神州租车IPO文件

神州租车IPO文件 F-1 1 a2206840zf-11>.htm F-1 Use these links to rapidly review the document Table of contents TABLE OF CONTENTS 2 Table of Contents As filed with the Securities and Exchange Commission on January18, 2012 Registration No.333- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF1933 China Auto RentalInc. (Exact name of registrant as specified in its charter) Not Applicable (Translation of Registrant's name into English) Cayman Islands (State or other jurisdiction of incorporation or organization) 6>7510 (Primary Standard Industrial Classification Code Number) Not Applicable (I.R.S. Employer Identification Number) 2F, Lead International Building 2A Zhonghuan South Road, Wangjing Chaoyang District Beijing, PRC 100102 +86-10-5820-9999 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Corporation Service Company 1180 Avenue of the Americas, Suite210 New York, New York 10036-8401 +1-800-927-9800 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: David T. Zhang, Esq. Fan Zhang, Esq. Kirkland& Ellis International LLP c/o 26/F, Gloucester Tower, The Landmark 15 Queen's Road Central Hong Kong +852-3761-3318 James C. Lin, Esq. Li He, Esq. Davis Polk& WardwellLLP 2201, China World Office 2 1 Jian Guo Men Wai Avenue Chaoyang District Beijing -8567-5000 100004, China +86-10 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule415 under the Securities Act of 1933, check the following box.?? If this form is filed to register additional securities for an offering pursuant to Rule462(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 Rule462(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 Rule462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.?? CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered(1)(2) Proposed maximum aggregate offering price(3) Amount of registration fee Ordinary shares, par value US$1.00 per share US$300,000,000 US$34,380 (1) Includes ordinary shares that may be purchased by the underwriters pursuant to an option to purchase additional ADSs. Also includes ordinary 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 40days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These ordinary shares are not being registered for the purposes of sales outside of the United States. (2) American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on FormF-6 (Registration No.333-). Each American depositary share representsordinary shares. (3) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule457(o) under the Securities Act. 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 filea further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section8(a), may determine. Table of Contents Subject to completion, dated, 2012 The information in this prospectus is not complete and may be changed. We may not sell the 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 we are not soliciting any offer to buy these securities in any jurisdiction where such offer or sale is not permitted. Prospectus American depositary shares China Auto RentalInc. Representingordinary shares This is an initial public offering of American depositary shares, or ADSs, by China Auto RentalInc. China Auto RentalInc. is selling ADSs. Each ADS representsordinary shares of China Auto RentalInc., par value $1.00 per share. The estimated initial public offering price is between $and $per ADS. We have applied to list our ADSs on the New York Stock Exchange under the symbol ;CARH.; Per ADS tal To Initial public offering price US$ US$ Underwriting discounts and commissions US$ US$ Proceeds to China Auto RentalInc., before expenses US$ US$ China Auto RentalInc. has granted the underwriters an option for a period of 30days to purchase from them up toadditional ADSs. The underwriters expect to deliver the ADSs to purchasers on or about,2012. Investing in our ADSs involves a high degree of risk. See ;Risk factors; beginning on page11. 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. J.P. Morgan , 2012 Table of Contents Table of contents Page Prospectus summary 1 Risk factors 11 Special note regarding forward-looking statements 46 Use of proceeds 48 Dividend policy 49 Capitalization 50 Dilution 51 Exchange rate information 53 Enforceability of civil liabilities 54 Corporate structure and history 56 Selected consolidated financial and operating data 58 Management's discussion and analysis of financial condition and results of operations 61 Industry 86 Business 92 Regulations 113 Management 128 Principal shareholders 134 Related party transactions 136 Description of share capital 138 Description of American depositary shares 148 Shares eligible for future sale 160 Taxation 162 Underwriting 172 Expenses related to this offering 180 Legal matters 181 Experts 181 Where you can find additional information 182 Index to consolidated financial statements F-1 i Table of Contents Prospectus summary This summary highlights information contained elsewhere in this prospectus and does not contain all the information that you should consider before investing in our ADRs. You should carefully read the entire prospectus, including our financial statements and related notes included in this prospectus and the information set forth under the headings ;Risk factors; and ;Management's discussion and analysis of financial condition and results of operations,; before making an investment decision. Our business We are the largest car rental company in China. We enjoy a clear leadership position across substantially all major operating metrics including fleet size, network coverage and number of customers. We also command the largest market share in terms of revenue in China's car rental market, according to Roland Berger, an independent consulting firm. We believe we are the first and only car rental company with a rental fleet of more than 10,000 vehicles in China's underpenetrated yet rapidly expanding car rental industry. Our fleet, comprising approximately 26,000 vehicles covering most of the popular models in China, was as large as the aggregate fleet size of the next eight largest car rental companies and approximately four times that of the second largest car rental company in China as of December31, 2011, according to Roland Berger. We are dedicated to providing customers with enjoyable, affordable and reliable car rental services. Our network of 520 service locations covers 66 cities in all provinces and provincial-level municipalities of China. We pursue excellence in serving our customers with 24/7 service at 52 major airports in China and in every city where we operate. Our products include short-term rentals, long-term rentals and leasing. Our large and fast-growing customer base, which reached 450,000 as of December31, 2011, had expanded at a compound annual growth rate, or CAGR, of 189.4% since December31, 2008. As of December31, 2011, we had over 920,000 registered members. Our brand ; ,; or ;China Auto Rental,; has become the most recognized car rental brand in China, according to a consumer survey conducted by Roland Berger in 2011. According to Baidu Index and Google Trends, two major keyword search popularity indices, our brand had the highest search volume among car rental companies in China and our total search volume on Baidu and Google was over four times and twice, respectively, that of our closest competing brand in China in 2011. Leveraging our strong brand, we employ a direct sales strategy and market through targeted Internet and traditional advertising. We believe our direct sales approach lowers our customer acquisition costs by bypassing third-party intermediaries enhances service quality and customer retention by providing us with and in-depth understanding of customer needs. We have established a robust and scalable information technology, or IT, platform, which fully integrates all aspects of our operations including transaction processing, customer management, fleet management and payment processing. Our IT platform allows us to collect, monitor and analyze vast amounts of customer, fleet and financial data on a real-time basis, which enables us to improve our operational efficiency and service quality. Our IT platform effectively supported our operations as our fleet expanded from 692 vehicles as of 1 Table of Contents December31, 2009 to approximately 26,000 vehicles as of December31, 2011, and we believe our IT platform is highly scalable for our future business expansion. Our revenues have grown significantly since our inception. We derive our revenues primarily from short-term rentals of our vehicles. Our revenues increased from RMB54.0million in 2009 to RMB143.0million (US$22.4million) in 2010 and RMB489.4million (US$76.7million) for the nine months ended September30, 2011. We incurred net losses of RMB3.2million, RMB43.3million (US$6.8million) and RMB117.6million (US$18.4million) in 2009, 2010 and in the nine months ended September30, 2011. Our adjusted EBITDA for 2009, 2010 and the nine months ended September30, 2011 was RMB17.3million, RMB26.3million (US$4.1million) and RMB148.9million (US$23.3million), respectively. For a reconciliation of our adjusted EBITDA to our net loss, see footnote 1 on pages9 and 10 of this prospectus. Our industry China's car rental industry is at an early stage of development and is expanding rapidly. According to Roland Berger, total revenues in China's car rental industry grew from approximately RMB5billion in 2005 to approximately RMB17billion (US$2.5billion) in 2010, representing a CAGR of 27%, and are expected to further increase to approximately RMB39billion (US$6.1billion) in 2015, representing a CAGR of 18% from 2010 to 2015. As of December31, 2010, there were over 10,000 car rental companies in China with an average fleet size of no more than 50 vehicles, according to the same source. The car rental penetration rate, which is the number of rental vehicles as a percentage of the total number of registered passenger vehicles, is significantly lower in China than in more mature markets, which indicates substantial growth potential. Further, in contrast to more mature markets, the majority of car rentals in China is for business use, while leisure use and replacement rentals constitute a smaller yet rapidly growing percentage of the total market, according to Roland Berger. Growth in China's car rental industry is driven largely by the rapid growth of China's economy, the urbanization of China's population, the increase in disposable income of China's consumers, improvement in China's road infrastructure, the increasing burden of car ownership and a favorable policy environment. China's car rental market is divided into two segments: short-term rentals, or rentals of 30days or less, and long-term rentals, or rentals of over 30days. Sustained disparity between numbers of licensed drivers and car owners is expected to contribute to the growth in the short-term rental market in China. China had approximately 151.3million licensed drivers and 61.2million registered passenger vehicles as of December31, 2010, according to the National Bureau of Statistics of China, or the NBSC. Growth of the short-term rental market in China is also expected to be driven by an increase in the amount of local travel by Chinese consumers, the growth of the domestic travel industry, the development of the replacement rental market, and improved social and technological facilities. Growth of the long-term rental market in China is expected to be driven by demand for car use by institutional customers that prefer not to incur large capital expenditures or dedicate significant resources to fleet management, as well as government agencies resorting to long-term rentals due to policy reform limiting car ownership by government agencies. 