30, 2009.
Operating costs. Our operating costs accounted for 53.1% and 19.2% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively and decreased RMB25.7 million, or 23.2%, from RMB110.9 million for the nine months ended September 30, 2008 to RMB85.2 million (US$12.5 million) for the nine months ended September 30, 2009, primarily due to a decrease in operating costs for our company-owned brokerage services of RMB20.6 million, or 20.6%, from RMB99.9 million for the nine months ended September 30, 2008 to RMB79.3 million for the nine months ended September 30, 2009. This decrease was primarily due to an RMB11.8 million decrease in sales office rental costs as a result of a reduction of 78 average company-owned operating sales offices in Beijing and Shanghai, offset by the addition of 26 operating sales office in Shenzhen, RMB8.1 million decrease in other sales office related costs such as utilities and telecommunications, and depreciation and amortization expenses. Our operating costs attributable to franchise services also decreased by RMB5.8 million mainly due to a decrease in royalty payments due to Realogy as we did not recognize any initial franchise fee revenue from newly signed regional sub-franchisors during this period.
Selling, general and administrative expenses. Our selling, general and administrative expenses accounted for 36.6% and 15.8% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively and decreased RMB6.2 million, or 8.1%, from RMB76.5 million for the nine months ended September 30, 2008 to RMB70.3 million (US$10.3 million) for the nine months ended September 30, 2009, primarily due to a decrease of RMB8.9 million in marketing expenses as management replaced traditional advertising with internet based marketing for our company-owned brokerage services and franchise services. The overall decrease in selling, general and administrative expenses was partially offset by increases of RMB0.9 million in costs associated with our mortgage management services as a result of hiring additional staff.
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Interest income. Our interest income decreased RMB1.1 million, or 41.8%, from RMB2.7 million for the nine months ended September 30, 2008 to RMB1.6 million (US$0.2 million) for the nine months ended September 30, 2009, mainly as a result of a lower average cash balance maintained for the nine months ended September 30, 2009.
Foreign currency exchange loss. Our foreign currency exchange loss decreased RMB4.0 million, or 89.2%, from RMB4.5 million for the nine months ended September 30, 2008 to RMB0.5 for the nine months ended September 30, 2009 primarily as a result of the stabilization of the exchange rate between the Renminbi and the U.S. dollar.
Net Income. As a result of the foregoing, we had a net income of RMB88.3 million (US$12.9 million) for the nine months ended September 30, 2009 as compared to a net loss of RMB99.3 million for the nine months ended September 30, 2008.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net revenues. Our net revenues increased RMB84.4 million, or 44.6%, from RMB189.0 million for the year ended December 31, 2007 to RMB273.4 million for the year ended December 31, 2008, primarily due to an increase in net revenues generated by our company-owned brokerage services. Our net revenue growth was also partly attributable to the establishment of our mortgage management services business as a separately managed segment and growth in our franchise services revenue.
Company-Owned Brokerage Services. Net revenues from our company-owned brokerage services increased RMB54.4 million, or 35.9%, from RMB151.7 million for the year ended December 31, 2007 to RMB206.1 million for the year ended December 31, 2008. This increase was primarily due to a substantial increase in the number of sale and purchase transactions in which we were involved from 4,424 for the year ended December 31, 2007 to 6,312 for the year ended December 31, 2008. The increase in the number of transactions in which our company-owned brokerage services were involved was primarily attributable to an increase in the number of sales offices in Beijing and Shanghai. In Beijing we increased from an average of 68 operating sales offices for the year ended December 31, 2007 to an average of 128 operating sales offices for the year ended December 31, 2008. In Shanghai we increased from an average of 75 operating sales offices for the year ended December 31, 2007 to an average of 139 operating sales offices for the year ended December 31, 2008.
Average commission rates remained relatively stable in the year ended December 31, 2008 as compared to the year ended December 31, 2007. As a result of our rapid expansion and, we believe, the weakness of the real estate market in China in 2008, our average monthly net revenues per operating sales office in Beijing, decreased by RMB27,615, or 36.0%, from RMB76,797 for the twelve months ended December 31, 2007 to RMB49,182 for the twelve months ended December 31, 2008. Our average monthly net revenues per operating sales office in Shanghai decreased by RMB22,881, or 23.1%, from RMB98,918 for the twelve months ended December 31, 2007 to RMB76,037 for the twelve months ended December 31, 2008. Revenues from our company-owned brokerage services in Shenzhen were minimal during such periods as these operations were launched in 2008.
Mortgage Management Services.Revenues from our mortgage management services were RMB10.7 million for the year ended December 31, 2008. Our mortgage management services were not separately segmented until 2008 when we began marketing the services under the Kaisheng brand, concentrating on brokering mortgage loan services to customers both inside and outside our CENTURY 21® China network. For the year ended December 31, 2008, we provided services for home mortgages for existing homes with an aggregate loan amount of approximately RMB1.9 billion.
Franchise Services. Revenues from our franchise services increased by RMB19.3 million, or 51.7%, from RMB37.3 million for the year ended December 31, 2007 to RMB56.6 million for the year ended
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December 31, 2008. This growth was primarily attributable to an increase in the number of our newly-opened operating regional sub-franchisors in 2008 from three in the year ended December 31, 2007 to eight in the year ended December 31, 2008, resulting in an increase in the initial franchise fees recognized as revenue.
Commissions and other agent related costs. Our commissions and other agent related costs increased by RMB68.7 million, or 82.9%, from RMB82.9 million for the year ended December 31, 2007 to RMB151.6 million for the year ended December 31, 2008 primarily due to RMB69.1 million increase in costs associated with our company-owned brokerage services, RMB52.6 million, or 76.1%, of which was attributable to increased costs associated with non-commission, payroll and benefit expenses for our sales professionals as a result of the increase in company-owned sales offices in 2008 described under “– Net Revenues – Company-Owned Brokerage Services” above. This increase was also caused by an increased number of sales professionals and staff for our mortgage management services, which were managed as a separate segment beginning in 2008.
Operating costs. Our operating costs increased by RMB66.6 million, or 83.3%, from RMB79.9 million for the year ended December 31, 2007 to RMB146.5 million for the year ended December 31, 2008, principally due to an increase in operating costs for our company-owned brokerage services of RMB60.6 million, or 84.1%, from RMB72.0 million for the year ended December 31, 2007 to RMB132.6 million for the year ended December 31, 2008. This increase was primarily due to higher sales office rental costs of RMB43.1 million as a result of the addition of 136 company-owned average operating sales offices in Beijing, Shanghai and Shenzhen, RMB16.9 million increase in other sales office related costs such as utilities and telecommunications, and depreciation and amortization expense. Our operating costs attributable to franchise services increased by RMB4.4 million due to an increase in royalty payments to Realogy resulting from our increased initial franchise fee revenue. In addition, the operation of our mortgage management services as a separate segment resulted in costs of RMB1.6 million for the year ended December 31, 2008 being allocated to our mortgage management services.
Selling, general and administrative expenses. Our selling, general and administrative expenses increased by RMB8.5 million, or 9.0%, from RMB94.5 million for the year ended December 31, 2007 to RMB103.0 million for the year ended December 31, 2008, primarily due to RMB17.4 million increase in non-sales payroll costs associated with expansion of company-owned brokerage services and mortgage management services as we hired more back office supporting staff in these business segments, offset in part by RMB4.8 million decrease in advertising and promotion expenses as we changed from traditional print media to more internet based advertising, as well as RMB3.9 million decrease in other general and administrative expenses as we reduced consulting fees and professional fees.
Interest income. Our interest income increased by RMB2.7 million, or 160.0%, from RMB1.7 million for the year ended December 31, 2007 to RMB4.4 million for the year ended December 31, 2008, mainly as a result of our increased average cash balance during 2008 as compared with 2007.
Net loss. As a result of the foregoing, our net loss increased by RMB59.1 million, or 81.2%, from RMB72.8 million for the year ended December 31, 2007 to RMB131.9 million for the year ended December 31, 2008.
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The following table sets forth selected quarterly results of operations for the seven quarters ended September 30, 2009. We have prepared this financial information on the same basis as our audited consolidated financial statements. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.
For Three Months Ended | |||||||||||||||||||||
March 31, 2008 | June 30, 2008 | September 30, 2008 | December 31, 2008 | March 31, 2009 | June 30, 2009 | September 30, 2009 | |||||||||||||||
(RMB’000) | (RMB’000) | (RMB’000) | (RMB’000) | (RMB’000) | (RMB’000) | (RMB’000) | |||||||||||||||
Revenue | |||||||||||||||||||||
Net revenue | 58,912 | 75,497 | 74,468 | 64,482 | 98,236 | 165,948 | 179,507 | ||||||||||||||
Costs and Expenses | |||||||||||||||||||||
Commissions and other agent related costs | (32,614 | ) | (42,213 | ) | (41,423 | ) | (35,300 | ) | (46,763 | ) | (72,204 | ) | (79,011 | ) | |||||||
Operating costs | (32,004 | ) | (34,712 | ) | (44,173 | ) | (35,568 | ) | (25,450 | ) | (29,384 | ) | (30,349 | ) | |||||||
Selling, general and administrative expenses | (22,348 | ) | (24,944 | ) | (29,164 | ) | (26,496 | ) | (19,259 | ) | (22,468 | ) | (28,551 | ) | |||||||
Total costs and expenses | (86,966 | ) | (101,869 | ) | (114,760 | ) | (97,364 | ) | (91,472 | ) | (124,056 | ) | (137,911 | ) | |||||||
(Loss) Income from operations | (28,054 | ) | (26,372 | ) | (40,292 | ) | (32,882 | ) | 6,764 | 41,892 | 41,596 | ||||||||||
Interest income | 1,112 | 950 | 646 | 1,733 | 406 | 448 | 721 | ||||||||||||||
Foreign currency exchange loss | (2,205 | ) | (822 | ) | (1,431 | ) | (1,068 | ) | (337 | ) | (77 | ) | (66 | ) | |||||||
(Loss) Income before income tax and share of associates’ losses | (29,147 | ) | (26,244 | ) | (41,077 | ) | (32,217 | ) | 6,833 | 42,263 | 42,251 | ||||||||||
Income tax | (558 | ) | (1,094 | ) | (128 | ) | (296 | ) | (301 | ) | (1,032 | ) | (1,488 | ) | |||||||
Share of associates’ losses | (833 | ) | (80 | ) | (137 | ) | (76 | ) | (97 | ) | (94 | ) | (2 | ) | |||||||
Net (loss) income | (30,538 | ) | (27,418 | ) | (41,342 | ) | (32,589 | ) | 6,435 | 41,137 | 40,761 | ||||||||||
Non-controlling interest | (431 | ) | — | — | — | — | — | — | |||||||||||||
Net (loss) income attributable to IFM Investments Limited | (30,969 | ) | (27,418 | ) | (41,342 | ) | (32,589 | ) | 6,435 | 41,137 | 40,761 |
Our Liquidity and Capital Resources
Through September 30, 2009, our principal sources of liquidity were cash generated from our operating activities, capital contributions and sale of preferred shares through private placements. Our net cash used in operating activities was approximately RMB38.7 million, RMB125.4 million for the years ended December 31, 2007 and 2008, respectively and the net cash provided by operating activities was approximately RMB97.5 million for the nine months ended September 30, 2009. Consequently, our accumulated deficit was RMB135.7 million, RMB268.0 million and RMB179.7 million as of December 31, 2007 and 2008 and as of September 30, 2009, respectively. Our cash and cash equivalents consist of cash on hand and liquid investments placed with banks and other financial institutions that are unrestricted as to withdrawal or use and have maturities of three months or less. We have no debt obligations. We expect to utilize a portion of our cash on hand to open and acquire company-owned sales offices in selected new markets as we grow our network of company-owned brokerage services. We currently anticipate that we will be able to meet our needs to fund operations for at least the next twelve months following this offering with operating cash flow and existing cash balances.
We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with accounting standards and regulations applicable to such subsidiaries. Under
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PRC law, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of our PRC subsidiaries with foreign investments is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation of these subsidiaries. In addition, dividend payments from our PRC subsidiaries could be delayed as such dividends may only be distributed upon completion of an annual audit of such subsidiary.
The following table sets forth a summary of our cash flows for the periods indicated:
For the Year Ended December 31, | For the Nine Months Ended September 30, | ||||||||||||||
2007 | 2008 | 2008 | 2009 | 2009 | |||||||||||
(RMB) | (RMB) | (RMB) | (RMB) | (US$) | |||||||||||
(unaudited) | |||||||||||||||
(in thousands) | |||||||||||||||
Net cash (used in) provided by operating activities | (38,721 | ) | (125,376 | ) | (106,337 | ) | 97,455 | 14,277 | |||||||
Net cash (used in) investing activities | (42,483 | ) | (38,446 | ) | (34,650 | ) | (8,915 | ) | (1,306 | ) | |||||
Net cash provided by (used in) financing activities | 307,830 | 13,272 | 8,189 | (2,313 | ) | (339 | ) | ||||||||
Effects of foreign exchange on cash and cash equivalents | (5,915 | ) | (3,689 | ) | (4,842 | ) | (28 | ) | (4 | ) | |||||
Net increase (decrease) in cash and equivalents | 220,711 | (154,239 | ) | (137,640 | ) | 86,199 | 12,628 | ||||||||
Cash and cash equivalents at the beginning of the period | 110,505 | 331,216 | 331,216 | 176,977 | 25,926 | ||||||||||
Cash and cash equivalents at the end of the period | 331,216 | 176,977 | 193,576 | 263,176 | 38,554 |
Operating Activities
Our operating activities primarily comprise our company-owned brokerage services, mortgage management services and franchise services. The timing of when we collect our fees on all of the business lines may differ from when we recognize revenue, which may result in significant changes in certain of our related balance sheet items such as deferred revenue and accounts receivable. For example, we collected more funds up front in 2007 related to our franchise fees as compared to 2008, which affected our cash used in operating activities.
For the nine months ended September 30, 2009, cash generated from operating activities amounted to RMB97.5 million, primarily due to RMB88.3 million net income earned during the period and, to a lesser degree, to an increase of RMB43.9 million in accrued expenses and other current liabilities due to increase in commission and other agent related costs, operating costs and selling, general and administrative expenses. These increases were partially offset by an increase of RMB54.5 million in accounts receivable primarily due to an increase in sales volume.
For the nine months ended September 30, 2008, cash used in operating activities amounted to RMB106.3 million, primarily due to RMB99.3 million of net losses during the period and, to a lesser degree, to a decrease of RMB18.7 million in deferred revenue in our franchise services business associated with new regional
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sub-franchisors and an increase of RMB12.4 million in accounts receivable primarily due to an increase in sales volume.
All of our operating cash generated in 2007 and 2008 was used in our operating activities. Significant changes in operating assets and liabilities that impacted our cash used in our operating activities include an increase in prepaid expenses and other current assets of RMB20.3 million in 2007, compared with a decrease in prepaid expenses and other current assets of RMB8.8 million in 2008, and an increase in accrued expenses and other current liabilities of RMB28.7 million in 2007, compared with an increase in accrued expenses and other current liabilities of RMB0.2 million in 2008. As we continue to expand the scale of our business, our working capital requirements are expected to increase as well.
Investing Activities
Our investing activities primarily relate to our purchases and disposals of equipment and acquisition activities.
Net cash used in investing activities amounted to RMB8.9 million for the nine months ended September 30, 2009 primarily due to our purchase of property and equipment. Net cash used in investing activities amounted to RMB34.7 million for the nine months ended September 30, 2008, primarily due to (i) our purchase of property and equipment of RMB19.3 million, (ii) our payment for the acquisition of IFM SH for RMB10.9 million, and, to a lesser degree, to our purchase of intangible assets of RMB4.5 million in connection with the reacquisition of the CENTURY 21® franchise rights from a franchisee in Shenzhen.
Net cash used in investing activities amounted to RMB38.4 million for the year ended December 31, 2008, primarily due to (i) our purchase of property and equipment of RMB23.1 million and (ii) our payment for the acquisitions of IFM SH and City Integrated Residential Services (China) Limited for an aggregate RMB10.9 million, and, to a lesser degree, to our purchase of intangible assets of RMB4.5 million in connection with the reacquisition of the CENTURY 21® franchise rights from a franchisee in Shenzhen. See “Our Corporate History and Structure — Our Principal Subsidiaries.”
Net cash used in investing activities amounted to RMB42.5 million for the year ended December 31, 2007, solely due to our purchase of property and equipment.
Financing Activities
Our financing activities primarily consist of capital contributions and issuance and sale of our preferred shares to investors.
Net cash used in financing activities amounted to RMB2.3 million for the nine months ended September 30, 2009 as a result of a net repayment of certain related party loans. Net cash provided by financing activities amounted to RMB8.2 million for the nine months ended September 30, 2008, primarily due to the RMB16.2 million gross proceeds from the issuance of our Series B preferred shares to Realogy and partially offset by an RMB8.0 million net repayment of certain related party loans.
Net cash provided by financing activities amounted to RMB13.3 million for the year ended December 31, 2008, primarily due to the RMB16.2 million in net proceeds from our issuance of our Series B preferred shares to Realogy and partially offset by RMB2.9 million in net repayments of certain related party loans.
Net cash provided by financing activities amounted to RMB307.8 million for the year ended December 31, 2007, primarily due to the RMB325.0 million in proceeds from our issuance of our Series B preferred shares to GL Asia Mauritius II Cayman Limited as well as proceeds received from our issuance of
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Series A preferred shares to Goldman Sachs Strategic Investments, and partially offset by RMB15.3 million in repayments of certain short-term borrowings, and RMB1.9 million in net repayments of certain related party loans.
We incurred RMB4.1 million, RMB42.5 million, RMB23.1 and RMB8.9 million of capital expenditures for the years ended December 31, 2006, 2007 and 2008 and the nine months ended September 30, 2009, respectively. We incurred these capital expenditures primarily in our company-owned brokerage services in connection with the establishment of brokerage stores, and financed these expenditures principally through the issuance of preferred shares.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2008:
Contractual Obligations (in thousands of RMB) | Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | |||||
Operating Lease | ||||||||||
Obligations | 125,533 | 56,303 | 60,375 | 8,855 | - | |||||
Minimum Service | ||||||||||
Fees | 11,104 | 683 | 1,366 | 1,366 | 7,689 | |||||
Total | 136,637 | 56,986 | 61,741 | 10,221 | 7,689 | |||||
Operating Leases
Our operating lease agreements are principally for our administrative offices and real estate brokerage sales offices. These leases have expiration dates, the latest of which is in 2015.
Minimum Service Fees
Pursuant to the master sub-franchise agreement entered into with Realogy, we are required to pay an annual minimum service fee to Realogy for the licensing of the CENTURY 21® brand. The minimum annual service fee is the greater of US$100,000 (approximately RMB683,000) or an amount calculated by multiplying US$500 (approximately RMB3,000) by the number of sales offices in our CENTURY 21® franchise network, to be adjusted for inflation or deflation.
Long-term Deposits Payable
We receive security deposits from franchisees which are recorded as long-term deposits payable. These deposits are refundable at the end of the franchise agreement period if the franchisees do not breach the franchise agreements. The long-term deposits payable as of September 30, 2009 were RMB8.9 million.
Off-Balance Sheet Commitments and Arrangements
As is customary in the mortgage management industry in Beijing, we provide interim guarantees to commercial banks in respect of the mortgage loans they extend to property buyers. An interim guarantee covers the period beginning when the bank disburses the mortgage loan to the property buyer and ending when the mortgage registration certificate is issued to the bank by the applicable property registry, which typically takes one to six months. The fair value of the interim guarantees as of December 31, 2007 and 2008 and as of September 30, 2009 was immaterial.
If a bank fails to obtain the mortgage registration certificate or the property buyer defaults on his payment obligations during the term of an interim guarantee, we may be required to pay the amount of the
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delinquent mortgage payments or any measurable loss suffered by the bank exceeding the payment already made by the buyer and the amount recoverable from the property.
Under PRC rules, the maximum financed portion of the purchase price of a property is 80%, which helps reduce our risk exposure. To further mitigate our risk exposure, we usually:
• | conduct certain background and credit checks on property buyers and reject less credit-worthy mortgage applications; |
• | assist in applying for buyers’ title documents, and issue a guarantee in a transaction only after a notice specifying the proposed date for collecting the title document has been issued by the applicable property registry; and |
• | actively participate in the process of banks’ applying for mortgage registration certificates. |
The contingent guarantee obligation in connection with our provision of interim guarantees was RMB143.9 million and RMB227.8 million as of December 31, 2007 and 2008, respectively, and RMB829.3 million as of September 30, 2009. This increase during the nine months ended September 30, 2009 was primarily due to a substantial increase in the number of home mortgages for existing homes that utilized our mortgage management services. We have not experienced any losses associated with our interim guarantees for the years ended December 31, 2007 and 2008. We have accrued RMB0.5 million for the nine months ended September 30, 2009 for the estimated loss associated with our interim guarantees.
Other than the contingent liabilities discussed above and the obligations set forth in the preceding section, we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Internal Control Over Financial Reporting
When preparing our consolidated financial statements for the years ended December 31, 2007 and 2008, we noted one material weakness in our internal control over financial reporting relating to a lack of sufficient resources to perform period-end financial reporting procedures, to address complex accounting issues under US GAAP and to prepare and review financial statements and related disclosures under US GAAP. This material weakness resulted in adjustments to the Group’s consolidated financial statements for the years ended December 31, 2007 and 2008. A material weakness is defined in PCAOB Standards and Related Rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Following the identification of this material weakness, we have expended additional resources from our management team and additional expenses to implement and maintain effective controls and procedures to remedy this material weakness and any additional weaknesses we may identify in our internal control over financial reporting in the future. In addition, we have hired and will continue to hire more staff for financial reporting and analysis and an external consultant to strengthen our control procedures over financial statement reviews for external reporting. Furthermore, we have expanded our training programs to our new and existing accounting staff on US GAAP financial statement preparation and reporting.
We plan to take additional measures to improve our internal control over financial reporting. These measures include (i) establishing an audit committee to oversee the accounting and financial reporting processes
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as well as external and internal audits of our company, (ii) hiring additional qualified professionals with relevant experience for our finance and accounting department, (iii) providing additional accounting and financial reporting training for our existing personnel, and (iv) increasing the level of interaction among our management, audit committee, independent registered public accounting firm and other external advisors. However, the process of designing and implementing an effective financial reporting system represents a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations.
We believe that the actions we have taken to date have enhanced the reliability and effectiveness of our internal control over financial reporting as of the date of this prospectus. However, our independent registered public accounting firm has not evaluated the effectiveness of the measures we have taken to improve our internal control over financial reporting since such material weakness was noted in connection with the recently completed 2007 and 2008 audits. We cannot assure you that the measures we have taken to date or any measures we take in the future will be sufficient to remediate the material weakness reported by our independent registered public accounting firm and to avoid potential future material weaknesses. See “Risk Factors—When preparing our consolidated financial statements for the years ended December 31, 2007 and 2008, we noted one material weakness in our internal control over financial reporting. If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately report our financial results on a timely basis may be impaired, which could adversely impact investor confidence and the market price of our ADSs.”
Inflation
Inflation in China has not materially impacted our results of operations in recent years. According to the National Bureau of Statistics of China, the change of consumer price index in China was 4.8% and 5.9% in 2007 and 2008, respectively.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with US GAAP, appearing elsewhere in this prospectus. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that our accounting policies with respect to revenue recognition, allowance for doubtful accounts, property and equipment, goodwill and intangible assets, impairment of long-lived assets, share-based compensation, and income taxes represent critical accounting policies that reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.
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Revenue Recognition
We recognize revenue where there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Revenues are recorded, net of sales related taxes and discounts.
Company-Owned Brokerage Services
Our company-owned brokerage services business earns most of its revenue from brokerage commissions from secondary real estate property sales, purchases and leasing transactions, referral and service fees of mortgage loan transactions to our mortgage management services segment, and to a lesser extent brokerage commissions from primary real estate property sales and purchase transactions. This commission income is recorded as revenue upon meeting the revenue recognition criteria described above, including the signing of a real estate sales and purchase agreement or rental agreement, the mortgage loan fund being disbursed by banks to the customers, and developers’ confirmation of successful sales of a primary real estate property. All revenue amounts are net of any sales discounts that management estimates based on current circumstances at the time of the sale and historical experience of anticipated subsequent discounts granted to customers.
Deferred revenues are recognized when payments are received in advance of revenue recognition.
Mortgage Management Services
We provide mortgage management services, many of which are provided in connection with our company-owned brokerage services business. We also provide interim financial guarantees to banking institutions in Beijing for a period ranging from approximately one to six months while government-owned property registries process and release the relevant mortgage pledge documents to such institutions.
The mortgage management services income is recognized on a net basis when the mortgage loan funds are disbursed by banks to the customers. The financial guarantee revenue is recognized when the respective mortgage pledge documents are collateralized by the banking institutions. We have not experienced any losses associated with the interim financial guarantees for the fiscal years ended December 31, 2007 and 2008 and we have accrued RMB0.5 million for estimated losses associated with our interim financial guarantees for the nine months ended September 30, 2009.
Franchise Services
We recognize our franchise services revenue as earned. Franchise revenue includes initial franchise fees, which are generally non-refundable and recognized as revenue when all material services or conditions relating to the initial franchise fee have been substantially performed and we have fulfilled all of our commitments and obligations (generally when a franchisee commences its operation under the CENTURY 21® brand). Our commitments and obligations related to earning the initial franchise fee include providing training and assessing the franchisees’ qualifications for commencement of operations. Franchise revenue also consists of ongoing service fees received from our franchisees. The ongoing service fees received are primarily based on a percentage of the franchisees’ gross income or a fixed monthly amount. The ongoing service fees are accrued as the underlying franchisee revenue is earned. On an ongoing basis, the services we provide to our franchisees include the license to use or sub-franchise CENTURY 21® brand and system, training services, and the right to participate in and benefit from the marketing campaigns using our NAF as well as information technology and back office support.
We also collect marketing fees from our franchisees and utilize such fees to fund advertising campaigns on behalf of our franchisees (known as National Advertising Fund, or NAF). Management fee income of NAF is recognized in proportion to the NAF that had been spent during the reporting period.
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Allowance for doubtful accounts
We accrue for allowances for doubtful accounts for receivable balances that are unlikely to be collected based on management analysis and estimates. This analysis is based on an assessment of our historical experience with particular customers or franchisees and the age of certain receivable balances, which may indicate that such receivables are no longer fully collectible. If the financial condition of our customers and franchisees were to deteriorate, resulting in an impairment of their ability to make payments, or if such customers or franchisees decided not to pay us, additional allowances could be required that would materially impact our financial position and results of operations.
We have adopted a provisioning policy for doubtful debts for our receivable balances based on the historical experience of the recoverability of the receivables. For the periods presented, our provision based on historical bad debts is approximately 2% of net revenue. The appropriateness of our provisioning is assessed on an ongoing basis based on our actual experience. In addition, we also make specific bad debt provisions for problem account receivable balances (e.g. for certain franchisees). Established reserves have historically been sufficient, and are based on aging, specific customer circumstances, historical experience and current knowledge of the related political and economic environments. It is possible, however, that the accuracy of the management’s estimation process could be impacted by unforeseen circumstances.
Allowances for doubtful accounts charged to selling, general and administrative expenses were RMB4.5 million, RMB5.2 million for the years ended December 31, 2007 and 2008, respectively. The allowance for doubtful accounts ending balance of RMB2.3 million, RMB3.6 million as of December 31, 2007 and 2008, respectively, represents a net ending balance after actual write-offs during the year. Accounts receivable related to company-owned brokerage services fees and franchise services fees are stated net of such allowance balances at the end of year. For the nine months ended September 30, 2009, allowances for doubtful accounts charged to selling, general and administrative expenses were RMB8.1 million, and the ending balance of the allowance for doubtful accounts was RMB6.3 million as of September 30, 2009.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives:
Computers and software | 5 years | |
Furniture, fixtures and equipment | 5 years | |
Vehicles | 5 years | |
Leasehold improvements | Shorter of lease term or useful lives of assets |
Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of the property and equipment, are expensed as incurred. Judgment is required to determine the estimated useful lives of assets and changes in these estimates and assumptions could materially impact our financial position and results of operations.
Gains and losses from the disposals of property and equipment are included in loss from operations.
Goodwill and indefinite-lived intangible assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts allocated to other intangible assets. Other intangible assets represent the rights to use and sub-franchise the CENTURY 21® brand in the PRC for 14.5 to 25 years. In addition, intangible assets also represent the customer relationships and real estate listing databases acquired through business combinations consummated in 2006 and 2008. We amortize intangible assets over their estimated useful lives on a straight-line basis.
We test goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis, or more frequently, if facts and circumstances warrant a review. We make
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judgments about goodwill whenever events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. The timing of an impairment test may result in charges to our statements of operations in our current reporting period that could not have been reasonably foreseen in prior periods. Application of an impairment test of goodwill requires judgment, including the identification of reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units and estimating the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value of each reporting unit, which could trigger impairment. More conservative assumptions of the anticipated future benefits from these reporting units could result in impairment charges, which would decrease net income and result in lower asset values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values. See Note 2(j) “Goodwill and indefinite-lived intangible assets” in the Consolidated Financial Statements for additional information.
Impairment of long-lived assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we assess the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition where the fair value is lower than the carrying value, measurement of an impairment loss is recognized in the statements of operations for the difference between the fair value, using the expected future discounted cash flows, and the carrying value of the assets. Determination of recoverability is based on estimates and changes in these estimates and assumptions could materially impact our financial position and results of operations. No impairment of long- lived assets was recognized for years ended December 31, 2007 and 2008 and the nine months ended September 30, 2009, respectively.
Share-based Compensation
We use a fair-value based method to account for share-based compensation. Accordingly, share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees’ requisite service period. For options that were granted with performance conditions which vest subsequent to our initial public offering, share-based compensation expenses would be recognized upon the offering using the graded-vesting method. Share-based compensation for the remaining options granted with service conditions are recognized, net of a forfeiture rate, over the requisite service period of the award, which is the vesting term, based on the fair value of the award on the grant date. Total compensation cost in 2007 and 2008 was RMB43,549 and RMB730,453, respectively and was RMB535,504 and RMB1,257,174 for the nine months ended September 30, 2008 and September 30, 2009. We did not issue any share-based awards prior to 2007. Determining the value of our share-based compensation expense in future periods requires the input of highly subjective assumptions, including the expected life of the share-based payment awards, estimated forfeitures and the price volatility of the underlying shares. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share based compensation expense could be materially different in the future. For example, as of September 30, 2009, approximately US$0.6 million of total unrecognized compensation costs related to unvested share options, which were expected to be recognized over a weighted-average period of 2.0 years. In addition, upon the completion of our initial public offering, approximately US$1.5 million of share-based compensation costs were expected to be recognized over a period of one year.
Determining the fair value of options requires making complex and subjective judgments. In assessing the fair value of the options we have granted, we considered the following principal factors:
• | The nature of our business and the contracts and agreements relating to our business; |
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• | The global economic outlook in general and the specific economic and competitive elements affecting our business; |
• | The nature and prospects of our industry in China; |
• | The growth of our operations; and |
• | Our business risks. |
In determining the fair value of our ordinary shares on each grant date, we relied in part on a valuation report prepared by an independent valuer based on data we provided. The valuation report provided us with guidelines in determining the fair value, but the final determination as to the fair value of our share awards was made by our management. To determine the fair value of our ordinary shares, the three generally accepted approaches were considered: the cost, market and income approaches. While useful for certain purposes, the cost approach is generally not considered applicable to the valuation of companies which are a going concern, as it does not capture the future earning potential of the business. Given that our current stage of development is different from those of other publicly listed companies in the same industry, comparability of peer companies’ financial metrics and the relevance of the market approach were considered low. In view of the above, we considered the income approach to be the most appropriate method to derive the fair values of our ordinary shares.
For the income approach, we utilized a discounted cash flow, or DCF, analysis based on our management’s best estimates of projected cash flows as of each of the valuation dates. The projected cash flows include among other things, an analysis of projected revenue growth, gross margins, effective tax rates, capital expenditures and working capital requirements. The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. The assumptions used in deriving the fair value of our ordinary shares are consistent with our business plan. These assumptions include: no material changes in the existing political, legal, fiscal and economic conditions in China; our ability to recruit and retain competent management, key personnel and technical staff to support our ongoing operations; and no material deviation in industry trends and market conditions from economic forecasts. These assumptions are inherently uncertain and subjective. The discount rates reflect the risks management perceived as being associated with achieving the forecasts and were derived by using the Capital Asset Pricing Model, after taking into account systematic risks and company-specific risks. Using this method, we determined the appropriate discount rates to be 22.5%, 23.0%, 23.5%, 22.5%, 21.5%, 21.5%, and 21.5% as of July 16, 2007, December 17, 2007, February 21, 2008, August 11, 2008, February 2, 2009, July 20, 2009, and August 20, 2009, respectively.
We also applied discounts for lack of marketability or, DLOM, to our equity value to reflect the fact that there is no ready public market for our shares as we are a closely held private company. When determining the DLOM, the Black-Scholes option model was used. Under this method, the cost of a put option that could be used to hedge the price change before a privately held share can be sold, is considered as a basis to determine the appropriate discount factor for lack of marketability. Based on the analysis, DLOM of 23% was used for the valuation of our ordinary shares as of each of the option grant date in 2007, 2008, and DLOM of 23%, 17% and 19% was used for the valuation of our ordinary shares as of the option grant date on February 2, 2009, July 20, 2009 and August 20, 2009, respectively.
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Valuation Assumptions: The company estimated the fair value of stock options using Black-Scholes Option Pricing valuation model. The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing valuation model with the following weighted-average assumptions:
2007 | 2008 | Nine months ended September 30, 2009 | ||||
Expected volatility | 43.90% - 48.30% | 48.30% - 53.30% | 70.50% - 75.40% | |||
Risk-free interest rate | 4.43% - 5.49% | 3.27% - 4.13% | 3.09% - 3.76% | |||
Dividend yield | 0.00% | 0.00% | 0.00% | |||
Expected term (in years) | 3.4 - 4.8 | 3.2 - 3.5 | 3.1 - 3.5 | |||
Weighted average fair value of options granted (US$) | 0.11 | 0.09 | 0.32 |
Expected Term:Due to insufficient historical information, giving consideration to the contractual terms of the stock-based awards, we adopted the simplified method for estimating the expected term to represent the period that our stock-based awards are expected to be outstanding.
Expected Volatility: The fair value of share-based payments made through the year ended December 31, 2007 and 2008 and the nine months ended September 30, 2009 was valued using the Black-Scholes Option Pricing valuation method with a volatility factor based on the historical stock prices of comparable companies.
Expected Dividend: The Black-Scholes Option Pricing valuation model calls for a single expected dividend yield as an input. We have not declared or paid any cash dividends on its capital stock, and we do not anticipate any dividend payments on its ordinary shares in the foreseeable future.
Risk-Free Interest Rate: We base the risk-free interest rate used in the Black-Scholes Option Pricing valuation method on the implied yield currently available on China treasury bonds constant maturities with an approximate equivalent remaining term.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, we consider both voluntary and company termination behavior.
The grant date, number of options granted, exercise price, fair value and intrinsic value of the options granted to date (based on the mid-point of the estimated price range of the initial public offering price), giving effect, in each case to our 10-for-1 share split, are set forth below. As of September 30, 2009, there were 4,421,880 share options exercisable. The number of options, price and value information below are based upon ordinary shares. Each ADS represent 15 Class A ordinary shares.
Grant date | Number of options granted | Exercise price | Fair value of ordinary shares | Intrinsic Value | ||||||
1 | 16 Jul 07 | 39,800,000 | i) US$0.11 ii) US$0.13 | i) US$0.11 ii) US$0.11 | i) US$0.39 ii) US$0.37 | |||||
2 | 17 Dec 07 | 5,500,000 | US$0.13 | US$0.13 | US$0.37 | |||||
3 | 20 Feb 08 | 1,700,000 | US$0.12 | US$0.12 | US$0.38 | |||||
4 | 11 Aug 08 | 3,000,000 | US$0.08 | US$0.08 | US$0.42 | |||||
5 | 2 Feb 09 | 200,000 | US$0.13 | US$0.13 | US$0.37 | |||||
6 | 20 July 09 | 700,000 | US$0.32 | US$0.32 | US$0.18 | |||||
7 | 20 Aug 09 | 2,500,000 | US$0.33 | US$0.33 | US$0.17 |
Income Taxes
We currently have deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, all of which are available to reduce future taxes payable in our significant tax jurisdictions. The largest component of our deferred tax assets are operating loss carryforwards generated by our PRC subsidiaries due to their historical operating losses. In assessing whether such deferred tax assets can be
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realized in the future, we need to make judgments and estimates on the ability of each of our PRC subsidiaries to generate taxable income in future years. To the extent that we believe that it is more likely than not that some portion or the entire amount of deferred tax assets will not be realized, we established a valuation allowance to offset the deferred tax assets. As of December 31, 2007 and 2008, we recognized a total valuation allowance of RMB16.5 million and RMB46.8 million, respectively. As of September 30, 2009, a total valuation allowance of RMB27.5 million was recognized against deferred tax assets. If we subsequently determine that all or a portion of the carryforwards are more likely than not to be realized, the valuation allowance will be released, which will result in a tax benefit in our consolidated statements of operations.
Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest rates for our outstanding debt and the interest income generated by excess cash invested in liquid investments with original maturities of three months or less. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase in interest rates, however, may raise the cost of any debt we incur in the future. In addition, our future interest income may be lower than expected due to changes in market interest rates. With respect to cash and cash equivalents as of December 31, 2008, a 10% decrease in interest rates would have decreased our interest income for the year then ended from RMB4.4 million to RMB4.0 million. In addition, with respect to cash and cash equivalents as of September 30, 2009, a 10% decrease in interest rates would have decreased our interest income for the nine months period then ended from RMB1.6 million to RMB1.4 million.
Foreign Exchange Risk
Substantially all of our revenues and most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash and cash equivalents denominated in U.S. dollars as a result of our past issuances of preferred shares through a private placement and proceeds from this offering. 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. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of approximately 18.3% of the RMB against the U.S. dollar from December 31, 2005 to December 31, 2008. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. To the extent that we need to convert U.S. dollars we receive from this offering 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. Assuming we were to convert the net proceeds received in this offering into the RMB, a 1.0% increase in the value of the RMB against the U.S. dollar would decrease the amount of the RMB we receive by RMB5.7 million. Cash and cash equivalents of the Group include aggregate amounts of US$11.7 million, US$7.8 million and US$1.9 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. A 1.0% increase in the value of the RMB against the U.S. dollar would decrease the amount of the RMB by RMB0.8 million, RMB0.5 million and RMB0.1 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. We have U.S. dollar
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payables of US$9.6 million, US$10.7 million and US$9.6 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. A 1.0% increase in the value of the RMB against the U.S. dollar would increase the payable amount by RMB0.3 million, RMB0.7 million and RMB0.7 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance to eliminate the exception to consolidate a qualifying special-purpose entity, change the approach to determining the primary beneficiary of a variable interest entity and require companies to more frequently re-assess whether they must consolidate variable interest entities. Under the new guidance, the primary beneficiary of a variable interest entity is identified qualitatively as the enterprise that has both (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. We will adopt this guidance at the beginning of our fiscal year 2010 and we do not expect the adoption of this guidance will have material impact on our consolidated financial statements.
In August 2009, the FASB issued guidance on Fair Value Measurements and Disclosures—Measuring Liabilities at Fair Value. The objective of the new guidance is to provide clarification for the fair value measurement of liabilities, specifically providing clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, a reporting entity is required to measure fair value using certain prescribed techniques. Techniques highlighted include using 1) the quoted price of the identical liability when traded as an asset, 2) quoted prices for similar liabilities or similar liabilities when traded as assets, or 3) another valuation technique that is consistent with the principles of fair value measurements. The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. Finally, the guidance clarifies that both a quoted price in an active market for the identical liability and the quoted price for the identical liability when traded as an asset in an active market when no adjustment to the quoted price of the asset are required are Level 1 fair value measurements. We will adopt this guidance at the beginning of its fiscal year 2010, and we do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.
In October 2009, the FASB issued an accounting standard update to revenue recognition relating to multiple-deliverable revenue arrangements. This update modifies the fair value requirements of existing accounting guidance by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence or VSOE, and third-party evidence or TPE, for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This update requires expanded qualitative and quantitative disclosures and is effective for fiscal years beginning on or after June 15, 2010. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. We are currently evaluating the impact, if any, that the adoption of this update will have on our consolidated financial statements.
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The Economy of the PRC
The PRC economy has grown significantly since the PRC government introduced economic reforms in the late 1970s. This growth has accelerated since China entered the World Trade Organization in 2001. The chart below shows the growth of China’s GDP from 2002 to 2008:
Source: CEIC Data Company, Ltd., or CEIC
Despite the recent financial crisis China’s real GDP growth in 2009 is expected to be not less than 8%. Major cities in China have grown rapidly in recent years, with GDP per capita in Beijing, Shanghai and Shenzhen considerably higher than the national average. The following table sets forth nominal GDP per capita for Beijing, Shanghai, Shenzhen and the national average from 2002 through 2008:
Nominal GDP per capita (in RMB) | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | Compound Annual Growth Rate | |||||||||
Beijing | 30,840 | 34,892 | 41,099 | 45,444 | 50,467 | 58,204 | 63,029 | 12.7 | % | ||||||||
Shanghai | 35,329 | 39,128 | 46,338 | 51,529 | 57,695 | 66,367 | 73,124 | 12.9 | % | ||||||||
Shenzhen | 46,388 | 54,545 | 59,271 | 60,801 | 69,450 | 79,645 | 89,814 | 11.6 | % | ||||||||
National Average | 9,398 | 10,542 | 12,336 | 14,053 | 16,165 | 19,524 | 22,698 | 15.8 | % |
Source: CEIC
PRC Real Estate Sector
Governmental Reforms in the Real Estate Sector
The PRC real estate sector remained part of a centrally planned economy until the late 1980s, when the Chinese government initiated reforms to transition real property ownership to a market-oriented system. A constitutional amendment instituted in 1988 allowed Chinese citizens to transfer long-term land use rights in China. This legislative amendment opened the real estate sector to private ownership of real properties and commenced the development of a private real estate market in China.
The PRC government promulgated rules in 1994 requiring companies to establish housing purchase benefit plans for their urban employees. Jointly funded by employers and employees, these plans provided substantial financial assistance to employees for home purchases. The PRC government ended its practice of
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allocating and exchanging housing units for its urban population in 1998. In 1999, to further stimulate the housing market, commercial banks began offering mortgage loans to individual property buyers and extended the maximum mortgage term to 30 years and the maximum financed portion of the purchase price of a property to 80%.