2 Table of Contents Our strengths We believe the following strengths have contributed to our success and differentiated us from our competitors: ?? clear market leadership in China's rapidly growing car rental market; ?? superior services and premium brand; ?? extensive business partnerships; ?? diversified business mix; ?? robust, scalable IT platform; and ?? experienced management team. Our strategy Our goal is to solidify and strengthen our leadership position in China's car rental market and become one of the largest car rental companies in the world. To achieve this goal, we intend to: ?? continue to enhance market leadership position; ?? further expand customer base and improve customer loyalty; ?? continue to improve operational efficiency; and ?? develop and enhance our used car sale business. Our challenges Our business is subject to numerous risks, as more fully described in the section entitled ;Risk factors; and other information included in this prospectus. These risks include: ?? our limited operating history in an emerging and rapidly evolving market; ?? our ability to be profitable in the future; ?? our ability to manage our growth or execute our strategies effectively; ?? the sustainability of our growth; ?? our ability to manage our liquidity and cash flows, retain existing financial resources or raise additional capital; ?? the effect of restrictive covenants on our ability to incur additional indebtedness and capital expenditures and conduct our business; ?? our ability to maintain and enhance our reputation and market recognition of our brand; and ?? uncertainties in the PRC car rental industry. 3 Table of Contents Our corporate structure The following diagram illustrates our corporate structure as of the date of this prospectus: Our corporate information Our principal executive offices are located at 2F, Lead International Building, 2A Zhonghuan South Road, Wangjing, Chaoyang District, Beijing 100102, People's Republic of China. Our telephone number at this address is +86-10-5820-9999 and our fax number is +86-10-5820-9966. Our registered office in the Cayman Islands is located at the offices of Offshore Incorporations (Cayman) Limited, Scotia Centre, 4thFloor, P.O.Box2804, George Town, Grand Cayman KY1-1112, Cayman Islands. Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our website is .zuche3>. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is Corporation Service Company, 1180 Avenue of the Americas, Suite210, New York, New York 10036-8401. Conventions that apply to this prospectus Unless otherwise indicated, references in this prospectus to: ?? ;we,; ;us,; ;our,; ;our company; or ;China Auto RentalInc.; are to China Auto RentalInc., a Cayman Islands company and its subsidiaries; 4 Table of Contents ?? ;shares; or ;ordinary shares; are to our ordinary shares, par value US$1.00 per share; ?? ;ADSs; are to our American depositary shares, each of which representsordinary shares; ?? ;ADRs; are to the American depositary receipts, which, if issued, evidence our ADSs; ?? ;China; or the ;PRC; are to the People's Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only; ?? ;RMB; or ;Renminbi; are to the legal currency of China; and ?? ;US$; are to the legal currency of the United States. This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. For amounts not recorded in our consolidated combined financial statements included elsewhere in this prospectus, unless otherwise stated, all translation of financial data from Renminbi into U.S. dollars has been made at RMB6.3780 to US$1.00, the noon buying rate in effect on September30, 2011 as set forth in the H.10 Statistical Release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. 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 January13,2012, the noon buying rate was RMB6.3065 to US$1.00. 5 Table of Contents The offering The following assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated. Offering price We currently estimate that the initial public offering price will be between US$and US$per ADS. ADSs offered by us ADSs. ADSs outstanding immediately after this offering ADSs (orADSs if the underwriters exercise their option to purchase additional ADSs in full). Ordinary shares outstanding immediately after this offering ordinary shares (orordinary shares if the underwriters exercise their option to purchase additional ADSs in full). New York Stock Exchange symbol CARH. The ADSs Each ADS representsordinary shares. The ADSs may be evidenced by ADRs. The depositary will hold the shares underlying your ADSs and you will have rights as provided in the deposit agreement. We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses. You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange. We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended. To better understand the terms of the ADSs, you should carefully read the ;Description of American depositary shares; section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus. 6 Table of Contents Option to purchase additional ADSs We have granted to the underwriters an option, exercisable within 30days from the date of this prospectus, to purchase up to an additionalADSs. Use of proceeds We estimate that we will receive net proceeds of approximately US$million from this offering (or US$million if the underwriters exercise their option to purchase additional ADSs in full), after deducting the underwriting discounts, commissions and estimated offering expenses payable by us and assuming an initial public offering price of US$per ADS, being the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus. We plan to use the net proceeds we receive from this offering for the following purposes: ?? US$million for vehicle acquisition to further expand our rental fleet; ?? US$million for repayment of certain borrowings; and ?? US$million for working capital and other general corporate purpose. See ;Use of proceeds; for additional information. Lock-up We, our directors and executive officers, and all of our existing shareholders have agreed with the underwriters not to sell, transfer or otherwise dispose of, and not to announce an intention to sell, transfer or otherwise dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See ;Underwriting; for more information. Risk factors See ;Risk factors; and other information included in this prospectus for a discussion of risks you should carefully consider before investing in the ADSs. Depositary Citibank, N.A. The number of ordinary shares that will be outstanding immediately after this offering is based onshares outstanding as of the date of this prospectus. 7 Table of Contents Summary consolidated financial and operating data We present below our summary consolidated financial and other operating data for the periods indicated. The following summary consolidated statement of operations data for the years ended December31, 2009 and 2010 and the consolidated balance sheet data as of December31, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary condensed consolidated statement of operations data for the nine months ended September30, 2010 and September30, 2011 and the condensed consolidated balance sheet data as of September30, 2011 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of our financial position and operating results for the period presented. We have omitted financial information as of and for the year ended December31, 2008 because such information is not available on a basis that is consistent with the consolidated financial information included in this prospectus and cannot be prepared in accordance with United States generally accepted accounting principles, or U.S.GAAP, without unreasonable effort or expense. Furthermore, we believe that the omission of such financial information would not have a material impact on a reader's understanding of our financial results and condition and related trends. The summary consolidated financial and operating data should be read in conjunction with our consolidated financial statements and related notes and ;Management's discussion and analysis of financial condition and results of operations; included elsewhere in this prospectus. The consolidated financial statements are prepared and presented in accordance with U.S.GAAP. Our historical results are not necessarily indicative of our results for any future periods. 8 Table of Contents Nine months ended September30 Year ended December31 (in thousands, except for share, per share and per ADS data) 2010 (Unaudited) 2011 (Unaudited) 2011 (Unaudited) 2009 2010 2010 Consolidated statement of operations data: Net revenues RMB54,010 RMB142,992 $ US 22,420 RMB61,904 RMB489,368 US$76,728 Expenses Depreciation of rental vehicles (11,924 ) (47,206 ) (7,401 ) (21,654 ) (167,264 ) (26,225 ) Direct operating expenses (22,692 ) (61,525 ) (9,646 ) (30,187 ) (195,596 ) (30,667 ) Selling, marketing and distribution expenses (3,463 ) (25,516 ) (4,001 ) (9,709 ) (77,831 ) (12,205 ) General and administrative expenses (11,366 ) (32,980 ) (5,173 ) (15,522 ) (77,896 ) (12,213 ) Interest income and other income, net 14 737 116 452 907 142 Interest expenses (7,735 ) (20,374 ) (3,194 ) (7,069 ) (89,091 ) (13,968 ) Total expenses (57,166 ) (186,864 ) (29,299 ) (83,689 ) (606,771 ) (95,136 ) Loss before income tax expense (3,156 ) (43,872 ) (6,879 ) (21,785 ) (117,403 ) (18,408 ) Income tax benefit/(expense) — 542 85 152 (224 ) (35 ) Net loss (3,156 ) (43,330 ) (6,794 ) (21,633 ) (117,627 ) (18,443 ) Loss per ordinary share: Basic (3,400.86 ) (5,660.13 ) (887.45 ) (3,584.59 ) (9,996.35 ) (1,567.32 ) Diluted (3,400.86 ) (5,660.13 ) (887.45 ) (3,584.59 ) (9,996.35 ) (1,567.32 ) Weighted average ordinary shares used in per share computation: Basic 928 7,597 7,597 6,035 11,767 11,767 Diluted 928 7,597 7,597 6,035 11,767 11,767 Selected non-GAAP financial data: Adjusted EBITDA(1) 17,277 26,262 4,116 7,555 148,926 23,349 (1)Adjusted EBITDA is defined as net income before net interest expenses, income taxes, depreciation, amortization and other income, net. Our management uses adjusted EBITDA as an operating performance metric for internal monitoring and planning purposes, including the preparation of our annual operating budget and monthly operating reviews. In addition, adjusted EBITDA serves as a supplemental measure with which we can evaluate profitability and make performance trend comparisons between us and our competitors. Furthermore, we believe that adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Adjusted EBITDA is also used by our management to evaluate our operating performance exclusive of financing costs and depreciation policies. Furthermore, we believe it provides a comparative metric to our management and investors that is consistent across companies with different capital structures and depreciation policies, enabling them to more accurately compare our performance to that of our peers. In addition, our management uses adjusted EBITDA as a proxy for cash flow available to finance fleet expenditures and the costs of our capital structure on a day-to-day basis so that we can more easily monitor our cash flows when a full statement of cash flows is not available. Adjusted EBITDA is not a recognized measurement under U.S.GAAP. When evaluating our operating performance or liquidity, investors should not consider adjusted EBITDA in isolation of, or as a substitute for, measures of our financial performance and liquidity as determined in accordance with U.S.GAAP, such as net income, operating income or net cash provided by operating activities. Adjusted EBITDA may have material limitations as a performance measure because it excludes items that are necessary elements of our costs and operations. Because other companies may calculate adjusted EBITDA differently than we do, it may not be comparable to similarly titled measures reported by other companies. 