Key Drivers of the PRC Real Estate Sector
China’s economic growth, together with an increase in disposable incomes, a rise in urbanization levels, the emergence of a mortgage lending market and government housing reforms, have driven the expansion of China’s real estate market. Housing reforms continue to encourage private ownership of properties. The chart below sets forth urban disposable income per capita and the urbanization rate in China from 2002 through 2008:
Source: CEIC |
Although China has experienced rapid growth in urban disposable incomes and urbanization rates in recent years, China still has substantial potential for growth compared to more developed countries. The chart below shows per capita disposable incomes and urbanization rates in China, Hong Kong and selected developed countries in 2008:
Source: CEIC; Euromonitor |
Primary Residential Property Market in the PRC
The PRC primary residential property sector has grown significantly in recent years, with increased real estate investment, higher sales volumes and rising average sales prices. The growth of the primary residential
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property market has contributed to an increase in home inventory. The table below shows selected data for the primary residential property market in China from 2002 to 2008.
2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | Compound Annual Growth Rate | ||||||||||
Investment in residential property development (in billions of RMB) | 523 | 678 | 884 | 1,086 | 1,364 | 1,801 | 2,208 | 27.1 | % | ||||||||
GFA of primary residential properties sold (in millions of square meters) | 237 | 298 | 397 | 496 | 554 | 701 | 559 | 15.4 | % | ||||||||
Sales revenue from primary residential properties (in billions of RMB) | 496 | 654 | 1,036 | 1,456 | 1,729 | 2,557 | 2,042 | 26.6 | % | ||||||||
ASP of primary residential properties (RMB per square meter) | 2,092 | 2,197 | 2,608 | 2,937 | 3,119 | 3,645 | 3,567 | 9.3 | % |
Source: CEIC
Secondary Residential Property Market in the PRC
The secondary residential property market has also grown significantly since the PRC government commenced reforming the real estate sector. Transaction volumes in secondary residential property markets generally grow in line with an increase in home stocks, as more properties are sold and the turnover rate for existing homes rises. The chart below sets forth the total residential property transaction volume in Beijing from 2003 through November 2009:
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Secondary residential property transaction volumes in Beijing and Shanghai have increased consistently since 2007, and have recently surpassed primary residential property transaction volumes in those cities. The charts below set forth secondary residential property transaction volumes, the ratio of secondary to primary residential market sales in Beijing and Shanghai from 2007 through November 2009:
Source: Beijing Housing Construction Technology Center |
Source: Shanghai Jansen Media and Shanghai Youwin Real Estate Information Service |
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The chart below shows the average selling price of secondary residential properties in Beijing and Shanghai from the beginning of 2008 through November 2009:
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Source: China Index Academy |
We believe the chart above demonstrates the resilience in pricing of the secondary residential property market, where, despite the global financial crisis and a downturn in the economy, secondary residential property pricing in Beijing and Shanghai has been relatively stable since 2008 through November 2009.
During 2008, transaction volumes in the PRC residential property market, both primary and secondary, weakened due to domestic monetary tightening and the global financial crisis. In 2009, the PRC government’s economic stimulus plans, together with improved sentiment in the residential property market, have contributed to a strong recovery in secondary residential property transaction volumes. Secondary residential property transaction volumes in Beijing and Shanghai increased 276% and 132%, respectively, in the eleven months ended November 30, 2009 compared to the same period in 2008.
Secondary residential property transaction volumes in Beijing and Shanghai have been relatively resilient and generally outperformed the growth rate of primary transaction volumes in recent years. The charts below set forth the rolling annual growth rates in primary and secondary residential property transaction volumes in Beijing and Shanghai from December 2008 to November 2009:
Source: Beijing Housing Construction Technology Center |
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Source: Shanghai Jansen Media and Shanghai Youwin Real Estate Information Service |
The PRC residential property markets, particularly in less developed areas, remain relatively nascent. Recent sales have consisted primarily of newly developed residential properties, with secondary residential property transactions representing a relatively small portion of total residential property sales. In contrast, in developed countries, secondary residential property transactions typically represent a majority of total residential property sales. The chart below illustrates the secondary to primary residential property transaction ratio in the United States and key cities in China for the first six months of 2009:
Source: National Association of Realtors; U.S. Census Bureau; CEIC; Beijing Housing Construction |
The secondary to primary residential property transaction ratio for the first six months of 2009 was 1.94 times and 1.30 times for Shanghai and Beijing, respectively. According to CEIC, based on gross floor area, the secondary to primary residential property transaction ratio for the first six months of 2009 was 0.26 times in China. Because the secondary component of a residential property market typically grows as the market matures, transaction volumes in secondary residential property markets in China are expected to increase as the PRC economy develops, just as secondary markets grew in the United States and other developed regions as their economies matured. Secondary residential property markets in China are already more developed in the more economically prosperous cities such as Beijing, Shanghai and Shenzhen, whose economies have grown faster
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than those of other regions in China. As the economies of those cities and other regions of China continue to develop, secondary residential property markets are expected to grow throughout the country.
PRC Real Estate Services Sector
Emergence and Growth of Real Estate Services Companies in China
The real estate services industry in China has become increasingly specialized as it has grown in size and complexity. This industry includes primary brokerage services, secondary brokerage services, mortgage management services and leasing services.
Primary Residential Property Brokerage Services
Primary residential property brokerage services include the brokering of sales of new homes built by property developers and related services. In China, primary residential sales have been driven principally by economic development, which led to rapid urbanization and a resulting increase in land development and gentrification. The primary residential brokerage services market in China is highly competitive and fragmented,with market participants ranging from companies with a national presence to local companies handling projects on an ad hoc basis.
Secondary Residential Property Brokerage Services
Secondary residential property brokerage services include the brokering of existing home sales and leases and related services. The secondary residential property brokerage market in China emerged in 1998, as the central government introduced market-oriented policies to replace the state-planned system for urban housing. The PRC government promulgated the Provisions on the Administration of Urban Real Estate Services in 1996, as revised in 2001, which established the regulatory framework for the industry. As the primary real estate market has grown, China’s secondary real estate market has expanded significantly. As a result, the number of secondary real estate brokerages has increased dramatically in China’s more developed cities.
The PRC government did not heavily regulate the secondary real estate market during its early stages of development, when brokerages frequently engaged in activities such as misappropriation of funds and price arbitrage. In 2006, the Ministry of Construction and the People’s Bank of China jointly issued the Circular Concerning Strengthening the Management of Real Estate Brokerage Services and Regulating the Trading Settlement Capital Account, which introduced regulations that required escrow accounts for home purchases and prohibited price arbitrage.
In addition, local governmental authorities in charge of construction, land resources and other areas regulate the secondary residential property brokerage industry. As a result, regulations governing this sector typically vary across different regions. For example, the maximum commission rate that real estate brokers can charge in Beijing, Shanghai and Shenzhen is 2.8%, 2.0% and 3.0%, respectively, while the maximum commission rate set by the central government is 3.0%.
Since the establishment of the regulatory framework for secondary real estate brokerage services, the ratio of brokered to non-brokered secondary residential property transactions in China’s developed cities has increased significantly. According to the Beijing Housing Construction Technology Center and Shanghai Jansen Media Co., Ltd., in June 2009 the percentage of total secondary residential property transactions conducted through a brokerage was approximately 67.7% in Beijing and 85.2% in Shanghai. In comparison, according to China Index Academy, approximately 60% of secondary property transactions nationally were conducted through brokerages in June 2009, and this national percentage is expected to grow to 80% over the next few years.
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An important aspect of China’s secondary residential property brokerage services industry is the predominance of open listings. Under the open listing system, property listings can be marketed simultaneously by multiple agents. In contrast, property listings in certain other countries, such as the United States, are made on an exclusive basis, which means that they can only be marketed by an exclusive agent. This has led to the emergence of Multiple Listing Services in the United States, where members can pool listings into a centralized system to attract more buyers while maintaining their exclusive listings.
However, due to the predominance of the open listing system in China, brokerages rarely share listing information with their competitors. As a result, larger brokerages are typically more attractive to home buyers, home sellers and sales professionals. For example, home buyers are granted access to a larger listing database, which provides a greater opportunity to find quality homes at reasonable prices. Similarly, home sellers may receive better services from a larger pool of sales professionals, who compete with each other to find the best terms for their customers. Finally, sales professionals can take advantage of more extensive listing databases and better brand recognition and awareness. As a result, large-scale players in the real estate brokerage industry enjoy economies of scale and have a competitive advantage over their smaller counterparts. This ultimately reduces market fragmentation. For instance, Centaline Property Agency Limited and Midland Holdings Limited dominate the secondary residential property brokerage market in Hong Kong, which also operates on an open listing system.
The secondary residential property brokerage industry in China is currently highly fragmented and extremely competitive due to low barriers of entry for smaller players. As of July 2009, 173,560 property brokerage companies and 247,812 property agents were registered with the China National Institute of Real Estate Appraisers and Brokers, with a total of over one million property agents industry-wide. We believe that industry consolidation will become an increasingly prevalent trend, as brokerages with larger networks of stores, stronger brand names and higher standards of professional service increase their market share. The chart below shows China’s top ten secondary real estate brokerage networks in the first half of 2009, as ranked by the China Index Academy based on a number of factors, including the number of cities in which they operate and their total number of stores:
Ranking | Company | Number of Cities Entered | Number of Sales Offices | |||
1 | Century 21 | 34 | > 1,000 | |||
2 | Centaline | 23 | 539 | |||
3 | 5i5j | 8 | 600 | |||
4 | Home Link | 3 | 450 | |||
5 | Hopefluent | 4 | 200 | |||
6 | MyTopHome | 9 | 200 | |||
7 | E-House | 4 | 113 | |||
8 | Midland | 7 | 350 | |||
9 | Shi-hua Real Estate | 2 | 108 | |||
10 | Hanyu Property | 1 | 80 |
Source: China Index Academy
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Mortgage Management Services
Mortgage management services include the provision of advisory, execution and similar services related to mortgage products. The residential mortgage sector in China has grown rapidly in recent years. The total amount of outstanding residential mortgages in China has increased significantly, from RMB825 billion as of December 31, 2002 to RMB2.98 trillion as of December 31, 2008, representing a compound annual growth rate of 23.9%. The chart below shows the amounts of outstanding residential mortgages in China from 2002 to 2008:
Source: CEIC |
As the residential mortgage market increases in size and sophistication, specialized mortgage management agents are becoming important channels for commercial banks to distribute their real estate financing products. In addition, mortgage management services are becoming increasingly associated with secondary real estate brokerage companies with large distribution networks, strong brand names and professional service standards.
The PRC government has imposed stringent regulations on the residential mortgage sector, including a minimum down payment requirement of 20% for first mortgages, which increases for subsequent mortgages. Additionally, PRC commercial banks providing residential mortgages place strong emphasis on client investigation and risk control. As a result, the residential mortgage sector in China has a relatively low non-performing loan ratio. According to the China Banking Regulatory Commission, the non-performing loan ratio of residential mortgages in China was approximately 0.91% in 2008.
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Overview
We are a leading comprehensive real estate services provider with the largest network of real estate sales offices in China. We are the exclusive franchisor in China for the CENTURY 21® brand, one of the world’s most recognized brands in the real estate industry. As of September 30, 2009, our CENTURY 21® China network covered 34 major cities with more than 1,000 sales offices, employed approximately 14,900 sales professionals and staff and maintained approximately 4.7 million property listings. In the first half of 2009, based on transaction volume, we ranked among the top three market leaders in over 90% of the cities in which we operate and were the market leader in more than 30% of those cities. We primarily focus on China’s fast-growing and highly fragmented secondary real estate market, which we expect to outgrow the primary market, especially in more economically prosperous cities.
We operate under three different but closely related business lines: company-owned brokerage services, mortgage management services and franchise services. We have deployed a unique business model that has allowed us to rapidly scale our company-owned operations by leveraging the in-depth market knowledge and human capital developed from our franchise network.
We started our franchise services business in 2000 and have rapidly expanded our franchise network and our brand. Our franchise services business grants regional franchise rights for the CENTURY 21® brand to regional sub-franchisors in China who, in turn, open their own sales offices or grant third parties the right to open sales offices within their region. We generate revenue from our franchise services by collecting initial franchise fees and ongoing service fees from these regional sub-franchisors. Our franchise network has provided us with valuable information to gauge market maturity and identify potential opportunities to establish and grow our company-owned brokerage services business. Until we launched our company-owned brokerage services business in 2006, we generated our net revenues solely from our franchise services business. We started our company-owned brokerage services business in Beijing and Shanghai in 2006 and in Shenzhen in 2008, and have quickly expanded our company-owned sales office network in these cities through organic growth and acquisitions of sales offices owned by third parties. As of September 30, 2009, we had approximately 280 company-owned sales offices, representing approximately 26.1% of our CENTURY 21® China network. Our company-owned brokerage services business owns and operates regional sub-franchisors and sales offices in the CENTURY 21® China network. We generate revenue from our company-owned brokerage services primarily through commissions earned from home buyers, sellers, lessors and lessees. In 2008 and the nine months ended September 30, 2009, our company-owned sales offices contributed approximately 75.4% and 91.9% respectively, of our total net revenues.
In 2008, we launched our independent mortgage management services in Beijing and Shanghai, providing services to customers both inside and outside our CENTURY 21® China network. Our mortgage management services business provides mortgage advisory services to home buyers and home owners and interim guarantee services to commercial banks. We generate revenue from our mortgage management services primarily through commissions earned from commercial banks in consideration of our advisory services and interim guarantee services. Our mortgage management services business is well positioned to take advantage of referrals from our extensive network of company-owned sales offices. In the first nine months of 2009, a substantial majority of the transactions handled by our company-owned brokerage services in which mortgages were utilized made use of our mortgage management services. We have provided services for home mortgages with an aggregate loan amount of approximately RMB6.1 billion since we launched our mortgage management service business through September 30, 2009. Our contingent guarantee obligation associated with our interim guarantees as of September 30, 2009 was RMB829.3 million.
Our rapid growth is supported by our information systems and training programs. Our information systems provide real-time and in-depth management and sales information, support our network of sales offices,
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and drive our marketing efforts. We strongly believe in training members of our management team, who are generally required to complete quarterly training courses. Additionally, all of our sales professionals are required when they join us to complete training courses that we conduct in-house, and are also required to complete monthly refresher or new skills courses.
We have experienced substantial growth since we commenced operations in 2000. Our total net revenues increased from RMB38.4 million in 2006 to RMB273.4 million in 2008, representing a compound annual growth rate of 166.8%, and from RMB208.9 million in the nine months ended September 30, 2008 to RMB443.7 million in the same period in 2009, representing an increase of 112.4%. After incurring net losses of RMB72.8 million and RMB131.9 million for the years ended December 31, 2007 and 2008, respectively, we became profitable during the nine month period ended September 30, 2009 with a net income of RMB88.3 million (US$12.9 million). We have received numerous awards and recognitions for our service quality and business achievements, including the “Highly Appraised Franchisor Award” by the China Chain Store and Franchise Association in 2008 and 2009, “Prominent Real Estate Services Provider” by Sina.com in 2008, and “Most Reputable Real Estate Services Provider” by Sohu.com in 2009.
Our Strengths
We believe that the following strengths differentiate us from our competitors and have enabled us to capture a leading position in the rapidly growing real estate services industry in China:
We leverage one of the world’s most recognized real estate service brands to drive our leadership in China
With more than 130,000 sales professionals in approximately 8,500 sales offices worldwide, the CENTURY 21® brand is one of the world’s most recognized real estate service brands. As the exclusive franchisor of the CENTURY 21® brand in China, we benefit from our brand’s association with trust, professionalism, efficiency and quality of service.
We have successfully adapted this well-established global brand for the China market, leveraging our in-depth knowledge of the real estate market in China, decade-long track record and consistent service quality to create a leading real estate service network. In the first half of 2009, based on transaction volume, we ranked among the top three market leaders in over 90% of the cities in which we operate and were the market leader in more than 30% of those cities.
We believe a strong brand in our industry appeals to:
• | customers, who trust our credibility, efficiency and service quality; |
• | franchisees, who are attracted to the customer recognition, systems and professionalism that our brand represents; and |
• | sales professionals, who are drawn to the long-term career prospects at our company and potential for growth. |
We believe that the widespread appeal of our brand and our reputation as a market leader paves the way for sustained business expansion and will help solidify premium market position. We have gained recognition and acclaim in our industry, including the “Highly Appraised Franchisor Award” by China Chain Store and Franchise Association in 2008 and 2009, “Prominent Real Estate Services Provider” by Sina.com in 2008, and “Most Reputable Real Estate Services Provider” by Sohu.com in 2009.
We have a unique business model that allows us to rapidly scale our distribution network and expand our product and service offerings
With more than 1,000 sales offices across 34 cities and approximately 14,900 sales professionals and staff, we have the largest real estate brokerage network in China as a result of our unique business model. By
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franchising to reputable and capable regional sub-franchisors, we have outpaced our competitors in building our brand and network nationally with minimal capital investment. Our franchise network allows us to gather valuable market knowledge to gauge market maturity, build our human capital and identify potential acquisition opportunities to expand our company-owned sales offices. We encourage our regional sub-franchisors to grow their own sales offices within their franchise network and where possible invest directly in our sub-franchisors to help facilitate their growth.
We open or acquire company-owned sales offices in selected new markets when such markets mature. We believe these strategies allow us to rapidly scale our company-owned brokerage services business, lower investment risks, shorten payback periods and significantly improve investment returns. For example, for the first nine months of 2009, our company-owned sales offices in Beijing contributed an average of approximately RMB205,805 of net revenues per month, compared to our franchised sales offices in Beijing which contributed an average of approximately RMB5,263 of net revenues per month.
We believe our national distribution platform and strong brand will allow us to distribute more products and services through our network, which will further drive our net revenues and margin growth. For example, since we launched our mortgage management services business, we have provided services for home mortgages with an aggregate loan amount of approximately RMB6.1 billion up to September 30, 2009.
We are the leader in the faster growing and more sustainable secondary real estate brokerage market
We are the largest secondary property broker in China as ranked by China Index Academy based on the number of cities in which we compete, our sales office count, the number of sales professionals in our network and our transaction volume. The secondary real estate brokerage market in China has become more active in recent years as the market has matured, and we expect secondary sales and leasing volume to outgrow primary sales volume over the long term. This process is consistent with the development of more mature markets such as the United States and Hong Kong. We believe this trend has reached an inflection point in the more economically prosperous cities such as Beijing and Shanghai, where secondary to primary sales volume ratio was 1.30 times and 1.94 times, respectively for all residential property sales during the first six months of 2009, compared with the U.S. ratio of 13.15 times, and the Hong Kong ratio of 5.16 times. As a result, we are well positioned to benefit from the growth in the secondary sales and leasing market in these cities and other cities in China as they mature.
We utilize our nationwide network to maintain a growing database of property listings that draws new customers and provides opportunities for future growth
We actively maintain a large and growing property listing database. Over the last three years, the total number of listings under our franchise network has risen from approximately 1.0 million in August 2006 to approximately 4.7 million as of September 30, 2009. Since the establishment of our company-owned sales offices in Beijing and Shanghai in 2006, we have grown the number of listings in our company-owned sales offices in Beijing and Shanghai to over 1.7 million as of September 30, 2009, which represent approximately 36% of the 4.7 million existing secondary residential units that we have targeted for listing.
This extensive listing database represents an important asset to our business. The predominance of the open listing system in China means that a broker generally only has access to properties listed within his company’s own system. Thus, prospective buyers or tenants are attracted to our network because of the broad range of listings in our network, which in turn drives more home owners to list their properties on our network. In addition, we actively follow up on our listings with marketing efforts by our sales professionals to generate potential leads and transactions. We believe that we will be able to increase our market share and drive our future growth through our continuous efforts to update and expand our property listings database.
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We have developed world class, standardized information systems and training programs to support the scalability of our business model
Since 2000, we have developed and enhanced our proprietary information systems, which are centrally coordinated through our headquarters. We believe that these information systems are critical to allow us to maintain and manage our rapid growth across regions and product lines.
In order to ensure operational efficiency, performance and revenue contribution, we maintain the following systems:
• | Sales Information System, which can be accessed by our sales professionals on a real-time basis and facilitates information sharing among our sales professionals efficiently. It also allows us to effectively monitor the activities of our sales professionals; |
• | Human Resource and Commission Information System, which monitors performance of our sales professionals and allows us to analyze their sales output. This also provides us with a transparent mechanism to determine compensation packages to motivate and retain our sales professionals and staff; and |
• | Training programs, which include off-line and online training programs. As with other companies in the sector, we have relatively high turnover among our sales professionals, and these programs allow us to continuously provide consistent, systematic and effective training to our new and existing sales professionals and staff. |
In order to protect our brand, reputation and business model, we maintain the following risk management systems:
• | A two-tiered franchise structure, whereby reputable regional sub-franchisors are granted regional franchise rights and remain responsible for supervising their respective regional businesses; |
• | A rigorous screening process to select prospective regional sub-franchisors; |
• | A proven legal structure to ensure that our sub-franchisors and franchisees strictly adheres to our franchise guidelines; and |
• | Supervisory systems to ensure quality of service and monitoring of sales professionals. |
We believe these systems facilitate our growth by allowing us to replicate our systems across business lines and geographies. For example, we have successfully integrated the acquisition of new company-owned sales offices into our business by leveraging the adaptability of our systems, which are consistent among our company-owned sales offices and franchised sales offices.
We have an experienced and stable management team
We have an experienced and stable management team, led by our Chairman, Mr. Donald Zhang, and our Vice Chairman, Mr. Harry Lu, who co-founded the company in 2000. Mr. Zhang and Mr. Lu are US-educated Chinese entrepreneurs who have strategically set out our business model and have extensive experience in the development and operation of the CENTURY 21® system. As industry leaders, they have played important roles in helping shape and improve the real estate services industry in China. For example, Mr. Lu is currently the Deputy General Secretary of China National Institute of Real Estate Appraisers and Brokers, the leading institution which sets the policies and standards of the real estate brokerage market in China.
Our senior management team consists of experts who have an in-depth understanding of China’s real estate service industry and substantial experience in the real estate brokerage, franchise and mortgage sectors in China. Most members of our core management team have participated in China’s real estate services industry
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since its inception and have been with us since our formation. We believe that the quality and depth of our management team have underpinned our success, allowed us to attract investments from top-tier investors such as Goldman Sachs Strategic Investments, and will drive our future growth and leadership in the China real estate services market.
Our Strategies
Our aim is to further strengthen our leadership as China’s largest real estate service provider, through the following strategies:
Strengthen our distribution network
We intend to further strengthen our distribution network through the following two-pronged strategy:
• | Company-owned sales offices: We intend to increase the number of company-owned sales offices in our core markets of Beijing, Shanghai and Shenzhen. Additionally, we intend to expand into new markets once they reach certain levels of maturity and local conditions are favorable, by entering into joint venture arrangements with our existing or new regional sub-franchisors or acquiring third party sales offices. Subject to market conditions, we intend to have at least 500 company-owned sales offices by the end of 2010. |
• | Franchised sales offices: We intend to continue to leverage our franchise system to expand our network and brand name, and to help us identify new markets in which to build our company-owned brokerage services business. We intend to continue to partner with reputable and capable companies as our regional sub-franchisors to expand our national footprint. |
Expand existing product lines
Through our independent mortgage management services business, we aim to build the leading real estate financial service business in China, to serve customers both inside and outside our CENTURY 21® franchise network. Given the geographic scope of the secondary sales market (unlike the primary market, which is focused on specific buildings or developments), our distribution network is the “point-of-sale” and therefore the ideal place to introduce additional products and services to our customers, including insurance and financing products. In 2009, a substantial majority of the transactions utilizing mortgage services that are handled by our company-owned sales offices used our mortgage management services. We plan to extend our presence to other parts of China in line with the expansion of our company-owned brokerage services business.
We also intend to leverage our extensive distribution network to selectively expand our presence in the primary real estate sales market and the commercial real estate sales and leasing market to complement our leadership in the secondary real estate market. In particular, we have recently built new teams dedicated to the primary and commercial real estate sales markets. We will devote efforts to utilize these cross-selling opportunities across our internal business functions to produce additional revenue streams capitalizing on our existing customer network.
We also intend to utilize our comprehensive database of property listings and information developed through our business and market research efforts to create marketable products that can be sold to our customers.
Enhance brand awareness
We strive to continuously enhance the appeal of our brand to customers, franchisees and sales professionals through effective and systematic marketing campaigns, focusing on the mid- to high-end market. We will continue to utilize the National Advertising Fund to promote our CENTURY 21® franchise networks
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and enhance brand awareness. In addition, we plan to further expand our marketing team and increase the scale and frequency of our marketing efforts.
We are also committed to utilizing the internet to expand our brand and to drive potential customers to our brokerage network. For the nine-month period ended September 30, 2009, our sales offices have generated significant traffic through our internet advertising efforts.
Furthermore, we plan to provide comprehensive and in-depth market information on a real time basis to premium customers, commercial banks and real estate developers. We believe our circulation of valuable information to these industry players will inspire further confidence in our professionalism and enhance our brand recognition.
Invest in human capital management
Human capital, including approximately 14,900 sales professionals and staff, constitutes our most important resource. Recruiting and retaining quality management, sales professionals and other staff is crucial to our continued expansion and success as a market leader in the real estate services industry.
We believe that the CENTURY 21® brand, systems and business platform appeal to potential employees looking for long term career prospects. To attract and retain both management and sales professionals of high caliber, we plan to further improve our human resource systems for more accurate assessment of employee performance and enhance our compensation and incentive structure.
We intend to implement a wide variety of training programs, offered to the sales professionals and staff of both our company-owned sales offices and franchised sales offices, on real estate market knowledge, sales practices and techniques and in-house IT training. We plan to further devote efforts to increase the number and enhance the effectiveness of courses available through our training programs and E-learning system, an online training system developed and operated by our in-house human resources management team.
Our Nationwide Network
We operate the largest network of real estate sales offices in China under the CENTURY 21® brand. As of September 30, 2009, our CENTURY 21® China network covered 34 major cities with more than 1,000 sales offices, employed approximately 14,900 sales professionals and staff and maintained approximately 4.7 million property listings.
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The map below shows the cities covered by CENTURY 21® franchise network as of September 30, 2009:
The table below sets forth a summary of the number of sales offices, sales professionals and staff and property listings in our CENTURY 21® franchise network, as of September 30, 2009:
Sales Offices | Sales Professionals and Staff | Property Listings | ||||
Beijing | 183 | 2,897 | 1,073,210 | |||
Shanghai | 158 | 2,568 | 1,058,125 | |||
Hangzhou | 82 | 1,238 | 328,923 | |||
Chengdu | 66 | 738 | 216,698 | |||
Jinan | 59 | 680 | 282,554 | |||
Wuhan | 60 | 681 | 220,666 | |||
Shenzhen | 27 | 370 | 302,459 | |||
Others | 439 | 5,737 | 1,215,262 | |||
Total | 1,074 | 14,909 | 4,697,897 | |||
Our Services
We operate under three different but closely related business lines: company-owned brokerage services, mortgage management services and franchise services. We have deployed a unique business model that has allowed us to rapidly scale our company-owned operations by leveraging the in-depth market knowledge and human capital developed from our franchise network.
Company-owned Brokerage Services
As of September 30, 2009, we directly own 280 CENTURY 21® sales offices strategically located in Beijing, Shanghai and Shenzhen, cities in China with among the highest number of secondary market real estate transactions per year. We primarily focus on China’s fast-growing and highly fragmented secondary real estate market, which we expect to outgrow the primary market, especially in more economically prosperous cities. As of September 30, 2009, we had 4,399 sales professionals and staff in our company-owned sales offices. In 2008
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and the nine months ended September 30, 2009, such offices were involved in 6,312 and 12,976 sale and purchase transactions and net revenues from our company-owned brokerage services business represented approximately 75.4% and 91.9% of our total net revenues, respectively.
The table below sets forth the number of our company-owned sales offices and sales professionals and staff in each city as of September 30, 2009:
Company- owned Sales Offices | Sales Professionals and Staff | |||
Beijing | 129 | 2,091 | ||
Shanghai | 124 | 1,938 | ||
Shenzhen | 27 | 370 | ||
Total | 280 | 4,399 | ||
Historically, we have developed our company-owned brokerage services business through organic growth and acquisitions of sales offices owned by third parties. We established Beijing Anxin, the operator of our company-owned sales offices in Beijing, in 2006. In Shanghai and Shenzhen, we acquired the sales offices operated by two pre-existing local players with sufficient local expertise in 2006 and 2008, respectively. After such acquisitions, we started to develop our company-owned brokerage services business locally with the assistance of the local management team.
Through our company-owned brokerage services business, we participate in sales and leasing transactions primarily with respect to middle to high grade residential properties in the secondary real estate market. Our services include property listing, advisory services and transaction negotiation and documentation. When we assist the seller in a real estate transaction, our sales professionals assist the seller in pricing the property and preparing it for sale, advertise the property (including on websites), introduce and promote the property to prospective buyers, and assist the seller in sale negotiations.
When we assist the buyer in a real estate transaction, our sales professionals generally help the buyer locate specific properties that meet the buyer’s personal and financial specifications, show properties to the buyer, assist the buyer in negotiating transaction terms and executing the transaction. We also promote our mortgage management services to our customers to provide the increased convenience of one-stop real estate brokerage services. We also participate in real estate sales and leasing transactions with respect to properties in the primary and commercial real estate markets.
We operate our company-owned brokerage services business under the CENTURY 21® franchise network. Each of our company-owned sales offices enters into a franchise agreement with one of our two wholly owned regional sub-franchisors. Under this arrangement, our company-owned sales offices are required to pay intra-group royalties to our regional sub-franchisors, who in turn, pay royalties to us. See “— Our Services — Franchise Services” for more information on our CENTURY 21® franchise network and operations.
Mortgage Management Services
We began operating our independent mortgage management services as a separate segment in 2008 in Beijing and Shanghai, under the independent brand of Kaisheng. Our mortgage management services include comprehensive advisory services in connection with the selection and procurement of mortgage products offered by commercial banks. Our experienced mortgage consultants promote and introduce various mortgage products, and advise home buyers or home owners in the selection of the appropriate mortgage product based on each mortgagor’s individual needs. We also have a call center in Shanghai to promote our mortgage management services business directly to our customers.
As an important aspect of the one-stop real estate brokerage services available within the CENTURY 21® franchise network, our mortgage management services can be accessed at our closing centers,
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providing a convenient, one-stop option to home buyers and home owners as well as a prime platform for commercial banks to offer their products and services. In 2009, a substantial majority of the transactions utilizing mortgage services that are handled by our company-owned sales offices made use of our mortgage management services. We also provide mortgage management services to customers outside of our CENTURY 21® China network.
For our mortgage management services, we primarily generate commissions from the commercial banks whose mortgage products we promote. As of September 30, 2009 we had established advisory relationships with 11 commercial banks, such as Bank of China and Industrial and Commercial Bank of China. In some cases, we provide mortgage management services to property owners who need mortgages on their existing properties to obtain consumer loans for acquisition of additional properties and charge commissions based on our services. We provided services for home mortgages with an aggregate loan amount of approximately RMB1.9 billion and RMB4.2 billion in 2008 and the nine months ended September 30, 2009, respectively. Based on the secondary residential property transaction volumes in Beijing and Shanghai for 2008, we estimate that we provided mortgage management services for 6.18% and 1.45% of the home mortgages in Beijing and Shanghai, respectively.
As is customary in the mortgage management industry in Beijing, we provide interim guarantees to commercial banks in respect of the mortgage loans they extend to property buyers. An interim guarantee covers the period beginning when the bank disburses the mortgage loan to the property buyer and ending when the mortgage registration certificate is issued to the bank by the applicable property registry, which typically takes one to six months.
If a bank fails to obtain the mortgage registration certificate or the property buyer defaults on his payment obligations during the term of an interim guarantee, we may be required to pay the amount of the delinquent mortgage payments or any measurable loss suffered by the bank exceeding the payment already made by the buyer and the amount recoverable from the property.
Under the PRC rules, the maximum financed portion of the purchase price of a property is 80%, which helps reduce our risk exposure. To further mitigate our risk exposure, we usually:
• | conduct certain background and credit checks on property buyers and reject less credit-worthy mortgage applications; |
• | assist in applying for buyers’ title documents, and issue a guarantee in a transaction only after a notice specifying the proposed date for collecting the title document has been issued by the applicable property registry; and |
• | actively participate in the process of banks’ applying for mortgage registration certificates. |
As of December 31, 2007 and 2008 and September 30, 2009, the contingent guarantee obligations of our company with respect to the provision of interim guarantee was RMB143.9 million, RMB227.8 million and RMB829.3 million, respectively. As of September 30, 2009, we had not been required to pay any amounts with respect to our interim guarantee services since we commenced this business.
Franchise Services
Our franchise network consists of three levels of franchise rights. First, through IFM Co., our wholly owned subsidiary, we are the exclusive franchisor for the CENTURY 21® brand in China. IFM Co. in-turn grants the right to franchise the CENTURY 21® brand within specific geographical regions to sub-franchisors whom we refer to as regional sub-franchisors. The geographical scope of a regional sub-franchisor is generally limited to a particular city, although a few have rights to multiple cities. We own certain of the regional sub-franchisors.
The regional sub-franchisors then either open their own sales offices or grant to independent operators the right to open sales offices within the sub-franchisor’s region. The sales offices owned by us are referred to as
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company-owned sales offices while those owned by third parties are referred to as franchised sales offices or franchisees. As part of our strategy of expanding our network and CENTURY 21® brand recognition, in addition to owning and operating our company-owned sales offices, we seek to increase the number of franchisees.
As of September 30, 2009, we had 28 regional sub-franchisors with established franchise networks in 34 cities in China with a total of 794 franchised sales offices employing approximately 10,500 sales professionals and staff. The table below sets forth the number of the franchised sales offices in our CENTURY 21® franchise network, as of September 30, 2009:
Franchise Sales Offices | Sales Professionals and Staff | |||
Hangzhou | 82 | 1,238 | ||
Chengdu | 66 | 738 | ||
Jinan | 59 | 680 | ||
Beijing* | 54 | 806 | ||
Wuhan | 60 | 681 | ||
Zhengzhou | 59 | 825 | ||
Tianjin | 43 | 616 | ||
Qingdao | 44 | 485 | ||
Shijiazhuang | 37 | 737 | ||
Shanghai* | 34 | 630 | ||
Kunming | 19 | 226 | ||
Shenyang | 24 | 371 | ||
Others* | 213 | 2,477 | ||
Total | 794 | 10,510 | ||
* | We wholly own the regional sub-franchisors for Beijing, Shanghai and Shenzhen. We also own 10%, 15% and 10% of the equity of regional sub-franchisors in Xiamen Shijitonghe Real Estate Consultant Co. Ltd, or Xiamen, Shandong Jinan Sanlian Real Estate Brokerage Co., Ltd., or Shandong, and Shaanxi Lide Industry Investments Co. Ltd, or Xian. |
We are the largest real estate brokerage franchisor in China based on the number of sales offices operating under the CENTURY 21® brand, and the only real estate franchisor with a national footprint.
Pursuant to the franchise agreements we entered into with the entities in our CENTURY 21® franchise network, we primarily generate revenue from our franchise services business in two ways. First, each regional sub-franchisor pays us an initial sub-franchising fee in consideration of entering into the regional sub-franchise agreement. Second, each regional sub-franchisor pays us ongoing service fees based on its revenue from the sales offices within its respective region, subject to minimum service fee requirements. The regional sub-franchisors generate revenue through an initial franchise fee and ongoing service fees from each sales office established in their regional network.
In addition to generating revenue from our regional sub-franchisors, we leverage the geographic breadth and local market expertise of our CENTURY 21® franchise network to increase our brand recognition and market share as well as to accumulate market information and local expertise in the geographic regions where we see the business potential for future expansion of our company-owned brokerage services.
Our Franchising Process and Franchise Services
Our franchising process involves conducting market surveys and identifying target regions or locations, identifying potential regional sub-franchisors, and negotiating and signing franchise agreements. Since 2000, we have become more efficient in developing our CENTURY 21® franchise network. Based on our research and analysis of the real estate market in China, we believe that approximately 100 cities in China meet our criteria to develop our CENTURY 21® franchise network.
The selection of regional sub-franchisors in target regions is of critical importance to the development of the CENTURY 21® franchise network. We identify suitable partners in regions where we plan to develop a
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franchise network. An evaluation committee consisting of key members of our senior management team is in charge of reviewing and selecting regional sub-franchisors in new regions. Major criteria for the evaluation process include reputation, financial strength, commitment and industry vision, demonstrated industry and local expertise as well as internal control capability.
After our regional sub-franchisor enters into our network, we start to provide our franchise services, which primarily include the license to use or sub-franchise CENTURY 21® brand and system, training services, and the right to participate in and benefit from the marketing campaigns using NAF as well as information technology and back office support.
As part of our ongoing monitoring and supervision of a regional sub-franchisor’s performance, we generally require our regional sub-franchisor to (1) comply with a uniform franchise policy and procedure adopted for the region, (2) use our standardized franchise agreement with the franchisees within the region, (3) meet certain performance criteria, including the development of a certain number of franchised sales offices, (4) abstain from engaging in any other real estate brokerage business similar to ours or investing in any franchised sales offices, or other real estate brokerage, consulting or valuation businesses, unless otherwise agreed by us and (5) obtain our consent prior to any transfer of more than 5% of its equity interest. We also have the right to terminate the regional sub-franchise agreement in the event that the regional sub-franchisor materially breaches its obligations under the agreement.
Our Information Systems
We supervise and manage our operations and provide information and back-office support to our franchise network through our proprietary information systems, which primarily include Sales Information System, or SIS and Human Resource and Commission Information System, or HCIS. We maintain certain backup and disaster recovery systems for critical functions of our SIS and HCIS. Our in-house information technology team, with the support from third party outsourcing firms, have developed, maintained and regularly upgraded our information systems, including the following:
• | Sales Information System. Embedded with comprehensive information collection, categorization, storage, processing and analysis modules, our SIS is our core back-office platform to provide day-to-day informational and operational support to our franchise network. Our SIS provides listing and customer information management as well as sales office and network management support: |
¡ | Listing and customer information. Listing and customer information is uploaded or updated to our SIS on a real-time basis through terminals available to individual sales professionals in our franchise network, whether through our company-owned brokerage sales offices or franchised sales offices. Information updating is one of the key functions performed by the sales professionals in our franchise network. The management team of each sales office actively reviews the accuracy of the listing information, and supervises the sales professionals in obtaining updates in connection with individual listings in our SIS on a real-time basis. As such, when providing services to customers, the sales professionals are able to use the information exchange and analytical modules to retrieve the most up-to-date information available at their respective levels of information access authority. As of September 30, 2009, we had approximately 4.7 million property listings in our system. We encourage information sharing and cooperation among sales offices or sales professionals. As a result, for the nine months ended September 30, 2009, a substantial majority of successful brokerage transactions completed by our company-owned sales offices in Beijing and Shanghai involved more than one sales professional. |
¡ | Management support. Our SIS is also designed to allow our management teams to supervise and manage our operations. The comprehensive analytical tools and multi- |
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dimensional supervising modules available in our SIS have become an important part of our strategic decision-making process. As financial and operational data and reports are periodically prepared and presented on a real-time basis, we can swiftly capture significant market and operational trends, or any abnormal occurrence. Our SIS also provides information security supervision services. |
Our SIS is designed to allow flexibility with respect to database structure, analytical functions, information points and information access authority, and to enhance adaptability for specific geographic regions to accommodate local customs. Listing and customer information are shared at different levels of access authority based on the specific needs of individual sales offices. Given the different ownership structure of the sales offices in our franchise network, various information sharing structures and access authorities are available to our sales offices.
• | Human Resource and Commission Information System. Our HCIS is our core human resource and commission management platform. It monitors performance and manages sales professional commissions, a key component of the compensation structure for our sales professionals based on individual performance. Through information exchange with our SIS, our HCIS allows us to accurately track the performance of each sales professional and credit commissions based on information relating to such sales professional’s performance and contribution in particular brokerage transactions. Apart from commission management, our HCIS provides services relating to human resources, such as employee management, organization structure and transaction tracing. |
Marketing and Brand Promotion
Marketing and brand promotion is an important part of building our CENTURY 21® franchise network in China. We primarily finance our marketing campaigns and activities for brand promotion through our NAF to which all regional sub-franchisors and franchisees within the CENTURY 21® franchise network in China make monthly contributions. The contributions made to our NAF, net of amounts retained for regional promotion as discussed below, amounted to RMB7.1 million, RMB10.6 million and RMB5.5 million in 2007 and 2008 and the nine months ended September 30, 2009, respectively. Our marketing committee, which consists of key management members in charge of marketing from each of our regional franchise networks, is responsible for directing and supervising the use of the fund. We receive a 15% management fee for our administration of the fund. To promote the CENTURY 21® brand in regional markets, each regional sub-franchisor retains 30% of its annual contribution to maintain an advertising fund for brand promotion in the local market. We have the policy to apply all contributions to our NAF each year to the marketing campaigns and activities for brand promotion during the relevant year. For major marketing campaigns we hire external marketing professionals to assist our in-house marketing team.
We have adopted an integrated approach to promote the CENTURY 21® brand:
• | Internet, newspapers and publications. We have advertising cooperation arrangements with many Chinese national and regional consumer media outlets, including major newspapers, publications such as China Real Estate Business and Sanlian Life Week Magazine and major internet real estate portals such as SouFun.com. |
• | Conferences and exhibitions. We organize an annual CENTURY 21® China Convention, during which we invite all of the sales professionals in the CENTURY 21® China network as well as major market players in the real estate industry. During the convention, we present awards to top-performing sales professionals in recognition of their achievements during the year. We also actively participate in other real estate conferences, exhibitions and trade shows. |
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• | Airplane advertising. We promote the CENTURY 21® brand through our in-flight videos on Air China and Shanghai Airlines. |
In addition to our brand building efforts, each sales office may choose to spend certain amounts on marketing property listings through the internet. Through our cooperation arrangement with major internet real estate portals such as SouFun.com, each sales office may promote property listings to advance potential customers’ direct access to such listings and responsible sales professionals. Our sales offices have generated significant traffic through our internet advertising efforts.
Competition
Company-owned Brokerage Services. The real estate brokerage industry is highly competitive in China, particularly in the metropolitan areas in which our company-owned brokerage services businesses operate, such as Beijing, Shanghai and Shenzhen. In addition, the industry has low capital commitment requirements for small operations, lowering the barriers to entry for new participants, especially participants pursuing alternative methods of marketing real estate, such as internet-based listing services. However, significant capital commitments would be required to compete on a regional or national basis. Companies compete for brokerage business primarily on the basis of the services offered, reputation and brand recognition, personal contacts, local expertise and brokerage commission rates. We primarily compete with Centaline (China) Property Consultants Limited in the Beijing, Shanghai and Shenzhen markets for secondary market real estate brokerage business, and to a lesser extent, E-house (China) Holdings Limited in these cities for primary real estate brokerage business. We also compete with regional competitors in each of the regions where we own and operate sales offices.
Mortgage Management Services. Our mortgage management services business covers both the Beijing and Shanghai regions in contrast to our competitors who typically cover a single region. We compete with in-house mortgage management teams of our competitors in the brokerage businesses and in some regions specific competitors including Beijing Houze Investment and Guarantee Company Limited in Beijing and Shanghai Haoyonghang Investment Management Company Limited in Shanghai.
Franchise Services. We compete primarily with regional and local real estate brokerage brand franchisors. In addition, other international real estate brand franchisors, such as Coldwell Banker, have entered or plan to enter into the China market. A real estate broker may choose to affiliate with a regional chain or choose not to affiliate with a franchisor but to remain independent. We believe that competition for the sale of franchises in the real estate brokerage industry is based principally upon the perceived value and quality of the brand, the types of services offered to franchisees, the availability of financing, and the fees the franchisees must pay.
The ability of our real estate brokerage franchisees to compete is important to our prospects for growth. The ability of an individual franchisee to compete may be affected by the quality of its sales professionals, the location of its office, the services provided to its sales professionals, the number of competing offices in the vicinity, its affiliation with a recognized brand name, community reputation, brokerage commission rate and other factors. A franchisee’s success may also be affected by general, regional and its local economic conditions.
Employees and Training
We recruit sales professionals for our company-owned sales offices based on their education, qualification, experience and personality. We recruit on an as-needed basis. Most new recruits undergo a probation period before they are formally hired. We had 842, 4,462, 2,990 and 4,654 employees as of
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December 31, 2006, 2007 and 2008 and September 30, 2009, respectively. The following table sets forth the number of our full-time employees by area of responsibility as of the dates indicated:
As of December 31, | As of September 30, | |||||||
2006 | 2007 | 2008 | 2009 | |||||
Company management | 14 | 27 | 42 | 46 | ||||
Sales professionals | 595 | 3,707 | 2,318 | 3,770 | ||||
Other employees | 233 | 728 | 630 | 838 | ||||
Total | 842 | 4,462 | 2,990 | 4,654 | ||||
We review the performance of our sales professionals on a periodic basis. We also have our own accreditation system for experienced sales professionals, including those sales professionals at our franchisees. We pay our sales professionals and managers a combination of salaries and sales commissions and pay salaries to all other employees. All our sales professionals and staff are entitled to welfare and benefits as required under PRC laws.
We maintain a comprehensive training system that combines our training programs and our E-learning system, an online learning system developed and operated by our in-house training team. Our training programs and E-learning system are available not only to the sales professionals and staff in our company-owned sales offices, but also to sales professionals and staff in all the sales offices in our CENTURY 21® franchise network. The courses in our training system include those developed in-house as well as the training courses provided by Realogy. Our training courses cover topics including new-hire training, ethics, brokerage business, sales techniques, information technology, management skills and finance and legal training.
• | Training programs.Through various training programs we sponsor, we have an aggregate of 52 courses in the forms of orientation, lecture, seminar or workshop for newly-recruited and experienced sales professionals. We also have 26 management courses for management teams of entities in our CENTURY 21® franchise network to improve and strengthen their management skills. As of September 30, 2009, we had 405 tutors providing training events in all regions where we have sales offices. |
• | E-learning system. We started to promote our E-learning online training system in 2008, which currently offers 117 different online courses to sales professionals and staff both in our company-owned sales offices and franchisees. Our E-learning training system provides courses, examinations, analytical and review toolkits and learning forums to our sales professionals and staff. Additionally, regional franchise networks are able to develop their own training courses through the E-learning system. |
Intellectual Property
The CENTURY 21® brand name, including related intellectual property, which we are authorized to use under our master sub-franchise agreement with Realogy, contributes to our competitive advantage in the real estate services market. We also rely on our Sales Information System and Human Resource and Commission Information System, each of which is copyright protected, and our training system that combines our training programs and our E-learning system to manage our business operations. See “—Our Information Systems” and “—Employees and Training.” Since commencement of our operations, our company-owned brokerage and franchise services businesses have significantly relied on the CENTURY 21® brand name, our proprietary information systems and our training system. To protect our intellectual property, we rely on a combination of trade secrets and copyright laws in China as well as imposing procedural and contractual confidentiality and invention assignment obligations on our sales professionals and staff, contractors and others. The built-in security functions and access authorization mechanisms in our franchise systems also help protect our confidential information.
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We offer our mortgage management services under the trade name of Kaisheng in Beijing and Shanghai. We are in the process of registering our trademark for our mortgage management services in China.
Facilities
Our headquarters are located in Beijing, China, where we lease approximately 1,700 square meters of corporate office space. As of September 30, 2009, our company-owned sales offices in Beijing, Shanghai and Shenzhen occupied an aggregate of approximately 30,000 square meters of leased space. We consider our corporate office space adequate for our current operations, and we expect that we are able to find new office spaces at reasonable rental rates if we open new company-owned sales offices.
Compliance and Legal Proceedings
Our operations in China are regulated by the Ministry of Commerce, the State Administration of Foreign Exchange, the Ministry of Housing and Urban-Rural Development, the Ministry of Land and Resources, the State Administration for Industry and Commerce and their respective local counterparts. See “Regulations” for further details on the regulations promulgated by such bodies. Historically, we have not incurred any material costs in complying with these regulations.
We are subject to various legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We have occasionally, and in each case, successfully, resorted to litigation against certain of our regional sub-franchisors with whom we have terminated our sub-franchise relationship for the sub-franchisor’s material breach of the regional sub-franchise agreement. In addition, we have successfully litigated against third parties who have infringed the CENTURY 21® trademark. We are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have a material and adverse effect on our business, financial condition or results of operations.
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OUR CORPORATE HISTORY AND STRUCTURE
We became the exclusive franchisor of the CENTURY 21® brand in China on March 22, 2000 through IFM Company Limited, or IFM Co., a Cayman Islands company controlled by one of our founders, Mr. Donald Zhang. See “Our Relationship with Realogy and Related Party Transactions.” Since then, we have worked to build the CENTURY 21® brand and our franchise network of CENTURY 21® sales offices in China.
We underwent a reorganization and introduced Goldman Sachs Strategic Investments (Asia) L.L.C., or Goldman Sachs Strategic Investments, as an investor to develop our company-owned brokerage services business in 2006. In connection with the reorganization, we incorporated IFM Investments Limited, our company in the Cayman Islands on November 30, 2005 to be the holding company of our various subsidiaries, including IFM Co. In consideration for the contribution of all issued and outstanding shares of IFM Co., our founders received all of the issued and outstanding shares of our company. On August 24, 2006, which is the effective date of our reorganization, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 200,000,000 Series A preferred shares to Goldman Sachs Strategic Investments for US$22.0 million. After this investment, we began to develop our company-owned brokerage services business. In October 2006, we incorporated Beijing Anxin to develop our company-owned sales offices in Beijing. In the same month, we also acquired 14 sales offices from a third party in Shanghai through Shanghai Ruifeng to develop our company-owned brokerage services business in Shanghai. In 2008, we began managing our mortgage management services in Beijing and Shanghai as a separate segment.
On October 19, 2007, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 105,253,600 Series B preferred shares to GL Asia Mauritius II Cayman Limited, for US$40.0 million. On February 21, 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 6,113,670 Series B preferred shares to Realogy, for approximately US$2.3 million.
As part of our reorganization, Xinye, a PRC wholly-owned foreign enterprise controlled by our founders, Mr. Donald Zhang and Mr. Harry Lu, agreed to transfer its 51% equity interests in IFM SH, 11.15% equity interests in IFM Beijing, 10% equity interests in Xiamen, 15% equity invest in Shandong and 10% equity interests in Xian, to us. Xinye completed its transfer of the Shandong interests to us on December 4, 2006, the IFM SH interests on December 4, 2008, the IFM Beijing interests on August 12, 2008, the Xiamen interests on December 26, 2008 and the Xian interests on February 9, 2009.
On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 per share, 20,000,000 Series A preferred shares of par value US$0.01 per share and 11,136,727 Series B preferred shares of par value US$0.01 per share were divided into 260,000,000 ordinary shares of US$0.001 par value per share, 200,000,000 Series A preferred shares of par value US$0.001 per share and 111,367,270 Series B preferred shares of par value US$0.001 per share, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760.
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The following diagram illustrates our anticipated shareholding and corporate structure with our principal subsidiaries immediately following this offering(1):
(1) | Represents economic ownership of our Class A and Class B ordinary shares. Immediately prior to this offering, IFM Overseas Partners, Goldman Sachs Strategic Investments, GL Asia Mauritius II and Realogy each owned 52.1%, 28.4%, 18.4% and 1.1%, respectively, of our ordinary shares. |
(2) | Consists of 61,108,179 Class A ordinary shares and 80,502,938 Class B ordinary shares, which have substantially the same rights as Class A ordinary shares except that they are not entitled to vote as further described in “Description of Shares Capital—Classes of shares.” |
Our Principal Subsidiaries
Company-owned brokerage services
We operate our company-owned brokerage services business through the following subsidiaries:
¡ | Beijing Anxin, incorporated on October 19, 2006, is the subsidiary established to own and operate our company-owned sales offices in Beijing. |
¡ | Shanghai Ruifeng, incorporated on September 28, 2006, is the subsidiary established to own and operate our company-owned sales offices in Shanghai. We acquired 14 sales offices from a third party in Shanghai through Shanghai Ruifeng to develop our company-owned brokerage services business in Shanghai in October 2006. |
¡ | Shenzhen CIR, incorporated on September 15, 2005, is the subsidiary that owns and operates our company-owned sales offices in Shenzhen. We acquired Shenzhen CIR from a third party to develop our company-owned brokerage services business in Shenzhen in July 2008. |
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Franchise services
We operate our franchise services business through the following subsidiaries:
¡ | IFM Co., incorporated on October 4, 1999, holds the exclusive franchise rights for the CENTURY 21® brand in China. |
¡ | IFM Beijing, incorporated on March 1, 2000, is the exclusive agent of IFM Co. to sub-franchise the CENTURY 21® network in China in its own name on behalf of IFM Co. |
¡ | IFM BJ Broker, incorporated on May 27, 2008, is our regional sub-franchisor in Beijing. |
¡ | IFM SH, incorporated on September 29, 2002, is our regional sub-franchisor in Shanghai and Shenzhen. |
Mortgage management services
We operate our mortgage management services business through the following subsidiaries:
¡ | MMC BJ, incorporated on August 13, 2007, was established to own and operate our mortgage management services in Beijing. |
¡ | MMC SH, incorporated on April 8, 2008, was established to own and operate our mortgage management services in Shanghai. |
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Directors and Executive Officers
The following table sets forth our current directors, director appointees and executive officers, their ages as of the date of this prospectus and the positions held by them. The business address for each of our directors, director appointees and executive officers, is 26/A, East Wing, Hanwei Plaza, No.7 Guanghua Road, Chaoyang District, Beijing 100004, People’s Republic of China.
Name | Age | Position | ||
Donald Zhang | 55 | Chairman, Chief Executive Officer | ||
Harry Lu | 43 | Vice Chairman, President | ||
Kevin Cheng Wei | 42 | Director and Chief Financial Officer | ||
Kevin Yung | 35 | Director Appointee and Executive Vice President (1) | ||
Weiping Zhang | 55 | Director and Vice President | ||
Jennifer Tang | 42 | Director | ||
Qiang Chai | 48 | Independent Director | ||
Liang Pei | 41 | Independent Director | ||
Conor Chiahung Yang | 46 | Independent Director Appointee (1) | ||
Lihong Ma | 37 | Legal & HR Vice President | ||
Hao Wang | 39 | Vice President & General Manager of Franchise Services Business Unit | ||
Qifeng Tan | 32 | Deputy General Manager of Company-owned Brokerage Services Business Unit | ||
Sheng Kang | 36 | General Manager of Beijing Kaishengjinglue Guarantee Co. Limited | ||
Wang Yui Fung | 40 | General Manager of Beijing Anxin | ||
Hau Piu Ip | 35 | General Manager of Shanghai Ruifeng |
(1) | Messrs. Kevin Yung and Conor Chiahung Yang have accepted our appointment to be the directors of our company, effective upon the completion of this offering. |
Mr. Donald Zhang is one of our co-founders. In addition to founding our company, Mr. Zhang has served as our director and chairman since 2000 and our chief executive officer since 2009. Prior to assuming his role with our company, Mr. Zhang founded Maxpro International Enterprises, Inc. and has served as its chairman and chief executive officer since it was founded in 1992. Maxpro is an import and export and real estate investments company. From 1982 to 1986, Mr. Zhang served as an assistant manager in the procurement department of China National Offshore Oil Corporation. Mr. Zhang received his bachelor’s degree from the University of International Business and Economics in Beijing and a master’s degree in International Trade from Webster University in Missouri. Mr. Zhang is a brother-in-law of Mr. Harry Lu.
Mr. Harry Lu is one of our co-founders. In addition to founding our company, Mr. Lu has served as our director and vice chairman since 2000 and president since 2008. From 1995 to 1999, Mr. Lu served as the general manager of the PRC Region of Maxpro International Enterprises, Inc., managing the China aspects of Maxpro’s import and export and real estate investments business. From 1992 to 1995, he served as the export manager of China National Pharmaceutical and Healthcare Product Import & Export Co., Ltd. Mr. Lu currently serves as the deputy general secretary of the China National Institute of Real Estate Appraisers and Brokers, the policy and standard setting institute of the real estate market in China. Mr. Lu received his bachelor’s degree from Beijing Institute of Technology and his master’s degree from Rutgers Business School, State University of New Jersey. Mr. Lu is a brother-in-law of Mr. Donald Zhang.
Mr. Kevin Cheng Wei has served as our director since November 2008. He joined us as our chief financial officer in December 2007. Prior to joining us, from 2006 to 2007, Mr. Wei served as the chief financial
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officer of Solarfun Power Holdings Co., Limited, a leading Chinese solar company listed on NASDAQ. From 2005 to 2006, Mr. Wei was the chief financial officer of an on-line advertising agency in China. Mr. Wei was the chief audit executive of LG Philips Displays International Ltd. from 2003 to 2005, where he was responsible for managing global internal audit coverage and risk management. From 1999 to 2003, he was Asia Pacific regional corporate audit manager with Altria Corporate Services Inc., including one year at Nabisco Inc. prior to its acquisition by Kraft Foods. Prior to Altria, from 1991 to 1999, Mr. Wei worked with KPMG LLP and Deloitte Touche LLP. Mr. Wei graduated from Central Washington University, where he received his Bachelor of Science degree (cum laude) with a double major in accounting and management information systems.
Mr. Kevin Yung will serve as our director upon the completion of this offering. He has served as our executive vice president since 2009. From 2007 to 2009, Mr. Yung was a partner at China Renaissance, a local financial advisory firm based in Beijing. From 2006 to 2007, Mr. Yung was a vice president with the Special Situations Group of Morgan Stanley. From 2003 to 2006, Mr. Yung was a vice president with the Special Situations Group of Citigroup Capital Markets Asia. From 1998 to 2003, Mr. Yung was an associate with the Real Estate Principal Investing Group of Morgan Stanley in New York, Tokyo and Hong Kong. From 1996 to 1998, Mr. Yung was an analyst with the Real Estate Investment Group at J.P. Morgan in New York. Mr. Yung received his bachelor's degree in finance and economics from Babson College.
Mr. Weiping Zhanghas served as our director since 2006 and vice president since 2002. From 2004 to 2007, he was senior vice president of IFM Beijing. From 2002 to 2004, he was deputy general manager for IFM SH. He was the representative of Maxpro International Enterprises, Inc. Beijing office from 1993 to 2002. Maxpro is an import and export and real estate investments company. From 1992 to 1993, Mr. Zhang was the Assistant General Manager of Hong Kong Donglong Company. Mr. Zhang received his bachelor’s degree from Beijing Foreign Language Institute.
Ms. Jennifer Tang has served as our director since 2009. Ms. Tang joined Avenue Asia Singapore Pte Ltd in 2006 and serves as its managing director and head of its legal department. From 2000 to 2006, Ms. Tang held various positions with Hutchison Whampoa Limited, including serving as group senior legal counsel of Hutchison Telecommunications International Ltd, a public company listed on the New York Stock Exchange and the Stock Exchange of Hong Kong. Ms. Tang received her bachelor’s degree in commerce and a bachelor’s degree in law from the University of New South Wales. She is currently admitted as a solicitor in New South Wales and Hong Kong.
Mr. Qiang Chai has served as our independent director since January 2010. Mr. Chai also served as vice president and secretary general of China National Institute of Real Estate Appraisers and Brokers since 1999. From 1992 to 1999, he was the director of the Real Estate and Residence Research Institute and deputy chief economist of the Policy Research Center of the Ministry of Housing and Urban-Rural Development of PRC. From 1985 to 1992, Mr. Chai was chief and deputy director of the Urban Economic Research Office of Urban-Rural Development Economic Institute. Mr. Chai received his bachelor’s degree in engineering from Wuhan University of Technology, and his master’s degree and doctor’s degree in economics from the graduate school of China Academy of Social Sciences.
Mr. Liang Pei has served as our independent director since January 2010. Mr. Pei has served as the secretary general of China Chain Store & Franchise Association since 2002 and an independent director of Fujian New Hua Du Supercenter Co., Ltd. since 2007. From 1992 to 2002, he worked as an official with Ministry of Internal Trade. Mr. Pei received his bachelor’s degree in commerce and economics and doctor’s degree in business administration, both from Renmin University of China.
Mr. Conor Chiahung Yang will serve as our independent director upon the completion of this offering. Mr. Yang is the chief financial officer of AirMedia Group Inc. (Nasdaq:AMCN), and has served in that role since March 2007. Prior to joining AirMedia, he was the chief executive officer of Rock Mobile Corporation from 2004 to February 2007. From 1999 to 2004, Mr. Yang served as the chief financial officer of the Asia Pacific region for CellStar Asia Corporation. Mr. Yang was an executive director of Goldman Sachs (Asia) L.L.C. from
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1997 to 1999. Mr. Yang was a vice president of Lehman Brothers Asia Limited from 1994 to 1996 and worked at Morgan Stanley Asia from 1992 to 1994. Mr. Yang received his MBA degree from University of California, Los Angeles in 1992 and his bachelor’s degree from Fu Jen University in Taiwan in 1985.
Ms. Lihong Ma has served as our legal and HR vice president since 2008. From 2007 to 2008, she was an associate of DLA Piper UK LLP. From 2006 to 2007, and from 2001 to 2004, she was an attorney of Dacheng Law Offices. From 2004 to 2006, Ms. Ma was the head of the legal department of the Beijing office of CapitaLand (China) Investment Co., Ltd. From 1996 to 2000, she was a translator of the Beijing office of Hong Kong Dragon Airlines Limited. From 1995 to 1996, she was a teacher of the training center of Beijing Automobile Industry Group. Ms. Ma received her bachelor’s degree from China University of Politics Science and Law and her master’s degree from Peking University School of Law. Ms. Ma is qualified for PRC Bar.
Mr. Hao Wang has served as the vice president and general manager of our franchise services business unit since 2009. Mr. Wang joined us in 2001 and served as franchise sales manager and franchise sales director of IFM Beijing and the general manager of IFM SH. From 1999 to 2001, he was the general manager of American Haohua Investment Consultant Company. From 1995 to 1999, Mr. Wang was the manager of the marketing division of China Pacific Insurance (Group) Co., Ltd. Mr. Wang received his bachelor’s degree from the Fine Art College of Shanghai University and his EMBA degree from the University of Texas at Arlington.
Mr. Qifeng Tan has served as the deputy general manager of our company-owned brokerage services business unit, executive director of Shenzhen CIR and general manager of Beijing Huachuang Xunjie Technology Co., Limited since 2009. From 2006 to 2009, he was the deputy general manager of Shanghai Ruifeng. From 2001 to 2006, he was project manager of the finance department, franchise manager of the franchise department and manager of the business expansion department of IFM Beijing. Mr. Tan received his associate’s degree from Xi’an Polytechnic Institute and is currently attending the EMBA program at China Central Technology University.
Mr. Sheng Kang has served as the general manager of Beijing Kaishengjinglue Guarantee Co. Limited since 2007. From 2006 to 2007, he was the general manager of Beijing Weijia Anjie Investment Guarantee Co., Ltd. From 2002 to 2006, he was the finance service and trading management director of 5i5j Real Estate Co., Ltd. From 2000 to 2002, Mr. Kang was the deputy general manager of Dongfang Hengji Real Estate Consulting Co., Ltd. of Dongli Group. From 1999 to 2000, he was the project deputy manager of China Xin Xing Construction Development Co., Ltd. Mr. Kang received his bachelor’s degree from Wuhan University of Hydraulic and Electrical Engineering and his master’s degree from Tsinghua University.
Mr. Wang Yui Fung has served as the general manager of Beijing Anxin since 2008. From 2005 to 2008, he was the general manager of Midland Realty Consulting (Shanghai) Co., Ltd. From 2004 to 2005, he was a sales manager at Hanyu Property Agency Co. Limited. From 2003 to 2004, he was regional manager of Nanjing Centaline Property Consultants Ltd. Mr. Fung received his secondary school degree from Moral Training English College in Hong Kong.
Mr. Hau Piu Ip has served as the general manager of Shanghai Ruifeng since 2009. He was a director and general manager of Shanghai Hopefluent Real Properties Consulting Co. Limited since 2007. From 1997 to 2006, he was the senior director of Centaline Property Agency Limited. Mr. Ip received his bachelor’s degree from Liverpool John Moores University and his master’s degree from Tongji University and United Business Institutes of Belgium.
Employment Agreements
We have entered into employment agreements with each of our executive officers. We may terminate an executive officer’s employment for cause, at any time, without remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty to a felony, negligent or dishonest acts to our detriment or
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misconduct or a failure to perform agreed duties. An executive officer may terminate the employment at any time upon advance written notice. Furthermore, we may terminate an executive officer’s employment at any time without cause, in which case, we will continue to make the base salary payment and certain benefits to the executive officer within a severance period in accordance with the employment agreement. Except for the foregoing, the officer is not entitled to any severance payments upon the termination of the employment for any reason.
Each executive officer has agreed to hold in strict confidence any trade secrets or confidential information of our company. Each officer also agrees to faithfully and diligently serve our company in accordance with the employment agreement and the guidelines, policies and procedures of our company approved from time to time by our board of directors.
Board of Directors
Our board of directors will consist of 9 directors upon completion of this public offering. A director is not required to hold any shares in the company by way of qualification. A director may, subject to any separate requirement for audit committee approval under applicable law or the listing rules of the New York Stock Exchange, and unless disqualified by the chairman of the relevant board meeting, vote with respect to any contract or transaction in which he or she is materially interested provided the nature of the interest is disclosed prior to its consideration and any vote on such contract or transaction. The directors may exercise all the powers of the company which are not, by the Companies Law or its amended and restated articles of association, required to be exercised by shareholders, including the power to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever outright or as security for any debt, liability or obligation of the company or of any third party.
Committees of the Board of Directors
We will establish an audit committee under the board of directors immediately upon the completion of this offering. We have adopted a charter for the audit committee, and its members and functions are described below.
Audit Committee
Our audit committee will consist of Conor Chiahung Yang, Liang Pei and Kevin Yung. Conor Chiahung Yang and Liang Pei satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. In addition, Conor Chiahung Yang and Liang Pei meet the “independence” standards under Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Conor Chiahung Yang will be the chair of our audit committee. Our audit committee will consist solely of independent directors that satisfy New York Stock Exchange and SEC requirements within one year of our initial public offering. The purpose of the audit committee is to assist our board of directors with its oversight responsibilities regarding: (i) the integrity of our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of our internal audit function and independent auditor. The audit committee will be responsible for, among other things:
• | appointing the independent auditors and pre-approving all audit and non-audit services permitted to be performed by the independent auditors; |
• | reviewing with the independent auditors any audit problems or difficulties and management’s response; |
• | discussing the annual audited financial statements with management and the independent auditors; |
• | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; and |
• | meeting separately and periodically with management and the independent auditors. |
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care
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and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended from time to time. A shareholder has the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
• | convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings; |
• | declaring dividends and distributions; |
• | appointing officers and determining the term of office of officers; |
• | exercising the borrowing powers of our company and mortgaging the property of our company; and |
• | approving the transfer of shares of our company, including the registering of such shares in our share register. |
Interested Transactions
A director may, subject to any separate requirement for audit committee approval under applicable law or the listing rules of the New York Stock Exchange, and unless disqualified by the chairman of the relevant Board meeting, vote in respect of any contract or transaction in which he or she is interested, provided that the nature of the interest of any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote in that matter.
Terms of Directors and Officers
Pursuant to our amended and restated memorandum and articles of incorporation to be adopted with effect following this offering, our board of directors will be divided into three classes. The members of each class will serve staggered three-year terms. Upon expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of the shareholders in the year in which their respective terms expire. Immediately after the consummation of the offering, the classes will be composed as follows:
Donald Zhang, Kevin Yung and Liang Pei will be Class I directors, whose terms will expire at the first annual meeting of shareholders following this offering.
Harry Lu, Kevin Cheng Wei and Qiang Chai will be Class II directors, whose terms will expire at the second annual meeting of shareholders following this offering; and
Weiping Zhang, Jennifer Tang and Conor Chiahung Yang will be Class III directors, whose terms will expire at the third annual meeting of shareholders following this offering;
Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our company.
Except as otherwise provided by law, vacancies on our board may be filled by the affirmative vote of a majority of the directors then in office, or by shareholders. A director elected by the board to fill a vacancy shall hold office only until our next annual general meeting and shall then be eligible for re-election as a director in the class where such vacancy existed.
Compensation of Directors and Executive Officers
For the year ended December 31, 2008, we paid an aggregate of approximately RMB9.3 million in cash compensation to our executive officers, and we did not pay any cash compensation to our non-executive
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directors. In addition, for the year ended December 31, 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we granted 2,300,000 options to our executive officers and directors to purchase ordinary shares of our company at an average exercise price at US$0.09 per share. These options expire five years after their dates of grant, and the aggregate number of ordinary shares underlying these options is 2,300,000. The total amount set aside or accrued by us to provide pension, retirement or similar benefits for our executive officers and directors for the year ended December 31, 2008 was approximately RMB0.5 million.
Stock Incentive Plan
Stock Incentive Plan. On August 18, 2006, we adopted a stock incentive plan, or the plan, which has been amended on October 19, 2007 and February 1, 2008, to provide additional incentive to those officers, employees, directors, consultants and other service providers of our Group, in order to strengthen the commitment of such persons to our Group, motivate such persons to faithfully and diligently perform their duties and to attract and attain competent and dedicated persons whose efforts will result in the long-term growth and profitability of our Group. The plan permits us to grant five types of awards: incentive stock options, nonqualified stock options, restricted shares, restricted share units and other awards. As of the date of the prospectus, the ordinary shares reserved for issuance under our plan represented 8.48% of our equity interest on a fully-diluted basis and the plan provides for proportional adjustment of such reserved shares in the event of adjustments to the conversion price of the preferred shares. As of September 30, 2009, after giving effect to our 10-for-1 share split effected January 4, 2010, we had outstanding 43.80 million options to purchase ordinary shares of our company exercisable at a weighted average exercise price at US$0.13 per share and the aggregate number of ordinary shares underlying these options is 43.80 million. These options generally expire five years after their dates of grant. See Note 17 “Share-Based Compensation” in the Consolidated Financial Statements for additional information.
Plan Administration. Our board of directors, or a committee designated by our board or directors, will administer the plan. The committee or the full board of directors, as appropriate, will determine the provisions and terms and conditions of granting awards under the plan.
Award Agreement. Options and other awards granted under our plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each grant. In addition, the award agreement may also provide that securities granted are subject to certain lock-up period following the effective date of a registration statement filed by us under the Securities Act, if so requested by us or any representative of the underwriters in connection with any registration of the offering of any of our securities.
Eligibility. We may grant awards to employees, directors and consultants of our company or any of our related entities, which include our subsidiaries or any entities in which we hold a substantial ownership interest.
Term of the Awards. The term of each award grant shall be stated in the relevant award agreement, provided that the term shall not exceed 10 years from the date of the grant.
Vesting Schedule. In general, the plan administrator determines, or the relevant award agreement specifies, the vesting schedule.
Transfer Restrictions. Awards granted under the plan may not be transferred in any manner by the grantee other than by will or the laws of succession and may be exercised during the lifetime of the grantee only by the grantee.
Termination of the Plan.Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law. However, no such action may (i) impair the rights of any grantee unless agreed by the grantee and the plan administrator or (ii) affect the plan administrator’s ability to exercise the powers granted to it under our plan.
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The following table sets forth information with respect to beneficial ownership of our ordinary shares as of the date of this prospectus, by:
• | each of our directors and executive officers; and |
• | each person known to us to own beneficially more than 5.0% of our ordinary shares. |
Ordinary Shares Beneficially Owned Prior to This Offering | Ordinary Shares Beneficially Owned After This Offering(1) | |||||||||
Name | Number(2) | Percent(2) | Number(2) | Percent(2) | ||||||
Directors and Executive Officers: | ||||||||||
Donald Zhang(4) | 260,000,000 | 52.1 | % | 260,000,000 | 37.9 | % | ||||
Harry Lu(5) | 52,000,000 | 10.4 | % | 52,000,000 | 7.6 | % | ||||
Kevin Cheng Wei | * | * | * | * | ||||||
Kevin Yung(a) | - | - | - | - | ||||||
Weiping Zhang | - | - | - | - | ||||||
Jennifer Tang | - | - | - | - | ||||||
Qiang Chai | - | - | - | - | ||||||
Liang Pei | - | - | - | - | ||||||
Conor Chiahung Yang(a) | - | - | - | - | ||||||
Lihong Ma | * | * | * | * | ||||||
Hao Wang | - | - | - | - | ||||||
Qifeng Tan | - | - | - | - | ||||||
Sheng Kang | * | * | * | * | ||||||
Wang Yui Fung | * | * | * | * | ||||||
Hau Piu Ip | - | - | - | - | ||||||
All Directors and Executive Officers as a group(6) | 264,353,676 | 52.5 | % | 264,353,676 | 38.3 | % | ||||
5% and above Shareholders: | ||||||||||
IFM Overseas Partners L.P.(7) | 260,000,000 | 52.1 | % | 260,000,000 | 37.9 | % | ||||
Goldman Sachs Strategic Investments (Asia) L.L.C.(8) | 141,611,117 | 28.4 | % | 141,611,117 | 20.6 | % | ||||
GL Asia Mauritius II Cayman Limited(9) | 129,614,081 | 26.0 | % | 129,614,081 | 18.9 | % |
Notes:
* | Upon exercise of all options granted, the individual or the entity would beneficially own less than 1% of our outstanding ordinary shares. |
(a) | Messrs. Kevin Yung and Conor Chiahung Yang have accepted our appointment to be the directors of our company, effective upon the completion of this offering. |
(1) | Assumes that the underwriters do not exercise the option to purchase additional ADSs. |
(2) | Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person or the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days of this offering, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person. The calculation of the number of shares also assumes the conversion of all of our outstanding preferred shares into ordinary shares upon the completion of this offering. Percentage of beneficial ownership of each listed person prior to this offering is based on 498,842,277 ordinary shares outstanding as of the date of this prospectus, including 238,842,277 ordinary shares convertible from our outstanding preferred shares. Percentage of beneficial ownership of each listed person after the offering is based on 686,154,777 ordinary shares outstanding immediately after the closing of this offering. |
(4) | Includes 260,000,000 Class A ordinary shares beneficially held by Donald Zhang through IFM Overseas Partners L.P. |
(5) | Includes 52,000,000 of the 260,000,000 Class A ordinary shares held by IFM Overseas Partners L.P. and corresponds to a 20% limited partner interest held in IFM Overseas Partners L.P. by Harry Lu. |
(6) | Includes (i) 260,000,000 Class A ordinary shares beneficially held by Donald Zhang and Harry Lu through IFM Overseas Partners L.P., and (ii) 4,353,676 Class A ordinary shares underlying share options held by our directors and executive officers as a group that are exercisable within 60 days after the date of this prospectus. |
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(7) | Includes 260,000,000 Class A ordinary shares held by IFM Overseas Partners L.P. IFM Overseas Limited, a corporation incorporated under the laws of the Cayman Islands that acts as the general partner of IFM Overseas Partners L.P. and exercises investment control over the Class A ordinary shares held by this entity. Maxpro International Enterprises, Inc., a New York corporation, owns 100% of the equity interest in IFM Overseas Limited. Donald Zhang owns 100% of the equity interest in Maxpro International Enterprises, Inc. IFM Holding Company Limited and Harry Lu, each a limited partner of IFM Overseas Partners L.P., hold 80% and 20% of the partnership interest in IFM Overseas Partners L.P., respectively. IFM Holding Company Limited is a corporation incorporated under the laws of Cayman Islands, and is 100% owned by Maxpro International Enterprises, Inc.. |
(8) | Includes 61,108,179 Class A ordinary shares and 80,502,938 Class B ordinary shares issuable upon conversion of the 200,000,000 Series A preferred shares held by Goldman Sachs Strategic Investments (Asia) L.L.C. Goldman Sachs Strategic Investments (Asia) L.L.C. is an indirectly wholly-owned subsidiary of The Goldman Sachs Group, Inc., which is a bank holding company whose shares are listed on the New York Stock Exchange. The address of Goldman Sachs Strategic Investments (Asia) L.L.C. is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, USA. |
(9) | Includes 91,893,513 Class A ordinary shares issuable upon conversion of the 105,253,600 Series B preferred shares. Also includes 37,720,568 ordinary shares, the estimated number of shares to be transferred by IFM Overseas Partners L.P. to GL Asia Mauritius II Cayman Limited, a Cayman Islands exempted company, upon exchange of the secured exchangeable note issued by IFM Overseas Partners L.P. to GL Asia Mauritius II Cayman Limited. The exchangeable note can be exchanged at the option of GL Asia Mauritius II Cayman Limited for such ordinary shares at any time at least 55 days after the offering. The exchange price is based on the fair market value of the shares at the time of the exchange. The estimated number of exchange shares into which the exchangeable note may be exchanged is based on an exchange price of US$7.50 per ADS, the mid-point of the estimated price range of the initial public offering price shown on the cover of this prospectus. GL Asia Mauritius II Cayman Limited is owned 50% by Avenue Asia International, Ltd. and 50% by GL Asia Mauritius II, LLC, but all of GL Asia Mauritius II Cayman Limited’s beneficial interest in the above shares has been allocated solely to GL Asia Mauritius II, LLC. GL Asia Mauritius II, LLC is owned by Avenue Asia Investments, L.P., Avenue Asia Special Situations Fund III, L.P. and Avenue Asia Special Situations Fund IV, L.P., but all of GL Asia Mauritius II, LLC’s beneficial interest in the above shares has been allocated solely to Avenue Asia Special Situations Fund IV, L.P., a Cayman Islands exempted limited partnership. The general partner of Avenue Asia Special Situations Fund IV, L.P. is Avenue Asia Capital Partners IV, Ltd., a Cayman Islands exempted company. The sole shareholder of Avenue Asia Capital Partners IV, Ltd. is Avenue Asia Capital Partners IV, LLC, a Delaware limited liability company. The managing member of Avenue Asia Capital Partners IV, LLC is GL Asia Partners IV, LLC, a Delaware limited liability company, which is controlled by Marc Lasry and Sonia Gardner. Voting and investment power of shares held by GL Asia Mauritius II Cayman Limited may be exercised by Avenue Asia Capital Partners IV, Ltd. or Avenue Asia Capital Management, L.P., a Delaware limited partnership. The general partner of Avenue Asia Capital Management, L.P. is Avenue Asia Capital Management GenPar, LLC, a Delaware limited liability company, which is controlled by Marc Lasry and Sonia Gardner. Mr. Lasry and Ms. Gardner disclaim beneficial ownership with respect to the above shares except to the extent of their pecuniary interest therein. The address of GL Asia Mauritius II Cayman Limited is 2nd Floor Anchorage Centre, Georgetown, Grand Cayman, Cayman Islands. |
As of the date of this prospectus, none of our outstanding ordinary shares or preferred shares are held by record shareholders in the United States. Certain holders of our preferred shares have represented to us that they are affiliated with a registered broker-dealer. Based on their representations, we believe that at the time of the purchase of our preferred shares, each of these holders purchased our preferred shares in the ordinary course of business, and had no agreements or understandings, directly or indirectly, with any person to distribute the shares. None of our existing shareholders has different voting rights from other shareholders after the closing of this offering. We are not aware of any arrangement that may at a subsequent date, result in a change of control of our company.
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OUR RELATIONSHIP WITH REALOGY AND RELATED PARTY TRANSACTIONS
Our Relationship with Realogy
In March 2000, IFM Company Limited, or IFM Co. entered into an international master sub-franchise agreement with Cendant Global Services B.V., a subsidiary of Cendant Corporation, the entity from which Realogy was spun off in 2006. Cendant Global Services B.V. assigned its rights under the master sub-franchise agreement to a subsidiary of Realogy which, in turn, assigned such rights to Realogy. IFM Co. became the exclusive franchisor of the CENTURY 21® brand and system in China for a term of 25 years, extendable at IFM Co.’s election for additional terms of 25 years upon payment of renewal fees of US$4.5 million for each renewal, to be adjusted for inflation or deflation. Under the agreement, IFM Co. is authorized to establish, operate and promote the CENTURY 21® network in China by using and sublicensing the CENTURY 21® brand and system owned by Realogy, which includes: (i) the trade names, trademarks, service marks, slogans, logos or other indicia relating to the CENTURY 21® franchise network; and (ii) the standard franchise agreement, sales tools and brochures, real estate products, programs, services and franchise/sub-franchise plans. Pursuant to our restructuring in 2005, our company was incorporated in the Cayman Islands and IFM Co. became our wholly owned subsidiary.
Under the master sub-franchise agreement, we are required to comply with certain franchise policies adopted by Realogy, as amended from time to time. The master sub-franchise agreement sets out certain terms pursuant to which we are required to operate our franchise services business, including the form of regional sub-franchise agreements to be entered into with regional sub-franchisors and the service fees payable to Realogy. The master sub-franchise agreement also provides that Realogy must approve and has a right of first refusal with respect to any sale or transfer of more than 25% of our equity interest, or any series of transactions resulting in sales or transfer of more than 49% of our equity interest. Realogy has approved this offering and has waived any right of first refusal it may have with respect to this offering. In addition, Realogy agreed not to, during the term of the agreement, license any other parties to sublicense the CENTURY 21® brand and system to operate real estate brokerages in China.
Upon entering into the master sub-franchise agreement, we paid Realogy an initial franchise fee. Apart from the initial franchise fee, we are required to pay certain ongoing service fees to Realogy, based on revenues generated from initial franchise fees and ongoing service fees collected from our regional sub-franchisors or direct franchisees. The master sub-franchise agreement also includes a minimum annual fee requirement, and to the extent that the service fees payable within a certain year are lower than such minimum amount, we are required to make additional payment to reach the minimum fee requirement. In the years ended December 31, 2007 and 2008 and the nine months ended September 30, 2009, the service fees which were paid or to be paid to Realogy amounted to RMB6.1 million, RMB10.5 million and RMB2.3 million, respectively.
Either party has the right to terminate the master sub-franchise agreement if the other party materially breaches the master sub-franchise agreement. Additionally, Realogy has the right to terminate the master sub-franchise agreement in the event that (1) we assign our rights and obligations without Realogy’s approval, (2) we fail to honor Realogy’s right of first refusal in connection with the assignment, or (3) we become insolvent. Within two years after the master sub-franchise agreement terminates or expires, we may not engage in the real estate brokerage franchise business, subject to certain exceptions. See “Risk Factors—We do not own the CENTURY 21® brand and our right to use the CENTURY 21® brand is subject to risks and limitations” for further discussion of the risks associated with this agreement and our reliance thereon.
On June 30, 2002, IFM Co. entered into a cooperation agreement with Beijing International Franchise Management Company Limited, or IFM Beijing, an entity controlled by our founders, Mr. Donald Zhang and Mr. Harry Lu. IFM Beijing then became the exclusive agent of IFM Co. to sub-franchise the CENTURY 21® brand and system in China on behalf of IFM Co. IFM Beijing is obliged to pay Realogy the service fees payable by IFM
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Co. under the master sub-franchise agreement. We became the controlling shareholder of IFM Beijing in October 2006.
On February 21, 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 6,113,670 Series B preferred shares to Realogy for approximately RMB16.2 million.
Related Party Transactions
Reorganization
We underwent a reorganization in 2006 in connection with our private placement of Series A preferred shares to Goldman Sachs Strategic Investments (Asia) L.L.C., or Goldman Sachs Strategic Investments. Our reorganization went effective on August 24, 2006. As part of our reorganization, Beijing Xinye Jiayuan Real Estate Consulting Service Co., Ltd., or Xinye, a PRC wholly-owned foreign enterprise controlled by our founders, Mr. Donald Zhang and Mr. Harry Lu, agreed to transfer its 51% equity interests in IFM SH, 11.15% equity interests in IFM Beijing, 10% equity interests in Xiamen, 15% equity interests in Shandong and 10% equity interests in Xian, to us. Xinye completed its transfer of the IFM SH interests to us on December 4, 2008, the IFM Beijing interests on August 12, 2008, the Xiamen interests on December 26, 2008, the Shandong interests on December 4, 2006 and the Xian interests on February 9, 2009. See “Our Corporate History and Structure.”
Related Party Loans and other Payments
We have entered into certain loan arrangements in the past with certain of our related parties, including some of our directors, our associate companies, Xinye, a PRC wholly-owned foreign enterprise controlled by Mr. Donald Zhang, our chairman and CEO, and Mr. Harry Lu, our vice chairman and president, and Maxpro International Enterprises Inc., or Maxpro, a New York corporation owned by Mr. Donald Zhang.