9 Table of Contents Our adjusted EBITDA is calculated as follows for the periods presented: Year ended December31 Nine months ended September30 (in thousands) 2009 2010 2010 2010 2011 2011 Net loss RMB(3,156 ) RMB(43,330 ) US$ (6,794 ) RMB(21,633 ) RMB(117,627 ) US$ (18,443 ) Income tax (benefit)/expense — (542 ) (85 ) (152 ) 224 35 Interest income and other income, net (14 ) (737 ) (116 ) (452 ) (907 ) (142 ) Interest expenses 7,735 20,374 3,194 7,069 89,091 13,968 Depreciation 12,712 49,937 7,829 22,551 175,299 27,485 Amortization — 560 88 172 2,846 446 Adjusted EBITDA 17,277 26,262 4,116 7,555 148,926 23,349 The following table presents a summary of our consolidated balance sheet data: ?? on an actual basis as of December31, 2009, December31, 2010 and September30, 2011; and ?? on a pro forma basis to give effect to the issuance and sale of theordinary shares in the form of ADSs by us in this offering, based on the initial public offering price of US$per ADS, the midpoint of the initial public offering price range as shown on the cover of this prospectus, after deducting underwriting discounts, commission and estimated offering expenses payable by us and assuming no exercise of the underwriters' option to purchase additional ADSs. As of December31 As of September30, 2011 2009 2010 2010 (Unaudited) (Actual) (Unaudited) (Actual) (Unaudited) (Proforma) (Unaudited) (Proforma) (in thousands) (Actual) (Actual) (Actual) Consolidated balance sheet data: Cash and cash equivalents RMB4,624 RMB81,062 US$ 12,710 RMB202,290 US$31,717 RMB US$ Total current assets 16,813 167,170 26,210 378,552 59,353 Rental vehicles, net 71,159 917,515 143,856 2,051,180 321,602 Total non-current assets 74,950 978,986 153,494 2,289,518 358,972 Total assets 91,763 1,146,156 179,705 2,668,070 418,325 Long-term borrowings due within one year 11,793 218,967 34,332 606,577 95,105 Total current liabilities 112,421 440,115 69,005 1,564,605 245,314 Long-term borrowings 2,676 403,514 63,267 911,877 142,972 Total non-current liabilities 2,676 608,809 95,455 915,343 143,515 Total shareholders' (deficit)/equity (23,334 ) 97,232 15,245 188,122 29,496 Total liabilities and shareholders' equity 91,763 1,146,156 179,705 2,668,070 418,325 The following table sets forth certain key operating data as of and for the dates and periods indicated: As of and for the year ended December31 As of and for the nine months ended September30 2009 2010 2010 2011 Fleet size(1) 692 10,202 4,622 22,638 Average daily rental rate(2) (RMB) 327 204 251 191 Utilization rate(3) 65.3% 61.2% 56.5% 58.4% RevPAC(4) (RMB) 213 125 142 112 (1)End period fleet size includes vehicles in operations and excludes vehicles retired and awaiting sale or vehicles in our possession but not yet in operation. (2)Average daily rental rate is calculated by dividing net short-term rental revenue in a given period by the fleet transaction days in that period. Fleet transaction days are the total rental days for all vehicles in our short-term fleet in a given period. (3)Fleet utilization rate is calculated by dividing the aggregate rental days for our short-term rental fleet during a given period by the aggregate days our short-term rental vehicles are available for rental during the same period. We exclude vehicles that are potentially lost, sold, awaiting sale or salvaged, but include vehicles in repair or maintenance and vehicles being used internally when calculating the aggregate days available for rental. Long-term rentals are also excluded from the fleet utilization rate calculation. (4)RevPAC is calculated by multiplying the average daily rental rate in a given period by the fleet utilization rate in that same period. 10 Table of Contents Risk factors An investment in our ADSs involves a high degree of risk. You should carefully consider 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 and industry Our limited operating history in an emerging and rapidly evolving market may not provide an adequate basis on which to judge our future prospects and results of operations. We commenced business operations in September 2007 and have expanded rapidly since then. We have become the largest car rental company in China within a relatively short period of time. However, our limited operating history may not provide a meaningful basis for you to evaluate our business, financial performance and prospects. Accordingly, you should not rely on results of operations for any prior periods as an indication of our future performance. You should consider our business and prospects in light of the risks, uncertainties, expenses and challenges that we will face as an early-stage company operating in a rapidly growing market. Going forward, we may not be successful in addressing the risks and uncertainties that we will confront, which may materially and adversely affect our business prospects. We have operated at a loss and we may not be profitable in the near future. We experienced net losses in 2009, 2010 and the nine months ended September30, 2011. We may not achieve or maintain profitability or avoid net losses in the future. Although our revenues have grown significantly in recent periods, such growth rates may not be sustainable and may decrease in the future. In addition, our ability to become profitable depends on our ability to control our expenses, which we expect will increase as we develop and expand our business. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus, and we may further encounter unforeseen expenses, difficulties, complications, delays and other unknown events. If we fail to increase revenues at the rate we anticipate or if our expenses increase without a more rapid increase in our revenues, we may not be able to achieve or maintain profitability. If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected. We have grown and expanded rapidly since our establishment. We may not be able to effectively manage our growth in future periods due to a number of different factors, including, among others, macroeconomic factors out of our control, competition within China's car rental industry, the greater difficulty of growing at sustained rates from a larger revenue base, our inability to control our expenses and the availability of resources for our growth. Specifically, our anticipated further expansion will place a significant strain on our management, systems and resources. We intend to broaden and deepen our network coverage to strategically add new service locations to further penetrate cities within our existing network, as well as to selectively enter into lower tier cities that we believe have high growth potential. In addition, we plan to continue to expand our fleet size, optimize our fleet 11 Table of Contents composition and diversify our business mix. All of these endeavors will require substantial managerial effort and skill and the incurrence of additional expenditures. Further, pursuing these strategies may require us to expand our operations through internal development efforts as well as partnerships, joint ventures, investments and acquisitions. We may not be able to efficiently or effectively implement our growth strategies or manage the growth of our operations, and any failure to do so may limit future growth and hamper our business strategies. Our growth rate may not be sustainable and a failure to maintain an adequate growth rate will adversely affect our business. Our revenues and our business operations have grown rapidly since our inception. Our net revenues have grown from RMB54.0million in 2009 to RMB143.0million (US$22.4million) in 2010 and from RMB61.9million in the nine months ended September30, 2010 to RMB489.4million (US$76.7million) in the nine months ended September30, 2011. Our fleet size increased from 692 vehicles as of December31, 2009 to 10,202 vehicles as of December31, 2010 and to 22,638 vehicles as of September30, 2011. We may not be able to sustain these high rates of growth in future periods and you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. If we are unable to maintain adequate revenue growth and at the same time control our expenses, our results of operation may be adversely affected, and we may not have adequate resources to execute our business strategies. Our business requires a large amount of capital to finance the replenishment and expansion of our fleet. Failure to manage our liquidity and cash flows or inability to raise additional financing in the future may materially and adversely affect our business, results of operations and financial condition. The car rental industry in China is capital intensive. Maintaining our competitiveness and implementing our growth strategies both require us to obtain sufficient funds to replenish and expand our fleet. Our capital expenditures relating to vehicle acquisitions, net of proceeds from used car sales, were RMB867.5million (US$136.0million) in 2010 and RMB1,392.4million (US$218.3million) in the nine months ended September30, 2011. To replenish or expand our fleet, we depend substantially on borrowings from financial institutions, capital leases, and loans from Legend Holdings Limited, or Legend Holdings, a former shareholder of our company. As of September30, 2011, our borrowings from financial institutions totaled RMB1,735.5million (US$272.1million), capital leases totaled RMB5.9million (US$0.9million), and loans from Legend Holdings totaled RMB549.6million (US$86.2million). As of September30, 2011, we had net current liabilities of RMB1,186.1million (US$186.0million) as we incurred a substantial amount of short-term and long-term borrowings to finance the rapid expansion of our rental fleet. From time to time, we will be required to repay our short-term and long-term borrowings when they become due. We may not be able to generate sufficient cash flows from our operations or obtain additional financing to service these obligations. Our ability to make additional capital expenditures to finance our business growth, primarily including our rental fleet expansion, may also be materially and adversely affected. Furthermore, we expect to raise additional financing to fund the replenishment and expansion of our fleet and the overall expansion of our business to provide enhanced products and services, acquire a larger customer base, respond to competitive pressures and develop 12 Table of Contents complementary businesses, technologies or services. Such additional financing may not be available on commercially reasonable terms or at all, especially if there is a recession or other events causing volatility in the capital markets worldwide. To the extent that we raise additional financing by issuing equity securities, our shareholders may experience substantial dilution, and to the extent we engage in debt financing, we may become subject to restrictive covenants that could limit our flexibility in conducting future business activities. Our ability to retain our existing financial resources and obtain additional financing on acceptable terms is subject to a variety of uncertainties, including: ?? PRC governmental policies relating to bank loans and other credit facilities; ?? PRC governmental regulations of foreign investment and the car rental industry in China; ?? economic, political and other conditions in China; ?? investors' perception of, and demand for, securities of car rental companies; ?? conditions of the United States and other capital markets in which we may seek to raise funds; and ?? our future results of operations, financial condition and cash flows. If additional financing