The following table sets forth the amounts due to and from those related parties which are controlled by our shareholders as of December 31, 2007, 2008 and September 30, 2009. On September 22, 2009, the amounts due from/to Xinye and Maxpro were fully settled. On the same day, an advance of approximately RMB5.9 million was made to Maxpro which is due on demand. On November 30, 2009, this remaining amount due from Maxpro was fully settled in cash.
Amounts Outstanding as of | ||||||||
December 31, | September 30, | |||||||
Amounts Due from Related Parties | Nature of Advances or Payment | 2007 | 2008 | 2009 | ||||
(in thousands of RMB) | ||||||||
Xinye | Unsecured, interest-free advances with no repayment date, for operations of Xinye | 39,656 | 36,024 | - | ||||
Maxpro | Unsecured, interest-free advances with no repayment date, for operations of Maxpro | 2,114 | 2,086 | 5,933 | ||||
Directors | Unsecured, interest-free loans to directors | 2,215 | - | - | ||||
Amounts Due to Related Parties | ||||||||
Xinye | Amounts payable for transfer of entities as part of the Reorganization | 13,377 | 5,700 | - | ||||
Maxpro | Loans for operations of IFM Co. | 29,266 | 27,465 | - |
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Private Placements
On August 24, 2006, pursuant to resolutions of our shareholders and our board of directors, each dated December 18, 2005, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 200,000,000 Series A preferred shares to Goldman Sachs Strategic Investments for approximately RMB170.7 million. On October 19, 2007, pursuant to resolutions of our shareholders and our board of directors, each dated October 19, 2007, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 105,253,600 Series B preferred shares to GL Asia Mauritius II Cayman Limited for a total consideration of approximately RMB290.6 million pursuant to resolutions of our shareholders and our board of directors, each dated July 31, 2008. On February 21, 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 6,113,670 Series B preferred shares to Realogy for approximately RMB16.2 million. On January 4, 2010, we effected a 10-for-1 share split of our authorized and issued share capital whereby each ordinary share, Series A preferred share and Series B preferred share, in each case par value US$0.01 per share, were divided into 10 ordinary shares, Series A preferred shares or Series B shares, as applicable, in each case par value US$0.001 per share.
The purchasers of our preferred shares were independent third parties prior to their respective investments in us. The prices at which our preferred shares were issued were determined based on arm’s-length negotiations between us and the investors and the transactions were, in each case, approved by our board of directors. Our Series A and Series B preferred shares are convertible into our ordinary shares at any time after their respective issuance prior to the closing of this offering. The initial conversion price is equal to the original per share purchase price of each series of preferred shares, subject to adjustment for any share split, share combination, capital reclassification or reorganization, any distribution made, any of our merger or consolidation with any other person, or any of our share issuance at an issuance price that is lower than the preferred share purchase price originally paid by our investors. In addition, certain holders of our preferred shares are entitled to adjustments if we achieve certain milestones, including the closing of this offering. Under these adjustment provisions, if this offering closes before March 31, 2010, the Series A preferred shareholders’ interest in the company on an as converted basis immediately prior to the closing of the offering will be reduced to 28.4%, and the Series B preferred shareholders’ interest in the company will be adjusted to maintain constant their interest in our company notwithstanding the Series A adjustment. The disclosure in this prospectus regarding the ownership interests of the holders of Series A and Series B preferred shares in the company immediately following the offering assume that this offering closes prior to March 31, 2010. All such adjustments shall be effected in connection with the conversion of the preferred shares immediately prior to the closing of this offering. Immediately prior to the closing of this offering, all issued and outstanding shares of our Series A preferred shares will be automatically converted, at the conversion price then in effect, into 61,108,179 shares of our Class A ordinary shares and 80,502,938 shares of our Class B ordinary shares and all issued and outstanding shares of our Series B preferred shares will be automatically converted, at the conversion price then in effect, into 97,231,160 shares of our Class A ordinary shares.
As part of our private placements, we and our founders granted to each of Goldman Sachs Strategic Investments, GL Asia Mauritius II Cayman Limited and Realogy certain minority protection rights, including pre-emptive rights, rights of first refusal and co-sale rights and consent rights regarding significant corporate actions. We and our founders also granted to Goldman Sachs Strategic Investments and GL Asia Mauritius II Cayman Limited certain corporate governance rights including the right to inspect the company and the right to appoint certain members to our board of directors. These minority protection rights will terminate upon completion of this offering. Our founders also agreed with the investors that until the 181st day following the completion of this offering, the founders will not transfer or otherwise dispose any of their respective equity interest in us, without the prior written consent of the investors. In addition, we granted to each of Goldman Sachs Strategic Investments, GL Asia Mauritius II Cayman Limited and Realogy certain registration rights in relation to the shares to be issued upon conversion of their respective preferred shares. See “Description of Share Capital—Registration Rights.”
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Goldman Sachs (Asia) L.L.C., an affiliate of Goldman Sachs Strategic Investments (Asia) L.L.C., which owns 200,000,000 of our Series A preferred shares immediately prior to the consummation of the offering, is one of the underwriters of this offering. The offering is being conducted in accordance with the applicable provisions of Rule 2720 of the National Association of Securities Dealers, Inc. Conduct Rules. See “Underwriting.”
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The real estate market and our operations in China are regulated by the Ministry of Commerce, the SAFE, the Ministry of Housing and Urban-Rural Development (formerly known as the Ministry of Construction), or the MOHURD, the Ministry of Land and Resources, or the MLR, the State Administration for Industry and Commerce, or the SAIC, and their respective authorized local counterparts.
Regulations on Real EstateMarket
Under the laws of the PRC, land is owned either by the state or by rural collective organizations. Generally the land use rights for real estate development purposes must be granted by the local counterparts of the MLR. The government can therefore control the volume of land granted for real estate development each year. The construction of real estate shall also abide by the planning of the local counterparts of the MOHURD. The government policies regulating, among others, (i) the monetary supply and credit markets issued by the People’s Bank of China; (ii) the real estate developer qualification issued by the MOHURD; and (iii) taxes applicable to real estate transaction issued by the State Tax Bureau will have material effect on the real estate market and our business.
Regulations on Real Estate Service Industry
The principal regulations governing the real estate service industry in China include theLaw on the Administration of the Urban Real Estate, as amended in August 2007, and theProvisions on the Administration of Urban Real Estate Services, or theReal Estate Services Provision, issued by the MOHURD in January 1996, as amended in August 2001.
Real Estate Service Companies
In accordance with theLaw on the Administration of the Urban Real Estate and the Real Estate Services Provision, real estate services refer to services of real estate consultation, appraisal and brokerage. A real estate service company is required to meet certain financial and personnel requirements and register with the SAIC or its local counterpart. To be qualified to engage in real estate services, a company is required to file with the local real estate regulatory authority within one month following the issuance of its business license by the SAIC or its local counterparts. To maintain such qualification, the company must maintain certain organizational, financial and operational criteria, such as possessing sufficient funding and employing qualified personnel. It must also keep proper records and comply with prescribed procedures in delivering its services. Failure to comply with the filing requirement may subject a real estate service company a fine between RMB10,000 and RMB30,000 and disqualify it from providing real estate services.
Pursuant to theReal Estate Services Provision, a real estate brokerage company must have certain number of licensed brokers. Local authorities in Beijing and Shanghai have specific requirements on employing such brokers.
On December 29, 2006, the MOHURD and the People’s Bank of China jointly issued a circular to further strengthen the regulation of the real estate services industry. According to such circular, a real estate brokerage company cannot display information on properties or customers until the execution of a brokerage contract with the relevant clients. Furthermore, a real estate brokerage company is forbidden to display any false or unverified information. The real estate brokerage company and its brokers shall not conceal transaction price and other transaction information from the transacting parties. Such entities are also prohibited from obtaining any gains by purchasing or renting a property at a lower price and then selling or leasing such property at a higher price. The real estate brokerage company is also required to establish a separate account for transaction settlement.
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Real Estate Service Brokers
Pursuant to theInterim Regulations on Professional Qualification for Real Estate Brokerage Professionals and theImplementation Rules on the Examinations of Real Estate Brokerage ProfessionalQualification issued by the Ministry of Human Resources and Social Security (formerly known as Ministry of Human Resources) and the MOHURD on December 18, 2001 and relevant circulars, real estate brokerage professionals include real estate brokers and assistant real estate brokers. To practice as a qualified real estate broker, an individual must pass an exam and obtain a qualification certificate for real estate brokers, and register with the China National Institute of Real Estate Appraisers and Brokers to obtain the real estate broker license. After obtaining a real estate brokerage license, an individual can act as broker, but may only provide brokerage services in the name of the real estate brokerage company for which he works. Each broker can only serve one real estate service company at a time.
In accordance with theBrokers Administration Measures issued by the SAIC in August 2004, the local offices of the SAIC are the administrative bodies responsible for brokers, including their registration and supervision. Within twenty days after a brokerage company employs or dismisses an individual broker, it must file the individual broker’s information and the related employment contracts with the local offices of SAIC. In addition, no brokerage or broker can engage in any activities beyond the permitted business scope or against a client’s interests. In cases of non-compliance, the local offices of the SAIC can issue warnings or impose fines up to RMB30,000.
Real Estate Consulting Business
In accordance with theReal Estate Services Provisions, any individual providing real estate consulting services must have real estate related credentials or meet certain educational requirements and possess a professional qualification certificate. At least fifty percent of the employees of a company engaging in real estate consulting services should have such qualifications to provide real estate consulting services.
Real Estate Service Charges
According to theCircular on Real Estate Service Charges promulgated by the National Development and Reform Commission (formerly known as State Planning Commission) and the MOHURD on July 7, 1995, a real estate service company must display its service charges, or commissions. Commissions for the sale of real properties should range between 0.5% and 2.5% of the transaction price. For exclusive brokerage services, commissions can be raised to up to 3% of the transaction price. However, theCircular on Real Estate Service Charges only sets a standard for reference with respect to real estate consulting services. Real estate consulting services providers may negotiate and determine their commission rates with clients.
In Beijing, government authorities have issued guidance for commission rates for consulting services that a real estate service company may not exceed. Moreover, the maximum commission rate for exclusive brokerage services has been lowered to 2.8% by the Beijing Price Bureau and the Beijing House and Land Resources Administration Bureau. For property leasing brokerage services, the commission rate may range from 50% to 100% of the underlying properties’ contracted monthly rent.
In Shanghai, pursuant to theCircular on Brokerage Services Charges for Sales and Rental of Residential Properties jointly issued by the Shanghai Price Bureau and the Shanghai House and Land Resources Administration Bureau on August 28, 2003, our PRC real estate brokerage subsidiaries located in Shanghai shall charge clients in accordance with the guidance commission rate. The maximum guidance commission rate for real estate brokerage services is 2% of the purchase price recorded with the real estate trading center. The maximum commission rate for property leasing brokerage services is 70% of the underlying properties’ contracted monthly rent. The guidance commission rate for investigation of property title and conditions, industry and market research, assisting the seller and the purchaser to conclude a property purchase contract and
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handling the registration of title assignment is 2% of the purchase price recorded with the real estate trading center. The maximum commission rate for rental services is 70% of the monthly rent.
In Shenzhen, the guidance commission rate for real estate brokerage services is 3% of the transaction price. A real estate brokerage company may not charge its client a commission rate exceeding 120% of this guidance commission rate.
Regulations on Franchise Business
To regulate the franchise industry, the Ministry of Commerce issued theAdministration Regulations on Commercial Franchise on February 6, 2007, theAdministration Rules on Filing of Commercial Franchise on April 30, 2007 and theNotice Concerning Authorizing Provincial Commerce Authorities to Conduct Filings of Commercial Franchise in April, 2009. Pursuant to these regulations, a franchisor must be an enterprise with at least two self-operated stores and have been in operation for at least one year. The franchisor should have a mature operating model and the ability to provide operating guidance, technology support and business training to franchisees. The franchisor is required to enter into a written franchise agreement with each of its franchisees, under which the franchisees have the right to terminate this agreement after a designated period. With the exception of renewed franchise agreements, the term of a franchise agreement must be no less than three years, unless otherwise agreed to by the franchisee.
A franchisor starting its franchise business after May 1, 2007 is required to file its business license, sample franchise agreement and other documents to the provincial commerce authority where it is registered for record within fifteen days following the execution of its first franchise agreement with a franchisee inside China. If the franchisor conducts franchise business in two or more municipalities, provinces or autonomous regions, it is required to file with the Ministry of Commerce before May 1, 2009, followed by a filing with the provincial commerce authority where it is registered. Foreign franchisors are also required to file the documents with the Ministry of Commerce. Moreover, the franchisor shall file information regarding the execution, withdrawal, renewal of and amendment to franchise agreements to the commerce authority for record before March 31 of each year.
Any changes in the recorded information of the franchisor should also be filed with the relevant commerce authority within thirty days following the occurrence of these changes. For a franchisor failing to file in accordance with these regulations, the relevant commerce authority may order it to comply within a designated time frame and impose a fine ranging from RMB10,000 to RMB50,000. If the franchisor fails to comply as ordered, the relevant commerce authority may impose another fine ranging from RMB50,000 to RMB100,000 and publicly announce the franchisor’s violation.
TheAdministration Regulations on Information Disclosure for Commercial Franchise, issued by the Ministry of Commerce on April 30, 2007, further requires a franchisor to disclose its basic information, ownership of business resources, franchise fees charged, products and services to be provided as well as other information to any franchisees at least thirty days prior to the execution of the franchise agreement.
Regulations on Trademarks
ThePRC Trademark Law, enacted by the National Congress on August 23, 1982, as amended, and theImplementation Rules of the PRC Trademark Law issued by the State Council on March 10, 1983, as amended, protect the title holders of registered trademarks and grant a renewable term of ten years to a trademark registered in the PRC. The Trademark Office under the SAIC handles trademark registrations and the filing of registered trademark licenses. Pursuant to theRegulations on Filing of Trademark License Contracts, promulgated on August 1, 1997, trademark license contracts are required to be filed with the Trademark Office within three months after executing such license contacts. However, unless otherwise provided in a trademark license contract, failure to complete the filing procedure will not affect the validity of this trademark license contract in
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accordance with theInterpretation Concerning Several Issues on Application of Laws in Handling Trademark Civil Dispute Cases issued by the Supreme People’s Court on October 12, 2002.
Regulations on Foreign Currency Exchange and Dividend Distribution
Foreign currency exchange
The principal regulations governing foreign currency exchange in China are theForeign Currency Administration Regulations, as amended in 2008. Under these regulations, the Renminbi may be converted for current account items, including the distribution of dividends, interest and royalties payments, trade and service-related foreign exchange transactions. Conversion of the Renminbi for capital account items, such as direct investment, loans, repatriation of investment and investment in securities outside China, however, is still subject to the SAFE’s approval.
Dividend Distribution
Under the relevant regulations, a foreign investment enterprise, or an FIE in China may pay dividends only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, it is required to allocate at least 10% of its accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of its registered capital. These reserves are not distributable as cash dividends. Our PRC subsidiaries which are FIEs are restricted from distributing any dividends to us until they have met the requirements set out in these regulations.
Pursuant to theCorporate Income Tax Law of the PRC and its implementation rules, which became effective on January 1, 2008, dividends payable by an FIE to its foreign investors will be subject to a 10% withholding tax, unless the foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands and the British Virgin Islands, where two of our offshore holding corporations are incorporated, do not have a tax treaty with China. In accordance with theArrangement between the Mainland and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or theDouble Taxation Arrangement, which became effective on January 1, 2007, any dividends from one of our PRC subsidiaries, Shenzhen CIR, paid to City Integrated Residential Services (China) Limited, its direct shareholder established in Hong Kong, may be subject to a withholding tax of the enterprise income tax at the rate of 5%, provided that City Integrated Residential Services (China) Limited holds at least 25% of the equity interest of Shenzhen CIR.
According to Circular of State Administration of Taxation on Printing and Issuing the Administrative Measures for Non-resident Individuals and Enterprises to Enjoy the Treatment under Taxation Treaties which come into force on October 1, 2009, non-resident individuals and enterprises can enjoy the relevant tax treatments relating to dividends under taxation treaties after obtaining approvals from competent tax authorities.
Foreign shareholder’s loan
In accordance with the Interim Provisions on the Management of Foreign Debts issued by the State Development and Reform Commission, the Ministry of Finance and the State Administration of Foreign Exchange of the PRC, or SAFE, which became effective on March 1, 2003, the summation of the accumulated medium-term and long-term debts and the balance of short-term debts borrowed by an FIE shall not exceed the difference between the total investment and the registered capital of the FIE. The FIE shall register the loan agreement with SAFE for the loan extended by its foreign shareholder upon execution of the loan agreement. Such loan agreement will not become valid and effective without such registration.
Regulations on Foreign Exchange Registration of Offshore Investment by PRC Residents
On October 21, 2005, SAFE issued the “State Administration of Foreign Exchange’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Round-trip
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Investment via Special Purpose Offshore Companies” (Hui Fa [2005] No. 75), or Notice No. 75, a public notice which became effective on November 1, 2005. Notice No. 75 requires PRC residents to register with the local SAFE branch before directly establishing or indirectly controlling any company referred to in the notice as a “special purpose offshore company” outside of the PRC for the purpose of capital financing with assets or equity interest in an onshore enterprise in the PRC, and to undergo registration procedures after completing an investment in or acquisition of any operating subsidiaries in the PRC via the special purpose offshore company, which we refer to herein as a “round-trip investment.” In addition, any change of shareholding or any other material capital alteration in such special purpose offshore company not involving a round-trip investment, such as a change in share capital or merger and acquisition, must be filed or registered within 30 days from the date of change. The relevant SAFE regulations apply retrospectively to registration of direct or indirect investments made by PRC residents in special purpose offshore companies before Notice No. 75 came into effect.
On May 29, 2007, SAFE promulgated the “Operational Rules for the State Administration of Foreign Exchange’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Round-trip Investment via Special Purpose Offshore Companies” (Hui Zong Fa [2007] No. 106), or Notice No. 106, which clarifies the implementation and application of Notice No. 75 and specifies the procedures of SAFE registrations. In accordance with Notice No. 106, the provisions in Notice No. 75 on SAFE registration of direct establishment of the special purpose offshore companies also applies to the round-trip investment by PRC residents who hold a minority equity interest without controlling the special purpose offshore companies.
In the event that a PRC resident with a direct or indirect stake in a special purpose offshore company fails to make the required SAFE registration, the PRC subsidiaries of such special purpose offshore company may be prohibited from distributing their profits to their offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries, and the offshore parent’s ability to contribute additional capital or provide loans, whether using the proceeds from this offering or otherwise, would be impaired. In addition, failure to comply with SAFE registration requirements as described above may also result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
Regulations on Employee Stock Options Plan
On March 28, 2007, the SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Option Holding Plan or Stock Option Plan of Overseas Listed Company, or the Stock Option Rule. The purpose of the Stock Option Rule is to regulate foreign exchange administration of Chinese citizens who participate in employee stock holding plans and stock option plans of offshore listed companies. According to the Stock Option Rule, if a Chinese citizen participates in any employee stock holding plan or stock option plan of an offshore listed company, a Chinese domestic agent or the Chinese subsidiary of the offshore listed company is required to file, on behalf of the individual, an application with the SAFE to obtain approval for an annual quota with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises. Concurrent with the filing of the required application with the SAFE, the Chinese domestic agent or the Chinese subsidiary must obtain approval from the SAFE to open a special foreign exchange account at a Chinese bank to hold the funds required in connection with the stock purchase or option exercise, any returned principal profits upon sales of stock, any dividends issued on the stock and any other income or expenditures approved by the SAFE. The Chinese domestic agent or the Chinese subsidiary is also required to obtain approval from the SAFE to open an offshore special foreign exchange account at an offshore trust bank to hold offshore funds used in connection with any employee stock holding plans.
All proceeds obtained by a Chinese citizen from dividends acquired from the offshore listed company through employee stock holding plans or stock option plans, or sales of the offshore listed company’s stock acquired through other methods, must be remitted back to China after relevant offshore expenses are deducted.
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The foreign exchange proceeds from these sales can be converted into Renminbi or transferred to the individuals’ foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at the Chinese bank. If stock options are exercised on a cashless basis, the Chinese individuals are required to remit the proceeds to the special foreign exchange account. We and our Chinese employees who have been granted stock options will be subject to the Stock Option Rule when our company becomes an offshore listed company. If we or our Chinese employees fail to comply with the Stock Option Rule, we and/or our Chinese employees may face sanctions imposed by foreign exchange authority or any other Chinese government authorities.
Regulations on Labor Contracts
On June 29, 2007, the PRC National People’s Congress enacted the PRC Labor Contract Law, or the Labor Contract Law, which became effective on January 1, 2008. The Implementation Regulation for the PRC Labor Contract Law, or the Implementation Regulation, was promulgated by the State Council and took effect on September 18, 2008. The Labor Contract Law formalizes, among others, workers’ rights concerning overtime hours, pensions and layoffs, the execution, performance, modification and termination of labor contracts, the clauses of labor contracts and the role of trade unions. In particular, it provides for specific standards and procedures for entering into non-fixed-term labor contracts as some of our sales professionals and staff do. Either the employer or the applicable sales professional or staff is entitled to terminate the labor contract in circumstances as prescribed in the Labor Contract Law or if certain preconditions are fulfilled, and in certain cases, the employer is required to pay a statutory severance upon the termination of a labor contract pursuant to the standards provided by the Labor Contract Law.
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We are a Cayman Islands exempted company and our affairs are governed by our amended and restated memorandum and articles of association and the Companies Law (2009 Revision) of the Cayman Islands, which is referred to below as the Companies Law, and the common law of the Cayman Islands. A Cayman Islands exempted company is a company that conducts its business outside of the Cayman Islands, and as such is exempted from certain requirements of the Companies Law.
The following are summaries of certain of the terms and provisions of our amended and restated memorandum and articles of association to be adopted with effect from the listing of our Class A ordinary shares and the Companies Law insofar as they relate to our Class A ordinary shares. These summaries are not complete, and you should read the complete forms of our amended and restated memorandum and articles of association, which will be filed as exhibits to our registration statement on Form F-1. For information on how to obtain copies of our amended and restated memorandum and articles of association, see “Where You Can Find More Information.”
The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the Class A ordinary shares are held in order to exercise shareholders’ rights in respect of the Class A ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of Class A ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holder of such ADSs.
Classes of shares
Immediately prior to the consummation of this offering, the share capital of the company shall be divided into ordinary shares of two classes, Class A ordinary shares and Class B ordinary shares and one class of preferred shares. The Class A ordinary shares and Class B ordinary shares shall carry equal rights and rank pari passu with one another other than as set out below.
As regards conversion
Subject to the provisions of the Articles and to compliance with all fiscal and other laws and regulations applicable thereto, including the Law, a holder of Class B ordinary shares shall be entitled at the option of the holder, to convert their Class B ordinary shares into an equal number of fully paid Class A ordinary shares.
As regards Voting Rights
The Class B ordinary shares shall not carry any right to vote.
As regards Transfers
Class B ordinary shares must be converted into Class A ordinary shares prior to any assignment or transfer.
Meetings
Subject to our articles of association, an annual general meeting and any extraordinary general meeting shall be called by not less than ten (10) clear days’ notice in writing. Notice of every general meeting will be given to all of our shareholders.
Notwithstanding that a meeting is called by shorter notice than that mentioned above, but, subject to our articles of association, it will be deemed to have been duly called, if it is so agreed (1) in the case of a meeting
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called as an annual general meeting by all of our shareholders entitled to attend and vote at the meeting; or (2) in the case of any other meeting, by a majority in number of our shareholders having a right to attend and vote at the meeting, being a majority together holding not less than ninety-five percent (95%) in nominal value of the ordinary shares giving that right.
No business other than the appointment of a chairman of the meeting may be transacted at any general meeting unless a quorum is present at the commencement of business. However, the absence of a quorum will not preclude the appointment of a chairman of the meeting. If present, the chairman of our board of directors shall be the chairman presiding at any shareholders’ meetings.
Any one or more of our members present in person or by proxy or (in the case of a member being a corporation) by its duly appointed corporate representative representing not less than one third in nominal value of our total issued voting shares throughout the meeting shall be a quorum. A corporation being a shareholder shall be deemed for the purpose of our articles of association to be present in person if represented by its duly authorized representative. Such duly authorized representative shall be entitled to exercise the same powers on behalf of the corporation which he or she represents as that corporation could exercise if it were our individual shareholder.
The quorum for a separate general meeting of the holders of a separate class of shares is described in “Modification of Rights” below.
Voting Rights Attaching to the Shares
Subject to any rights or restrictions attached to any shares, at any general meeting every holder of Class A ordinary shares who is present in person (or, in the case of a holder of Class A ordinary shares being a corporation, by its duly authorized representative) or by proxy shall have one vote and on a poll every holder of Class A ordinary shares present in person (or, in the case of a holder of Class A ordinary shares being a corporation, by its duly appointed representative) or by proxy shall have one vote for each Class A ordinary shares which such person is the holder. Voting at any meeting of the holder of Class A ordinary shares is by show of hands unless a poll is demanded. A poll may be demanded by the chairman or any other shareholder present in person or by proxy or (in the case of a member being a corporation, by its duly authorized representative).
Any ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes cast at a meeting of our shareholders, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast at a meeting of our shareholders. Holders of our Class A ordinary shares may by ordinary resolution, among other things, elect directors, and make alterations of capital. See “— Alteration of Capital.” A special resolution is required for matters such as a change of name. See “— Modification of Rights.”
No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is registered as our shareholder at the applicable record date for that meeting.
If a recognized clearing house or a central depository (or its nominee(s)) being a corporation is our shareholder, it may authorize such person or persons as it thinks fit to act as its representative(s) at any meeting or at any meeting of any class of shareholders provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized. A person authorized pursuant to this provision is entitled to exercise the same powers on behalf of the recognized clearing house (or its nominee(s)) as if such person was the registered holder of our shares held by that clearing house (or its nominee(s)) including the right to vote individually on a show of hands.
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Protection of Minority Shareholders
The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one fifth of our shares in issue, appoint an inspector to examine our affairs and report thereon in a manner as the Grand Court shall direct.
Any shareholder of a company may petition the court which may make a winding up order if the court is of the opinion that it is just and equitable that the company should be wound up or, as an alternative to a winding up order, (a) an order regulating the conduct of the company’s affairs in the future, (b) an order requiring the company to refrain from doing or continuing an act complained of by the shareholder petitioner or to do an act which the shareholder petitioner has complained it has omitted to do, (c) an order authorizing civil proceedings to be brought in the name and on behalf of the company by the shareholder petitioner on such terms as the court may direct, or (d) an order providing for the purchase of the shares of any shareholders of the company by other shareholders or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.
Claims against us by our shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our memorandum and articles of association.
The Cayman Islands courts ordinarily would be expected to follow English case law precedents that permit a minority shareholder to commence a representative action against, or derivative actions in our name to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us, and (3) an irregularity in the passing of a resolution which requires a qualified (or special) majority.
Pre-emption Rights
There are no pre-emption rights applicable to the issuance of new shares under either Cayman Islands law or our amended and restated memorandum and articles of association.
Liquidation Rights
Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares, if our company shall be wound up the liquidator may, with the sanction of a Special Resolution of our company and any other sanction required by the Companies Law, divide among the shareholders in kind the whole or any part of the assets of our company (whether they shall consist of property of the same kind or not) and may for that purpose value any assets and determine how the division shall be carried out as between the shareholders or different classes of shareholders. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the shareholders as the liquidator, with the like sanction, shall think fit, but so that no shareholders shall be compelled to accept any asset upon which there is a liability. If our company shall be wound up, and the assets available for distribution among the shareholders as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. And if winding up the assets available for distribution among the shareholders shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed amongst the shareholders in proportion to the capital paid up at the commencement of the winding up on the shares held by them respectively.
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Modification of Rights
Except with respect to alteration of our share capital (as described below) and the location of our registered office, alterations to our memorandum and articles of association may only be made by special resolution of no less than two-thirds of votes cast at a meeting of the shareholders.
Subject to the Companies Law, all or any of the special rights attached to any class, unless otherwise provided for by the terms of issue of the shares of that class, may be varied, modified or abrogated either with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. The provisions of our articles of association relating to general meetings shall apply mutatis mutandis to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting other than an adjourned meeting shall be a person or persons together holding, or represented by proxy, on the date of the relevant meeting not less than one-third in nominal value of the issued shares of that class, every holder of shares of the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll.
The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
Alteration of Capital
We may from time to time by ordinary resolution in accordance with the Companies Law alter the conditions of our Memorandum of Association to:
• | increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe; |
• | consolidate and divide all or any of our capital into shares of larger amount than our existing shares; |
• | divide our shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares attach thereto respectively any preferential, deferred, qualified or special rights, privileges, conditions or such restrictions which in the absence of any such determination by our company in general meeting, as the directors may determine; |
• | sub-divide our shares, or any of them, into shares of smaller amount than is fixed by the Memorandum of Association (subject, nevertheless, to the Companies Law); or |
• | cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person. |
We may, by special resolution, subject to any confirmation or consent required by the Companies Law, reduce our share capital or any capital redemption reserve fund in any manner authorized by the Companies Law.
Transfer of Shares
Subject to any applicable restrictions set forth in our amended and restated articles of association, including in respect of the Class B ordinary shares, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or a form prescribed by the Designated Stock Exchange (as defined in the amended and restated articles of association) or in any other form which our directors may approve.
Our board of directors may, or the Board, in its absolute discretion, and without giving any reason therefor, refuse to register a transfer of any share (not being a fully paid up share) to a person of whom it does not
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approve, or any share issued under any share incentive scheme for employees upon which a restriction on transfer imposed thereby still subsists, and it may also, without prejudice to the foregoing generality, refuse to register a transfer of any share to more than four joint holders or a transfer of any share (not being a fully paid up share) on which our company has a lien. Without limiting the generality of the last sentence, the Board may decline to recognize any instrument of transfer unless:
• | a fee of such maximum sum as the Designated Stock Exchange may determine to be payable or such lesser sum as the Board may from time to time require is paid to our company in respect thereof; |
• | the instrument of transfer is in respect of only one class of share; |
• | the instrument of transfer is lodged at the Office or such other place at which the Register is kept in accordance with the Law or the Registration Office (as the case may be) accompanied by the relevant share certificate(s) and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer (and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do); and |
• | if applicable, the instrument of transfer is duly and properly stamped. |
If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.
The registration of transfers of shares may be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers of shares shall not be suspended nor the register closed for more than thirty (30) days in any year.
Share Repurchase
We are empowered by the Companies Law and our amended and restated articles of association to purchase our own shares, subject to certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Law, our amended and restated memorandum and articles of association and to any applicable requirements imposed from time to time by the Designated Stock Exchange and/or the SEC.
Dividends
Subject to the Companies Law and to our amended and restated articles of association, the board of directors may from time to time declare dividends in any currency. Dividends may be declared or paid out of our profits (realised or unrealised) and reserves lawfully available for distribution, including share premium.
Unless and to the extent that the rights attached to any shares or the terms of issue thereof otherwise provide, all dividends shall be declared and paid according to the amounts paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for the purposes of our amended and restated articles of association as paid up on the share; and all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid.
Our board of directors may from time to time pay to our shareholders such interim dividends as appear to the directors to be justified by our profits, and in particular (but without prejudice to the generality of the foregoing) if at any time the share capital of our company is divided into different classes, the Board may pay such interim dividends in respect of those shares in the capital of our company which confer on the holders thereof deferred or non-preferential rights as well as in respect of those shares which confer on the holders thereof preferential rights with regard to dividend and may also pay any fixed dividend which is payable on any shares of our company half-yearly or on any other dates, whenever such profits, in the opinion of the Board, justifies such payment.
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Our board of directors may retain any dividends or other monies payable on or in respect of a share upon which we have a lien, and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists. Our board of directors may also deduct from any dividend or other monies payable to any shareholder all sums of money, if any, presently payable by him or her to us on account of calls, installments or otherwise.
No dividend shall carry interest against us.
Whenever our board of directors has resolved that a dividend be paid or declared on our share capital, the board of directors may further resolve: (a) that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up on the basis that the shares so allotted are to be of the same class as the class already held by the allottee, provided that those of our shareholders entitled thereto will be entitled to elect to receive such dividend, or part thereof, in cash in lieu of such allotment; or (b) that those of our shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as our board of directors may think fit on the basis that the shares so allotted are to be of the same class as the class already held by the allottee. We may upon the recommendation of our board of directors by ordinary resolution resolve in respect of anyone particular dividend that notwithstanding the foregoing a dividend may be satisfied wholly in the form of an allotment of shares credited as fully paid without offering any right to our shareholders to elect to receive such dividend in cash in lieu of such allotment.
Any dividend, interest or other sum payable in cash to a holder of shares may be paid by check or warrant sent through the post addressed to the registered address of the shareholder entitled, or in the case of joint holders, to the registered address of the person whose name stands first in our register of shareholders in respect of the joint holding to such person and to such address as the holder or joint holders may in writing direct. Every check or warrant so sent shall be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on our register of shareholders in respect of such shares, and shall be sent at his or their risk and the payment of any such check or warrant by the bank on which it is drawn shall operate as a good discharge to us in respect of the dividend and/or bonus represented thereby, notwithstanding that it may subsequently appear that the same has been stolen or that any endorsement there on has been forged.
Any dividend unclaimed for six years from the date of declaration of such dividend may be forfeited by the board of directors and shall revert to us.
Whenever the Board or our company in general meeting has resolved that a dividend be paid or declared, our board of directors may direct that any dividend be satisfied wholly or in part by the distribution of specific assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe securities of any other company, and where any difficulty arises in regard to such distribution our directors may settle it as they think expedient, and in particular may disregard fractional entitlements, round the same up or down or provide that the same shall accrue to our benefit, and may fix the value for distribution of such specific assets and may determine that cash payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to our board of directors.
Untraceable Shareholders
Our company shall have the power to sell, in such manner as the Board thinks fit, any shares of a holder who is untraceable, but no such sale shall be made unless:
• | all checks or warrants in respect of dividends of the shares in question, being not less than three in total number, for any sum payable in cash to the holder of such shares in respect of them sent during the relevant period have remained uncashed; |
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• | so far as it is aware at the end of the relevant period, our company has not at any time during the relevant period received any indication of the existence of a holder who is the holder of such shares or of a person entitled to such shares by death, bankruptcy or operation of law; and |
• | our company, if so required by the rules governing the listing of shares on the Designated Stock Exchange, has given notice to, and caused advertisement in newspapers to be made in accordance with the requirements of, the Designated Stock Exchange of its intention to sell such shares in the manner required by the Designated Stock Exchange, and a period of three months or such shorter period as may be allowed by the Designated Stock Exchange has elapsed since the date of such advertisement. |
For the purpose of the foregoing, the “relevant period” means the period commencing twelve (12) years before the date of publication of the advertisement referred to under the third bullet point above and ending at the expiry of the period referred to in that paragraph.
The net proceeds of the sale will belong to the company and upon receipt by the company of such net proceeds it shall become indebted to the former Member for an amount equal to such net proceeds.
Board of Directors
We are managed by a board of directors which currently consists of nine members, includingthree independent directors. Our amended and restated articles of association provide that the board of directors shall consist of not less than two (2)directors.
Pursuant to our amended and restated memorandum and articles of incorporation to be adopted with effect following this offering, our board of directors will be divided into three classes. The members of each class will serve staggered three-year terms. Upon expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of the shareholders in the year in which their respective terms expires.
Our shareholders may by ordinary resolution at any time remove any director before the expiration of his period of office notwithstanding anything in the articles of association or in any agreement between us and such director, and may by ordinary resolution elect another person in his stead. Subject to our articles of association, the directors will have power at any time and from time to time to appoint any person to be a director, either as an addition to the existing directors or to fill a casual vacancy but so that the total amount of directors (exclusive of alternate directors) must not at any time exceed the number fixed in accordance with the articles of association. Any person so elected will hold office during such term only as the director in whose place he is elected would have held the same if he had not been removed.
There are no share ownership qualifications for directors.
Meetings of our board of directors may be convened at any time deemed necessary by the secretary or by any member of our board of directors.
A meeting of our board of directors will be competent to make lawful and binding decisions if a majority of the directors are present or represented. At any meeting of our directors, each director, be it by his or her presence or by his or her alternate, is entitled to one vote. A director may vote in respect of any contract or transaction in which he is interested, provided, (a) such director must, if his interest in such contract or arrangement is material, declare the nature of his interest at the earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice stating that, by reason of the facts specified in the notice, he is to be regarded as interested in any contracts of a specified description which we may subsequently make and (b) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the Audit Committee.
Questions arising at a meeting of our board of directors are required to be decided by simple majority votes of the members of our board of directors present or represented at the meeting. In the case of a tie vote, the
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chairman of the meeting shall have a second or deciding vote. Our board of directors may also pass resolutions without a meeting by unanimous written consent.
The remuneration to be paid to the directors shall be such remuneration as the directors shall determine. Such remuneration shall be deemed to accrue from day to day. The directors shall also be entitled to be paid their traveling, hotel and other expenses properly incurred by them in going to, attending and returning from meetings of the directors, or any committee of the directors, or general meetings of the company, or otherwise in connection with our business.
Under Cayman Islands laws, our directors have a duty of loyalty and must act honestly and in good faith and in our best interests. Our directors also have a duty to exercise the care, diligence, and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duties to us, our directors must ensure compliance with the memorandum and articles of association and the class rights vested thereunder in the holders of the shares. A shareholder may in certain circumstances have rights to damages if a duty owed by the directors is breached.
Issuance of Additional Ordinary Shares or Preferred Shares
Our amended and restated articles of association authorize our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Our amended and restated articles of association authorizes our board of directors to establish from time to time one or more series of preferred shares and to fix the designations, powers, preferences and relative, participating, optional and other rights, if any, and the qualifications, limitations and restrictions thereof, if any, including, without limitation:
• | the number of shares constituting each such class or series; |
• | dividend rights, conversion rights, voting powers, full or limited or no voting powers; |
• | redemption privileges, liquidation preferences; and |
• | to increase or decrease the size of any such class or series (but not below the number of shares of any class or series of preferred shares then outstanding) to the extent permitted by law. |
Our board of directors may issue series of preferred shares without action by our shareholders to the extent authorized but unissued. Immediately following this offering we will have 100,000,000 authorized but unissued preferred shares, par value US$0.001 per share. Accordingly, the issuance of preferred shares may adversely affect the rights of the holders of the ordinary shares. In addition, the issuance of preferred shares may be used as an anti-takeover device without further action on the part of the shareholders. We have no immediate plans to issue any preferred shares.
Issuance of preferred shares may dilute the voting power of holders of ordinary shares. Subject to applicable regulatory requirements, our board of directors may issue additional ordinary shares without action by our shareholders to the extent of available authorized but unissued shares. The issuance of additional ordinary shares may be used as an anti-takeover device without further action on the part of the shareholders. Such issuance may dilute the voting power of existing holders of ordinary shares.
The listing maintenance requirements of the New York Stock Exchange, which apply so long as our ADSs are quoted on that market, require shareholder approval of certain issuances of our securities equal to or exceeding 20% of the then outstanding voting power of all our securities or the then outstanding number of our ordinary shares.
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Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. See “Where You Can Find More Information.”
Differences in Corporate Law
The Companies Law of the Cayman Islands is modeled after that of the United Kingdom but does not follow recent United Kingdom statutory enactments. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Mergers and Similar Arrangements
The Companies Law provides for the merger and consolidation of Cayman Islands companies and Cayman Islands and foreign companies if the merged company or continued company will continue to be a Cayman Islands company. In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement in question is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in-person or by proxy at a meeting, or meetings convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies itself that:
• | the statutory provisions as to majority vote have been complied with; |
• | the shareholders have been fairly represented at the meeting in question; |
• | the arrangement is one that a businessman would reasonably approve; and |
• | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offerer may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection may be made to the Grand Court of the Cayman Islands but is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
If the arrangement and reconstruction are thus approved, any dissenting shareholders would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of U.S. corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholder Suits
Our Cayman Islands counsel is not aware of any reported class action or derivative action having been brought in a Cayman Islands court. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
• | a company is acting or proposing to act illegally or beyond the scope of its authority; |
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• | the act complained of, although not beyond the scope of its authority, could be effected duly if authorized by more than a simple majority vote which has not been obtained; and |
• | those who control the company are perpetrating a “fraud on the minority.” |
Under Delaware law, a stockholder may bring a derivative action on behalf of the corporation to enforce the rights of the corporation. Delaware law expressly authorizes stockholder derivative suits on the condition that the stockholder either held the stock at the time of the transaction of which the stockholder complains, or acquired the stock thereafter by operation of law and continues to hold it throughout the duration of the suit. An individual may also commence a class action suit on behalf of himself and other similarly situated stockholders where the requirements for maintaining a class action under Delaware law have been met. A plaintiff instituting a derivative suit is required to serve a demand on the corporation before bringing suit, unless such demand would be futile.
Corporate Governance
Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve. Under our amended and restated articles of association, subject to any separate requirement for audit committee approval under the applicable rules of the New York Stock Exchange or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his interest in any contract or arrangement in which he is interested, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.
Duties of Directors
Under the common law of the Cayman Islands law members of our board of directors owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and exercise their powers and fulfill the duties of their office honestly. This duty has four essential elements:
• | a duty to act in good faith in the best interests of the company; |
• | a duty not to personally profit from opportunities that arise from the office of director; |
• | a duty to avoid conflicts of interest; and |
• | a duty to exercise powers for the purpose for which such powers were intended. |
In addition, the Companies Law imposes various duties on officers of a company with respect to certain matters of management and administration of the company and imposes fines on persons who fail to satisfy those requirements. However, in many circumstances, an individual is only liable if he is knowingly guilty of the default or knowingly and willfully authorizes or permits the default.
Interested Directors
The Companies Law does not require a director who is interested in a transaction entered into by a Cayman company to disclose his interest nor does the Companies Law render such director liable to such company for any profit realized pursuant to such transaction. Such an obligation is imposed under our amended and restated articles of association and a director must act in accordance with his duties at common law (as above).
Voting Rights and Quorum Requirements
Under Cayman Islands law, the voting rights of shareholders are regulated by a company’s articles of association and, in certain circumstances, the Companies Law. The articles of association will govern matters
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such as quorum for the transaction of business, rights of shares and majority votes required to approve any action or resolution at a meeting of the shareholders or board of directors. Under the Companies Law, certain matters must be approved by a special resolution, which is defined as two-thirds of the votes cast by shareholders present at a meeting and entitled to vote, or such higher majority as imposed by a company’s articles of association; otherwise, unless the articles of association otherwise provide, the requisite majority is a simple majority of votes cast.
Indemnification
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provide for the indemnification of our directors, auditors and other officers against all losses or liabilities incurred or sustained by him or her as a director, auditor or other officer of our company in defending any proceedings, whether civil or criminal, in which judgment is given in his or her favor, or in which he or she is acquitted provided that this indemnity shall not extend to any matter in respect of any fraud or dishonesty which may attach to any of said persons.
Shareholder Proposals
The Companies Law does not provide shareholders any right to bring business before a meeting or requisition a general meeting.
Approval of Corporate Matters by Written Consent
The Companies Law allows a special resolution to be passed in writing if signed by all the shareholders and authorized by the articles of association.
Calling of Special Shareholders Meetings
The Companies Law does not have provisions governing the proceedings of shareholders meetings which are usually provided in the articles of association.
Staggered Board of Directors
The Companies Law does not contain statutory provisions that require staggered board arrangements for a Cayman Islands company. Such provisions, however, may validly be provided for in the articles of association, and we have provided for a staggered board of directors in our articles of association. Pursuant to such provision, one-third of the current members of our board are required to stand for re-election each year.
Issuance of Preferred Shares
The Companies Law allows shares to be, issued with preferred, deferred or other special rights, whether in. regard to dividends, voting, return of share capital or otherwise. Our articles of association provide that the directors may allot, issue, grant options over or otherwise dispose of shares (including fractions of a share) with or without preferred, deferred or other special rights or restrictions, in one or more series, whether with regard to dividend rights, dividend rates, conversion rights, voting rights, rights and terms of redemption and liquidation preferences or otherwise and to such persons, at such times and on such other terms as they think proper.
Anti-takeover Provisions
The Companies Law does not prevent companies from adopting a wide range of defensive measures, such as staggered boards, blank check preferred stock, removal of directors only for cause and provisions that
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restrict the rights of shareholders to call meetings and submit shareholder proposals. Our articles of association contain the following provisions which may be regarded as defensive measures: (i) a staggered board of directors, (ii) the ability to issue preferred shares and (iii) directors may in their absolute discretion decline to register any transfer of shares (not being a fully paid share) without assigning any reason.
Registration Rights
Upon completion of this offering, certain holders of our ordinary shares and their permitted transferees will be entitled to request that we register our ordinary shares held by them under the Securities Act.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 12,487,500 outstanding ADSs representing approximately 27.3% of our ordinary shares in issue. All of the ADSs sold in this offering and the ordinary shares they represent will be freely transferable by persons other than our “affiliates” without restriction or further registration under the Securities Act. Sales or perceived sales of substantial amounts of our ADSs in the public market could adversely affect prevailing market prices of our ADSs. Prior to this offering, there has been no public market for our ordinary shares or the ADSs, and we cannot assure you that a regular trading market for our ADSs will develop. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. We do not expect that a trading market will develop for our ordinary shares not represented by the ADSs.
Lock-up Agreements
We and our existing shareholders, including certain of our executive officers and directors, have agreed with the underwriters to certain lock-up arrangements. See “Underwriting”.
A total of 498,842,277 of our ordinary shares are subject to the lock-up agreements.
Rule 144
In general, under Rule 144, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months (including any period of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.
In general, under Rule 144, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described above, a number of shares that does not exceed the greater of:
• | 1% of the number of ordinary shares then outstanding, in the form of ADSs or otherwise, which will equal approximately 6,861,548 shares immediately after this offering; or |
• | the average weekly trading volume of the ADSs representing our ordinary shares on the New York Stock Exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
Beginning 90 days after the date of this prospectus, persons other than affiliates who purchased ordinary shares under a written compensatory plan or contract may be entitled to sell such shares in the United States in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 subject only to its manner-of-sale requirements. However, the Rule 701 shares would remain subject to lock-up arrangements and would only become eligible for sale when the lock-up period expires.
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Registration Rights
Upon completion of this offering, certain holders of our ordinary shares, in the form of ADSs or otherwise, or their transferees will be entitled to request that we register their shares under the Securities Act, following the expiration of the lock-up agreements described above. See “Description of Share Capital— Registration Rights.”
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
JPMorgan Chase Bank, N.A., as depositary will issue the ADSs which you will be entitled to receive in this offering. Each ADS will represent an ownership interest in fifteen (15) Class A ordinary shares which we will deposit with the custodian, as agent of the depositary, under the deposit agreement among ourselves, the depositary and registered holders of ADSs on the books of the depositary. In the future, each ADS will also represent any securities, cash or other property deposited with the depositary but which they have not distributed directly to you. Unless specifically requested by you, all ADSs will be issued on the books of our depositary in book-entry form and periodic statements will be mailed to you which reflect your ownership interest in such ADSs. In our description, references to American depositary receipts or ADRs shall include the statements you will receive which reflect your ownership of ADSs.
The depositary’s office is located at 4 New York Plaza, New York, NY 10004.
You may hold ADSs either directly or indirectly through your broker or other financial institution. If you hold ADSs directly, by having an ADS registered in your name on the books of the depositary, you are an ADR holder. This description assumes you hold your ADSs directly. If you hold the ADSs through your broker or financial institution nominee, you must rely on the procedures of such broker or financial institution to assert the rights of an ADR holder described in this section. You should consult with your broker or financial institution to find out what those procedures are.
As an ADR holder, we will not treat you as a shareholder of ours and you will not have any shareholder rights. Cayman Island law governs shareholder rights. Because the depositary or its nominee will be the shareholder of record for the shares represented by all outstanding ADSs, shareholder rights rest with such record holder. Your rights are those of an ADR holder. Such rights derive from the terms of the deposit agreement to be entered into among us, the depositary and all registered holders from time to time of ADSs issued under the deposit agreement. The obligations of the depositary and its agents are also set out in the deposit agreement. Because the depositary or its nominee will actually be the registered owner of the shares, you must rely on it to exercise the rights of a shareholder on your behalf. The deposit agreement and the ADSs are governed by New York law.
The following is a summary of the material terms of the deposit agreement. Because it is a summary, it does not contain all the information that may be important to you. For more complete information, you should read the entire deposit agreement and the form of ADR which contains the terms of your ADSs. You can read a copy of the deposit agreement which is filed as an exhibit to the registration statement of which this prospectus forms a part. You may also obtain a copy of the deposit agreement at the SEC’s Public Reference Room which is located at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. You may also find the registration statement and the attached deposit agreement on the SEC’s website at http://www.sec.gov.
Share Dividends and Other Distributions
How will I receive dividends and other distributions on the shares underlying my ADSs?
We may make various types of distributions with respect to our securities. The depositary has agreed that, to the extent practicable, it will pay to you the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, after converting any cash received into U.S. dollars and, in all cases, making any necessary deductions provided for in the deposit agreement. You will receive these distributions in proportion to the number of underlying securities that your ADSs represent.
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Except as stated below, the depositary will deliver such distributions to ADR holders in proportion to their interests in the following manner:
Cash. The depositary will distribute any U.S. dollars available to it resulting from a cash dividend or other cash distribution or the net proceeds of sales of any other distribution or portion thereof (to the extent applicable), on an averaged or other practicable basis, subject to (i) appropriate adjustments for taxes withheld, (ii) such distribution being impermissible or impracticable with respect to certain registered ADR holders, and (iii) deduction of the depositary’s expenses in (1) converting any foreign currency to U.S. dollars to the extent that it determines that such conversion may be made on a reasonable basis, (2) transferring foreign currency or U.S. dollars to the United States by such means as the depositary may determine to the extent that it determines that such transfer may be made on a reasonable basis, (3) obtaining any approval or license of any governmental authority required for such conversion or transfer, which is obtainable at a reasonable cost and within a reasonable time and (4) making any sale by public or private means in any commercially reasonable manner. If exchange rates fluctuate during a time when the depositary cannot convert a foreign currency, you may lose some or all of the value of the distribution.
Shares. In the case of a distribution in shares, the depositary will issue additional ADSs to evidence the number of ADSs representing such shares. Only whole ADSs will be issued. Any shares which would result in fractional ADSs will be sold and the net proceeds will be distributed in the same manner as cash to the ADR holders entitled thereto.
Rights to receive additional shares. In the case of a distribution of rights to subscribe for additional shares or other rights, if we provide evidence satisfactory to the depositary that it may lawfully distribute such rights, the depositary will distribute warrants or other instruments in the discretion of the depositary representing such rights. However, if we do not furnish such evidence, the depositary may:
• | sell such rights if practicable and distribute the net proceeds in the same manner as cash to the ADR holders entitled thereto; or |
• | if it is not practicable to sell such rights, do nothing and allow such rights to lapse, in which case ADR holders will receive nothing. |
We have no obligation to file a registration statement under the Securities Act in order to make any rights available to ADR holders.
Other Distributions. In the case of a distribution of securities or property other than those described above, the depositary may either (i) distribute such securities or property in any manner it deems equitable and practicable or (ii) to the extent the depositary deems distribution of such securities or property not to be equitable and practicable, sell such securities or property and distribute any net proceeds in the same way it distributes cash.
If the depositary determines that any distribution described above is not practicable with respect to any specific registered ADR holder, the depositary may choose any method of distribution that it deems practicable for such ADR holder, including the distribution of foreign currency, securities or property, or it may retain such items, without paying interest on or investing them, on behalf of the ADR holder as deposited securities, in which case the ADSs will also represent the retained items.
Any U.S. dollars will be distributed by checks drawn on a bank in the United States for whole dollars and cents. Fractional cents will be withheld without liability and dealt with by the depositary in accordance with its then current practices.
The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADR holders.
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There can be no assurance that the depositary will be able to convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a specified price, nor that any of such transactions can be completed within a specified time period.
Deposit, Withdrawal and Cancellation
How does the depositary issue ADSs?
The depositary will issue ADSs if you or your broker deposit shares or evidence of rights to receive shares with the custodian and pay the fees and expenses owing to the depositary in connection with such issuance. In the case of the ADSs to be issued under this prospectus, we will arrange with the underwriters named herein to deposit such shares.
Shares deposited in the future with the custodian must be accompanied by certain delivery documentation, including instruments showing that such shares have been properly transferred or endorsed to the person on whose behalf the deposit is being made.
The custodian will hold all deposited shares (including those being deposited by or on our behalf in connection with the offering to which this prospectus relates) for the account of the depositary. ADR holders thus have no direct ownership interest in the shares and only have such rights as are contained in the deposit agreement. The custodian will also hold any additional securities, property and cash received on or in substitution for the deposited shares. The deposited shares and any such additional items are referred to as “deposited securities.”
Upon each deposit of shares, receipt of related delivery documentation and compliance with the other provisions of the deposit agreement, including the payment of the fees and charges of the depositary and any taxes or other fees or charges owing, the depositary will issue an ADR or ADRs in the name or upon the order of the person entitled thereto evidencing the number of ADSs to which such person is entitled. All of the ADSs issued will, unless specifically requested to the contrary, be part of the depositary’s direct registration system, and a registered holder will receive periodic statements from the depositary which will show the number of ADSs registered in such holder’s name. An ADR holder can request that the ADSs not be held through the depositary’s direct registration system and that a certificated ADR be issued.
How do ADR holders cancel an ADS and obtain deposited securities?
When you turn in your ADR certificate at the depositary’s office, or when you provide proper instructions and documentation in the case of direct registration ADSs, the depositary will, upon payment of certain applicable fees, charges and taxes, deliver the underlying shares to you or upon your written order. At your risk, expense and request, the depositary may deliver deposited securities at such other place as you may request.
The depositary may only restrict the withdrawal of deposited securities in connection with:
• | temporary delays caused by closing our transfer books or those of the depositary or the deposit of shares in connection with voting at a shareholders’ meeting, or the payment of dividends; |
• | the payment of fees, taxes and similar charges; or |
• | compliance with any U.S. or foreign laws or governmental regulations relating to the ADRs or to the withdrawal of deposited securities. |
This right of withdrawal may not be limited by any other provision of the deposit agreement.
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Record Dates
The depositary may, after consultation with us if practicable, fix record dates for the determination of the registered ADR holders who will be entitled (or obligated, as the case may be):
• | to receive any distribution on or in respect of shares, |
• | to give instructions for the exercise of voting rights at a meeting of holders of shares, |
• | to pay the fee assessed by the depositary for administration of the ADR program and for any expenses as provided for in the ADR, or |
• | to receive any notice or to act in respect of other matters, |
all subject to the provisions of the deposit agreement.
Voting Rights
How do I vote?
If you are an ADR holder and the depositary asks you to provide it with voting instructions, you may instruct the depositary how to exercise the voting rights for the shares which underlie your ADSs. As soon as practicable after receiving notice of any meeting or solicitation of consents or proxies from us, the depositary will distribute to the registered ADR holders a notice stating such information as is contained in the voting materials received by the depositary and describing how you may instruct the depositary to exercise the voting rights for the shares which underlie your ADSs, including instructions for giving a discretionary proxy to a person designated by us. For instructions to be valid, the depositary must receive them in the manner and on or before the date specified. The depositary will try, as far as is practical, subject to the provisions of and governing the underlying shares or other deposited securities, to vote or to have its agents vote the shares or other deposited securities as you instruct. The depositary will only vote or attempt to vote as you instruct. The depositary will not itself exercise any voting discretion. Furthermore, neither the depositary nor its agents are responsible for any failure to carry out any voting instructions, for the manner in which any vote is cast or for the effect of any vote.
There is no guarantee that you will receive voting materials in time to instruct the depositary to vote and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
Reports and Other Communications
Will ADR holders be able to view our reports?
The depositary will make available for inspection by ADR holders at the offices of the depositary and the custodian the deposit agreement, the provisions of or governing deposited securities, and any written communications from us which are both received by the custodian or its nominee as a holder of deposited securities and made generally available to the holders of deposited securities.
Additionally, if we make any written communications generally available to holders of our shares, and we furnish copies thereof (or English translations or summaries) to the depositary, it will distribute the same to registered ADR holders.
Fees and Expenses
What fees and expenses will I be responsible for paying?
The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions, rights and other distributions,
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issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason, US$5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge.
The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:
• | a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs; |
• | a fee of up to US$0.02 per ADS for any cash distribution made pursuant to the deposit agreement; |
• | a fee of up to US$0.02 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision); |
• | reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of the depositary’s agents (including without limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable law, rule or regulation (which charge shall be assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions); |
• | a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto; |
• | stock transfer or other taxes and other governmental charges; |
• | cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares; |
• | transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; and |
• | expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars. |
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and exchange application and listing fees. Neither the depositary nor we can determine the exact amount to be made available to us because (i) the number of ADSs that will be issued and outstanding, (ii) the level of fees to be charged to holders of ADSs and
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(iii) our reimbursable expenses related to the ADR program are not known at this time. The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide services to any holder until the fees and expenses owing by such holder for those services or otherwise are paid.
Payment of Taxes
ADR holders must pay any tax or other governmental charge payable by the custodian or the depositary on any ADS or ADR, deposited security or distribution. If an ADR holder owes any tax or other governmental charge, the depositary may (i) deduct the amount thereof from any cash distributions, or (ii) sell deposited securities (by public or private sale) and deduct the amount owing from the net proceeds of such sale. In either case the ADR holder remains liable for any shortfall. Additionally, if any tax or governmental charge is unpaid, the depositary may also refuse to effect any registration, registration of transfer, split-up or combination of deposited securities or withdrawal of deposited securities until such payment is made. If any tax or governmental charge is required to be withheld on any cash distribution, the depositary may deduct the amount required to be withheld from any cash distribution or, in the case of a non-cash distribution, sell the distributed property or securities (by public or private sale) to pay such taxes and distribute any remaining net proceeds to the ADR holders entitled thereto.
By holding an ADR or an interest therein, you will be agreeing to indemnify us, the depositary, its custodian and any of our or their respective directors, employees, agents and affiliates against, and hold each of them harmless from, any claims by any governmental authority with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced rate of withholding at source or other tax benefit obtained.
Reclassifications, Recapitalizations and Mergers
If we take certain actions that affect the deposited securities, including (i) any change in par value, split-up, consolidation, cancellation or other reclassification of deposited securities or (ii) any distributions not made to holders of ADRs or (iii) any recapitalization, reorganization, merger, consolidation, liquidation, receivership, bankruptcy or sale of all or substantially all of our assets, then the depositary may choose to:
• | amend the form of ADR; |
• | distribute additional or amended ADRs; |
• | distribute cash, securities or other property it has received in connection with such actions; |
• | sell any securities or property received and distribute the proceeds as cash; or |
• | none of the above. |
If the depositary does not choose any of the above options, any of the cash, securities or other property it receives will constitute part of the deposited securities and each ADS will then represent a proportionate interest in such property.
Amendment and Termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement and the ADSs without your consent for any reason. ADR holders must be given at least 30 days prior notice of any amendment that imposes or
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increases any fees or charges (other than stock transfer or other taxes and other governmental charges, transfer or registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or otherwise ADR and ADRs, prejudices any substantial existing right of ADR holders. Such notice need not describe in detail the specific amendments effectuated thereby, but must give ADR holders a means to access the text of such amendment. If an ADR holder continues to hold an ADR or ADRs after being so notified, such ADR holder is deemed to agree to such amendment and to be bound by the deposit agreement as so amended. Notwithstanding the foregoing, if any governmental body or regulatory body should adopt new laws, rules or regulations which would require amendment or supplement of the deposit agreement or the form of ADR to ensure compliance therewith, we and the depositary may amend or supplement the deposit agreement and the ADR at any time in accordance with such changed laws, rules or regulations, which amendment or supplement may take effect before a notice is given or within any other period of time as required for compliance. No amendment, however, will impair your right to surrender your ADSs and receive the underlying securities, except in order to comply with mandatory provisions of applicable law.
How may the deposit agreement be terminated?
The depositary may, and shall at our written direction, terminate the deposit agreement and the ADRs by mailing notice of such termination to the registered holders of ADRs at least 30 days prior to the date fixed in such notice for such termination; provided, however, if the depositary shall have (i) resigned as depositary under the deposit agreement, notice of such termination by the depositary shall not be provided to registered holders unless a successor depositary shall not be operating under the deposit agreement within 45 days of the date of such resignation, and (ii) been removed as depositary under the deposit agreement, notice of such termination by the depositary shall not be provided to registered holders of ADRs unless a successor depositary shall not be operating under the deposit agreement on the 90th day after our notice of removal was first provided to the depositary. After termination, the depositary’s only responsibility will be (i) to deliver deposited securities to ADR holders who surrender their ADRs, and (ii) to hold or sell distributions received on deposited securities. As soon as practicable after the expiration of six months from the termination date, the depositary will sell the deposited securities which remain and hold the net proceeds of such sales (as long as it may lawfully do so), without liability for interest, in trust for the ADR holders who have not yet surrendered their ADRs. After making such sale, the depositary shall have no obligations except to account for such proceeds and other cash.
Limitations on Obligations and Liability to ADR holders
Limits on our obligations and the obligations of the depositary; limits on liability to ADR holders and holders of ADSs
Prior to the issue, registration, registration of transfer, split-up, combination, or cancellation of any ADRs, or the delivery of any distribution in respect thereof, and from time to time, we or the depositary or its custodian may require:
• | payment with respect thereto of (i) any stock transfer or other tax or other governmental charge, (ii) any stock transfer or registration fees in effect for the registration of transfers of shares or other deposited securities upon any applicable register and (iii) any applicable fees and expenses described in the deposit agreement; |
• | the production of proof satisfactory to it of (i) the identity of any signatory and genuineness of any signature and (ii) such other information, including without limitation, information as to citizenship, residence, exchange control approval, beneficial ownership of any securities, compliance with applicable law, regulations, provisions of or governing deposited securities and terms of the deposit agreement and the ADRs, as it may deem necessary or proper; and |
• | compliance with such regulations as the depositary may establish consistent with the deposit agreement. |
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The issuance of ADRs, the acceptance of deposits of shares, the registration, registration of transfer, split-up or combination of ADRs or the withdrawal of shares, may be suspended, generally or in particular instances, when the ADR register or any register for deposited securities is closed or when any such action is deemed advisable by the depositary; provided that the ability to withdrawal shares may only be limited under the following circumstances: (i) temporary delays caused by closing transfer books of the depositary or our transfer books or the deposit of shares in connection with voting at a shareholders’ meeting, or the payment of dividends, (ii) the payment of fees, taxes, and similar charges, and (iii) compliance with any laws or governmental regulations relating to ADRs or to the withdrawal of deposited securities.
The deposit agreement expressly limits the obligations and liability of the depositary, ourselves and our respective agents. Neither we nor the depositary nor any such agent will be liable if:
• | any present or future law, rule, regulation, fiat, order or decree of the United States, the Cayman Islands, the People’s Republic of China or any other country, or of any governmental or regulatory authority or securities exchange or market or automated quotation system, the provisions of or governing any deposited securities, any present or future provision of our charter, any act of God, war, terrorism or other circumstance beyond our, the depositary’s or our respective agents’ control shall prevent or delay, or shall cause any of them to be subject to any civil or criminal penalty in connection with, any act which the deposit agreement or the ADRs provide shall be done or performed by us, the depositary or our respective agents (including, without limitation, voting); |
• | it exercises or fails to exercise discretion under the deposit agreement or the ADR; |
• | it performs its obligations under the deposit agreement and ADRs without gross negligence or bad faith; |
• | it takes any action or refrains from taking any action in reliance upon the advice of or information from legal counsel, accountants, any person presenting shares for deposit, any registered holder of ADRs, or any other person believed by it to be competent to give such advice or information; or |
• | it relies upon any written notice, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. |
Neither the depositary nor its agents have any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs. We and our agents shall only be obligated to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs, which in our opinion may involve us in expense or liability, if indemnity satisfactory to us against all expense (including fees and disbursements of counsel) and liability is furnished as often as may be required. The depositary and its agents may fully respond to any and all demands or requests for information maintained by or on its behalf in connection with the deposit agreement, any registered holder or holders of ADRs, any ADRs or otherwise related to the deposit agreement or ADRs to the extent such information is requested or required by or pursuant to any lawful authority, including without limitation laws, rules, regulations, administrative or judicial process, banking, securities or other regulators. The depositary shall not be liable for the acts or omissions made by any securities depository, clearing agency or settlement system in connection with or arising out of book-entry settlement of deposited securities or otherwise. Furthermore, the depositary shall not be responsible for, and shall incur no liability in connection with or arising from, the insolvency of any custodian that is not a branch or affiliate of JPMorgan Chase Bank, N.A.
Additionally, none of us, the depositary or the custodian shall be liable for the failure by any registered holder of ADRs or beneficial owner therein to obtain the benefits of credits on the basis of non-U.S. tax paid against such holder’s or beneficial owner’s income tax liability. Neither we nor the depositary shall incur any liability for any tax consequences that may be incurred by holders or beneficial owners on account of their ownership of ADRs or ADSs.
Neither the depositary nor its agents will be responsible for any failure to carry out any instructions to vote any of the deposited securities, for the manner in which any such vote is cast or for the effect of any such
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vote. Neither the depositary nor any of its agents shall be liable to registered holders of ADRs or beneficial owners of interests in ADSs for any indirect, special, punitive or consequential damages (including, without limitation, lost profits) of any form incurred by any person or entity, whether or not foreseeable and regardless of the type of action in which such a claim may be brought.
The depositary may own and deal in any class of our securities and in ADSs.
Disclosure of Interest in ADSs
To the extent that the provisions of or governing any deposited securities may require disclosure of or impose limits on beneficial or other ownership of deposited securities, other shares and other securities and may provide for blocking transfer, voting or other rights to enforce such disclosure or limits, you agree to comply with all such disclosure requirements and ownership limitations and to comply with any reasonable instructions we may provide in respect thereof. We reserve the right to instruct you to deliver your ADSs for cancellation and withdrawal of the deposited securities so as to permit us to deal with you directly as a holder of shares and, by holding an ADS or an interest therein, you will be agreeing to comply with such instructions.
Books of Depositary
The depositary or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADRs, which register shall include the depositary’s direct registration system. Registered holders of ADRs may inspect such records at the depositary’s office at all reasonable times, but solely for the purpose of communicating with other holders in the interest of the business of our company or a matter relating to the deposit agreement. Such register may be closed from time to time, when deemed expedient by the depositary.
The depositary will maintain facilities for the delivery and receipt of ADRs.
Pre-release of ADSs
In its capacity as depositary, the depositary shall not lend shares or ADSs; provided, however, that the depositary may (i) issue ADSs prior to the receipt of shares and (ii) deliver shares prior to the receipt of ADSs for withdrawal of deposited securities, including ADSs which were issued under (i) above but for which shares may not have been received (each such transaction a “pre-release”). The depositary may receive ADSs in lieu of shares under (i) above (which ADSs will promptly be canceled by the depositary upon receipt by the depositary) and receive shares in lieu of ADSs under (ii) above. Each such pre-release will be subject to a written agreement whereby the person or entity (the “applicant”) to whom ADSs or shares are to be delivered (a) represents that at the time of the pre-release the applicant or its customer owns the shares or ADSs that are to be delivered by the applicant under such pre-release, (b) agrees to indicate the depositary as owner of such shares or ADSs in its records and to hold such shares or ADSs in trust for the depositary until such shares or ADSs are delivered to the depositary or the custodian, (c) unconditionally guarantees to deliver to the depositary or the custodian, as applicable, such shares or ADSs, and (d) agrees to any additional restrictions or requirements that the depositary deems appropriate. Each such pre-release will be at all times fully collateralized with cash, U.S. government securities or such other collateral as the depositary deems appropriate, terminable by the depositary on not more than five (5) business days’ notice and subject to such further indemnities and credit regulations as the depositary deems appropriate. The depositary will normally limit the number of ADSs and shares involved in such pre-release at any one time to thirty percent (30%) of the ADSs outstanding (without giving effect to ADSs outstanding under (i) above), provided, however, that the depositary reserves the right to change or disregard such limit from time to time as it deems appropriate. The depositary may also set limits with respect to the number of ADSs and shares involved in pre-release with any one person on a case-by-case basis as it deems appropriate. The depositary may retain for its own account any compensation received by it in conjunction with
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the foregoing. Collateral provided pursuant to (b) above, but not the earnings thereon, shall be held for the benefit of the registered holders of ADRs (other than the applicant).
Appointment
In the deposit agreement, each registered holder of ADRs and each person holding an interest in ADSs, upon acceptance of any ADSs (or any interest therein) issued in accordance with the terms and conditions of the deposit agreement will be deemed for all purposes to:
• | be a party to and bound by the terms of the deposit agreement and the applicable ADR or ADRs, and |
• | appoint the depositary its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions contemplated in the deposit agreement and the applicable ADR or ADRs, to adopt any and all procedures necessary to comply with applicable laws and to take such action as the depositary in its sole discretion may deem necessary or appropriate to carry out the purposes of the deposit agreement and the applicable ADR and ADRs, the taking of such actions to be the conclusive determinant of the necessity and appropriateness thereof. |
Governing Law
The deposit agreement and the ADRs shall be governed by and construed in accordance with the laws of the State of New York. In the deposit agreement, we have submitted to the jurisdiction of the courts of the State of New York and appointed an agent for service of process on our behalf.
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The following summary of material Cayman Islands, PRC and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Conyers Dill & Pearman, our Cayman Islands counsel.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties that may be applicable on instruments executed in, or brought within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
People’s Republic of China Taxation
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises, such as dividends paid to us by our PRC subsidiaries, were exempt from PRC withholding tax. Under the PRC Corporate Income Tax Law and its implementation rules effective on January 1, 2008, all domestic and foreign-invested companies in China are subject to a uniform corporate income tax at the rate of 25% and dividends from a PRC subsidiary to its foreign parent company are subject to a withholding tax at the rate of 10%, unless such foreign parent company’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax, or the tax is otherwise exempted or reduced pursuant to the PRC tax laws.
Under the PRC Corporate Income Tax Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China are considered PRC resident enterprises and therefore be subject to PRC corporate income tax at the rate of 25% on their worldwide income. Under the implementation rules of the PRC Corporate Income Tax Law, “de facto management bodies” is defined as the bodies that have material and overall management and control over the business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. In addition, the Circular Related to Relevant Issues on the Identification of a Chinese holding Company Incorporated Overseas as a Residential Enterprise under the Criterion of De Facto Management Bodies Recognizing issued by the State Administration of Taxation on April 22, 2009 provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function mainly in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the enterprise’s directors or senior management with voting rights reside in the PRC.
The PRC Corporate Income Tax Law and its implementation rules are relatively new and ambiguities exist with respect to the interpretation of the provisions relating to resident enterprise issues. Although our offshore holding companies are not controlled by any PRC company or company group, we cannot assure you that we will not be deemed to be a PRC resident enterprise under the PRC Corporate Income Tax Law. If we are deemed to be a PRC resident enterprise, we will be subject to PRC corporate income tax at the rate of 25% on our worldwide income. In that case, however, dividend income we receive from our PRC subsidiaries may be
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exempt from PRC corporate income tax because the PRC Corporate Income Tax Law and its implementation rules generally provide that dividends received by a PRC resident enterprise from its directly invested entity that is also a PRC resident enterprise is exempt from corporate income tax. However, as there is still uncertainty as to how the PRC Corporate Income Tax Law and its implementation rules will be interpreted and implemented, we cannot assure you that we are eligible for such PRC corporate income tax exemptions or reductions.
In addition, the PRC Corporate Income Tax Law and its implementation rules are relatively new and ambiguities exist with respect to the interpretation of the provisions relating to identification of PRC-sourced income. If we are deemed to be a PRC resident enterprise, dividends distributed to our non-PRC entity investors by us, or the gain our non-PRC entity investors may realize from the transfer of our ordinary shares or ADSs, may be treated as PRC-sourced income and therefore be subject to a 10% PRC withholding tax pursuant to the PRC Corporate Income Tax Law. If we became a PRC resident enterprise under the new PRC tax system and received income other than dividends, our profitability and cash flows would be adversely impacted due to our worldwide income being taxed in China under the PRC Corporate Income Tax Law.
United States Federal Income Taxation
The following is a summary of the material United States federal income tax considerations relating to the acquisition, ownership, and disposition of our ADSs or ordinary shares by a U.S. Holder (as defined below) that will hold ADSs or ordinary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code. This summary is based upon existing United States federal tax law, which is subject to differing interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation that may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax rules (for example, financial institutions, insurance companies, broker-dealers, partnerships and their partners, and tax-exempt organizations (including private foundations)), holders who are not U.S. Holders, holders who own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that will hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or investors that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any non-United States, state, or local tax considerations. Each U.S. Holder is urged to consult its tax advisor regarding the United States federal, state, local, and non-United States income and other tax considerations of an investment in ADSs or ordinary shares.
General
For purposes of this summary, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the law of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the United States Internal Revenue Code.
If a partnership is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner of a partnership holding our ADSs or ordinary shares, the U.S. Holder is urged to consult its tax advisor regarding an investment in our ADSs or ordinary shares.
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For United States federal income tax purposes, a U.S. Holder of ADSs will be treated as the owner of the underlying shares represented by the ADSs.
Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, will be classified as a “passive foreign investment company” or a PFIC, for United States federal income tax purposes, if, in the case of any particular taxable year, either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of its average quarterly assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income. For this purpose, cash is categorized as a passive asset and the company’s unbooked intangibles are taken into account. A non-U.S. corporation will be treated as owning a proportionate share of the assets and income of any other corporation in which it owns, directly or indirectly, more than 25% (by value) of the stock.
Based on our current income and assets and taking into consideration this offering, we presently do not believe that we should be classified as a PFIC for the current taxable year. While we do not anticipate becoming a PFIC in future taxable years, the composition of our income and our assets will be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. Under circumstances where we determine not to deploy significant amounts of cash to (i) fund the development of our company-owned brokerage services business; (ii) fund the development of our company-owned sales offices, (iii) invest and upgrade our information and operations systems; or (iv) fund general corporate purposes, our risk of becoming classified as a PFIC may substantially increase.
In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our anticipated market capitalization following the close of this offering. Among other matters, if our market capitalization is less than anticipated or subsequently declines, we may be or become classified as a PFIC for the current or one or more future taxable years. Further, while we believe our classification methodology and valuation approach is reasonable, it is possible that the Internal Revenue Service may challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our company being or becoming classified as a PFIC for the current or one or more future taxable years. If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares.
Because PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that we are not or will not become classified as a PFIC, and our PFIC status will depend on whether we continue to follow our capital expenditure plans and the continued existence of goodwill. The discussion below under “Dividends” and “Sale or Other Disposition of ADSs or Ordinary Shares” is written on the basis that we will not be classified as a PFIC for United States federal income tax purposes. The U.S. federal income tax rules that apply if we are classified as a PFIC for our 2010 or subsequent taxable years are generally discussed below under “Passive Foreign Investment Company Rules.”
Dividends
Any cash distributions (including the amount of any PRC tax withheld) paid on our ADSs or ordinary shares out of our earnings and profits, as determined under United States federal income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend income. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid will generally be treated as a “dividend” for United States federal income tax purposes. For taxable years beginning before January 1, 2011, a non-corporate recipient of dividend income generally will be subject to tax on dividend income from a “qualified foreign corporation” at a maximum United States federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met. A non-United States corporation (other than a corporation that is classified as a PFIC for
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the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock (or ADSs in respect of such stock) which is readily tradable on an established securities market in the United States. We have been approved to list the ADSs on the New York Stock Exchange, and our ADSs are expected to be readily tradable on the New York Stock Exchange, which is an established securities market in the United States. In the event that we are deemed to be a PRC resident enterprise under the PRC Corporate Income Tax Law, we may be eligible for the benefits of the United States-PRC income tax treaty. See “Taxation — Peoples’ Republic of China Taxation.” If we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by the ADSs, would be eligible for the reduced rates of taxation. In the event that we are deemed to be a PRC resident enterprise under the PRC Corporate Income Tax Law, a U.S. Holder may be subject to PRC withholding taxes on dividends paid on our ADSs. Dividends received on our ADSs or ordinary shares will not be eligible for the dividends received deduction allowed to corporations.
Dividends generally will be treated as income from foreign sources for United States foreign tax credit purposes. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld, may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes.
Sale or Other Disposition of ADSs or Ordinary Shares
A U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or ordinary shares. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. In the event that gain from the disposition of the ADSs or ordinary shares is subject to tax in the PRC, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income. See “Taxation — Peoples’ Republic of China Taxation.” The deductibility of a capital loss may be subject to limitations.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares), and (ii) any gain realized on the sale or other disposition, including a pledge, of ADSs or ordinary shares. Under the PFIC rules, if a U.S. Holder receives any such excess distribution or realizes any such gain, the:
• | excess distribution or realized gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares; |
• | amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are classified as a PFIC (a “pre-PFIC” year) will be taxable as ordinary income; |
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• | amount allocated to each prior taxable year, other than the current taxable year or a pre-PFIC year, will be subject to tax at the highest tax rate in effect applicable to you for that year; and |
• | interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than the current taxable year or a pre-PFIC year. |
If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, you would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules.
If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below), we will continue to be treated as a PFIC with respect to such holder for all subsequent years during which such holder holds the ADSs or ordinary shares, unless we cease to be a PFIC and such holder makes a “deemed sale” election or, in certain circumstances, a “deemed dividend” election with respect to the ADSs or ordinary shares, as applicable. If a deemed sale election is made, the U.S. Holder will be deemed to have sold the ADSs or ordinary shares held by such holder at their fair market value and any gain from such deemed sale would be subject to the PFIC rules described above. If a deemed dividend election is made, the U.S. Holder must include in income as a dividend its pro rata share of certain earnings and profits of our company, and such deemed dividend would be treated as an excess distribution for purposes of the PFIC rules described above. After the deemed sale election or deemed dividend election, so long as we do not become a PFIC in a subsequent taxable year, the U.S. Holder’s ADSs or ordinary shares with respect to which such election was made will not be treated as shares in a PFIC.
As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election, provided that the listing on the New York Stock Exchange is approved and that the ADSs are regularly traded. We anticipate that our ADSs should qualify as being regularly traded, but no assurances may be given in this regard. If a U.S. Holder makes this election, the holder will generally (i) include as income for each taxable year the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as a loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but only to the extent of the amount previously included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during any period that such corporation is not classified as a PFIC.
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, you may continue to be subject to the PFIC rules with respect to your indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal income tax purposes.
The “QEF election,” which serves as a further alternative to the foregoing rules, is not available (as set forth below). Subject to certain limitations, a United States person may make a “qualified electing fund” election, or QEF election, with respect to its investment in a PFIC in which the United States person owns shares (directly or indirectly) of the PFIC. If a QEF election is made by a U.S. Holder for the first year in which such U.S. Holder owns shares (directly or indirectly) of the PFIC, such U.S. Holder must generally include in income its pro rata share of the ordinary earnings and capital gains of the foreign corporation for each year such corporation meets the income test or the asset test regardless of whether any distributions are made (and will receive a basis increase to reflect such undistributed amounts included in income). A U.S. Holder may elect to defer actual payment of the tax liability arising from certain “non-passive” income until the PFIC makes actual distributions of amounts previously deemed included in such U.S. Holder’s income, subject to an interest charge generally applicable to underpayments of tax on such deferred tax liability. Notwithstanding the foregoing, a U.S. Holder may be required to report taxable income as a result of the QEF election without corresponding receipts of cash.
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No portion of any such ordinary earnings inclusions would be eligible for the reduced 15% tax rate on individuals in respect of “qualified dividends.” A QEF election will only be possible for a U.S. Holder if the PFIC furnishes such U.S. Holder with a statement, including in it the U.S. Holder’s share of the PFIC’s ordinary earnings and net capital gain. Since the company does not intend to provide the information necessary to enable a U.S. Holder to make a QEF election, the QEF election will not be available to U.S. Holders.
If a U.S. Holder owns our ADSs or ordinary shares during any taxable year that we are a PFIC, the holder must file an annual Internal Revenue Service Form 8621. In the case of a U.S. Holder who has held ADSs or ordinary shares during any taxable year in respect of which we were classified as a PFIC and continues to hold such ADSs or ordinary shares (or any portion thereof) and has not previously determined to make a mark-to- market election, and who is now considering making a mark-to-market election, special tax rules may apply relating to purging the PFIC taint of such ADSs or ordinary shares.
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ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated in the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of the following benefits:
• | political and economic stability; |
• | an effective judicial system; |
• | a favorable tax system; |
• | the absence of exchange control or currency restrictions; and |
• | the availability of professional and support services. |
However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:
• | The Cayman Islands has a less developed body of securities laws as compared to that of the United States and these securities laws provide significantly less protection to investors; and |
• | The Cayman Islands companies may not have standing to sue before the federal courts of the United States. |
Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders be arbitrated.
Almost all of our assets are located in China. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States. We appointed CT Corporation System, 111 Eighth Avenue, New York, New York 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.
Conyers Dill & Pearman, our counsel as to the laws of the Cayman Islands, and Jun He Law Offices, our counsel as to Chinese law, have advised us respectively that there is uncertainty as to whether the courts of the Cayman Islands or China respectively 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 |
• | entertain original actions brought in the Cayman Islands or China respectively against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. |
Conyers Dill & Pearman has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as debt in the courts of the Cayman Islands under the common law doctrine of obligation. Conyers Dill & Pearman has further advised us that because it is uncertain whether a Cayman Islands court would determine that a U.S. court judgment based on the civil liability provisions of the U.S. federal securities laws is in the nature of a penalty, it is uncertain whether such a liability judgment would be enforceable in the Cayman Islands.
Jun He Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. Under the PRC Civil Procedures Law, courts in China may
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recognize and enforce foreign judgments pursuant to treaties between China and the country where the judgment is rendered or based on reciprocity arrangements for the recognition and enforcement of foreign judgments between jurisdictions. If there are neither treaties nor reciprocity arrangements between China and a foreign jurisdiction where a judgment is rendered, according to the PRC Civil Procedures Law, matters relating to the recognition and enforcement of a foreign judgment in China may be resolved through diplomatic channels. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States or the Cayman Islands. As a result, it is generally difficult to recognize and enforce in China a judgment rendered by a court in either of these two jurisdictions.
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Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Goldman Sachs (Asia) L.L.C. and Morgan Stanley & Co. International plc are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, the number of ADSs indicated in the table below. Goldman Sachs (Asia) L.L.C.’s address is 68th Floor, Cheung Kong Center, 2 Queen’s Road, Central, Hong Kong. Morgan Stanley & Co. International plc’s address is 25 Cabot Square, Canary Wharf, London E14 4QA.
Underwriter | Number of ADSs | |
Goldman Sachs (Asia) L.L.C. | ||
Morgan Stanley & Co. International plc | ||
William Blair & Company L.L.C. | ||
Oppenheimer & Co. Inc. | ||
Total | 12,487,500 | |
The underwriters are offering the ADSs subject to their acceptance of the ADSs from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the ADSs offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated. The underwriters are obligated to take and pay for all of the ADSs offered by this prospectus if any such ADSs are taken. However, the underwriters are not required to take or pay for the ADSs covered by the underwriters’ option described below.
We have agreed to indemnify the underwriters against, or to contribute to payments the underwriters may be required to make in respect of, liabilities arising out of an untrue or allegedly untrue statement of a material fact contained in the registration statement, prospectus and other offering documents, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading provided that such liabilities do not arise in reliance upon written information furnished to us by the underwriters expressly for use in the aforementioned documents.
The representatives have advised us that the underwriters propose initially to offer the ADSs to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of US$ per ADS. No further discount will be allowed to dealers or re-allowed by dealers to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.
The following table shows the per ADS and total underwriting discounts and commissions to be paid by us in connection with this offering. The amounts in the following table are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional ADSs as described below.
Per ADS | Total | |||||||||||
Option Not Exercised | Option Exercised | Option Not Exercised | Option Exercised | |||||||||
Underwriting Discounts and Commissions paid by us | US$ | US$ | US$ | US$ | ||||||||
Expenses payable by us | US$ | US$ | US$ | US$ |
The underwriters have agreed to reimburse us for certain roadshow expenses in connection with the offering.
In addition, we have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 1,873,125 additional ADSs at the initial public offering price listed
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on the cover page of this prospectus, less underwriters discounts and commissions. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase additional ADSs approximately proportionate to each underwriter’s initial amount reflected in the table above.