is not available on acceptable terms or at all, we may not be able to fund our expansion, promote our brand, enhance our products and services, respond to competitive pressures or take advantage of investment or acquisition opportunities, all of which may adversely affect our results of operations and business prospects. Restrictive covenants contained in credit facilities may limit our ability to incur additional indebtedness or capital expenditures and restrict our future operations, and failure to comply with these restrictive covenants may adversely affect our liquidity, financial condition and results of operations. We are subject to restrictive covenants under our credit facilities with banks and other financial institutions. These restrictive covenants include, among other things, financial covenants such as maintaining certain asset-liability ratios, vehicle utilization rates and rates of return on fixed assets, limitations on our ability to incur additional indebtedness or create new mortgages or charges, making timely reports and principal and interest payments, restrictions on the use of proceeds and asset sales, and requirements to provide notice or obtain consent for certain significant corporate events. These covenants limit the manner in which we conduct our business and we may be unable to engage in certain business activities or finance future operations or capital needs. Failure to meet any of these financial covenants or any other restrictive covenant may entitle lenders to declare all borrowings outstanding and accrued and unpaid interest to be immediately due and payable and require us to pay accrued and unpaid interest at higher interest rates. Furthermore, any event of default or acceleration of payment in a credit facility may trigger cross-default or cross-acceleration provisions in other credit facilities. If lenders accelerate the repayment of our borrowings, we may not have sufficient cash to timely repay the borrowings and any repayment may disrupt our cash flow and liquidity plans. Additionally, Legend Holdings has provided guarantees for a significant portion of our borrowings and to a lesser extent, we have provided collateral under certain credit facilities. If we cannot repay 13 Table of Contents these borrowings, lenders may enforce these guarantees or take ownership of other collaterals granted to them. In addition, our failure to comply with any financial or other restrictive covenants under our credit facilities, or an assessment that we are likely to fail to comply with these covenants could lead us to seek an amendment to or a waiver of these covenants. If we are not successful in obtaining such amendment or waiver, the lender may demand acceleration of the repayment of the borrowings. As a result, our business, financial condition and results of operations would be materially and adversely affected. Our business depends heavily on our reputation and market recognition of our brand, and any negative publicity or other harm to our brand or failure to maintain and enhance our brand recognition may materially and adversely affect our business, financial condition and results of operations. We believe that our reputation and market recognition of our brand have contributed significantly to the success of our business. Maintaining and enhancing our reputation and brand recognition depends primarily on the quality and consistency of our products and services, as well as the success of our marketing and promotional efforts. We believe that maintaining and enhancing our brand is critical to our efforts to maintain and expand our customer base. If customers do not perceive our products to be of high quality, our brand image may be harmed, thereby decreasing the attractiveness of our products. While we have devoted significant resources to brand promotion efforts in recent years, our ongoing marketing efforts may not be successful in further promoting our brand. In addition, our brand image may be harmed by negative publicity relating to our company or China's car rental industry regardless of its veracity. If we are unable to maintain and further enhance our brand recognition and increase market awareness for our company and products, our ability to attract customers may be impeded and our business prospects may be materially and adversely affected. Our growth may be adversely impacted by uncertainties in China's car rental industry, which is relatively new and may experience unexpected downturns for various reasons, including market acceptance and government policies. China's car rental industry is relatively new and renting a car is a relatively new concept among Chinese consumers. Car rentals may not gain acceptance or popularity among Chinese consumers. The growth of the car rental industry, as well as demand for our products and services, is subject to uncertainties and numerous other factors, some of which are beyond our control. These uncertainties and factors include but are not limited to: ?? general economic conditions in China, particularly economic conditions adversely affecting consumer spending; ?? the growth and strength of China's travel industry and demand for transportation services; ?? the growth and strength of the global automobile industry, in particular China's automobile industry, including the popularity and perceptions of automobile safety and reliability; ?? the development and change of government regulations of transportation laws and regulations; and ?? the popularity and perceptions of car rental among the general public. 14 Table of Contents A decline in the popularity of car rentals could adversely affect our revenue growth and business prospects. If we do not compete successfully against existing and new competitors, we may lose market share and customers. The car rental industry in China is highly competitive and fragmented. As of December31, 2010, there were over 10,000 car rental companies in China with an average fleet size of no more than 50 vehicles, according to Roland Berger. We compete in the short-term rental market with local car rental companies such as eHi Car Service and Topone and with international car rental companies such as Avis. We compete in the long-term rental market with state-owned enterprises such as Shou Qi and Dazhong and international companies such as Avis. Alliances or mergers among our existing competitors or with new entrants into the car rental industry may present additional challenges. Some of our competitors or potential competitors, especially major international car rental companies, may have higher brand recognition among certain of our target customers and greater financial, technical and marketing resources. In addition, certain of our competitors have operated commercially successful car rental businesses for as long as or longer than we have. We believe that our ability to compete successfully depends upon many factors both within and beyond our control, including the competitiveness of our prices, diversity and condition of our vehicles, the quality of our products and services, the size and diversity of our customer base, our brand strength in the market relative to our competitors, customer receptivity of the car rental business, consumer spending power and other macroeconomic factors. In particular, we believe that price is one of the key factors that customers consider in choosing car rental services. The Internet has also increased pricing transparency by enabling customers to access various competitors' prices easily. If we try to increase our prices, our competitors who have greater financial resources may seek to compete aggressively on price. In addition, our competitors may reduce prices to gain a competitive advantage or compensate for declines in their rental activities. To the extent we do not match or remain within a reasonable competitive margin of our competitors' pricing, our revenue and results of operations could be materially and adversely affected, as we may lose customers and experience a decrease in reservations. If competitive pressure leads us to match our competitors' downward pricing and we are not able to reduce our expenses, our profit margins and results of operations could be materially and adversely impacted. If we are unable to purchase adequate supplies of competitively priced cars and the cost of the cars we purchase increases, our financial condition and results of operations may be materially and adversely affected. The price and other terms at which we can acquire vehicles from automobile manufacturers vary based on market conditions. In 2011, we purchased approximately 28.0%, 22.4%, 16.4%, 13.8% and 5.6% of our fleet vehicles from our top five vehicle suppliers, respectively. There is no guarantee we will be able to purchase a sufficient number of vehicles on competitive terms and conditions to meet our expansion and replenishment needs. If we are unable to obtain an adequate supply of cars, if we obtain less favorable pricing and other terms when we acquire cars and are unable to pass on those increased costs to our customers, or if we fail to maintain good relationships with any of our significant car suppliers, our financial condition and results of operations may be materially and adversely affected. 15 Table of Contents Because we incur significant up-front capital expenditures for vehicle acquisitions, our profitability may be materially and adversely affected if we fail to achieve our forecasted revenues. To fulfill the anticipated demand for our products, we must make significant investments in vehicle acquisitions. The build-up of our fleet in advance of actual reservations exposes us to significant up-front capital expenditures. If market demand for our products does not increase as quickly as we anticipate, if at all, we may be unable to afford paying our up-front costs, and our operating results may be adversely affected as a result of underutilization of capacity and asset impairment charges. We face residual risks related to the disposition of our rental vehicles. Automobile manufacturers in China do not offer vehicle repurchase or guaranteed depreciation programs to car rental companies. We bear the risk of effective depreciation when disposing of our rental vehicles, and carry all of the risk that the market value of a vehicle at the time of its disposition may be less than its estimated residual value. This is known as ;residual risk.; When we acquire rental vehicles, we estimate the period that we will hold the assets, primarily based on historical measures of the amount of rental activity. We also estimate the residual value of the vehicles at the expected time of disposal. As a result, our results of operations are affected by our ability to accurately estimate the optimal holding periods and appropriate residual value for our vehicles in our fleet and our ability to dispose of these vehicles at optimal prices. China's used car market is at its early stage of development and there is no established national distribution network of used automobile dealers in China, which creates an impediment for the sale of used vehicles and increases the residual risk of our fleet. A variety of reasons could cause the used car market for vehicles in our fleet to experience considerable downward pricing pressure. For example, a decline in new car sales prices may drive down used car sales prices or discourage consumers from buying used cars. A continued decline in the results of operations, financial condition or reputation of a manufacturer of vehicles included in our fleet could reduce the residual values of those vehicles, particularly if the manufacturer were to unexpectedly announce the eventual elimination of a model or immediately cease manufacturing them altogether. Such a reduction in residual value could cause us to sustain a loss on the ultimate sale of these vehicles. A decline in general economic activity may also have a material adverse effect on the value we realize when we sell our used vehicles. Any such decline would adversely affect our overall financial condition. Loans extended by Legend Holdings may be declared void by PRC authorities, which may materially and adversely affect our financial conditions and results of operations. rom July 2010 to December 2011, Legend Holdings made a series of F RMB-denominated loans to our PRC operating company, Beijing China Auto RentalCo.,Ltd., or CAR Beijing. As of September30, 2011, we incurred outstanding borrowings from Legend Holdings totaling RMB549.6million (US$86.2million) bearing interests at floating interest rates between 6.2% and 7.0%. PRC laws generally do not permit companies that do not possess financial service business licenses to extend loans directly to other companies, including affiliates, without using a financial agency. Legend Holdings did not hold a financial service business license and did not extend loans to us through a financial agency. PRC governmental authorities may declare these loans void and as a result, require us to repay the loans to Legend Holdings before their maturity dates, which may materially and adversely affect our financial conditions and results of operations. 