We have agreed that we will not offer, sell, contract to sell, pledge, grant any option to purchase, purchase any option or contract to sell, right or warrant to purchase, make any short sale, file a registration statement with respect to, or otherwise dispose of (including entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequence of ownership interests) any of our ADSs or ordinary shares or any securities that are convertible into or exchangeable for, or that represent the right to receive, our ADSs or ordinary shares without the prior written consent of the representatives for a period ending 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee share options outstanding on the date hereof. However, in the event that either (1) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 15-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the 17-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless the representatives waive, in writing, such an extension.
Each of our existing shareholders, including certain of our executive officers and directors have agreed, subject to certain exceptions, that they will not offer, sell, contract to sell, pledge, grant any option to purchase, purchase any option or contract to sell, right or warrant to purchase, make any short sale, file a registration statement with respect to, or otherwise dispose of (including entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequence of ownership interests) any of our ADSs or ordinary shares or any securities that are convertible into or exchangeable for, or that represent the right to receive, our ADSs or ordinary shares without the prior written consent of the representatives for a period ending 180 days after the date of this prospectus. However, in the event that either (1) during the last 17 days of the relevant “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the relevant “lock-up” period, we announce that we will release earnings results during the 15-day period beginning on the last day of the relevant “lock-up” period, then in either case the expiration of the relevant “lock-up” will be extended until the expiration of the 17-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless the representatives waive, in writing, such an extension.
We have received an approval for listing our ADSs listed on the New York Stock Exchange under the symbol “CTC.”
In connection with the listing of the ADSs on the New York Stock Exchange, the underwriters have undertaken to sell our ADSs at a minimum price of at least US$4.00 per share, in round lots of 100 shares or more to a minimum of 400 beneficial owners in the United States and to sell these shares in a manner such that we will have more than 1,100,000 publicly held shares outstanding in the United States with an aggregate market value of at least US$40 million and a global market capitalization of at least US$150 million.
Before this offering, there has been no public market for our ordinary shares or ADSs. The initial public offering price was determined through negotiations among us and the representatives. Among the factors considered in determining the initial public offering price are our future prospects and those of our industry in general, our sales, earnings, certain other financial and operating information in recent periods, the price-earnings ratios, price-sales ratios and market prices of securities and certain financial and operating information of companies engaged in activities similar to ours.
An active trading market for the ADSs may not develop. It is also possible that after the offering the ADSs will not trade in the public market at or above the initial public offering price.
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Until the distribution of the ADSs is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our ADSs. However, the representatives, or any person acting for them, on behalf of the underwriters, may engage in transactions that stabilize the price of the ADSs, such as bids or purchases to peg, fix or maintain that price.
In connection with the offering, the underwriters may purchase and sell our ADSs in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of ADSs than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional ADSs in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional ADSs or purchasing ADSs in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of ADSs available for purchase in the open market as compared to the price at which they may purchase ADSs through the option to purchase additional ADSs. “Naked” short sales are sales in excess of the option to purchase additional ADSs. The underwriters must close out any naked short position by purchasing ADSs in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our ADSs in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of ADSs made by the underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased ADSs sold by or for the account of such underwriter in stabilizing or short covering transactions.
Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our ADSs or preventing or retarding a decline in the market price of our ADSs. As a result, the price of our ADSs may be higher than the price that might otherwise exist in the open market.
Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the ADSs. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
In connection with the offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, the representatives will be facilitating internet distribution for this offering to certain of their respective internet subscription customers. An electronic prospectus may be made available on the internet website maintained by one or more of the representatives. Other than the prospectus in electronic format, the information contained on, or that may be accessed through, the web site of any of the representatives is not part of this prospectus.
Some of the underwriters and their affiliates have engaged and may in the future engage in investment banking and other commercial dealings in the ordinary course of business with us and our affiliates.
Goldman Sachs Strategic Investments (Asia) L.L.C., an affiliate of Goldman Sachs (Asia) L.L.C., purchased, after giving effect to our 10-for-1 share split effected January 4, 2010, 200,000,000 of our Series A preferred shares for a consideration of US$22.0 million pursuant to a Stock Purchase Agreement dated December 19, 2005. All of our issued and outstanding Series A convertible preferred shares will automatically convert into 61,108,179 Class A and 80,502,938 Class B ordinary shares, at a conversion rate then in effect, upon completion of this offering. Under our amended and restated memorandum and articles of association, as the holder of a majority of our outstanding Series A convertible preferred shares, Goldman Sachs Strategic Investments (Asia)
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L.L.C. is entitled to appoint two directors to our board of directors. Two of our former directors, Messrs. David Chou and Jin-Song Chen, are employees of Goldman Sachs (Asia) L.L.C. Messrs. Chou and Chen resigned from our board of directors on January 4, 2010, and upon completion of this offering, Goldman Sachs Strategic Investments (Asia) L.L.C.’s rights to appoint any directors to our board of directors will terminate.
Selling Restrictions
European Economic Area
In relation to each member state of the European Economic Area that has implemented the Prospectus Directive, each, a relevant member state, with effect from and including the date on which the Prospectus Directive is implemented in that relevant member state, or the relevant implementation date. The ADSs may not be offered to the public in that relevant member state prior to the publication of a prospectus in relation to the ADSs that has been approved by the competent authority in that relevant member state or, where appropriate, approved in another relevant member state and notified to the competent authority in the relevant member state, all in accordance with the Prospectus Directive, except that with effect from and including the relevant implementation date, an offer of the ADSs to the public may be made in that relevant member state at any time:
• | to legal entities which are authorized or regulated to operate in the financial markets or, if not authorized or regulated, whose corporate purpose is solely to invest in securities; |
• | to any legal entity which has two or more of (i) an average of at least 250 employees during the last financial year; (ii) a total balance sheet of more than € 43,000,000; and (iii) an annual net turnover of more than € 50,000,000, as shown in its last annual or combined accounts; |
• | to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of representatives of the underwriters; or |
• | in any other circumstances falling within Article 3(2) of the Prospectus Directive. |
For the purposes of the above, the expression an “offer of any ADSs to the public” in relation to any ADSs in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the ADSs to be offered so as to enable an investor to decide to purchase or subscribe the ADSs, as the same may be varied in that member state by any measure implementing the Prospectus Directive in that member state and the expression Prospective Directive means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state.
United Kingdom
Each of the underwriters has represented, warranted and agreed that (i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act of 2000, or the FSMA) received by it in connection with the issue or sale of any ADSs in circumstances in which section 21(1) of the FSMA does not apply to us; and (ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the ADSs in, from or otherwise involving the United Kingdom. The foregoing shall apply in addition to the restrictions set out under the heading “European Economic Area” above.
Japan
The underwriters will not offer or sell any of our ADSs directly or indirectly in Japan or to, or for the benefit of any Japanese person or to others, for re-offering or re-sale directly or indirectly in Japan or to any Japanese person, except in each case pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law of Japan and any other applicable laws and regulations of Japan. For purposes of this paragraph, “Japanese person” means any person resident in Japan, including any corporation or other entity organized under the laws of Japan.
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Hong Kong
The ADSs may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the ADSs may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to ADSs which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Singapore
Each underwriter has acknowledged that this prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, the underwriter has represented and agreed that it has not offered or sold any ADSs or caused the ADSs to be made the subject of an invitation for subscription or purchase and will not offer or sell the ADSs or cause the ADSs to be made the subject of an invitation for subscription or purchase, and has not circulated or distributed, nor will it circulate or distribute, this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the ADSs, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275, of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Note: Where the ADSs are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) | a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or |
(b) | a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, |
shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the ADSs pursuant to an offer made under Section 275 except:
(1) | to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions specified in Section 275 of the SFA; |
(2) | where no consideration is or will be given for the transfer; or |
(3) | where the transfer is by operation of law. |
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Cayman Islands
This prospectus does not constitute a public offer of the ADSs or ordinary shares, whether by way of sale or subscription, in the Cayman Islands. Each underwriter has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, any ADSs or ordinary shares in the Cayman Islands.
General
No action may be taken in any jurisdiction other than the United States that would permit a public offering of the ADSs or the possession, circulation or distribution of this prospectus in any jurisdiction where action for that purpose is required. Accordingly, the ADSs may not be offered or sold, directly or indirectly, and neither the prospectus nor any other offering material or advertisements in connection with the ADSs may be distributed or published in or from any country or jurisdiction except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction.
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An affiliate of Goldman Sachs (Asia) L.L.C., one of the underwriters, will beneficially own more than 10% of our outstanding ordinary shares immediately prior to the completion of this offering. Thus, Goldman Sachs (Asia) L.L.C. is deemed to have a “conflict of interest” with us under the applicable provisions of Rule 2720 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc. Accordingly, this offering is being conducted in compliance with the applicable provisions of Rule 2720. Rule 2720 requires that a “qualified independent underwriter” participate in the preparation of the registration statement and the prospectus and exercise the usual standards of due diligence. Morgan Stanley & Co. International plc is acting as the qualified independent underwriter for this offering. Morgan Stanley & Co. International plc is not entitled to any compensation in its capacity as the qualified independent underwriter. We have agreed to indemnify Morgan Stanley & Co. International plc in its capacity as the qualified independent underwriter against liabilities under the Securities Act, or contribute to payments that it may be required to make in that respect.
EXPENSES RELATING TO THIS OFFERING
The following table sets forth the main estimated expenses in connection with this offering, other than the underwriting discounts and commissions, which we will be required to pay:
Securities and Exchange Commission registration fee | US$ | 15,000 | |
FINRA filing fee | US$ | 21,000 | |
NYSE listing fee | US$ | 150,000 | |
Legal fees and expenses | US$ | 1,800,000 | |
Accounting fees and expenses | US$ | 890,000 | |
Printing fees | US$ | 300,000 | |
Other fees and expenses | US$ | 300,000 | |
Total | US$ | 3,476,000 | |
All amounts are estimated, except the Securities and Exchange Commission registration fee, the NYSE listing fee and the FINRA filing fee.
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The validity of the ADSs and certain other legal matters with respect to U.S. federal and New York law will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP. Certain legal matters with respect to U.S. federal and New York law in connection with this offering will be passed upon for the underwriters by Latham & Watkins. The validity of our ordinary shares represented by the ADSs offered in this offering will be passed upon for us by Conyers Dill & Pearman. Legal matters as to Chinese law will be passed upon for us by Jun He Law Offices and for the underwriters by Commerce & Finance Law Offices. Skadden, Arps, Slate, Meagher & Flom LLP may rely upon Conyers Dill & Pearman with respect to matters governed by the laws of the Cayman Islands and upon Jun He Law Offices with respect to matters governed by Chinese law. Latham & Watkins may rely upon Commerce & Finance Law Offices with respect to matters governed by Chinese law.
Our consolidated financial statements as of December 31, 2007 and 2008 and September 30, 2009 and for each of the two years in the period ended December 31, 2008 and for the nine months ended September 30, 2009 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The offices of PricewaterhouseCoopers Zhong Tian CPAs Limited Company are located at 26/F Office Tower A, Beijing Fortune Plaza, 7 Dongsanhuan Zhong Road, Chaoyang District, Beijing 100020, the People’s Republic of China.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission a registration statement (including relevant exhibits and schedules) on Form F-1 (File No. 333-164216) under the Securities Act with respect to our Class A ordinary shares and a registration statement on Form F-6 (File No. 333-164239) under the Securities Act with respect to our ADSs. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement. You should read the registration statement and its exhibits and schedules for further information with respect to us and our ordinary shares and ADSs. Information regarding the contents of contracts or other documents described in this prospectus is not necessarily complete and you should refer to the actual contracts and documents filed as exhibits to the registration statement for more detailed and complete information.
Immediately upon completion of this offering we will become subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements and annual reports to shareholders, and Section 16 short-swing profit and related reporting for our officers and directors and for holders of more than 10% of our Class A ordinary shares. The registration statement, reports and other information so filed can be inspected and copied at the public reference facility maintained by the SEC at 100 F. Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility.
Our SEC filings will also be available to the public on the SEC’s internet website athttp://www.sec.gov.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
F-2 | ||
CONSOLIDATED FINANCIAL STATEMENTS | ||
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2008 AND AS OF SEPTEMBER 30, 2009 | F-3 | |
F-4 | ||
F-5 | ||
F-6 | ||
F-7 – F-43 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
IFM Investments Limited:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders’ deficit and of cash flows present fairly, in all material respects, the financial position of IFM Investments Limited and its subsidiaries (collectively, the “Company”) at December 31, 2007 and 2008 and September 30, 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, and the nine months ended September 30, 2009 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Beijing, the People’s Republic of China
November 16, 2009, except for Notes 22(d), (e), (f), (g), (h), which are as of January 27, 2010
F-2
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Consolidated Balance Sheets as of December 31, 2007 and 2008 and as of September 30, 2009
(in thousands, except par value)
December 31, | September 30, | |||||||||||||||||
2007 RMB | 2008 RMB | 2009 RMB | 2009 US$ | 2009 RMB | 2009 US$ | |||||||||||||
(Note 2(c)) | (Note 2(c)) | |||||||||||||||||
Pro-forma (Note 16) (unaudited) | ||||||||||||||||||
ASSETS | ||||||||||||||||||
Current assets: | ||||||||||||||||||
Cash and cash equivalents | 331,216 | 176,977 | 263,176 | 38,554 | 263,176 | 38,554 | ||||||||||||
Restricted cash | 14,497 | 17,213 | 21,565 | 3,159 | 21,565 | 3,159 | ||||||||||||
Accounts receivable, net | 9,965 | 13,633 | 60,030 | 8,794 | 60,030 | 8,794 | ||||||||||||
Amounts due from related parties | 44,068 | 38,110 | 6,210 | 910 | 6,210 | 910 | ||||||||||||
Prepaid expenses and other current assets | 28,677 | 19,877 | 20,104 | 2,945 | 20,104 | 2,945 | ||||||||||||
Total current assets | 428,423 | 265,810 | 371,085 | 54,362 | 371,085 | 54,362 | ||||||||||||
Non-current assets: | ||||||||||||||||||
Investment in associates | 3,367 | 1,042 | 849 | 124 | 849 | 124 | ||||||||||||
Property and equipment, net | 42,467 | 42,954 | 41,076 | 6,017 | 41,076 | 6,017 | ||||||||||||
Intangible assets, net | 26,317 | 29,796 | 28,318 | 4,148 | 28,318 | 4,148 | ||||||||||||
Goodwill | 3,537 | 9,281 | 9,281 | 1,360 | 9,281 | 1,360 | ||||||||||||
Other non-current assets | 9,076 | 12,012 | 12,183 | 1,785 | 12,183 | 1,785 | ||||||||||||
Total assets | 513,187 | 360,895 | 462,792 | 67,796 | 462,792 | 67,796 | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY |
| |||||||||||||||||
Current liabilities: | ||||||||||||||||||
Accounts payable | 8,809 | 6,904 | 10,382 | 1,521 | 10,382 | 1,521 | ||||||||||||
Accrued expenses and other current liabilities | 52,234 | 53,597 | 97,450 | 14,276 | 97,450 | 14,276 | ||||||||||||
Amounts due to related parties | 43,493 | 34,015 | 253 | 37 | 253 | 37 | ||||||||||||
Deferred revenue | 32,397 | 5,396 | 6,324 | 926 | 6,324 | 926 | ||||||||||||
Deferred tax liabilities | - | 533 | - | - | - | - | ||||||||||||
Total current liabilities | 136,933 | 100,445 | 114,409 | 16,760 | 114,409 | 16,760 | ||||||||||||
Long-term deposits payable | 8,511 | 10,573 | 8,874 | 1,300 | 8,874 | 1,300 | ||||||||||||
Deferred tax liabilities | 203 | 338 | 377 | 55 | 377 | 55 | ||||||||||||
Total liabilities | 145,647 | 111,356 | 123,660 | 18,115 | 123,660 | 18,115 | ||||||||||||
Commitments and contingencies (Note 19) | ||||||||||||||||||
Convertible redeemable preferred shares (US$0.001 par value, 305,254, 311,367 and 311,367 shares authorized, issued and outstanding, with redemption value of RMB547,379, RMB566,470 and RMB566,470 as of December 31, 2007 and 2008 and as of September 30, 2009, respectively) (none outstanding on a pro-forma basis as of September 30, 2009 (unaudited)) | 469,971 | 501,892 | 514,162 | 75,322 | - | - | ||||||||||||
Shareholders’ (deficit) equity: | ||||||||||||||||||
Class A ordinary shares (US$0.001 par value, 1,003,609, 1,013,747 and 1,013,747 shares authorized as of December 31, 2007, 2008 and as of September 30, 2009; 260,000 shares issued and outstanding as of December 31, 2007 and 2008 and as of September 30, 2009; 3,133,000 shares authorized, 418,339 shares issued and outstanding on a pro-forma basis (unaudited) as of September 30, 2009) | 2,152 | 2,152 | 2,152 | 315 | 3,233 | 473 | ||||||||||||
Class B ordinary shares (none outstanding as of December 31, 2007, 2008 and as of September 30, 2009; 100,000 shares authorized, 80,503 shares issued and outstanding on a pro-forma basis (unaudited) as of September 30, 2009) | - | - | - | - | 550 | 81 | ||||||||||||
Additional paid-in capital | 28,537 | 13,508 | 2,496 | 366 | 519,942 | 76,169 | ||||||||||||
Accumulated deficit | (135,695 | ) | (268,013 | ) | (179,680 | ) | (26,322 | ) | (184,595 | ) | (27,042 | ) | ||||||
Total IFM Investments Limited shareholders’(deficit) equity | (105,006 | ) | (252,353 | ) | (175,032 | ) | (25,641 | ) | 344,045 | 50,401 | ||||||||
Non-controlling interest | 2,575 | - | 2 | - | 2 | - | ||||||||||||
Total shareholders’(deficit) equity | (102,431 | ) | (252,353 | ) | (175,030 | ) | (25,641 | ) | 344,047 | 50,401 | ||||||||
Total liabilities, convertible redeemable preferred shares and shareholders’(deficit) equity | 513,187 | 360,895 | 462,792 | 67,796 | 467,707 | 68,516 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Operations for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 (unaudited) and 2009
(in thousands, except per share data)
Year Ended December 31, | Nine Months Ended September 30, | ||||||||||||||
2007 RMB | 2008 RMB | 2008 RMB | 2009 RMB | 2009 US$ | |||||||||||
(unaudited) | (Note 2(c)) | ||||||||||||||
Net revenue | 189,029 | 273,359 | 208,877 | 443,691 | 64,998 | ||||||||||
Costs and expenses: | |||||||||||||||
Commissions and other agent related costs | (82,866 | ) | (151,550 | ) | (116,250 | ) | (197,978 | ) | (29,003 | ) | |||||
Operating costs | (79,886 | ) | (146,457 | ) | (110,889 | ) | (85,183 | ) | (12,479 | ) | |||||
Selling, general and administrative expenses | (94,471 | ) | (102,952 | ) | (76,456 | ) | (70,278 | ) | (10,295 | ) | |||||
Total costs and expenses | (257,223 | ) | (400,959 | ) | (303,595 | ) | (353,439 | ) | (51,777 | ) | |||||
(Loss) income from operations | (68,194 | ) | (127,600 | ) | (94,718 | ) | 90,252 | 13,221 | |||||||
Interest income | 1,708 | 4,441 | 2,708 | 1,575 | 231 | ||||||||||
Foreign currency exchange loss | (5,485 | ) | (5,526 | ) | (4,458 | ) | (480 | ) | (70 | ) | |||||
(Loss) income before income tax and share of associates’ losses | (71,971 | ) | (128,685 | ) | (96,468 | ) | 91,347 | 13,382 | |||||||
Income tax | (394 | ) | (2,076 | ) | (1,780 | ) | (2,821 | ) | (414 | ) | |||||
Share of associates’ losses | (409 | ) | (1,126 | ) | (1,050 | ) | (193 | ) | (28 | ) | |||||
Net (loss) income | (72,774 | ) | (131,887 | ) | (99,298 | ) | 88,333 | 12,940 | |||||||
Non-controlling interest | (1,347 | ) | (431 | ) | (431 | ) | - | - | |||||||
Net (loss) income attributable to IFM Investments Limited | (74,121 | ) | (132,318 | ) | (99,729 | ) | 88,333 | 12,940 | |||||||
Accretion of convertible redeemable preferred shares | (7,247 | ) | (15,759 | ) | (11,735 | ) | (12,269 | ) | (1,797 | ) | |||||
Income allocated to participating preferred shareholders | - | - | - | (41,451 | ) | (6,072 | ) | ||||||||
Net (loss) income attributable to ordinary shareholders | (81,368 | ) | (148,077 | ) | (111,464 | ) | 34,613 | 5,071 | |||||||
Net (loss) income per share, basic | (0.31 | ) | (0.57 | ) | (0.43 | ) | 0.13 | 0.02 | |||||||
Net (loss) income per share, diluted | (0.31 | ) | (0.57 | ) | (0.43 | ) | 0.13 | 0.02 | |||||||
Shares used in calculating net (loss) income per share, basic | 260,000 | 260,000 | 260,000 | 260,000 | 260,000 | ||||||||||
Shares used in calculating net (loss) income per share, diluted | 260,000 | 260,000 | 260,000 | 264,263 | 264,263 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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Consolidated Statements of Shareholders’ Deficit for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2009
(in thousands)
IFM Investments Limited Shareholders’ Deficit | ||||||||||||||||
Ordinary Shares | ||||||||||||||||
Shares | Amount RMB | Additional Paid-in Capital RMB | Accumulated Deficit RMB | Non-controlling Interest RMB | Total Shareholders’ Deficit RMB | |||||||||||
Balance as ofJanuary1, 2007 | 260,000 | 2,152 | 35,740 | (61,574 | ) | 1,228 | (22,454 | ) | ||||||||
Net (loss) income | - | - | - | (74,121 | ) | 1,347 | (72,774 | ) | ||||||||
Share-based compensation | - | - | 44 | - | - | 44 | ||||||||||
Accretion of convertible redeemable preferred shares | - | - | (7,247 | ) | - | - | (7,247 | ) | ||||||||
Balance as ofDecember 31, 2007 | 260,000 | 2,152 | 28,537 | (135,695 | ) | 2,575 | (102,431 | ) | ||||||||
Net (loss) income | - | - | - | (132,318 | ) | 431 | (131,887 | ) | ||||||||
Share-based compensation | - | - | 730 | - | - | 730 | ||||||||||
Acquisition of non-controlling interest | - | - | - | - | (3,006 | ) | (3,006 | ) | ||||||||
Accretion of convertible redeemable preferred shares | - | - | (15,759 | ) | - | - | (15,759 | ) | ||||||||
Balance as ofDecember 31, 2008 | 260,000 | 2,152 | 13,508 | (268,013 | ) | - | (252,353 | ) | ||||||||
Net income | - | - | - | 88,333 | - | 88,333 | ||||||||||
Share-based compensation | - | - | 1,257 | - | - | 1,257 | ||||||||||
Establishment of a subsidiary | - | - | - | - | 2 | 2 | ||||||||||
Accretion of convertible redeemable preferred shares | - | - | (12,269 | ) | - | - | (12,269 | ) | ||||||||
Balance as of September 30, 2009 | 260,000 | 2,152 | 2,496 | (179,680 | ) | 2 | (175,030 | ) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2008 and
for the nine months ended September 30, 2008 (unaudited) and 2009
(in thousands)
Year Ended December 31, | Nine Months Ended September 30, | |||||||||
2007 RMB | 2008 RMB | 2008 RMB | 2009 RMB | 2009 US$ | ||||||
(unaudited) | (Note 2(c)) | |||||||||
Cash flows from operating activities: | ||||||||||
Net (loss) income | (72,774) | (131,887) | (99,298) | 88,333 | 12,940 | |||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||||
Depreciation and amortization | 7,464 | 16,019 | 12,175 | 12,927 | 1,894 | |||||
Allowance for doubtful accounts | 4,542 | 5,218 | 3,413 | 8,061 | 1,181 | |||||
Effects of foreign currency exchange loss | 5,977 | 4,408 | 4,458 | 480 | 70 | |||||
Share-based compensation | 44 | 730 | 536 | 1,257 | 184 | |||||
Share of associates’ losses | 409 | 1,126 | 1,050 | 193 | 28 | |||||
Loss on disposals of property and equipment | 256 | 10,679 | 3,381 | 1,592 | 233 | |||||
Changes in operating assets and liabilities: | ||||||||||
Restricted cash | (7,704) | (2,716) | 51 | (4,352) | (638) | |||||
Accounts receivable | (8,070) | (8,886) | (12,440) | (54,458) | (7,978) | |||||
Prepaid expenses and other current assets | (20,300) | 8,800 | 6,364 | (227) | (33) | |||||
Other non-current assets | (7,297) | (2,936) | (4,508) | (171) | (25) | |||||
Deferred tax liabilities | (23) | 668 | 211 | (494) | (72) | |||||
Accounts payable | 7,001 | (1,905) | (1,202) | 1,232 | 181 | |||||
Accrued expenses and other current liabilities | 28,707 | 245 | (4,389) | 43,853 | 6,425 | |||||
Deferred revenue | 23,626 | (27,001) | (18,729) | 928 | 136 | |||||
Long-term deposits payable | (579) | 2,062 | 2,590 | (1,699) | (249) | |||||
Net cash (used in) provided by operating activities | (38,721) | (125,376) | (106,337) | 97,455 | 14,277 | |||||
Cash flows from investing activities: | ||||||||||
Purchases of property and equipment | (42,483) | (23,084) | (19,288) | (8,915) | (1,306) | |||||
Purchases of intangible assets | - | (4,500) | (4,500) | - | - | |||||
Business combinations, net of cash acquired | - | (10,862) | (10,862) | - | - | |||||
Net cash used in investing activities | (42,483) | (38,446) | (34,650) | (8,915) | (1,306) | |||||
Cash flows from financing activities: | ||||||||||
Repayments of short-term borrowings | (15,288) | - | - | - | - | |||||
Proceeds from issuance of preferred shares | 324,983 | 16,162 | 16,162 | - | - | |||||
Advances from related parties | 1,361 | 12,454 | 4,595 | 31,900 | 4,673 | |||||
Repayments of advances from related parties | (3,226) | (15,344) | (12,568) | (34,213) | (5,012) | |||||
Net cash provided by (used in) financing activities | 307,830 | 13,272 | 8,189 | (2,313) | (339) | |||||
Effects of foreign exchange rate changes on cash and cash equivalents | (5,915) | (3,689) | (4,842) | (28) | (4) | |||||
Net increase (decrease) in cash and cash equivalents | 220,711 | (154,239) | (137,640) | 86,199 | 12,628 | |||||
Cash and cash equivalents at the beginning of the year/period | 110,505 | 331,216 | 331,216 | 176,977 | 25,926 | |||||
Cash and cash equivalents at the end of the year/period | 331,216 | 176,977 | 193,576 | 263,176 | 38,554 | |||||
Supplemental disclosure of cash flows information | ||||||||||
Income tax paid | 1,194 | 1,416 | 1,310 | 43 | 6 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amount expressed in Renminbi (“RMB”), unless otherwise stated)
1. | ORGANIZATION AND PRINCIPAL ACTIVITIES |
a) | Organization and principal activities |
IFM Investments Limited (the “Company”) was incorporated in the Cayman Islands on November 30, 2005, by IFM Holding Company Ltd. (“IFM Holding”), a Cayman Islands exempt company. In incorporating the Company, IFM Holding contributed all of its equity interests in IFM Company Ltd. (“IFM Co.”), a Cayman Islands exempt company, to the Company. IFM Holding was a wholly-owned subsidiary of Maxpro International Enterprise, Inc. (“Maxpro”), a New York corporation. Maxpro was 100% owned by Mr. Donald Zhang.
On December 15, 2005, IFM Overseas Partners L.P., a Cayman Islands limited partnership (the “Partnership”) was established and IFM Holding and IFM Overseas Limited became the limited and general partner of the Partnership, respectively. IFM Overseas Limited was 100% owned by Mr. Donald Zhang through Maxpro.
On August 24, 2006, IFM Holding contributed all of its equity interests in the Company to the Partnership in exchange for 80% ownership therein. On the same date, Mr. Harry Lu was admitted to the Partnership as a limited partner with a 20% ownership.
Following the contribution of the Company to the Partnership, on August 24, 2006, Goldman Sachs Strategic Investments (Asia) L.L.C. (“Goldman”) committed to invest US$22.0 million (approximately RMB175.3 million) in the Company in exchange for 200.0 million Series A Preferred Shares.
On August 18, 2006, the Company adopted an Employee Stock Option Plan (the “ESOP”). 40.0 million ordinary shares were reserved and authorized for issuance under the ESOP.
On October 19, 2007, the Company issued 105.3 million Series B Preferred Shares to GL Asia Mauritius II Cayman Limited for US$40.0 million (approximately RMB300.6 million).
On October 19, 2007, the shareholders of the Company approved to amend the ordinary shares reserved under the ESOP to 85.3 million and the ordinary shares authorized under the ESOP to 52.5 million.
On February 21, 2008, the Company issued 6.1 million Series B Preferred Shares to Realogy Corporation (“Realogy”) for US$2.3 million (approximately RMB16.7 million).
As of September 30, 2009, there were 260.0 million ordinary shares (held by Partnership), 200.0 million Series A Preferred Shares (held by Goldman), 111.4 million Series B Preferred Shares (held by GL Asia Mauritius II Cayman Limited and Realogy) issued and outstanding, and 43.8 million outstanding share options. There were 487.5 million ordinary shares reserved for issuance upon conversion of the Series A Preferred Shares, 181.0 million ordinary shares reserved for issuance upon conversion of the Series B Preferred Shares, and 85.3 million ordinary shares reserved for issuance under the ESOP.
The Company’s subsidiaries are principally engaged in franchising the CENTURY 21® brand name and operation systems to regional sub-franchisees and outlet stores (collectively “franchisees”) that are independently-owned and operated. The Company provides operational and administrative services, tools and systems to franchisees, which are designed to assist franchisees in achieving increased revenue and profitability. Specifically, the Company and its subsidiaries operate in the following businesses:
(i) | Company-owned Brokerage Services — operates a full-service real estate brokerage business under the CENTURY 21® brand name in the People’s Republic of China (“PRC”). |
F-7
Table of Contents
IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
(ii) | Mortgage Management Services — provides real estate mortgage brokerage and comprehensive advisory services in connection with the selection, application for and procurement of mortgage products to banks and home buyers, with part of these services provided in connection with the Company’s real estate brokerage services business. |
(iii) | Franchise Services — franchises the CENTURY 21® brand name and operation system in the PRC. On March 22, 2000, IFM Company Limited (“IFM Co.”), one of the wholly-owned subsidiaries of the Company, entered into an arrangement, a Restated Century 21 International Subfranchise Agreement For the People’s Republic of China (“Master Franchise Agreement”), with Cendant Global Services B.V. (“Cendant”), the owner of the CENTURY 21® brand, to acquire the exclusive right to use the CENTURY 21® brand and operation system in the PRC, from year 2000 to 2025 and is extendable at the Group’s election for unlimited additional terms of 25 years upon payment of renewal fees of US$4.5 million for each renewal. Cendant Corporation, Cendant’s parent company, subsequently restructured their business and spun off Cendant into Realogy. As part of this spin-off, Cendant assigned its rights under the Master Franchise Agreement to Realogy. |
The Company and its subsidiaries are collectively referred to as the “Group”.
b) | Reorganization |
The Company was established in the Cayman Islands in 2005 and subsequently reorganized on August 24, 2006 to be the holding company of its subsidiaries to facilitate investments by private equity investors (the “Reorganization”). To complete the Reorganization, entities that were held by Beijing Xinye Jia Yuan Real Estate Consulting Co., Ltd. (“Xinye”), a wholly-owned foreign enterprise, which were under the common control of Mr. Donald Zhang and Mr. Harry Lu, were transferred to the Company. These entities held by Xinye were:
Name | Place of registration / operation | % of Ownership held by Xinye | Effective date of transfer to the Company | Principal activity | |||||||
1 | Shanghai Yaye Real Estate Brokerage Co., Ltd. (“IFM SH”) | PRC | 51 | % | Dec 4, 2008 | Real estate franchising | |||||
2 | Beijing Aifeite International Franchise Consulting Company Ltd. (“IFM Beijing”) | PRC | 11 | % | Aug 12, 2008 | Real estate franchising | |||||
3 | Xiamen Shijitonghe Real Estate Consultant Co., Ltd. (“Xiamen”) | PRC | 10 | % | Dec 26, 2008 | Real estate franchising | |||||
4 | Shandong Jinan Sanlian Real Estate Brokerage Co., Ltd. (“Shandong”) | PRC | 15 | % | Dec 4, 2006 | Real estate franchising | |||||
5 | Shaanxi Lide Industry Investments Co., Ltd. (“Xian”) | PRC | 10 | % | Feb 9, 2009 | Real estate franchising |
While the above entities were owned by Xinye, the interests in these entities, according to the stipulation of the Stock Purchase Agreement of Series A and Series B Preferred Shares financing, belongs to the Company, and have been transferred to the Company upon the completion of the Reorganization on February 9, 2009.
Accordingly, the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented.
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Table of Contents
IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
As of September 30, 2009, the Company’s subsidiaries and equity investments are listed below.
Name | Date of Incorporation | Place of Incorporation | % of Ownership held by the Company | Relationship with the Company | Principal activity | ||||||||
Subsidiaries | |||||||||||||
1 | IFM Company Ltd. (“IFM Co.”) | Oct 4, 1999 | Cayman Islands | 100 | % | Subsidiary | Holding franchise right | ||||||
2 | Beijing Aifeite International Franchise Consulting Company Ltd. (“IFM Beijing”) | Mar 1, 2000 | PRC | 100 | % | Subsidiary | Real estate franchising | ||||||
3 | City Integrated Residential Services (China) Limited (“CIR”) | Oct 25, 2000 | HK | 100 | % | Subsidiary | Investment holding | ||||||
4 | Shanghai Yaye Real Estate Brokerage Co., Ltd. (“IFM SH”) | Sep 29, 2002 | PRC | 100 | % | Subsidiary | Real estate franchising | ||||||
5 | CIR Real Estate Consultant (Shenzhen) Co., Ltd. (“Shenzhen CIR”) | Sep 15, 2005 | PRC | 100 | % | Subsidiary | Real estate brokerage service | ||||||
6 | Genius Nation Investments Ltd. (“Genius”) | May 18, 2006 | British Virgin Islands | 100 | % | Subsidiary | Investment holding | ||||||
7 | Shanghai Ruifeng Real Estate Investments Consultant Co., Ltd. (“Shanghai Ruifeng”) | Sep 28, 2006 | PRC | 100 | % | Subsidiary | Real estate brokerage service | ||||||
8 | Beijing Anxinruide Real Estate Brokerage Co., Ltd. (“Beijing Anxin”) | Oct 19, 2006 | PRC | 100 | % | Subsidiary | Real estate brokerage service | ||||||
9 | Shanghai Anshijie Real Estate Consultant Co., Ltd. (“Anshijie”) | Nov 28, 2006 | PRC | 100 | % | Subsidiary | Investment holding | ||||||
10 | Beijing Kaishengjinglue Guarantee Co., Ltd. (“MMC BJ”) | Aug 13, 2007 | PRC | 100 | % | Subsidiary | Real estate mortgage brokerage service | ||||||
11 | Shanghai Kaiyi Investment Consultant Management Co., Ltd. (“MMC SH”) | Apr 8, 2008 | PRC | 100 | % | Subsidiary | Real estate mortgage brokerage service | ||||||
12 | Beijing IFM International Real Estate Brokerage Co., Ltd. (“IFM BJ Broker”) | May 27, 2008 | PRC | 100 | % | Subsidiary | Real estate franchising | ||||||
13 | Beijing IFM Investment Managements Limited (“IFM BJ Inv”) | Sep 27, 2008 | PRC | 100 | % | Subsidiary | Investment holding | ||||||
14 | Shanghai Ruifeng Investment Managements Limited (“Ruifeng Inv”) | Nov 20, 2008 | PRC | 100 | % | Subsidiary | Real estate brokerage service | ||||||
15 | Beijing Huachuangxunjie Technology Co., Ltd. (“Huachuang”) | July 16, 2009 | PRC | 100 | % | Subsidiary | Software development and licensing | ||||||
16 | Business Vision Management Consultants Limited (“BVMC”) | Sep 18, 2009 | HK | 85 | % | Subsidiary | Investment holding |
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
Name | Date of Incorporation | Place of Incorporation | % of Ownership held by the Company | Relationship with the Company | Principal activity | ||||||||
Equity Investments | |||||||||||||
1 | Xiamen Shijitonghe Real Estate Consultant Co., Ltd. (“Xiamen”) | Feb 12, 2001 | PRC | 10 | % | Associate | Real estate franchising | ||||||
2 | Shandong Jinan Sanlian Real Estate Brokerage Co., Ltd. (“Shandong”) | Apr 21, 2005 | PRC | 15 | % | Associate | Real estate franchising | ||||||
3 | Shaanxi Lide Industry Investments Co., Ltd. (“Xian”) | Dec 12, 2005 | PRC | 10 | % | Associate | Real estate franchising |
c) | Liquidity |
The Group’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities during the normal course of operations. The Group incurred net loss of approximately RMB72.8 million, RMB131.9 million in the years ended December 31, 2007 and 2008, respectively, and net income of approximately RMB88.3 million for the nine months ended September 30, 2009, and the net cash used in operating activities was approximately RMB38.7 million, RMB125.4 million for the years ended December 31, 2007 and 2008, respectively and the net cash provided by operating activities was approximately RMB97.5 million for the nine months ended September 30, 2009. Accumulated deficit was RMB135.7 million, RMB268.0 million and RMB179.7 million as of December 31, 2007 and 2008 and as of September 30, 2009, respectively. In addition, as described in Note 19(c) to the consolidated financial statements, the Group provided interim financial guarantees to various banking institutions in respect of loans granted by these banking institutions to the Group’s customers. The Group assesses its liquidity by its ability to generate cash to fund its operations, its ability to attract investors and its ability to borrow funds on favorable economic terms. Historically, the Group has relied principally on both operational sources of cash, as well as non-operational sources of financing, from related parties and outside investors, to fund its operations and capital expansion needs. In addition, the management considers that the likelihood of all these financial guarantee liabilities being required to be paid is remote. The Group’s ability to continue as a going concern is dependent on management’s ability to successfully execute its business plan, which includes increasing sales while decreasing operating costs and expenses, as well as, generating operational cash flows, continued support from outside sources of financing, and obtaining additional funding to support longer term capital requirements. If management were unsuccessful in achieving one or more of the above-mentioned goals, the Group’s ability to continue as a going concern could be adversely impacted.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
a) | Basis of preparation and consolidation |
The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The Group’s consolidated financial statements include the financial statements of the Company and its subsidiaries. All transactions and balances among the Company and the subsidiaries have been eliminated upon consolidation.
The Reorganization as described in Note 1(b) above has been accounted for as a reorganization of businesses under common control in a manner similar to a pooling of interests. Accordingly, the accompanying consolidated financial statements of the Group include the assets and liabilities of the
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
subsidiaries at their historical carrying amounts. In addition, the accompanying consolidated statements of operations, consolidated balance sheets and consolidated statements of cash flows include the results of operations and cash flows of the Group, as if the current group structure had been in existence throughout the periods presented.
Investments in business entities in which the Group does not have control but has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method.
On December 30, 2009, in preparation for the intended Qualified IPO as defined (Note 17), the shareholders and Board of the Company approved resolutions effecting certain amendments to the authorised and issued share capital to effect a 10-for-one split of the Company’s share capital pursuant to which each ordinary share, Series A and Series B convertible preferred share of the Company was subdivided into 10 shares at a par value of US$0.001 per share. All share and per share amounts presented in the consolidated financial statements have been restated on a retroactive basis to reflect the effect of the share split.
b) | Use of estimates |
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Significant accounting estimates reflected in the Group’s consolidated financial statements mainly include the useful lives of property and equipment and intangible assets, allowance for doubtful accounts, provision for losses associated with the interim financial guarantees, valuation allowance of deferred tax assets, and purchase price allocation relating to business combinations as well as property and equipment and goodwill and intangible assets impairment assessment. In addition, the Group uses assumptions in the valuation model to estimate the fair value of share options granted. The Group bases its estimates of the carrying value of certain assets and liabilities on historical experience and on other various factors that they believe to be reasonable under the circumstances, when the carrying values are not readily available from other sources.
c) | Convenience translation |
Translations of balances in the consolidated statements of operations, consolidated balance sheets and consolidated statements of cash flows from RMB into United States dollars (“US$”) as of and for the nine months ended September 30, 2009 are solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.8262, representing the noon buying rate in The City of New York for cable transfers of RMB, as certified for customs purposes by the Federal Reserve Bank of New York on September 30, 2009. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on September 30, 2009, or at any other rate.
d) | FASB Accounting Standards Codification™ |
In June 2009, the Financial Accounting Standard Board (“FASB”) established the FASB Accounting Standards Codification™ (the “Codification”) as the single source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. The Codification did not have a material impact on the Group’s consolidated financial statements upon adoption. Accordingly, the Group’s notes to its consolidated financial statements now explain accounting concepts in plain English rather than cite the specific US GAAP references.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
e) | Cash and cash equivalents |
Cash and cash equivalents consist of cash on hand and demand deposits which are unrestricted as to withdrawal or use, and which have maturities of three months or less.
f) | Restricted cash |
The restricted cash relates to (i) sales proceeds received from the property buyers on behalf of the property sellers during the purchase process, which are deposited into designated bank accounts, (ii) cash deposited into banking institutions as security deposit for the mortgage management services and (iii) cash proceeds related to National Advertising Fund for marketing purposes on behalf of its franchisees (see Note 2(l)). The total amount of restricted cash is approximately RMB14.5 million, RMB17.2 million and RMB21.6 million as of December 31, 2007 and 2008 and as of September 30, 2009, respectively.
g) | Accounts receivable |
Accounts receivable represent amounts recognized as revenue which have yet to be received from customers and franchisees. The Group accrued allowance for doubtful accounts for those receivable balances which are unlikely to be collected based on management’s analysis and estimates. Accounts receivable are stated net of allowance for doubtful accounts.
h) | Property and equipment |
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives:
Computers and software | 5 years | |
Furniture, fixtures and equipment | 5 years | |
Vehicles | 5 years | |
Leasehold improvements | Shorter of lease term or estimated useful lives of assets |
Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of the property and equipment, are expensed as incurred. Gains and losses from the disposal of property and equipment are included in income (loss) from operations.
i) | Intangible assets |
Intangible assets as of December 31, 2007 and 2008 and as of September 30, 2009 consist of:
i) | CENTURY 21® franchise rights acquired from Realogy represent the rights to use and sub-franchise the CENTURY 21® brand in the PRC for an initial period of 25 years (see Note 9). The Group amortizes intangible assets over their estimated useful lives on a straight-line basis. |
ii) | Acquired intangible assets include the reacquired CENTURY 21® franchise rights, customer relationships, real estate listing databases and trademark (see Note 7). Acquired intangible assets are recorded at fair value on the acquisition date and the Group amortizes these intangible assets over their estimated useful lives on a straight-line basis. |
j) | Goodwill and indefinite-lived intangible assets |
Goodwill represents the excess of costs over fair value of assets of businesses acquired. Any shortfall represents the amount of goodwill impairment. The Group completes a two-step goodwill impairment test
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
annually or more frequently if circumstances indicate impairment may have occurred. The first step compares the fair value of each reporting unit to its carrying amount. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.