16 Table of Contents Our business and results of operations may be adversely affected if we lose the financial support of Legend Holdings. Legend Holdings has provided guarantees for a significant portion of our borrowings from financial institutions. The borrowings from financial institutions guaranteed by Legend Holdings amounted to an aggregate of approximately RMB617.0million (US$96.7million) and RMB1,735.5million (US$272.1million) as of December31, 2010 and September30, 2011, respectively. If Legend Holdings ceases to provide guarantees for our borrowings from financial institutions for any reason or fails to comply with the terms of these guarantees, we may not be able to obtain loans and other credit facilities from banks or other financial institutions at favorable terms, if at all, without obtaining guarantees from another guarantor, and the lenders may demand acceleration of the repayment of the borrowings by us. This may materially adversely affect our business and financial conditions. If our efforts to maintain a high level of customer satisfaction and loyalty are not successful, we may not be able to attract or retain customers, and our operating results may be adversely affected. Customer satisfaction is critical to the success of our business. From time to time, our customers may express dissatisfaction with our products and services, including our vehicle availability or response time for questions or incidents relating to our vehicles. To the extent dissatisfaction with our products and services is widespread or not adequately addressed, our reputation could be harmed and our efforts to build and strengthen our brand recognition would be adversely impacted, which could harm our ability to attract and retain customers and adversely affect our business and results of operations. We rely on third-party service providers to deliver certain services to our customers. If these service providers experience operational difficulties or disruptions or deliver services of an inadequate level of quality, our business could be adversely affected. We depend on third-party service providers to deliver certain of our services to our customers. In particular, we outsource the cleaning, repair and general maintenance work for our fleet to third-party service providers such as automobile dealerships, repair shops designated by automobile dealerships and local service shops selected based on reputation and assessment by our local teams. We also use third-party service providers to dispatch on-the-ground, nationwide roadside assistance teams to promptly respond to our customers' roadside emergencies. We do not control the operation of these providers. If these third-party service providers terminate their relationship with us, or do not provide an adequate level of service to our customers, it would be disruptive to our business as we seek to replace the service provider or remedy the inadequate level of service. In addition, if one or more of our customers suffer or claim to have suffered harm or damages as a result of the actions or are otherwise unsatisfied with the quality of services of third-party service providers, our reputation and our brand could be harmed. This, in turn, may cause us to lose customers, which would adversely affect our business and results of operations. 17 Table of Contents Our business, financial condition and results of operations may be adversely affected by the downturn in the PRC or global economy, weakness in travel demand and/or a significant increase in fuel costs. Our results are affected by many economic factors. A decline in economic activity either in China or in international markets may have a material adverse effect on our business. For the car rental business, a decline in economic activity typically results in a decline in both business and leisure travel and, accordingly, a decline in the volume of car rental transactions. The global financial markets experienced significant disruptions in 2008 and 2009. A variety of factors, including the current European sovereign debt crisis and concerns about the viability of the European Union and the Euro, could cause further disruptions to the global economy. To the extent that there have been improvements in some areas, it is uncertain whether such recovery is sustainable. A slowdown in the global or Chinese economy or the recurrence of any financial disruptions may also have a material and adverse impact on financings available to us. The weakness in the economy could erode investors' confidence, which constitutes the basis of the equity markets. A financial turmoil affecting the financial markets and banking system may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at all. Moreover, prices for petroleum-based products, including gasoline, have experienced significant volatility in recent years and affected automotive travel patterns in many ways. Limitations in fuel supplies or significant increases in fuel prices could substantially discourage customers from renting cars and have an adverse effect on our business and results of operations. We may not be successful in expanding into used car sale business. Historically, we disposed of our used vehicles primarily through auctions and biddings to used car dealers and brokers. In 2012, we expect to adopt a new vehicle disposition system under which our rental vehicles of a certain age are automatically entered into the proper system for disposition through our rent-to-buy used car sale program, bidding or auction, which we believe will provide a more systematic and cost-efficient way for us to proactively sell our used vehicles to rental customers, brokers and dealers. As part of this effort, we may make substantial investments in anticipation of future revenues. Expansion into the used car sale business may require us to work with different groups of business partners and address a different market. Expansion into the used car sale business may also result in substantial costs and the diversion of resources and management attention. In addition, we may face new competitive pressure as we expand into the used car sale business. Our expansion into the used car sale business may not be successful or profitable. If we fail to implement such disposition strategy successfully or if we are unable to successfully incorporate our used car sale business into our existing business model, our results of operations and our business could be adversely and materially affected. Our business depends substantially on the continued efforts of our key executive officers and our business may be severely disrupted if we lose their services. Our future success depends on the active participation of our executive team, who possesses significant knowledge of the car rental business and is responsible for the strategic direction of our business. In particular, we are highly dependent on Mr.Charles Zhengyao Lu, our founder, 18 Table of Contents chairman and chief executive officer. Our business also depends on the continued services of our key employees who have specialized knowledge of our business and industry and would be difficult to replace. Competition for qualified personnel is particularly intense in the car rental industry. While we attempt to provide competitive compensation packages to attract and retain key personnel, some of our competitors may have greater resources and more experience than us, making it difficult for us to compete for key personnel. Our expenses may increase if we implement salary increases in order to retain the requisite services of our staff. As of December31, 2011, we had 3,384 full-time employees, the majority of whom staff our stores and call centers in positions that demand a relatively low wage. However, we have observed an overall tightening of the labor market and an emerging labor shortage. Failure to obtain stable and dedicated labor support may disrupt our business and adversely affect our operations. Furthermore, labor costs have increased in China in recent years and may continue to increase in the near future. To remain competitive, we may need to increase the salaries of our employees to attract and retain them. Our labor costs amounted to RMB14.2million, RMB37.9million (US$5.9million), RMB18.8million and RMB87.7million (US$13.8million) in 2009, 2010 and the nine months ended September30, 2010 and 2011, respectively, accounting for 26.3%, 26.5%, 30.3% and 17.9% of our total revenues during the respective periods. Increases in labor costs will increase our expenses and our financial position may be adversely affected. Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. We principally rely on trade secrets to protect our technology and know-how. We have devoted substantial resources to the development of our technology, including our software program for rental reservations. In order to protect our technology and know-how, we rely significantly on confidentiality agreements with our employees, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we would not be able to assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive position. Restrictions on car usage in certain Chinese cities may limit our fleet growth, increase our vehicle license fees and adversely affect our fleet utilization rate, which may adversely affect our results of operations. Several of the major Chinese cities we operate in, including Beijing and Shanghai, have implemented quotas or other restrictions on new vehicle registrations in an effort to ease traffic congestion and air pollution. If such restrictions continue or intensify, or if more Chinese cities adopt similar restrictions, our vehicle license fees may increase substantially and the growth of our fleet may be limited, which in turn may adversely affect our business prospects and results of operations. In addition, some cities in China such as Beijing, Nanchang and Guiyang have also implemented traffic control measures banning cars with certain license plate 19 Table of Contents numbers on certain days from traveling in these cities. If such restrictions continue, or if more Chinese cities adopt similar restrictions, our fleet management and fleet utilization rate may be adversely affected, which in turn may adversely affect our business prospects and results of operations. Failure to fully comply with various PRC transportation laws and regulations and other applicable PRC laws with respect to our businesses could harm our results of operations. Our business operations are subject to a number of PRC laws and regulations with respect to transportation and car rental businesses. Regulatory requirements and restrictions include the registration of commercial vehicles, restrictions on the non-local use of cars, the registration of a branch company for each service hub, obtaining licenses and permits and making certain filings to operate the car rental business. Regulations relating to enterprises engaging in car See ;Regulations— rental business; and ;Regulations—Regulations on registration of branch companies.; If we fail to comply with the laws and regulations, regardless of whether such failure was intentional, we could be subject to fines and other penalties, including the withdrawal of licenses or permits that are essential to the operation of our business, which could adversely affect our business operations. In addition, PRC laws and regulations regulate other aspects of our business, including operation of parking facilities, leasing and the sale of used cars. For example, we may be required to register or file with or obtain a license from local authorities to operate parking facilities, according to local rules and regulations. See ;Regulations—Regulations on operating parking facilities.; If we fail to comply with any existing PRC laws or regulations, including the laws with respect to operating parking facilities, leasing and the sale of used cars, or fail to obtain or maintain any of the required permits or approvals, or if the PRC government promulgates new laws and regulations that require additional licenses or imposes additional restrictions on the operation of any part of our business, the relevant regulatory authorities may impose fines and penalties on us, confiscate our income, revoke our business licenses and require us to discontinue our business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material and adverse effect on our results of operations. Our PRC subsidiaries may have engaged in business activities without the necessary approvals from or registration with local authorities. This could subject us to fines or other penalties that may negatively impact our results of operations or interfere with our ability to operate our business. According to applicable PRC laws, a company is required to conduct business within the business scope prescribed in its business license and file an amendment to its registration with the appropriate authority if the company expands or changes the scope of its business. Additional governmental approvals, licenses, registrations or filings may also be required for any expansion of business scope. As our PRC operating subsidiaries quickly expand their operations, they may need to obtain additional governmental approvals and licenses or amend their registrations or filings, which they may fail to do in a timely manner. Failure to obtain these permits or register or file in a timely manner, or at all, may subject us to fines and penalties and substantially inhibit our ability to operate our business. 20 Table of Contents As the car rental industry is at an early stage of development in China, the regulatory scheme continues to evolve and there are currently very few national laws or regulations specifically regulating the car rental industry. The car rental industry is mainly regulated by governmental authorities at local levels, which impose various regulatory requirements on the operating entities and vehicles, and such regulatory requirements vary from place to place, and the practice of local authorities may also deviate from the existing local rules. See ;Regulations—Regulations relating to enterprises engaging in car rental business.; As a result of the inconsistency in local rules and their interpretation and implementation, as well as the fast expansion of our business, we have not obtained or timely renewed all of the requisite permits and licenses, made or timely renewed all of our requisite filings or registrations for our business operations or fully complied with all other regulatory requirements applicable in the cities in which we currently operate, including the permit or registration for car rental business and the registration and operational requirements of the commercial vehicles used for rental operations, as required by certain local authorities. We are in the process of obtaining the requisite permits, licenses or registrations in different cities with respect to our car rental businesses. However, we cannot assure you that we will obtain all of the requisite permits or licenses, make all of the requisite filings or registrations in a timely manner or comply with all of the other regulatory requirements in the future. Moreover, the third-party service providers engaged by us may not have met all such regulatory requirements either, which may subject us to fines and other administrative actions. Certain PRC provinces and cities have promulgated rules that prohibit an entity with a prescribed business scope of engaging in the car rental business from concurrently providing chauffeured services during the provisions of car rental services. An April 2011 circular from the Ministry of Transport, or MOT, reiterated the prohibition on the national level, stating that PRC car rental companies without passenger transportation permits should not provide chauffeured services to rental customers. See ;Regulations—Regulations relating to enterprises engaging in car rental business—Regulations on chauffeured services.; Historically, we provided chauffeured services to a small number of long-term rental customers through certain PRC subsidiaries engaged in the car rental business. We are in the process of transferring these services to our PRC subsidiary that is licensed to provide chauffeured services. If relevant authorities find that a legal entity providing both car rental services and chauffeured services violated applicable regulations or rules, we may be required to refrain from providing chauffeured services and be subject to fines and other penalties. Furthermore, a company that conducts business in a location outside its domicile must register its branch office as a branch company with the competent local authority. See ;Regulations—Regulations on registration of branch companies.; As of December31, 2011, we had 234 service hubs, 163 of which were registered as our subsidiaries or branch companies with competent local authorities. We are in the process of applying for the remaining of branch company registrations in cities where we operate rental businesses. As we quickly expand our operations, we may need to register additional branches. If we fail to complete such registrations in a timely manner, we may be subject to penalties, which may include fines or disgorgement of income. We may be subject to these penalties as a result of our failure to meet the registration requirements, and these penalties may substantially inhibit our ability to operate our business. 21 Table of Contents Our failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties. Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations. See ;Regulations—Regulations relating to labor matters.; We have not made adequate employee benefit payments as required under applicable PRC labor laws. Accruals for the underpaid amounts as recorded were RMB8.2million (US$1.3million) as of September30, 2011. Our failure to make contributions to various employee benefit plans and comply with applicable PRC labor-related laws may subject us to late payment penalties or fines. If we are subject to such penalties in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected. We do not have title to vehicles covered by the capital lease agreements or sale and leaseback agreements during the term of these agreements, and a failure to service these agreements could adversely impact our ability to operate the vehicles. In 2010 and 2011, we acquired a total of 338 cars from Minsheng Financial Leasing through capital leases and entered into sales and leaseback arrangements with Minsheng Financial Leasing under which we used 7,182cars as collateral to obtain borrowings. During the terms of the capital lease agreements and sale and leaseback agreements, which typically range from 24 to 36months, we do not have title to the leased vehicles. Under these agreements, we may lose access to the vehicles if we fail to make timely payments, insure the vehicles as required by the financial institutions, or breach other covenants under the agreements, which would make it difficult to maintain normal operations of our fleet and achieve optimal fleet utilization rate, which in turn may adversely affect our results of operations. We face risks related to liabilities resulting from the use of our vehicles by our customers. Our business can expose us to claims for personal injury, death and property damage resulting from the use of our rental cars by our customers. For example, if a customer uses a car that has worn tires or some mechanical or other problem, including a manufacturing defect, which contributed to a motor vehicle accident that results in a death or significant property damage, we may be a defendant of the claims for the alleged liabilities for the accident and the damage resulting from it. Furthermore, according to the PRC Tort Law, when the driver of a rental car who is not the owner of the vehicle is held liable for a traffic accident, liability will first be covered by the insurance company providing the compulsory traffic accident insurance of the vehicle, and the driver shall be responsible for the portion not covered by the compulsory traffic accident insurance. See ;Regulations—Tort law.; However, since judicial or arbitral proceedings determining the cause of a motor vehicle accident can be lengthy and costly, and the results of such proceedings may be uncertain, we may not be successful in defending ourselves each time such an incident occurs. If a significant number of such claims cannot be resolved, our reputation could suffer. We could be negatively impacted if losses for which we do not have insurance coverage increase or our insurance coverage prove to be limited or inadequate. Our rental contracts typically provide that the customers are responsible for damage to or loss (including certain loss through theft) of our vehicles while they are renting them. We also require that our customers bear a portion of insurance premiums for accident damage that we 22 Table of Contents have purchased from third-party insurance companies. We bear the risk of damage to or losses of our vehicles, including those caused by theft or flood. To mitigate such risk, we maintain motor vehicle damage insurance coverage of up to 100% of the actual value of each vehicle in respect of vehicle damage. Though we believe the amounts and nature of the coverage we obtain are adequate in light of the risks involved, this coverage may not be sufficient to cover all damage that our vehicles could potentially sustain. Further, if any customer damages or loses one of our vehicles, the customer may not be able to compensate us for all of our losses, or at all. Further, pursuing claims against our insurers or our customers may prove costly and time consuming and because we are responsible for damage to our vehicles, a deterioration in claims management could lead to delays in settling claims, thereby increasing claim costs. In addition, substantial uninsured claims filed against us or the inability of our insurance carriers to pay otherwise-insured claims would have an adverse effect on our financial condition. The insurance premiums we have to pay may increase, which may adversely affect our business and results of operations. We rely upon insurance coverage to protect against personal injuries and property damage caused by our vehicles and require our customers to bear a portion of the insurance premiums at the time of rental. We also maintain property insurance coverage in respect of vehicle damage and other losses. The insurance premiums amounted to RMB3.2million, RMB20.3million (US$3.2million), RMB7.9million and RMB73.4million (US$11.5million) during 2009, 2010 and the nine months ended September30, 2010 and 2011, respectively, which accounted for 5.9%, 14.2%, 12.8% and 15.0% of our total revenues during the respective periods. We have purchased insurance from a limited number of insurance companies in China on favorable terms. Two PRC insurance companies provide substantially all of our insurance coverage. If the insurance premiums we pay for our coverage increase, regardless of whether it is because of an increase in claims on our part, a general industry-wide increase in pricing or our failure to maintain good relationships with our primary insurance providers, we may not be able to pass such premium increase to our customers, which could have an adverse effect upon our results ofoperations. If we are unable to obtain and maintain adequate space at locations convenient to our customers at reasonable costs, or if our rights to lease certain properties are challenged, our growth opportunities may be adversely affected. Our service hubs, all of which are on leased properties and operated by us, are physical storefronts with parking facilities. Our service hubs are located primarily in China's largest cities and we must compete for limited parking space in these cities. Further, the efficient operation of our business requires that our physical storefronts and the parking facilities are within close proximity of each other. Given the population density of the large cities in which we operate, identifying such locations can be difficult and renting them can be expensive. If we were to lose a lease or concession rights relating to our locations, finding suitable replacement locations at reasonable costs could prove difficult and we may not be able to find replacement locations at all. Furthermore, some of the leased properties for our service hubs, the lessors were unable to provide us with copies of title certificates or documents evidencing the authorization or consent of the ultimate owners of such properties. We are in the process of standardizing the internal procedures for signing lease agreements, such as requiring lessors to provide title 23 Table of Contents certificates for our review prior to signing, or owners' written consents if the lessors are not the registered property owners. However, some of the lessors may not have proper legal rights to lease the properties to us and, as a result, the corresponding lease agreements could be deemed invalid. In addition, under the PRC laws, failure to register a lease agreement with the local housing bureau may subject us to penalties imposed by competent PRC government authorities. Although we requested all of our lessors to make the required registrations, certain lessors have not obtained such registrations. We believe we can make alternative leasing arrangements without incurring material costs or causing any material disruption to our business. However, if we need to relocate a large number of service hubs within a short period of time, our operations could be disrupted. Manufacturer safety recalls could create risks to our business. Our vehicles may be subject to safety recalls by their manufacturers. During a recall period, we may attempt to retrieve recalled cars from customers and decline to rent these cars until we have taken all of the steps described in the recall. If a large number of cars is subject to simultaneous recalls, we may not be able to rent those vehicles to our customers for a significant period of time. These recalls, depending on their severity, could materially affect our revenues, damage our customer relations and brand, and reduce the residual value of the vehicles involved. We face risks arising from our heavy reliance on information technology systems and any disruption to our information technology systems, such as computer virus attacks, could adversely impact our business. We rely heavily upon our IT platform in all aspects of our operations, including transaction processing, fleet management and payment processing. Our IT platform connects one central data center with four kinds of service terminals, namely, our website at .zuche, our mobile client applications available for iOS and Android operating systems, our 24/7 call centers and our service hubs. A major disruption of communications could cause a loss of reservations, interfere with our fleet management, slow down rental and sales processes and otherwise materially and adversely affect our ability to manage our business effectively. The reliability of our network infrastructure is critical to our business. Any system interruption that results in the unavailability of our website or a disruption to our communications platform could damage our reputation and brand and cause our business and operating results to suffer. We may experience temporary system interruptions for various reasons, including network failures, power failures, cyber attacks, software errors or an overwhelming number of visitors trying to reach our website during periods of strong demand. As we are dependent in part on third parties for the implementation and maintenance of certain aspects of our systems and because some of the causes of system interruptions may be outside of our control, we may not be able to remedy such interruptions in a timely or satisfactory manner, or at all. Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to and delays in our service and operations as well as loss, interruptions misuse or theft of data. Any successful attempts by hackers to disrupt our website service or our internal systems could harm our business, reputation or brand, and could be expensive to remedy. Efforts to prevent hackers from entering our computer systems are expensive to implement and may limit the functionality of our services. Any significant disruption to our website or internal computer systems could result in a loss of customers and adversely affect our business and results of operations. 24 Table of Contents If our IT platform that stores confidential information about our customers is breached or otherwise subjected to unauthorized access or fraudulent transactions, we may be exposed to liabilities and suffer a loss of customers and damage to our business reputation. Our IT platform holds confidential information about our customers. We have implemented measures to protect our proprietary information database from Internet hacking and other unauthorized access to our customers' confidential information. However, we cannot guarantee that such anti-hacking technology will effectively protect against increasingly sophisticated counter-measures and it is possible that third parties, such as hackers or criminal organizations, may unlawfully gain access to information provided by our users to us. Confidential information of our customers may also be misappropriated or inadvertently disclosed through employee misconduct or mistakes. We may also in the future be required to disclose to government authorities certain confidential information concerning our customers. Furthermore, many of our customers pay for our services through third-party online payment service providers. In such transactions, secure transmission of confidential information, such as customers' debit and credit card numbers and expiration dates, personal information and billing addresses, over public networks, including our website, is essential for maintaining consumer confidence. We have limited influence over the security measures of third-party online payment service providers. Any compromise of our security or third-party service providers' security would have a material adverse effect on our reputation, business prospects, financial condition and results of operations. Any significant breach of security of our IT platform could significantly harm our business, reputation and results of operations and could expose us to lawsuits brought by our customers and sanctions by governmental authorities in the jurisdictions in which we operate. Additionally, if we are accused of failing to protect the confidential information of our customers, we may be forced to expend significant financial and managerial resources in defending against these accusations and we may face potential liability. Any negative publicity may adversely affect our public image and reputation, which in turn may reduce the number of our users and harm our business and results of operations. ins and Our servers may also be vulnerable to computer viruses, break-similar disruptions caused by any unauthorized tampering into our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential information of our customers. We may not have sufficient protection or recovery plans in these circumstances and our business interruption insurance may not be sufficient to compensate us for losses that may occur. As we rely heavily on our servers, computer systems and the Internet service in performing our business, such disruptions could negatively impact our ability to effectively run our business, which could have an adverse affect on our operating results. Failure to adequately protect our intellectual property rights may substantially harm our business and operating results. Because our business depends substantially on our intellectual property, including our IT platform, the protection of our intellectual property rights is crucial to the success of our business. We rely on a combination of trademarks, trade secrets, copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to 25 Table of Contents copy aspects of our website features, software and functionality or obtain and use information that we consider proprietary, such as the technology used to operate our website, our content and our trademarks. Moreover, policing our proprietary rights is difficult and may not always be effective. As of December 31, 2011, we registered in China the trademark for our ; ; brand and two other trademarks. We are in the process of registering the trademark for our ; ; brand and six other trademarks in China. As of December 31, 2011, we also registered five domain names, including .zuche. Competitors have adopted and in the future may adopt service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term ; ; or our other trademarks. The protection of intellectual property rights and brands in China may not be as effective as those in the United States or other countries. The steps we have taken may be inadequate to prevent the misappropriation of our technology or unauthorized use of our brands. From time to time, we may have to enforce our intellectual property rights through litigation. Such litigation may result in substantial costs and diversion of resources and management attention. Our business may be subject to seasonal effects, and a disruption in rental activities during our busy seasons could adversely affect our results of operations. Our business generally experiences some effects of seasonal variations due to customer demand or increases in travel during certain time of the year such as Labor Day, National Day