Intangible assets with an indefinite life are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of the fair value of the intangible assets to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized equal in amount to that excess.
The Group reviews the carrying amounts of goodwill and other indefinite-lived intangible assets at November 30 each year to determine if such assets may be impaired. The Group did not incur any impairment loss on goodwill and indefinite-lived intangible assets for all the periods presented.
k) | Impairment of long-lived assets |
The Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group assesses the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition where the fair value is lower than the carrying value, measurement of an impairment loss is recognized in the statements of operations for the difference between the fair value, using the expected future discounted cash flows, and the carrying value of the assets. No impairment of long-lived assets was recognized for the periods presented.
l) | Revenue recognition |
The Group recognizes revenue where there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Revenues are recorded net of sales related taxes and discounts.
Company-Owned Brokerage Services
As an owner-operator of real estate brokerages, the Group assists customers in listing, marketing, selling, leasing and finding homes and earns brokerage commissions. Brokerage commissions earned are recorded as revenue upon the signing of a real estate sales and purchase agreement between the buyer and the seller or rental agreement between the tenant and the landlord. The signing of such agreements is the evidence of recognition of the provision of our services by the customers.
The staff commissions are recognized concurrently with the associated brokerage commissions revenues, which is upon executing the sales and purchase agreement or rental agreement, and are presented as commission and other agent related costs in the consolidated statements of operations.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
Mortgage Management Services
The Group provides mortgage management services, many of which are provided in connection with the company-owned brokerage services business. The Group also provides interim financial guarantees to banking institutions in Beijing for a period ranging from approximately one to six months while government-owned property registries process and release the relevant mortgage pledge documents to the relevant banking institutions.
The mortgage management services income is recognized on a net basis when the mortgage loan funds are disbursed by banks to the customers. The financial guarantee revenue is recognized when the respective mortgage pledge documents are collateralized by the banking institutions.
Franchise Services
The Group recognizes franchise fee revenue as earned. Franchise revenue includes initial franchise fees, which are generally non-refundable and recognized by the Group as revenue when all material services or conditions relating to the initial franchise fee have been substantially performed and the Group has fulfilled all its commitments and obligations (generally when a franchisee commences its operations under the CENTURY 21® brand). Franchise revenue also consists of recurring franchise fees received from the Group’s franchisees. The recurring franchise fees received are primarily based on the higher of a percentage of the franchisees’ monthly gross income or a fixed minimum monthly amount. The recurring franchise fees are accrued as the underlying franchisee revenue is earned. For the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009, the Group’s initial franchise fees were RMB14.3 million, RMB41.8 million, RMB35.5 million (unaudited) and RMB1.2 million, respectively.
The Group also collects marketing fees from its franchisees and utilizes such fees to fund advertising campaigns on behalf of its franchisees (known as National Advertising Fund, or NAF). Management fee income of NAF, which is 15% of marketing fees collected from franchisees, is recognized in proportion to the NAF that had been spent during the reporting period.
m) | Deferred revenue |
Deferred revenue generally consists of advances received from franchisees for initial franchise fees paid prior to the Group fulfilling its obligations and advances of brokerage commission from customers for Company-owned brokerage services as of balance sheet dates and they are recognized and transferred to revenues upon rendering of the services.
n) | Advertising expenses |
Advertising costs are expensed as incurred. Advertising-related expenses, including promotional expenses and production costs of marketing materials, amounted to RMB24.8 million, RMB20.1 million, RMB17.7 million (unaudited) and RMB8.8 million during the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009, respectively.
o) | Business tax and related surcharges |
The Group is subject to business tax and related surcharges on the services provided in the PRC. Such tax is levied based on revenue at an applicable rate of approximately 5% and is recorded as a reduction of revenues.
p) | Foreign currency translation |
The functional currency of the Company and its subsidiaries is RMB. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates prevailing at the dates of the
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are included in the consolidated statements of operations.
q) | Fair value of financial instruments |
The Group’s financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable, amounts due from/to related parties, accounts payable, financial guarantees, accrued expenses and other liabilities. The fair values of these financial instruments approximate their carrying amounts, as reported in the consolidated balance sheets, due to the short-term maturities of these instruments.
r) | Share-based compensation |
The Company issues share options granted under a share incentive plan. The cost of employee services received in exchange for stock-based compensation is measured at the grant date fair value of the award. Share options that were granted with performance conditions vest subsequent to the Company’s Qualified IPO as defined (Note 17) and use the graded-vesting method to recognize share-based compensation expenses. Share-based compensation for the remaining share options granted with service conditions are recognized, net of an estimated forfeiture rate, over the requisite service period of the award, which is the vesting term, based on the fair value of the award on the grant date.
s) | Investments in associates |
Associates are entities over which the Group has the ability to exercise significant influence over the operating and financial policies, but which it does not control. Investments in associates are accounted for by the equity method of accounting. Under this method, the Group’s share of the post-acquisition profits or losses of associates is recognized in the consolidated statement of operations and its share of post-acquisition movements in reserves is recognized in reserves. When the Group’s share of losses in an associate equals or exceeds its interest in the associates, the Group does not recognize further losses, unless the Group has incurred obligations or made payments on behalf of the associates.
The Group reviews investments in associates for impairment whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment. The fair value determination, particularly for investments in privately-held companies, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments and the determination of whether any identified impairment is other-than-temporary. As of December 31, 2007, the Group had three associates and as of September 30, 2008, the Group has determined that one of the associates, Shandong was impaired. The investment in Shandong amounted to approximately RMB1.3 million and an impairment loss was recorded for the nine months ended September 30, 2008 and for the year ended December 31, 2008. The remaining two investments in associates as of December 31, 2008 and September 30, 2009 were Xiamen and Xian. No impairment losses were recorded for the nine months ended September 30, 2009.
t) | Non-controlling interests |
Non-controlling interests represent the equity interests in the Group’s subsidiaries that is not attributable, either directly or indirectly, to the Group. Prior to January 1, 2009, if the carrying value of the non-controlling interests’ equity of the subsidiary is reduced to zero, the subsidiary’s losses are no longer allocated to the non-controlling interests.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
On January 1, 2009, the Group adopted the new US GAAP guidance, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary in an effort to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements. As required, the Group has incorporated the changes in its consolidated financial statements presentation for all periods presented. The retrospective application of this guidance reclassifies non-controlling interest of RMB1.3 million, RMB0.4 million and RMB0.4 million (unaudited) for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008, respectively, as net income attributable to non-controlling interest, a separate line item below net loss in the presentation of net loss attributable to the Group.
As at December 31, 2007, non-controlling interests accounted for 49% of the net assets of IFM SH held by Jinjiang Group Co., Ltd. (“Jinjiang”). In February 2008, the acquisition of this 49% equity interest from Jinjiang was accounted for using the purchase method of accounting. The acquired equity interest of IFM SH was recorded at fair value on the acquisition date. As a result, there was no non-controlling interest as of December 31, 2008. In September 2009, the Group established a majority-owned subsidiary, namely BVMC, which the Group owned 85% equity interest. As of September 30, 2009, non-controlling interests accounted for 15% of the net assets of BVMC held by Mr. Cai Yuxiang.
u) | Income tax |
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax assets bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which it expects the difference to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized.
On January 1, 2007, the Group adopted the new guidance and management evaluates its open tax positions that exist in each jurisdiction for each reporting period. If an uncertain tax position is taken or expected to be taken in a tax return, the tax benefit from that uncertain position is recognized in the Group’s consolidated financial statements if it is more likely than not that the position is sustainable. The Group does not have any significant uncertain tax positions and there was no effect on its financial condition or results of operations as a result of implementing the new guidance.
v) | Guarantees |
For certain guarantees a guarantor is required to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. The Group provides interim guarantee services to banking institutions for the mortgage services it refers to banks as part of its mortgage management services in Beijing. An interim guarantee covers the period beginning when the bank disburses the mortgage loan to the property buyer and ending when the mortgage registration certificate is issued to the bank by the applicable property registry, which generally takes one to six months.
w) | Statutory reserves |
The Company’s subsidiaries in the PRC are required to make appropriations to certain non-distributable reserve funds. In accordance with the laws applicable to China’s Foreign Investment Enterprises, the subsidiaries registered as wholly-owned foreign enterprises or Sino-jointly invested companies under PRC law are required to make appropriations from its after-tax profit as determined under the Accounting
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
Standards for Business Enterprises and the “Accounting System for Business Enterprises” as promulgated by the State of the People’s Republic of China (“PRC GAAP”) to non-distributable reserve fund, including a general reserve, an enterprise expansion fund and a staff welfare and bonus fund. The appropriation to the general reserve fund must be at least 10% of their after tax profits as determined under PRC GAAP. Appropriation is not required if the reserve fund has reached 50% of the registered capital of the respective company. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the boards of directors of the related subsidiaries. In addition, in accordance with the China Company Laws, the subsidiaries of the Company registered as China domestic companies must make appropriations from its after-tax profit as determined under the PRC GAAP to non-distributable reserve funds including a statutory surplus fund, a statutory public welfare fund and a discretionary surplus fund. The appropriation to the statutory surplus fund must be at least 10% of the after-tax profits as determined under PRC GAAP. Appropriation is not required if the surplus fund has reached 50% of the registered capital of the respective company. Appropriation to the statutory public welfare fund and discretionary surplus fund is made at the discretion of the respective company.
The use of the general reserve fund, statutory surplus fund and discretionary surplus fund are restricted to the offsetting of losses or increase in registered capital of the respective company. The enterprise expansion fund can be used to expand production or to increase registered capital. The staff bonus and welfare fund is available to fund payments of special bonus to staff and for collective welfare benefits. The statutory public welfare fund is restricted to capital expenditures for the welfare of employees.
The staff bonus and welfare fund is a liability in nature. Other statutory reserves are not transferable to the Company in the form of cash dividends, loans or advances and are therefore not available for distribution except in liquidation.
No appropriation was made to above statutory reserve funds for the years ended December 31, 2007 and 2008 as these subsidiaries of the Company were in loss position under PRC GAAP. For the nine months ended September 30, 2009, no appropriation to the above statutory reserve funds has been made as the boards of the Companies would make a resolution on the appropriation of such statutory reserve funds, if any, when the annual financial results of the Company’s subsidiaries are available in the future.
x) | Operating lease |
Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases net of any incentives received from the lessor are expensed on a straight-line basis over the terms of the underlying lease.
y) | Net income (loss) per share |
Basic net income (loss) per share is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income is allocated between ordinary shares and other participating securities based on their participating rights to the extent that each class may share income for the period, whereas net loss is allocated to ordinary shares because other participating securities are not contractually obligated to share the loss of the Group. The Group’s convertible redeemable preferred shares are participating securities. Diluted net income (loss) per share is calculated by dividing net income (loss) attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of the ordinary shares issuable upon the exercise of share options (using the treasury stock method) and the conversion of the convertible redeemable preferred shares (using the if-converted method). Ordinary equivalent shares are not included in the denominator of the diluted net income (loss) per share calculation when inclusion of such shares would be anti-dilutive.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
z) | Recent accounting pronouncements |
In June 2009, the FASB issued authoritative guidance to eliminate the exception to consolidate a qualifying special-purpose entity, change the approach to determining the primary beneficiary of a variable interest entity and require companies to more frequently re-assess whether they must consolidate variable interest entities. Under the new guidance, the primary beneficiary of a variable interest entity is identified qualitatively as the enterprise that has both (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The Group will adopt this guidance at the beginning of its fiscal year 2010, and it does not expect the adoption of this guidance will have material impact on its consolidated financial statements.
In August 2009, the FASB issued guidance on Fair Value Measurements and Disclosures — Measuring Liabilities at Fair Value. The objective of the new guidance is to provide clarification for the fair value measurement of liabilities, specifically providing clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, a reporting entity is required to measure fair value using certain prescribed techniques. Techniques highlighted include using 1) the quoted price of the identical liability when traded as an asset, 2) quoted prices for similar liabilities or similar liabilities when traded as assets, or 3) another valuation technique that is consistent with the principles of fair value measurements. The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. Finally, the guidance clarifies that both a quoted price in an active market for the identical liability and the quoted price for the identical liability when traded as an asset in an active market when no adjustment to the quoted price of the asset are required are Level 1 fair value measurements. The Group will adopt this guidance at the beginning of its fiscal year 2010, and it does not expect the adoption of this guidance will have material impact on the Group’s consolidated financial statements.
In October 2009, the FASB issued an accounting standard update to revenue recognition relating to multiple-deliverable revenue arrangements. This update modifies the fair value requirements of existing accounting guidance by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence (“VSOE”) and third-party evidence (“TPE”) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This update requires expanded qualitative and quantitative disclosures and is effective for fiscal years beginning on or after June 15, 2010. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Group is currently assessing the impact, if any, that the adoption of this update will have on its consolidated financial statements and disclosures.
aa) | Fair value measurements |
On January 1, 2008, the Group adopted the authoritative guidance which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurement for all of the Group’s financial assets and liabilities and those nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. On January 1, 2009, the Group adopted this standard for all its remaining non financial assets and liabilities and the adoption will prospectively impact the recognition of nonfinancial assets and liabilities in business combinations and the determinations of impairment for nonfinancial assets and liabilities. The carrying amount of the Group’s cash and cash equivalents approximates their fair value due to the short
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
maturity of those instruments. The carrying value of receivables and payables approximates their market value based on their short-term maturities. As of September 30, 2009, the adoption of the authoritative guidance did not materially affect the Group’s results and financial condition.
3. | CERTAIN RISKS |
a) | Significant risks and uncertainties |
The Group operates in a dynamic and high risk real estate industry and is susceptible to fluctuations in the real estate market in the PRC, and the property market in the PRC is at an early stage of development and is volatile, which could have a material adverse effect on the Group’s business, financial condition and results of operations.
b) | PRC Regulations |
The Chinese market in which the Group operates poses certain macro-economic and regulatory risk and uncertainties. These uncertainties extend to the ability of the Group to conduct business in the real estate sector in the PRC. Though the PRC has, since 1978, implemented a wide range of market-oriented economic reforms, continued reforms and progress towards a full market-oriented economy are uncertain. In addition, the real estate industry remains highly regulated. Restrictions are currently in place and are unclear with respect to which segments of this industry foreign owned entities, like the Group may operate. The Chinese government may issue from time to time new laws or new interpretations on existing laws to regulate areas such as real estate. Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws and the Group’s legal structure and scope of operations in the PRC, which could be subjected to further restrictions which could result in severe limits to the Company’s ability to conduct business in the PRC.
The real estate market in the PRC is typically affected by changes in government policies regarding the real estate industry, the financial market and other related areas. The PRC government has in the past adopted various administrative measures to restrain what it perceived as unsustainable growth in the real estate market, particularly when the real estate market in China has experienced rapid and significant growth. The PRC real estate market could experience a prolonged downturn in the future, which could have a material adverse impact on our business, financial condition and results of operations.
c) | Concentration of credit risk |
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable.
The Group’s cash and cash equivalents and restricted cash are deposited with several major financial institutions in PRC. The Group has not experienced any losses on its deposits of cash and cash equivalent and its restricted cash.
The Group is exposed to counterparty credit risk in the event of nonperformance by counterparties to various agreements and sales transactions. The Group manages such risk by evaluating the financial position and creditworthiness of such counterparties. As of December 31, 2007 and 2008 and as of September 30, 2009, there were no significant concentrations of credit risk with any individual counterparty or group of counterparties. Concentrations of credit risk associated with receivables are considered minimal due to the Group’s diverse customer base.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
d) | Foreign currency risk |
The RMB is not freely convertible into foreign currencies. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into other currencies. Cash and cash equivalents of the Group denominated in US$ included aggregate amounts of US$11.7 million, US$7.8 million and US$1.9 million, as of December 31, 2007 and 2008 and as of September 30, 2009, respectively.
e) | Guarantee risk |
The Group provides interim guarantee services to banking institutions for the mortgage services it refers to banks in Beijing. If a home buyer defaults on the payment obligations during the term of the interim guarantee, the Group is exposed to guarantee risk (see Note 19(c)).
4. | ACCOUNTS RECEIVABLE |
The following summarizes the Group’s accounts receivable as of December 31, 2007 and 2008 and as of September 30, 2009 (in RMB thousands):
December 31, | September 30, | ||||||||
2007 | 2008 | 2009 | |||||||
Accounts receivable | 12,235 | 17,261 | 66,324 | ||||||
Less: Allowance for doubtful accounts | (2,270 | ) | (3,628 | ) | (6,294 | ) | |||
9,965 | 13,633 | 60,030 | |||||||
The following table sets out the movements of the allowance for doubtful accounts for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2009 (in RMB thousands):
Year ended December 31, | Nine months ended September 30, | ||||||||
2007 | 2008 | 2009 | |||||||
Balance at beginning of the year/period | - | (2,270 | ) | (3,628 | ) | ||||
Charged to costs and expenses | (4,542 | ) | (5,218 | ) | (8,061 | ) | |||
Write-off of receivable balances and corresponding provisions | 2,272 | 3,860 | 5,395 | ||||||
Balance at end of the year/period | (2,270 | ) | (3,628 | ) | (6,294 | ) | |||
5. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consisted of the following (in RMB thousands):
December 31, | September 30, | |||||
2007 | 2008 | 2009 | ||||
Prepaid rental | 16,331 | 12,142 | 14,993 | |||
Staff advances and deposits | 4,756 | 1,850 | 2,193 | |||
Prepayments to suppliers | 3,559 | 1,903 | 1,269 | |||
Others | 4,031 | 3,982 | 1,649 | |||
Total | 28,677 | 19,877 | 20,104 | |||
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
6. | PROPERTY AND EQUIPMENT, NET |
Property and equipment, net, consisted of the following (in RMB thousands):
December 31, | September 30, | ||||||||
2007 | 2008 | 2009 | |||||||
Computers and software | 18,657 | 18,950 | 20,946 | ||||||
Furniture, fixtures and equipment | 11,974 | 18,814 | 19,450 | ||||||
Vehicles | 4,611 | 6,353 | 6,800 | ||||||
Leasehold improvements | 14,946 | 18,652 | 23,038 | ||||||
50,188 | 62,769 | 70,234 | |||||||
Less: accumulated depreciation and amortization | (7,721 | ) | (19,815 | ) | (29,158 | ) | |||
Property and equipment, net | 42,467 | 42,954 | 41,076 | ||||||
For the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009, depreciation and amortization expense for property and equipment amounted to RMB5.9 million, RMB14.2 million, RMB10.7 million (unaudited) and RMB11.4 million, respectively.
7. | BUSINESS COMBINATIONS |
a) | On February 14, 2008, the Group acquired the remaining 49% equity interest in IFM SH from the third party non-controlling interest holder, Jinjiang. The purchase consideration of RMB4.9 million was allocated to net assets acquired at the date of acquisition and goodwill as follows (in RMB thousands): |
Amount | ||
Net assets acquired | 3,530 | |
Goodwill | 1,370 | |
Total purchase consideration | 4,900 | |
Goodwill represents the excess of the purchase price over the fair value of net assets acquired which are not deductible for tax purposes. The Group did not incur any impairment loss on goodwill for all the periods presented.
b) | On July 1, 2008, the Group acquired City Integrated Residential Services (China) Limited (“CIR”), which wholly owned CIR Real Estate Consultant (Shenzhen) Co., Ltd. (“Shenzhen CIR”). The purchase consideration of RMB7.9 million was allocated to net tangible assets and intangible assets acquired at the date of acquisition and goodwill as follows (in RMB thousands): |
Amount | Estimated Useful life | |||
Net tangible assets acquired | 2,809 | |||
Intangible assets acquired: | ||||
Trademark | 403 | 10 years | ||
Customer relationships | 266 | 10 years | ||
Real estate listing databases | 64 | 10 years | ||
Goodwill | 4,374 | |||
Total purchase consideration | 7,916 | |||
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
The amortizable intangible assets have estimated useful lives of 10 years. Goodwill represents the excess of the purchase price over the fair value of net tangible assets and intangible assets acquired which are not deductible for tax purposes. The operating results of the entity acquired are included in the Group’s consolidated financial statements since July 1, 2008. The Group did not incur any impairment loss on goodwill for all the periods presented.
Unaudited pro forma financial information
The following unaudited pro forma consolidated results of operations of the Group were prepared assuming that the acquisitions were completed as of the beginning of the earliest period presented (in RMB thousands, except per share data):
Year ended December 31, | Nine months ended September 30, | ||||||||
2007 | 2008 | 2008 | |||||||
Net revenue | 223,646 | 278,440 | 213,958 | ||||||
Net loss attributable to ordinary shareholders | (83,103 | ) | (156,293 | ) | (119,680 | ) | |||
Net loss per share, basic | (0.32 | ) | (0.60 | ) | (0.46 | ) | |||
Net loss per share, diluted | (0.32 | ) | (0.60 | ) | (0.46 | ) |
8. | GOODWILL |
The following summarizes the changes in goodwill allocated to the Group’s reportable segments as of December 31, 2007 and 2008 and as of September 30, 2009 (in RMB thousands):
Company-Owned Brokerage Services | Franchise Services | Total | ||||||
Shanghai | Shenzhen | |||||||
Balance, January 1, 2007 | 3,537 | - | - | 3,537 | ||||
Acquisitions | - | - | - | - | ||||
Balance, December 31, 2007 | 3,537 | - | - | 3,537 | ||||
Acquisitions | - | 4,374 | 1,370 | 5,744 | ||||
Balance, December 31, 2008 | 3,537 | 4,374 | 1,370 | 9,281 | ||||
Acquisitions | - | - | - | - | ||||
Balance, September 30, 2009 | 3,537 | 4,374 | 1,370 | 9,281 | ||||
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
9. | INTANGIBLE ASSETS, NET |
The following summarizes the Group’s intangible assets as of December 31, 2007 and 2008 and as of September 30, 2009 (in RMB thousands):
CENTURY 21® franchise rights | Customer relationships | Real estate listing databases | Trademark | Total | |||||||||||
Cost | 37,257 | 683 | 477 | - | 38,417 | ||||||||||
Accumulated amortization | (10,445) | (17) | (12) | - | (10,474) | ||||||||||
Balance as of January 1, 2007 | 26,812 | 666 | 465 | - | 27,943 | ||||||||||
Amortization | (1,510) | (68) | (48) | - | (1,626) | ||||||||||
Balance as of December 31, 2007 | 25,302 | 598 | 417 | - | 26,317 | ||||||||||
Additions | 4,500 | 266 | 64 | 403 | 5,233 | ||||||||||
Amortization | (1,601) | (82) | (51) | (20) | (1,754) | ||||||||||
Balance as of December 31, 2008 | 28,201 | 782 | 430 | 383 | 29,796 | ||||||||||
Amortization | (1,336 | ) | (71 | ) | (41 | ) | (30 | ) | (1,478 | ) | |||||
Balance as of September 30, 2009 | 26,865 | 711 | 389 | 353 | 28,318 | ||||||||||
The franchise rights acquired from Realogy entitled the Group to use and sub-franchise the CENTURY 21® brand in China. The franchise rights for China acquired from Realogy have a contractual period of 25 years with a specific renewal clause for another 25 years upon payment by the Company of US$4.5 million. The Group considered its historical experience in renewing or extending similar franchise agreements when determining the estimated useful life of the franchise rights acquired from Realogy. Given the lack of historical experience of the Group in renewing or extending similar arrangements with Realogy as the franchise relationship was first entered into with Realogy in 2000 for 25 years, the Group considered assumptions that market participants would use about the renewal or extension provisions. Since the Group needs to pay the renewal fee of US$4.5 million, which is equivalent to the fair value of the franchise rights at the time such rights were acquired from Realogy in March 2000, to Realogy for the franchise rights extension, it is uncertain whether market participants would pay this amount for the renewal of franchise rights in the future. Therefore, the Group considered this entity-specific factor and determined that the estimated useful life of the franchise rights acquired from Realogy is the contractual period of 25 years. As a result, the franchise rights acquired from Realogy are recognized as intangible assets and are being amortized over a period of 25 years.
As a result of a change in the Group’s business strategy to grant franchise rights to sub-franchisees in the Shenzhen region, the Group reacquired the CENTURY 21® franchise rights from a franchisee in Shenzhen for RMB4.5 million in July 2008. This consideration was negotiated on an arm’s length basis. In accordance with the franchise agreement, there are no specific renewal or extension provisions. The Group considered its own historical experience in renewing or extending similar franchise agreements when determining the estimated useful life of the reacquired franchise rights. Given the lack of historical experience of the Group in renewing or extending similar arrangements with other franchisees, the Group considered this entity-specific factor and determined that the estimated useful life of the reacquired franchise rights is the remaining contractual period which is 14.5 years. Therefore, these rights are recognized as intangible assets and are amortized over the remaining contractual life of 14.5 years.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
The Group has recorded approximately RMB1.6 million, RMB1.8 million, RMB1.4 million (unaudited) and RMB1.5 million of amortization for intangible assets for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009, respectively. There was no impairment loss on intangible assets for any of the periods presented.
Based on the Group’s intangible assets subject to amortization, the annual estimated amortization expense related to the above intangible assets is as follows (in RMB thousands):
The remainder of 2009 | 666 | |
2010 | 2,144 | |
2011 | 2,144 | |
2012 | 2,144 | |
2013 | 2,144 | |
Thereafter | 19,076 | |
Total | 28,318 | |
10. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consisted of the following (in RMB thousands):
December 31, | September 30, | |||||
2007 | 2008 | 2009 | ||||
Salaries, commission and welfare payable | 22,515 | 25,031 | 50,362 | |||
Other taxes payable | 3,047 | 4,450 | 14,872 | |||
Royalty fees payable | 1,470 | 2,366 | 1,657 | |||
Third party deposits | 14,480 | 9,678 | 14,824 | |||
Other current liabilities | 10,722 | 12,072 | 15,735 | |||
Total | 52,234 | 53,597 | 97,450 | |||
Royalty fees payable relate to the Master Franchise Agreement entered into with Realogy. The royalty fees are determined based on the Group’s franchise revenue for the periods.
11. | DEFERRED REVENUE |
Cash received in advance on contracts is deferred and recognized when the services are rendered. The deferred revenue is primarily related to initial franchise fees received from franchisees and advances received from customers relating to brokerage commissions.
12. | LONG-TERM DEPOSITS PAYABLE |
The Group receives security deposits from franchisees which are recorded as long-term deposits payable. These deposits are refundable at the end of the franchise agreement period if the franchisees do not breach the franchise agreements. The long-term deposits payable as of December 31, 2007 and 2008 and as of September 30, 2009 were RMB8.5 million, RMB10.6 million and RMB8.9 million, respectively.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
13. | INCOME TAXES |
Taxation in the Cayman Islands and the British Virgin Islands |
Neither the Cayman Islands nor the British Virgin Islands currently levies taxes on individuals or corporations based upon profits, income, gains or appreciation. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands or BVI withholding tax will be imposed.
The Company and IFM Co. are tax-exempted companies incorporated in the Cayman Islands. Genius is a tax-exempted company incorporated in the British Virgin Islands.
PRC Corporate Income Tax |
Prior to January 1, 2008, pursuant to the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws, the corporate income taxes (“CIT”) of PRC entities were generally assessed at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax.
On March 16, 2007, the National People’s Congress of PRC enacted the Corporate Income Tax Law, under which Foreign Investment Enterprises and domestic companies would be subject to CIT at a uniform rate of 25%. This became effective on January 1, 2008. In accordance with the CIT Law, there will be a transition period for enterprises which currently receive preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to a corporate income tax rate lower than 25% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the CIT Law.
IFM Beijing, Beijing Anxin and IFM SH are subject to the income tax rate of 33% before 2008, 25% thereafter in accordance with the CIT Law.
As Shanghai Ruifeng and Anshijie are both registered in Shanghai Pu Dong New Area, and Shenzhen CIR is registered in Shenzhen special economic zone, they are subject to the preferential income tax rate of 15% according to the Foreign Investment and Foreign Enterprise Income Tax Law before 2008. From January 1, 2008 onwards, the income tax rate is to be increased progressively from 18% to 25% from 2008 to 2012, respectively. Accordingly, they are subject to income tax rate of 15%, 18% and 20% in 2007, 2008 and 2009, respectively.
In October 2009, Huachuang obtained a Software Enterprise Certification which entitles it to exemption from CIT for the first two years in which it has taxable income and a 50% reduction in CIT for each of the following three years.
The provision for income tax is as follows (in RMB thousands):
Year ended December 31, | Nine months ended September 30, | |||||||||
2007 | 2008 | 2008 | 2009 | |||||||
(unaudited) | ||||||||||
Income tax provision: | ||||||||||
Current | 417 | 1,408 | 1,569 | 3,315 | ||||||
Deferred | (23 | ) | 668 | 211 | (494 | ) | ||||
Total | 394 | 2,076 | 1,780 | 2,821 | ||||||
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
The following table presents the tax impact of significant temporary differences between the tax and financial statement bases of assets and liabilities that gave rise to deferred tax assets and liabilities as of December 31, 2007 and 2008 and as of September 30, 2009 (in RMB thousands):
December 31, | September 30, | ||||||||
2007 | 2008 | 2009 | |||||||
Current | |||||||||
Deferred tax assets: | |||||||||
Allowance for doubtful accounts | 881 | 770 | 1,463 | ||||||
Deferred revenue | 1,945 | 948 | 1,155 | ||||||
Accrued expense and payroll | 4,226 | 4,823 | 12,068 | ||||||
Disposals of property and equipment | - | 753 | - | ||||||
Others | 288 | 828 | - | ||||||
Total deferred tax assets | 7,340 | 8,122 | 14,686 | ||||||
Less: valuation allowance | (5,337 | ) | (5,828 | ) | (14,686 | ) | |||
2,003 | 2,294 | - | |||||||
Deferred tax liabilities: | |||||||||
Timing differences of revenue recognition | (1,755 | ) | (2,532 | ) | - | ||||
Others | (248 | ) | (295 | ) | - | ||||
Total deferred tax liabilities | (2,003 | ) | (2,827 | ) | - | ||||
Net deferred tax liabilities | - | (533 | ) | - | |||||
Non-current | |||||||||
Deferred tax assets: | |||||||||
Net operating loss carry forwards | 9,033 | 38,983 | 10,999 | ||||||
Intangible assets | 2,095 | 1,955 | 1,851 | ||||||
Total deferred tax assets | 11,128 | 40,938 | 12,850 | ||||||
Less: valuation allowance | (11,128 | ) | (40,938 | ) | (12,850 | ) | |||
- | - | - | |||||||
Deferred tax liabilities: | |||||||||
Intangible assets and property and equipment | (203 | ) | (338 | ) | (377 | ) | |||
Net deferred tax liabilities | (203 | ) | (338 | ) | (377 | ) | |||
The Group has made a full valuation allowance against its net deferred tax assets. The Group evaluates a variety of factors in determining the amount of valuation allowance, including the Group’s limited operating history, accumulated deficit, existence of taxable temporary differences and expected reversal periods.
The following table sets forth the movements of the valuation allowance for net deferred tax assets for the periods presented:
Year ended December 31, | Nine months ended September 30, | ||||||||
2007 | 2008 | 2009 | |||||||
Balance at beginning of the year/period | (5,286 | ) | (16,465 | ) | (46,766 | ) | |||
(Provision) write-back for the year/period | (11,179 | ) | (30,301 | ) | 19,230 | ||||
Balance at end of the year/period | (16,465 | ) | (46,766 | ) | (27,536 | ) | |||
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
The Group had total net operating loss carried forward as of December 31, 2007 and 2008 and as of September 30, 2009 amounting to RMB39.4 million, RMB177.3 million and RMB49.1 million, respectively, which will begin to expire in 2011.
CIT exemptions and tax rate reduction enjoyed by the Group had no effect on net loss and basic and diluted net loss per share for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008. The increase to net income and basic and diluted net income per share for the nine months ended September 30, 2009 resulting from the combined effects of CIT exemption and tax rate reduction amounted to RMB0.9 million and RMB0.002 per share, respectively.
A reconciliation of income tax of the statutory income tax rate to the Group’s effective tax rate is as follows:
Year ended December 31, | Nine months ended September 30, | |||||||||||
2007 | 2008 | 2008 | 2009 | |||||||||
(unaudited) | ||||||||||||
Statutory income tax rates | (33.0 | )% | (25.0 | )% | (25.0 | )% | 25.0 | % | ||||
Effect of preferential tax rate | 18.0 | % | 7.4 | % | 6.9 | % | (1.4 | )% | ||||
Effect of income tax rate change | 0.2 | % | (2.8 | )% | (3.1 | )% | 1.9 | % | ||||
Change in valuation allowance | 15.4 | % | 23.3 | % | 25.3 | % | (21.1 | )% | ||||
Others | (0.1 | )% | (1.4 | )% | (2.3 | )% | (1.3 | )% | ||||
Effective tax rate | 0.5 | % | 1.5 | % | 1.8 | % | 3.1 | % | ||||
On December 6, 2007, the State Council issued the detailed implementation regulations of the new PRC Corporate tax law. Pursuant to the regulations, a 10% withholding income tax will be levied on dividends declared on or after January 1, 2008 by foreign investment enterprises to their foreign enterprise shareholders unless the enterprise investor is deemed as a PRC Tax Resident Enterprise (“TRE”).
The Company’s subsidiaries have determined that they have no present plan to declare and pay any dividend on their shares in the foreseeable future. The Group plans to continue to reinvest its subsidiaries’ undistributed earnings, if any, in their operations in China in the foreseeable future.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
14. | NET (LOSS) INCOME PER SHARE |
The following table sets forth the computation of basic and diluted net (loss) income per ordinary share for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009 (in RMB thousands, except per share data):
Year Ended December 31, | Nine months ended September 30, | |||||||||||
2007 | 2008 | 2008 | 2009 | |||||||||
(unaudited) | ||||||||||||
Numerator: | ||||||||||||
Net (loss) income attributable to IFM Investments Limited | (74,121 | ) | (132,318 | ) | (99,729 | ) | 88,333 | |||||
Accretion of Series A Preferred Shares | (4,893 | ) | (5,032 | ) | (3,761 | ) | (3,868 | ) | ||||
Accretion of Series B Preferred Shares | (2,354 | ) | (10,727 | ) | (7,974 | ) | (8,401 | ) | ||||
Income allocated to participating preferred shareholders | - | - | - | (41,451 | ) | |||||||
Numerator for basic and diluted net (loss) income per share | (81,368 | ) | (148,077 | ) | (111,464 | ) | 34,613 | |||||
Denominator: | ||||||||||||
Weighted-average shares — basic | 260,000 | 260,000 | 260,000 | 260,000 | ||||||||
Potential dilutive shares: | ||||||||||||
Preferred shares* | - | - | - | - | ||||||||
Options* | - | - | - | 4,263 | ||||||||
Weighted averages shares — diluted | 260,000 | 260,000 | 260,000 | 264,263 | ||||||||
Net (loss) income per share — basic | (0.31 | ) | (0.57 | ) | (0.43 | ) | 0.13 | |||||
Net (loss) income per share — diluted | (0.31 | ) | (0.57 | ) | (0.43 | ) | 0.13 | |||||
Net income for the nine months ended September 30, 2009 has been allocated to the ordinary shares and preferred shares based on their respective rights to share in dividends.
* The potentially dilutive securities were not included in the calculation of dilutive net (loss) income per share in those periods where their inclusion would be anti-dilutive.
15. | CONVERTIBLE REDEEMABLE PREFERRED SHARES |
On August 24, 2006, the Company issued 200.0 million shares of Series A convertible redeemable preferred shares (Series A Preferred Shares) in exchange for cash of US$21.4 million (approximately RMB170.7 million), net of issuance cost of US$0.6 million (approximately RMB4.6 million).
On October 19, 2007, the Company issued approximately 105.3 million shares of Series B convertible redeemable preferred shares (Series B Preferred Shares) in exchange for cash of US$38.7 million (approximately RMB290.6 million), net of issuance cost of US$1.3 million (approximately RMB10.0 million).
On February 21, 2008, the Company issued approximately 6.1 million shares of Series B Preferred Shares in exchange for cash of US$2.2 million (approximately RMB16.2 million), net of issuance cost of US$0.1 million (approximately RMB0.5 million).
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
The Group has determined that the convertible redeemable preferred shares should not be classified as liabilities since the preferred shares are contingently redeemable and that conversion and redemption features embedded in the convertible redeemable preferred shares are not required to be bifurcated and accounted for as a derivative since the embedded features do not permit or require net settlement and therefore do not meet the definition of a derivative. Since the conversion price of the convertible redeemable preferred shares exceeded the fair value of the Group’s ordinary shares on the date of issuance of the Preferred Shares, no portion of the proceeds from the issuance was accounted for as attributable to the conversion feature.
The Company’s convertible redeemable preferred shares with outstanding balances as of September 30, 2009 are as follows:
Original Issue Price Per Share | Shares | |||||||||||
Date of Issuance | Authorized | Issued and Outstanding | Carrying Amount | Liquidation Amount | ||||||||
RMB | (’000) | (’000) | (RMB’000) | (RMB’000) | ||||||||
Series A | Aug 24, 2006 | 0.88 | 200,000 | 200,000 | 185,930 | 201,661 | ||||||
Series B | Oct 19, 2007 | 2.86 | 105,254 | 105,254 | 311,226 | 345,718 | ||||||
Series B | Feb 21, 2008 | 2.71 | 6,113 | 6,113 | 17,006 | 19,091 | ||||||
311,367 | 311,367 | 514,162 | 566,470 | |||||||||
The key terms of the Series A and Series B Preferred Shares are as follows:
Dividend rights
The holders of the Series A and Series B Preferred Shares are entitled to participate in non-cumulative dividend of 8% payable on an as-converted basis, when declared by the Board of Directors. As long as Preferred Shares are outstanding, the Company may not pay any dividend to ordinary shareholders until all dividends declared and payable to the preferred shareholders have been paid. In the event the Company shall declare a dividend to the holders of ordinary shares, then in each such case, the holders of Preferred Shares shall be entitled to a proportionate share of such dividend on an as-converted basis.
Redemption rights
In the event that a qualified initial public offering does not occur within six years of the Series A issuance date or five years of the Series B issuance date, the holders of Series A and Series B Preferred Shares may redeem any or all of Series A and Series B Preferred Shares at a redemption price equal to 115% of the original preferred shares issuance price per share plus all declared but unpaid dividends adjusted for share splits, share dividends, recapitalizations and other adjustments.
The carrying value of the convertible redeemable preferred shares was accreted from its carrying value on the date of issuance to the redemption value using effective interest method over the period from date of issuance to the earliest redemption date. The accretion was recorded against retained earnings, or in the absence of retained earnings, by charges against additional paid-in capital. Once additional paid-in capital has been exhausted, additional charges should be recorded by increasing the accumulated deficit.
Liquidation preferences
In the event of a liquidation, dissolution or winding up of the Company, available assets and funds of the Company are first distributed to the holders of Series A and Series B Preferred Shares at their original issuance price per share multiplied by 115% plus any declared but unpaid dividends adjusted for share
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
splits, share dividends, recapitalizations, and other adjustments. In the event that available assets and funds are insufficient to permit payment to the holders of the Series A and Series B Preferred Shares, the assets and funds will be distributed ratably to the Series A and Series B Preferred Shares holders based on their proportional share ownership. After the distribution to the holders of Series A and Series B Preferred Shares are made, any remaining legally available assets and funds shall be distributed to the holders of ordinary shares and Series A and Series B Preferred Shares pro rata on an as-converted basis.
Voting rights
The holder of each Series A and Series B Preferred Shares shall be entitled to such number of votes as equals the whole number of ordinary shares into which such holder’s collective Series A and Series B Preferred Shares are convertible immediately after the close of business on the record date of the determination of the Company’s shareholders entitled to vote or, if no such record date is established, at the date such vote is taken or any written consent of the Company’s shareholders is first solicited. The holders of Series A and Series B Preferred Shares shall vote together with the holders of ordinary shares, and not as a separate class or series, on all matters put before the members.
Conversion rights
Each of the convertible preferred shares is convertible into the number of fully-paid ordinary shares as determined by dividing the original issue price applicable to such convertible preferred shares by the conversion price in effect at that time. The conversion price of Series A and Series B Preferred Shares shall initially be the original issue price of such Series A and Series B Preferred Shares and shall be adjusted in accordance with conversion provision contained in the Company’s Articles of Association.
With respect to the Series A Preferred Shares, these conversion provisions include certain performance-based adjustments related to certain targets of net profits after tax for the years ended December 31, 2008 and 2009 or the completion of a Qualified IPO as defined (Note 17) prior to December 31, 2009. Depending on whether the pre-determined targets are met, the conversion price of the Series A Preferred Shares may be adjusted such that the Series A Preferred Shareholders’ percentage ownership on an as-converted basis would decrease.
The pre-determined target was not met for December 31, 2008. In the event there is any adjustment to the Series A Preferred Share conversion price, the Series B conversion price will also be adjusted such that the Series B Preferred Shareholders’ percentage ownership on an as-converted basis immediately following such adjustment remains the same as the shareholding immediately prior to the adjustment to the Series A Preferred Share conversion price.
16. | UNAUDITED PRO-FORMA BALANCE SHEET AND NET(LOSS)INCOME PER SHARE |
All of the Series A and Series B convertible redeemable preferred shares will automatically be converted into ordinary shares at the applicable conversion price upon a Qualified IPO as defined in Note 17 or the proposed IPO conducted in accordance with the Registration Statement on Form F-1 (File No. 333-164216) as filed with the United States Securities and Exchange Commission. The pro-forma balance sheet as of September 30, 2009 presents an adjusted financial position as if the conversion of the Series A and Series B convertible redeemable preferred shares into ordinary shares occurred on September 30, 2009.
The unaudited pro-forma basic and diluted net (loss) income per share for the year ended December 31, 2008 and for the nine months ended September 30, 2009, giving effect to the assumed conversion of the
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
Series A and Series B convertible redeemable preferred shares into ordinary shares on the original dates of issuance are as follows (in RMB thousands, except per share data):
Year Ended December 31, 2008 | Nine Months Ended September 30, 2009 | ||||
Numerator: | |||||
Net (loss) income attributable to ordinary shareholders | (148,077 | ) | 34,613 | ||
Add: Income allocated to participating preferred shareholders | - | 41,451 | |||
Add: Accretion of convertible redeemable preferred shares | 15,759 | 12,269 | |||
Less: Pro-forma effect of compensation expense from Series A convertible redeemable preferred shares modification | (4,915 | ) | |||
Numerator for pro-forma basic and diluted net (loss) income per share | (137,233 | ) | 88,333 | ||
Denominator: | |||||
Denominator for basic net (loss) income per share | 260,000 | 260,000 | |||
Pro-forma effect of Series A convertible redeemable preferred shares | 141,611 | 141,611 | |||
Pro-forma effect of Series B convertible redeemable preferred shares | 96,485 | 97,231 | |||
Denominator for pro-forma basic (loss) income per share | 498,096 | 498,842 | |||
Potential dilutive securities: | |||||
Options | - | 3,721 | |||
Denominator for pro-forma diluted (loss) income per share | 498,096 | 502,563 | |||
Basic net (loss) income per share | (0.28 | ) | 0.18 | ||
Diluted net (loss) income per share | (0.28 | ) | 0.18 |
The above unaudited pro forma financial information was presented giving effect to the conversion of the Series A and B Preferred Shares as of September 30, 2009 as well as the amendments made pursuant to special resolutions of the Board dated October 22, 2009 and January 27, 2010 with respect to the performance-based adjustments to the Series A Preferred Shares (Note 22 (c) and (f)) and the redesignation of the ordinary shares effective immediately prior to the consummation of the IPO (Note 22 (e)(ii)).
17. | SHARE-BASED COMPENSATION |
On August 18, 2006, and as amended and restated on October 19, 2007 and February 1, 2008, the Company adopted the 2006 Stock Incentive Plan and the Amended and Restated 2006 Stock Incentive Plan (the “Plan”) under which 52.5 million shares have been authorized for issuance and 85.3 million shares have been reserved for issuance. In accordance with the Plan, if there is an adjustment to the then-in effect Series A Preferred Share conversion price (Note 15), the number of shares reserved for issuance under the Plan shall be increased or decreased to such number of shares representing 8.41% of the equity interest of the Company, on a fully-diluted basis.
In 2007, two batches of share options were granted under the Plan. For share-based award granted with performance conditions (Batch A), one-third (1/3) of the option shall become vested and exercisable on the 181st day following the date of a Qualified IPO and the remaining two-thirds (2/3) of the share options shall become vested and exercisable on the first anniversary of a Qualified IPO. For share-based award granted with service conditions (Batch B), one-fourth (1/4) of the option shall vest and become exercisable on the first anniversary of the effective date of the employment and the remaining three-fourths (3/4) shall vest quarterly over the following eight quarters.
“Qualified IPO” shall mean a firm commitment, underwritten registered public offering by the Company of its Ordinary Shares on an internationally recognized, major stock exchange acceptable to the preferred share
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
holders (including, for example, the New York Stock Exchange or the NASDAQ), with a valuation of the Company, as a result of such public offering, of not less than US$400 million and with gross proceeds to the Company of at least US$100 million.
In 2008, two batches of share options were granted under the Plan based on service conditions. For Batch C, one-third (1/3) of the Option Shares covered by the grant shall vest and become exercisable on each of the first, second and third anniversary dates of the Effective Date of the Option Agreement. Under Batch D, one-third (1/3) of the Option Shares covered by the Option shall vest and become exercisable on each of the first, second and third anniversary dates of the date of Employment of Optionee.
On February 2, 2009, the Company granted share options for 200,000 shares to a certain employee. One-third (1/3) of the share options should vest and become exercisable on each of the first, second and third anniversary dates of the date of employment of the option holder.
On July 20, 2009, the Company granted 700,000 share options to certain employees. One-third (1/3) of the share options should vest and become exercisable on each of the first, second and third anniversary dates of the date of employment of option holders.
On August 20, 2009, the Company granted 2,500,000 share options to certain employees. Of the total 2,500,000 share options granted, 1,500,000 share options should vest one-half (1/2) of the option on the first anniversary of the effective date of the employment agreement between the option holders and the Company, with the remaining share options vesting on each of the following four calendar quarters. The remaining 1,000,000 share options should vest one-third (1/3) of the share options on each of the first, second and third anniversary dates of the date of employment of the option holders.
The exercise price for the purchase of Option Shares upon the exercise of all or any portion of the Option shall be the Fair Market Value price per Share on the date of grant as determined by the Administrator in its sole discretion. The Fair Market Value is provided by an independent third-party valuer at each of the share options’ grant date. The term of the share options is five years from the grant date.
Valuation Assumptions: The Company estimated the fair value of share options using Black-Scholes Option Pricing valuation model. The fair value of each option grant is estimated on the date of grant with the following weighted-average assumptions:
Year ended December 31, 2007 | Year ended December 31, 2008 | Nine months ended September 30, 2009 | ||||
Expected volatility | 43.90%-48.30% | 48.30%-53.30% | 70.50%-75.40% | |||
Risk-free interest rate | 4.43%-5.49% | 3.27%-4.13% | 3.09%-3.76% | |||
Dividend yield | 0.00% | 0.00% | 0.00% | |||
Expected term (in years) | 3.4-4.8 | 3.2-3.5 | 3.1-3.5 | |||
Weighted average fair value of the underlying shares on the date of option grants (US$) | 0.11 | 0.09 | 0.32 |
Expected Term: Due to insufficient historical information, giving consideration to the contractual terms of the share-based awards, the Company adopted the simplified method for estimating the expected term to represent the period that the Company’s share-based awards are expected to be outstanding.
Expected Volatility: The fair value of share-based payments made through the years ended December 31, 2007 and 2008 and the nine months ended September 30, 2009 was valued using the Black-Scholes Option
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
Pricing valuation method with a volatility factor based on the historical stock prices of comparable companies.
Expected Dividend: The Black-Scholes Option Pricing valuation model calls for a single expected dividend yield as an input. The Company has never declared or paid any cash dividends on its capital stock, and the Company does not anticipate any dividend payments on its ordinary shares in the foreseeable future.
Risk-Free Interest Rate: The Company bases the risk-free interest rate used in the Black-Scholes Option Pricing valuation method on the implied yield currently available on China Treasury Bonds constant maturities with an approximate equivalent remaining term.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers both voluntary and company termination behavior.
The following table summarizes the Group’s share options activities for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2009:
Share options Outstanding | ||||||||
Share options available | Number of Share options | Weighted Average Exercise Price (US$) | ||||||
Balance as of December 31, 2006 | 40,000,000 | - | - | |||||
Share options authorized | 12,352,110 | - | - | |||||
Share options granted | (45,300,000 | ) | 45,300,000 | 0.12 | ||||
Share options cancelled/forfeited | 500,000 | (500,000 | ) | 0.11 | ||||
Balance as of December 31, 2007 | 7,552,110 | 44,800,000 | 0.12 | |||||
Share options authorized | 124,770 | - | - | |||||
Share options granted | (4,700,000 | ) | 4,700,000 | 0.09 | ||||
Share options cancelled/forfeited | 7,600,000 | (7,600,000 | ) | 0.11 | ||||
Balance as of December 31, 2008 | 10,576,880 | 41,900,000 | 0.12 | |||||
Share options granted | (3,400,000 | ) | 3,400,000 | 0.32 | ||||
Share options cancelled/forfeited | 1,500,000 | (1,500,000 | ) | 0.11 | ||||
Balance as of September 30, 2009 | 8,676,880 | 43,800,000 | 0.13 | |||||
The weighted-average grant date fair value of options granted for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2009 was US$0.05, US$0.04 and US$0.17 per option, respectively. The following table summarizes the weighted average remaining contractual life and exercise price for the share options outstanding and exercisable as of September 30, 2009:
Share options Outstanding | Share options Exercisable | |||||||||||
Range of Exercise Prices (US$) | Number of options outstanding | Weighted Average Remaining Contractual Life (In years) | Weighted Average Exercise Price (US$) | Number of options outstanding | Weighted Average Remaining Contractual Life (In years) | Weighted Average Exercise Price US($) | ||||||
0.08 | 3,000,000 | 3.86 | 0.08 | 1,000,000 | 3.86 | 0.08 | ||||||
0.11-0.12 | 12,050,000 | 2.86 | 0.11 | 500,000 | 3.39 | 0.12 | ||||||
0.13 | 25,550,000 | 2.89 | 0.13 | 2,921,880 | 3.21 | 0.13 | ||||||
0.32-0.33 | 3,200,000 | 4.87 | 0.33 | - | - | - | ||||||
43,800,000 | 3.10 | 0.13 | 4,421,880 | 3.38 | 0.11 | |||||||
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
There were no share options exercisable as of December 31, 2007. There were 1,475,000 and 4,421,880 share options exercisable as of December 31, 2008 and as of September 30, 2009, respectively. The total fair value of options vested is US$70,675 and US$198,972 (approximately RMB482,000 and RMB1,358,000) as of December 31, 2008 and September 30, 2009, respectively. The intrinsic value of exercisable share options has not been included as the Company was a private company in the periods presented.
Share-based compensation expense for share-based awards granted with performance conditions is to be recognized using the graded-vesting method. For the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009, the Company did not recognize any share-based compensation as the vesting of the performance condition awards is contingent upon a Qualified IPO which is not considered probable until the event happens. Share-based compensation expenses for other batches of share-based awards which are based on service conditions are recognized using the straight-line attribution approach. For the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009, the Company has recognized share-based compensation of approximately RMB44,000, RMB730,000, RMB536,000 (unaudited) and RMB1,257,000, respectively.
As of September 30, 2009, there was US$624,613 (approximately RMB4,264,000) of total unrecognized compensation cost related to non-vested share-based compensation granted under the plan. The cost is expected to be recognized over a weighted average period of 2.0 years.
18. | EMPLOYEE BENEFIT PLANS |
The Group participates in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. PRC labor regulations require the companies to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant labor bureau is responsible for meeting all retirement benefit obligations; the Group has no further commitments beyond its monthly contribution. Employees of the Company located in the PRC are covered by the retirement schemes defined by local practice and regulations, which are essentially defined contribution schemes. The PRC government is directly responsible for the payments of the benefits to these employees.
The total contributions for such employee benefits were approximately RMB11.2 million, RMB18.9 million, RMB15.7 million (unaudited), and RMB11.9 million for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009, respectively. Amounts accrued and included in salaries, commission and welfare payable in the accompanying balance sheets were approximately RMB4.6 million, RMB7.7 million and RMB8.2 million as of December 31, 2007 and 2008 and as of September 30, 2009, respectively.
19. | COMMITMENTS AND CONTINGENCIES |
a) | Contractual obligations with franchisees |
The Group establishes franchise arrangements with franchisees in the PRC to grant trademark of “CENTURY 21®” for a contractual period and receives recurring franchise fees throughout the period. The Group is obligated to provide ongoing support to franchisees for the operation of “CENTURY 21®” system and provide operational guidance and training to franchisees.
b) | Operating lease commitments |
The Group has operating lease agreements principally for its administrative offices and real estate brokerage stores. These leases expire by 2015 and are renewable upon negotiation. Rental expenses under operating leases
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009 were RMB38.3 million, RMB84.4 million, RMB64.1 million (unaudited) and RMB52.2 million, respectively.
Future minimum lease payments under these non-cancellable operating lease agreements as of September 30, 2009 are as follows (in RMB thousands):
The remainder of 2009 | 19,483 | |
2010 | 60,922 | |
2011 | 38,699 | |
2012 | 19,783 | |
2013 | 6,146 | |
Thereafter | 3,203 | |
Total | 148,236 | |
c) | Contingent guarantee obligations |
The Group provides interim guarantee services to banking institutions for the mortgage services it refers to banks as part of its mortgage management services in Beijing. An interim guarantee covers the period beginning when the bank disburses the mortgage loan to the property buyer and ending when the mortgage registration certificate is issued to the bank by the applicable property registry, which generally takes one to six months. The Group measures its financial guarantees based on their fair values. The fair value of the financial guarantee as of December 31, 2007 and 2008 and as of September 30, 2009 were immaterial.
If a bank fails to obtain the mortgage registration certificate or the property buyer defaults on his payment obligations during the term of an interim guarantee, the Group may be required to pay the amount of the delinquent mortgage payments or any measurable loss suffered by the bank exceeding the payment already made by the buyer and the amount recoverable from the property. As of December 31, 2007 and 2008 and September 30, 2009, the contingent guarantee obligations of the Group were approximately RMB143.9 million, RMB227.8 million and RMB829.3 million, respectively.
The Group has not been required to pay any amounts with respect to its guarantee services since the commencement of this business. The Group performs regular assessment on any potential losses associated with the interim financial guarantees based on the payment status of the guaranteed loans. The Group accrued nil, nil and approximately RMB0.5 million for the estimated loss associated with the interim guarantees as of December 31, 2007 and 2008 and as of September 30, 2009, respectively.
d) | Minimum Service Fees |
The Group is required to pay annual minimum service fees to Realogy for the licensing of the CENTURY 21® brand to 2025. The minimum service fees is the greater of the minimum of US$100,000 (approximately RMB683,000) or an amount calculated by multiplying US$500 (approximately RMB3,000) by the number of sales offices in our CENTURY 21® franchise network. The minimum service fees for future years are as follows (in RMB thousands):
The remainder of 2009 | - | |
2010 | 683 | |
2011 | 683 | |
2012 | 683 | |
2013 | 683 | |
Thereafter | 7,686 | |
Total | 10,418 | |
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
e) | Litigation |
From time to time, the Group is involved in claims and legal proceedings that arise in the ordinary course of business. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on the Group’s financial position or results of operations. However, litigation is subject to inherent uncertainties and the Group’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Group’s financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.
20. | RELATED PARTY TRANSACTIONS |
The table below sets forth the related parties and their relationships with the Group:
Related Parties | Relationships with the Group | |||
Maxpro International Enterprises Inc. (“Maxpro”) | 100% owned by Donald Zhang, the ultimate shareholder of the Company | |||
Beijing Xinye Jiayuan Real Estate Consulting Services Co., Ltd. (“Xinye”) | 80% owned by Donald Zhang, 20% owned by Harry Lu, the ultimate shareholders of the Company | |||
Regional entities (Xiamen, Shandong, Xian) | Associates |
As of December 31, 2007 and 2008 and September 30, 2009, the amounts due from/to related parties consisted of the following (in RMB thousands):
December 31, | September 30, | |||||
2007 | 2008 | 2009 | ||||
Amounts due from related parties | ||||||
Xinye | 39,656 | 36,024 | - | |||
Maxpro | 2,114 | 2,086 | 5,933 | |||
Directors | 2,215 | - | - | |||
Regional entities | 83 | - | 277 | |||
Total amounts due from related parties | 44,068 | 38,110 | 6,210 | |||
Amounts due to related parties | ||||||
Xinye | 13,377 | 5,700 | - | |||
Maxpro | 29,266 | 27,465 | - | |||
Regional entities | 850 | 850 | 253 | |||
Total amounts due to related parties | 43,493 | 34,015 | 253 | |||
The amounts due from Xinye were advances for the operations of Xinye. Amounts due to Xinye related to amounts payable for the transfer of the entities as part of the Reorganization. The balances with Xinye were unsecured, interest-free and had no fixed terms of repayment.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
The amounts due from Maxpro related to the unsecured advances for the operations of Maxpro. The payable to Maxpro were advances for the operations of IFM Co. The amounts with Maxpro are unsecured, interest-free and have no fixed terms of repayment.
On September 22, 2009, the amounts due from/to Xinye and Maxpro were fully settled. On the same day, an advance of approximately RMB5.9 million was made to Maxpro which is due on demand.
Amounts due from Directors related to unsecured loans made to Directors bearing no interest. These amounts were fully repaid in 2008.
The amounts due from the three regional entities related to royalty fees receivable. The amounts due to the regional companies related to security deposits for franchise rights placed with the Group.
21. | SEGMENT INFORMATION |
The reportable segments represent the Group’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker (“CODM”) to assess performance and to allocate resources. In identifying its reportable segments, the Group also considers the nature of services provided by its operating segments. The Group’s CODM has been identified as the Chairman and Vice Chairman, who review the consolidated and segment results when making decisions about allocation of resources and assessing performance of the Group.
Management has determined that the Group operates in three reportable segments in 2007: Company-owned Brokerage Services located in Beijing and Shanghai, Franchise Services and Mortgage Management Services. Company-owned Brokerage Services in Beijing and Shanghai involve brokering transactions from secondary real estate property sales, purchases and leasing transactions, referral and service fees of mortgage loan transactions to our mortgage management services segment while Company-owned Brokerage Services in Shanghai also provides brokering services in primary real estate property sales and purchase transactions in addition to the above transactions in Beijing. Franchise Services generate revenue by selling regional franchise rights for the CENTURY 21® brand in China to regional franchisees in various cities.
Company-Owned Brokerage Services located in Shenzhen was acquired in 2008 (see Note 7(b)) and became a new reportable segment. The Mortgage Management Services business grew substantially in 2008 and accordingly had its revenue, costs and expenses reviewed separately by the CODM starting from 2008. Mortgage Management Services include comprehensive advisory services in connection with the selection, application for and procurement of mortgage products offered by commercial banks.
Management evaluates the operating results of each of its reportable segments based upon (1) revenue from external customers, (2) commissions and other agent related costs, (3) operating costs, (4) selling, general and administrative expense, (5) income (loss) from operations and (6) net income (loss), each of which is presented in the Group’s Consolidated Statements of Operations. Corporate executive compensation and headquarters rental cost and interest income are not allocated among segments and are recorded as non-allocated items. The CODM does not review balance sheet information to measure the performance of the reportable segments, nor is this part of the segment information regularly provided to the CODM.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
The following tables summarize the selected revenue and expense information for each reportable segment for the year ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009:
Year ended December 31, 2007 | ||||||||||||||||||
(in RMB thousands) | ||||||||||||||||||
Company-Owned Brokerage Services | Franchise Services | Non- allocated | Total | |||||||||||||||
Beijing | Shanghai | Total | ||||||||||||||||
Revenue from external customers | 62,666 | 89,026 | 151,692 | 37,337 | - | 189,029 | ||||||||||||
Commissions and other agent related costs | (30,914 | ) | (46,623 | ) | (77,537 | ) | (5,329 | ) | - | (82,866 | ) | |||||||
Operating cost | (33,983 | ) | (38,045 | ) | (72,028 | ) | (7,858 | ) | - | (79,886 | ) | |||||||
Selling, general and administrative expenses | (16,636 | ) | (31,081 | ) | (47,717 | ) | (17,754 | ) | (29,000 | ) | (94,471 | ) | ||||||
(Loss) income from operations | (18,867 | ) | (26,723 | ) | (45,590 | ) | 6,396 | (29,000 | ) | (68,194 | ) | |||||||
Net (loss) income | (18,656 | ) | (26,664 | ) | (45,320 | ) | 6,478 | (33,932 | ) | (72,774 | ) |
Year ended December 31, 2008 | ||||||||||||||||||||||||
(in RMB thousands) | ||||||||||||||||||||||||
Company-Owned Brokerage Services | Total | Franchise Services | Mortgage Management Services | Non- allocated | Total | |||||||||||||||||||
Beijing | Shanghai | Shenzhen | ||||||||||||||||||||||
Revenue from external customers | 75,543 | 126,830 | 3,703 | 206,076 | 56,633 | 10,650 | - | 273,359 | ||||||||||||||||
Commissions and other agent related costs | (58,394 | ) | (84,693 | ) | (3,517 | ) | (146,604 | ) | (2,130 | ) | (2,816 | ) | - | (151,550 | ) | |||||||||
Operating cost | (58,071 | ) | (70,496 | ) | (4,010 | ) | (132,577 | ) | (12,291 | ) | (1,589 | ) | - | (146,457 | ) | |||||||||
Selling, general and administrative expenses | (23,095 | ) | (26,989 | ) | (2,721 | ) | (52,805 | ) | (13,772 | ) | (5,561 | ) | (30,814 | ) | (102,952 | ) | ||||||||
(Loss) income from operations | (64,017 | ) | (55,348 | ) | (6,545 | ) | (125,910 | ) | 28,440 | 684 | (30,814 | ) | (127,600 | ) | ||||||||||
Net (loss) income | (63,938 | ) | (55,297 | ) | (6,183 | ) | (125,418 | ) | 27,000 | 225 | (33,694 | ) | (131,887 | ) |
Nine Months ended September 30, 2008 (unaudited) | ||||||||||||||||||||||||
(in RMB thousands) | ||||||||||||||||||||||||
Company-Owned Brokerage Services | Total | Franchise Services | Mortgage Management Services | Non- allocated | Total | |||||||||||||||||||
Beijing | Shanghai | Shenzhen | ||||||||||||||||||||||
Revenue from external customers | 50,196 | 101,752 | 1,755 | 153,703 | 47,271 | 7,903 | - | 208,877 | ||||||||||||||||
Commissions and other agent related costs | (44,981 | ) | (65,662 | ) | (1,843 | ) | (112,486 | ) | (1,777 | ) | (1,987 | ) | - | (116,250 | ) | |||||||||
Operating cost | (43,734 | ) | (54,254 | ) | (1,919 | ) | (99,907 | ) | (9,899 | ) | (1,083 | ) | - | (110,889 | ) | |||||||||
Selling, general and administrative expenses | (18,284 | ) | (21,997 | ) | (1,127 | ) | (41,408 | ) | (8,783 | ) | (4,404 | ) | (21,861 | ) | (76,456 | ) | ||||||||
(Loss) income from operations | (56,803 | ) | (40,161 | ) | (3,134 | ) | (100,098 | ) | 26,812 | 429 | (21,861 | ) | (94,718 | ) | ||||||||||
Net (loss) income | (56,744 | ) | (40,119 | ) | (3,128 | ) | (99,991 | ) | 25,439 | 314 | (25,060 | ) | (99,298 | ) |
Nine Months ended September 30, 2009 | ||||||||||||||||||||||||
(in RMB thousands) | ||||||||||||||||||||||||
Company-Owned Brokerage Services | Total | Franchise Services | Mortgage Management Services | Non- allocated | Total | |||||||||||||||||||
Beijing | Shanghai | Shenzhen | ||||||||||||||||||||||
Revenue from external customers | 187,077 | 200,414 | 20,446 | 407,937 | 13,287 | 22,467 | - | 443,691 | ||||||||||||||||
Commissions and other agent related costs | (85,970 | ) | (96,125 | ) | (11,906 | ) | (194,001 | ) | (688 | ) | (3,289 | ) | - | (197,978 | ) | |||||||||
Operating cost | (34,292 | ) | (38,153 | ) | (6,879 | ) | (79,324 | ) | (4,738 | ) | (1,121 | ) | - | (85,183 | ) | |||||||||
Selling, general and administrative expenses | (17,666 | ) | (16,867 | ) | (3,398 | ) | (37,931 | ) | (8,922 | ) | (5,331 | ) | (18,094 | ) | (70,278 | ) | ||||||||
Income (loss) from operations | 49,149 | 49,269 | (1,737 | ) | 96,681 | (1,061 | ) | 12,726 | (18,094 | ) | 90,252 | |||||||||||||
Net income (loss) | 49,250 | 49,329 | (1,712 | ) | 96,867 | (1,538 | ) | 9,927 | (16,923 | ) | 88,333 |
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
All of the Group’s revenues from external customers are generated in the PRC.
22. | SUBSEQUENT EVENTS |
(a) | On August 17, 2009, the Company entered into a definitive agreement to establish a majority-owned subsidiary in Beijing, China, which will engage in advisory services focusing on commercial properties. In accordance with the agreement, the Company will need to inject RMB2.55 million as paid-in capital, and will initially own 85% of this entity and has the option to acquire the remaining 15% depending on operation performance. As of October 31, 2009, this subsidiary has not been established. |
(b) | On October 20, 2009, the Company established a majority-owned subsidiary in Beijing, China, which will engage in advisory services focusing on the primary residential properties market. In accordance with the agreement, the Company injected RMB700,000 as paid-in capital and initially owns 70% of this entity and has the option to acquire the remaining 30% depending on the operation’s performance. |
(c) | On October 22, 2009, a special resolution of the Board was made to amend the Third Amended and Restated Articles of Association of the Company with respect to the performance-based adjustments to the Series A Preferred Shares. The change in fair value to the Series A Preferred Shares as a result of this modification was immaterial. |
(d) | On November 30, 2009, the amounts due from Maxpro were fully settled in cash. |
(e) | On December 30, 2009, in preparation for the intended Qualified IPO, the shareholders and Board of the Company approved resolutions effecting certain amendments to the authorised and issued share capital to: |
(i) | effect a 10-for-one split of the Company’s share capital pursuant to which each ordinary share, Series A and Series B convertible preferred share of the Company was subdivided into 10 shares at a par value of US$0.001 per share. |
(ii) | immediately upon the closing of the Qualified IPO prior to March 31, 2010: |
• | increase the authorised share capital of the Company from US$1,325,114 divided into 1,013,746,760 ordinary shares, 200,000,000 Series A Preferred Shares and 111,367,270 Series B Preferred Shares to US$3,333,000 divided into 3,021,632,730 ordinary shares, 200,000,000 Series A Preferred Shares and 111,367,270 Series B Preferred Shares by the creation of an additional 2,007,885,970 ordinary shares; |
• | reorganize the share capital such that the total authorised share capital of the Company of 3,333,000,000 shares of a nominal or par value of US$0.001 each shall be reclassified and re-designated into 3,133,000,000 Class A ordinary shares of a nominal or par value of US$0.001 each (the “Class A Ordinary Shares”), 100,000,000 Class B ordinary shares of a nominal or par value of US$0.001 each (the “Class B Ordinary Shares”) and 100,000,000 preferred shares of a nominal or par value of US$0.001 each (the “Preferred Shares”); |
• | convert all of the then currently issued and outstanding 200,000,000 Series A Preferred Shares and 111,367,270 Series B Preferred Shares into 238,842,277 Class A Ordinary Shares in accordance with the conversion rights disclosed in Note 15; |
• | re-designate all of the then issued and outstanding ordinary shares into Class A Ordinary Shares on a one to one basis and further re-designate 80,502,938 of the then issued and outstanding Class A Ordinary Shares registered in the name of Goldman Sachs Strategic Investments (Asia) L.L.C. into 80,502,938 Class B Ordinary Shares. |
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
(iii) | On October 22, 2009, a special resolution of the Board was made to amend the Third Amended and Restated Articles of Association of the Company with respect to the performance-based adjustments to the Series A Preferred Shares, which resulted in a modification to the Company’s share options. This modification made each share option exercisable into 0.87 ordinary shares upon the completion of a Qualified IPO prior to March 31, 2010. If the completion of Qualified IPO occurs subsequent to March 31, 2010, the number of ordinary shares that can be purchased by 1 share option would be further adjusted. This modification does not result in any incremental fair value because the terms of the share options included such anti-dilution provisions. |
All share and per share amounts presented in the consolidated financial statements have been restated on a retroactive basis to reflect the effect of share split and issuances. |
(f) | On January 27, 2010, the shareholders and Board of the Company approved resolutions deeming their proposed offering (the “Proposed IPO”) to be a Qualified IPO. As a result of this resolution, the terms of the Series A Preferred Shares performance-based adjustments have been modified such that they are effective upon the Proposed IPO as well a Qualified IPO as defined in Note 17. This modification will result in compensation expense of approximately US$720,000 on the modification date. |
(g) | On January 27, 2010, the Company notified certain of the option holders under Batch A (Note 17), that the terms of their awards would be modified to deem the Proposed IPO to be a Qualified IPO for purposes of the Batch A vesting schedule. The Company is currently assessing whether there is any incremental fair value to be recognized as compensation expense as a result of this modification. |
(h) | The Group has performed an evaluation of subsequent events through January 27, 2010, which is the date the financial statements were issued, with no other events or transactions needing recognition or disclosure identified. |
23. | RESTRICTED NET ASSETS |
Relevant PRC laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the PRC subsidiaries are required to annually appropriate 10% of net after-tax income to the general reserve fund or statutory surplus fund (see Note 2(w)) prior to payment of any dividends, unless such reserve funds have reached 50% of its respective registered capital. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries are restricted in their ability, which restricted portion amounted to approximately RMB293.5 million, RMB264.0 million and RMB313.3 million as of December 31, 2007 and 2008 and as of September 30, 2009, respectively. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries for working capital and other funding purposes, the Company may in the future require additional cash resources from the PRC subsidiaries due to changes in business conditions, to fund future acquisitions and development, or merely to declare and pay dividends to make distributions to shareholders.
24. | ADDITIONAL INFORMATION—CONDENSED FINANCIAL STATEMENTS |
The separate condensed financial statements of IFM Investments Limited (the “Company”) as presented below have been prepared in accordance with Securities and Exchange Commission Regulation S-X
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
Rule 5-04 and Rule 12-04 and present the Company’s investments in its subsidiaries under the equity method of accounting. Such investments are presented on the separate condensed balance sheets of the Company as “Long-term investments”.
The Company was incorporated in the Cayman Islands on November 30, 2005, by IFM Holding Company Ltd. (“IFM Holding”), a Cayman Islands exempt company. IFM Holding was a wholly-owned subsidiary of Maxpro International Enterprise, Inc. (“Maxpro”), a New York corporation. Maxpro was 100% owned by Mr. Donald Zhang.
The subsidiaries did not pay any dividend to the Company for the periods presented. Certain information and footnote disclosures generally included in financial statements prepared in accordance with US GAAP have been condensed and omitted. The footnote disclosures contain supplemental information relating to the operations of the Company, as such, these statements should be read in conjunction with the notes to the consolidated financial statements of the Company.
The Company did not have significant capital and other commitments, long-term obligations, or guarantees as of September 30, 2009.
Operating expense for the Company for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2008 and 2009 included share-based compensation as a result of the options granted to employees of the Company in 2007, 2008, and 2009. Total share-based compensation for the years ended December 31, 2007 and 2008, and for the nine months ended September 30, 2008 and 2009 were approximately RMB44,000, RMB730,000, RMB536,000 (unaudited) and RMB1,257,000, respectively.
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
Financial information of parent company
Condensed Balance Sheets
(in thousands, except par value)
December 31, | September 30, | |||||||||||
2007 RMB | 2008 RMB | 2009 RMB | 2009 US$ | |||||||||
(Note 2(c)) | ||||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | 84,232 | 52,238 | 8,887 | 1,302 | ||||||||
Amounts due from subsidiaries, associates and related parties | 45,223 | 34,583 | 64,922 | 9,511 | ||||||||
Prepaid expenses and other current assets | 1,410 | - | - | - | ||||||||
Total current assets | 130,865 | 86,821 | 73,809 | 10,813 | ||||||||
Non-current assets: | ||||||||||||
Long-term investments | 254,339 | 175,424 | 270,365 | 39,607 | ||||||||
Total assets | 385,204 | 262,245 | 344,174 | 50,420 | ||||||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||||||
Current liabilities: | ||||||||||||
Accrued expenses and other current liabilities | 5,034 | 5,897 | 2,520 | 369 | ||||||||
Amounts due to subsidiaries, associates and related parties | 15,205 | 6,809 | 2,524 | 370 | ||||||||
Total liabilities | 20,239 | 12,706 | 5,044 | 739 | ||||||||
Convertible redeemable preferred shares (US$0.001 par value, 305,254, 311,367 and 311,367 shares authorized, issued and outstanding with redemption value of RMB 547,379, RMB 566,470 and RMB 566,470 as of December 31, 2007 and 2008 and as of September 30, 2009, respectively) | 469,971 | 501,892 | 514,162 | 75,322 | ||||||||
Shareholders’ deficit: | ||||||||||||
Ordinary shares (US$0.001 par value, | 2,152 | 2,152 | 2,152 | 315 | ||||||||
Additional paid-in capital | 28,537 | 13,508 | 2,496 | 366 | ||||||||
Accumulated deficit | (135,695 | ) | (268,013 | ) | (179,680 | ) | (26,322 | ) | ||||
Total shareholders’ deficit | (105,006 | ) | (252,353 | ) | (175,032 | ) | (25,641 | ) | ||||
Total liabilities, convertible redeemable preferred shares and shareholders’ deficit | 385,204 | 262,245 | 344,174 | 50,420 | ||||||||
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IFM INVESTMENTS LIMITED
Notes to Consolidated Financial Statements — (Continued)
Financial information of parent company
Condensed Statements of Operations
(in thousands)
Year Ended December 31,
| Nine Months Ended September 30,
| ||||||||||||||
2007 RMB | 2008 RMB | 2008 RMB | 2009 RMB | 2009 US$ | |||||||||||
(unaudited) | (Note 2(c)) | ||||||||||||||
Costs and expenses: | |||||||||||||||
Selling, general and administrative expenses | (16,343 | ) | (14,202 | ) | (8,897 | ) | (6,573 | ) | (963 | ) | |||||
Total costs and expenses | (16,343 | ) | (14,202 | ) | (8,897 | ) | (6,573 | ) | (963 | ) | |||||
Loss from operations | (16,343 | ) | (14,202 | ) | (8,897 | ) | (6,573 | ) | (963 | ) | |||||
Interest income | 901 | 1,325 | 1,048 | 19 | 3 | ||||||||||
Foreign currency exchange loss | (8,425 | ) | (7,635 | ) | (7,316 | ) | (54 | ) | (8 | ) | |||||
Loss before share of subsidiaries’ and associates’ losses (income) | (23,867 | ) | (20,512 | ) | (15,165 | ) | (6,608 | ) | (968 | ) | |||||
Share of subsidiaries’ and associates’ (losses) income | (50,254 | ) | (111,806 | ) | (84,564 | ) | 94,941 | 13,908 | |||||||
Net (loss) income | (74,121 | ) | (132,318 | ) | (99,729 | ) | 88,333 | 12,940 | |||||||
Accretion of convertible redeemable preferred shares | (7,247 | ) | (15,759 | ) | (11,735 | ) | (12,269 | ) | (1,797 | ) | |||||
Income allocated to participating preferred shareholders | - | - | - | (41,451 | ) | (6,072 | ) | ||||||||
Net (loss) income attributable to ordinary shareholders | (81,368 | ) | (148,077 | ) | (111,464 | ) | 34,613 | 5,071 | |||||||
Condensed Statements of Cash Flows
(in thousands)
Year Ended December 31, | Nine Months Ended September 30, | ||||||||||||||
2007 RMB | 2008 RMB | 2008 RMB | 2009 RMB | 2009 US$ | |||||||||||
(unaudited) | (Note 2(c)) | ||||||||||||||
Net cash used in operating activities | (20,754 | ) | (13,736 | ) | (10,566 | ) | (9,959 | ) | (1,459 | ) | |||||
Net cash used in investing activities | (201,190 | ) | (32,889 | ) | (32,889 | ) | - | - | |||||||
Net cash provided by (used in) financing activities | 279,341 | 19,137 | 18,354 | (33,367 | ) | (4,888 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (3,898 | ) | (4,506 | ) | (4,743 | ) | (25 | ) | (4 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 53,499 | (31,994 | ) | (29,844 | ) | (43,351 | ) | (6,351 | ) | ||||||
Cash and cash equivalents at the beginning of year/period | 30,733 | 84,232 | 84,232 | 52,238 | 7,653 | ||||||||||
Cash and cash equivalents at the end of year/period | 84,232 | 52,238 | 54,388 | 8,887 | 1,302 | ||||||||||
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. | Indemnification of Directors and Officers. |
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated Articles of Association provide for indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such, except through their own fraud or dishonesty.
Pursuant to the form of indemnification agreements filed as Exhibit 10.2 to this Registration Statement, we will agree to indemnify our directors and officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such a director or officer.
The form of Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement will also provide for indemnification of us and our officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item 7. | Recent Sales of Unregistered Securities. |
During the past three years, we have issued the following securities (including options to acquire our ordinary shares). We believe that each of the following issuances was exempt from registration under the Securities Act in reliance on Regulation S under the Securities Act or pursuant to Section 4(2) of the Securities Act regarding transactions not involving a public offering. On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 each, 20,000,000 Series A preferred shares of par value US$0.01 each and 11,136,727 Series B preferred shares of par value US$0.01 each were divided into 260,000,000 ordinary shares of US$0.001 par value each, 200,000,000 Series A preferred shares of par value US$0.001 each and 111,367,270 Series B preferred shares of par value US$0.001 each, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760. The share split has been retroactively reflected for the information presented below.
Purchaser | Date of Sale or | Number of Securities | Consideration | Underwriting | ||||
Goldman Sachs Strategic Investments (Asia) L.L.C. | August 24, 2006 | 200,000,000 Series A preferred shares | 22,000,000 | Not applicable | ||||
GL Asia Mauritius II Cayman Ltd | October 19, 2007 | 105,253,600 Series B preferred shares | 40,000,000 | Not applicable | ||||
Realogy Corporation | February 21, 2008 | 6,113,670 Series B preferred shares | 2,323,406 | Not applicable | ||||
Certain directors, officers, employees, and consultants of the Registrant | July 16, 2007 | options to purchase a total of 39,800,000 ordinary shares | Not applicable1 | Not applicable | ||||
Certain directors, officers, employees, and consultants of the Registrant | December 17, 2007 | options to purchase a total of 5,500,000 ordinary shares | Not applicable1 | Not applicable |
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Purchaser | Date of Sale or | Number of Securities | Consideration | Underwriting | ||||
Certain directors, officers, employees, and consultants of the Registrant | February 20, 2008 | options to purchase a total of 1,700,000 ordinary shares | Not applicable1 | Not applicable | ||||
Certain directors, officers, employees, and consultants of the Registrant | August 11, 2008 | options to purchase a total of 3,000,000 ordinary shares | Not applicable1 | Not applicable | ||||
Certain directors, officers, employees, and consultants of the Registrant | February 2, 2009 | options to purchase a total of 200,000 ordinary shares | Not applicable1 | Not applicable | ||||
Certain directors, officers, employees, and consultants of the Registrant | July 20, 2009 | options to purchase a total of 700,000 ordinary shares | Not applicable1 | Not applicable | ||||
Certain directors, officers, employees and consultants of the Registrant | August 20, 2009 | options to purchase a total of 2,500,000 ordinary shares | Not applicable1 | Not applicable |
1 | Issued pursuant to the 2006 Stock Incentive Plan, as amended |
Item 8. | Exhibits and Financial Statement Schedules. |
(a) Exhibits
See Exhibit Index beginning on page II-5 of this registration statement.
Item 9. | Undertakings. |
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant under the provisions described in Item 6, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(b) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the People's Republic of China, on January 27, 2010.
IFM INVESTMENTS LIMITED | ||
By: | /s/ Donald Zhang | |
Name: Donald Zhang | ||
Title: Chairman of the Board of Directors Chief Executive Officer |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Donald Zhang and Harry Lu, and each of them singly, as his true and lawful attorneys-in-fact and agents, each with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signatures | Title | Date | ||
/s/ Donald Zhang Name: Donald Zhang | Chairman of the Board of Directors and Chief Executive Officer (principal executive officer) | January 27, 2010 | ||
/s/ Harry Lu Name: Harry Lu |
Vice Chairman of the Board of Directors and President | January 27, 2010 | ||
/s/ * Name: Kevin Cheng Wei | Director and Chief Financial Officer (principal financial and accounting officer) | January 27, 2010 | ||
/s/ * Name: Weiping Zhang | Director | January 27, 2010 | ||
/s/ * Name: Jennifer Tang | Director | January 27, 2010 | ||
/s/ * Name: Qiang Chai | Director | January 27, 2010 | ||
/s/ * Name: Liang Pei | Director | January 27, 2010 | ||
/s/ * Name: Gregory F. Lavelle Title: Managing Director Puglisi & Associates | Authorized Representative in the United States
| January 27, 2010
|
* By: | /s/ Donald Zhang | |||||
Donald Zhang Attorney-in-fact |
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IFM INVESTMENTS LIMITED
EXHIBIT INDEX
Exhibit Number | Description of Documents | |
1.1* | Form of Underwriting Agreement. | |
3.1** | Memorandum and Articles of Association of the Registrant, as currently in effect. | |
3.2** | Amended and Restated Memorandum and Articles of Association of the Registrant. | |
4.1 | Registrant’s Specimen American Depositary Receipt (included in Exhibit 4.3). | |
4.2* | Registrant’s Specimen Certificate for Class A ordinary shares. | |
4.3* | Form of Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts. | |
4.4* | Registration Rights Agreement, dated as of December 30, 2009, granting registration rights to certain shareholders of the Registrant. | |
5.1* | Opinion of Conyers Dill & Pearman regarding the validity of the ordinary shares being registered. | |
8.1* | Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding certain U.S. tax matters. | |
8.2* | Opinion of Conyers Dill & Pearman regarding certain Cayman Islands tax matters. | |
10.1* | Amended and Restated 2006 Stock Incentive Plan. | |
10.2* | Form of Indemnification Agreement with the Registrant’s directors. | |
10.3* | Form of Employment Agreement with Donald Zhang, Harry Lu, Kevin Cheng Wei, Kevin Yung and Weiping Zhang. | |
10.4* | English translation of Form of Labor Contract with Lihong Ma, Hao Wang, Qifeng Tan and Sheng Kang. | |
10.5* | English translation of Labor Contract with Wang Yui Fung. | |
10.6* | English translation of Labor Contract with Hau Piu Ip. | |
10.7* | Restated CENTURY 21 International Sub-franchise Agreement for the People’s Republic of China, dated as of March 22, 2000. | |
21.1* | Subsidiaries of the Registrant. | |
23.1** | Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an Independent Registered Public Accounting Firm. | |
23.2 | Consent of Conyers & Dill Pearman (included in Exhibit 5.1). | |
23.3 | Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1). | |
23.4* | Consent of Jun He Law Offices. | |
23.5* | Consent of Conor Chiahung Yang. | |
23.6* | Consent of Kevin Yung. | |
24.1* | Powers of Attorney (included on signature page). | |
99.1* | Code of Business Conduct and Ethics of the Registrant. |
* | Filed previously. |
** | Filed herewith. |
II-5