and Chinese Lunar New Year holidays. During these times, our rate of reservations and the revenues generated are generally higher than the rest of the year. However, our revenues also fluctuate due to other factors affecting our income such as changing weather conditions. The seasonality changes may cause fluctuations in our financial results and any occurrence that disrupts rental activity during our busy seasons could have a disproportionately material adverse effect on our liquidity and results of operations. Future strategic alliances or acquisitions may have a material and adverse effect on our business, reputation and results of operations. Our success will depend, in part, on our ability to expand our markets and grow our business in response to changing customer needs and competitive pressures. We may seek to grow our business by entering into strategic alliances to obtain access to complementary businesses, solutions or technologies, or we may seek to obtain these benefits through acquisitions. The identification of suitable partners or acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully close desired agreements. The anticipated benefits of any alliance, acquisition, investment or business relationship may not be realized or we may be exposed to unknown liabilities. Further, if a business partner were to violate the agreement we have entered into with them, such actions may have an adverse effect on our business and our reputation. Also, we may not be able to successfully assimilate and integrate the business, technologies, solutions, personnel or operations of any company we partner with or acquire. Acquisitions may also involve the entry into geographic or business markets in 26 Table of Contents which we have little or no prior experience. For one or more of those arrangements or transactions, we may: ?? provide proprietary information and the right to use of our intellectual property to our business partners; ?? issue additional equity securities that would dilute our shareholders; ?? use cash that we may need in the future to operate our business; ?? incur debt on terms unfavorable to us or that we are unable to repay; ?? incur large charges or expenses or assume substantial liabilities; ?? encounter difficulties retaining key employees of the acquired companies or integrating business cultures; and ?? become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. Any of these actions involve risks that could harm our business and operating results. If we fail to implement and maintain an effective system of internal controls or fail to remediate the material weakness and deficiencies in our internal control over financial reporting that has been identified, we may be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected. Prior to this offering, we have been a private company and have had limited accounting personnel and other resources with which to address our internal control over financial reporting. We and our independent registered public accounting firm, in connection with the preparation and external audit of our consolidated financial statements as of and for the fiscal year ended December31, 2010, identified a material weakness and other control deficiencies in our internal control over financial reporting as of December31, 2010. A ;material weakness; is 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. The material weakness identified primarily related to our lack of U.S.GAAP resources, processes and documentation. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company. In light of the material weakness and other control deficiencies that were identified as a result of the limited procedures performed, we believe it is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified. We have taken measures and plan to continue to take measures to remedy the identified material weakness and control deficiencies. However, the implementation of these measures may not fully address this material weakness and other control deficiencies in our internal 27 Table of Contents control over financial reporting, and we cannot assure you that any of those or other measures will be adequate to fully remedy the material weakness and control deficiencies. Our failure to address the material weakness and other control deficiencies or our failure to discover and address any other material weaknesses or control deficiencies may result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud. Upon the completion of this offering, we will become a public company in the United States that will be subject to the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. The SEC, as required under Section404 of the Sarbanes-Oxley Act, or Section404, has adopted rules requiring public companies to include a report of management on the effectiveness of these companies' internal control over financial reporting in their annual reports. In addition, an independent registered public accounting firm must report on the effectiveness of public companies' internal control over financial reporting. These requirements will first apply to us beginning with our annual report on Form20-F for the fiscal year ending December31, 2013. Our management may conclude that our internal control over financial reporting is not effective due to our failure to cure the identified material weakness and control deficiencies or otherwise. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may not reach the same conclusion or may issue a report that is qualified if it is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated or reviewed. In addition, during the course of the evaluation, documentation and testing of our internal control over financial reporting, we may identify other material weaknesses and deficiencies that we may not be able to remediate in time to meet the deadline imposed by the SEC for compliance with the requirements of Section404. If our management or our independent registered public accounting firm concludes that our internal control over financial reporting is not effective, the market price of our ADSs may be adversely affected due to a loss of investor confidence in the reliability of our reporting process. We will need to incur significant costs and use significant management and other resources to comply with Section404 of the Sarbanes-Oxley Act. business is vulnerable to interruptions caused by health Our epidemics, earthquakes, fires, floods, other natural events. Our business could be materially adversely affected by the outbreak of health epidemics such as H1N1, or swine influenza, avian influenza, severe acute respiratory syndrome, or SARS. In 2009 and early 2010, there were outbreaks of swine influenza in certain regions of the world, including China. In 2006, 2007 and 2011, there were reports on the occurrences of avian influenza in various parts of China, including a few confirmed human cases and deaths. Any prolonged recurrence of swine influenza, avian influenza, SARS or other adverse public health developments in China could adversely affect economic activities in China, decrease business or leisure travel and require the temporary closure of our offices, which could severely disrupt our business operations and adversely affect our results of operations. Our systems and operations are also vulnerable to interruption or damage caused by earthquakes, fires, floods, power losses, telecommunications failures, acts of war, human errors, break-ins and similar events. 28 Table of Contents Significant natural disasters such as earthquake, fire or flood, could have a material adverse impact on our business, operating results and financial condition. Risks related to doing business in the People's Republic of 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. 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 developed 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 control of foreign exchange and the allocation of resources. While the PRC economy has experienced significant growth in the past 30years, 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 strategically allocating 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 demand of vehicle usage in China, which could materially and adversely affect our business. Uncertainties with respect to the PRC legal system could have a material and adverse effect on us. We conduct our business primarily through our subsidiaries and branch companies in China. Our operations in China are governed by PRC laws and regulations. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations continue to evolve and the limited number and non-binding nature of published decisions concerning them, their interpretation and enforcement involves uncertainties. In addition, the PRC legal system is based partly on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. 29 Table of Contents We principally rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to conduct our business or our financial condition. We are a holding company, and we rely principally on dividends and other distributions on equity from our wholly owned subsidiaries in China for our cash requirements, including the funds necessary to service any debt we may incur. Current PRC regulations permit our subsidiaries in China to pay dividends to us only out of their respective accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its respective after tax profits each year, if any, to fund certain statutory reserve funds until the aggregate amount of such reserve funds reaches 50% of its registered capital. At its discretion, each of our PRC subsidiaries may allocate a discretionary portion of its respective after-tax profits to staff welfare and bonus funds. These reserves may not be distributable as cash dividends. Furthermore, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Most of our assets are held by, and substantially all of our earnings and cash flows are attributable to, our PRC subsidiaries. Our cash flows are principally derived from dividends paid to us by our PRC subsidiaries. As a result, our ability to distribute dividends largely depends on earnings from our PRC subsidiaries and their ability to pay dividends out of their earnings. If operating losses from our PRC subsidiaries were to continue to grow, our operating results and cash flows would be further materially and adversely affected. Our PRC subsidiaries so far have not paid us any dividends. We cannot assure you that our PRC subsidiaries will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends. In addition, the PRC Enterprise Income Tax Law, or New EIT Law, and its implementation rules provide that a withholding tax rate of 10% will be applicable to dividends payable by foreign-invested enterprises in the PRC to their non-PRC resident enterprise shareholders unless otherwise or reduced according to treaties or arrangements between the PRC exempted government and governments of other countries or regions where the non-PRC resident enterprises are incorporated. While the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income, or the Double Tax Avoidance Arrangement, provides that dividends paid by a foreign-invested enterprise in the PRC to its direct holding company, which is considered a Hong Kong tax resident and is determined by competent PRC tax authority to have satisfied relevant requirements under the Double Tax Avoidance Arrangement between China and Hong Kong and other applicable PRC laws, will be subject to withholding tax at the rate of 5% of total dividends. Entitlement to a lower tax rate on dividends according to tax treaties or arrangements between the PRC central government and governments of other countries or regions is further subject to approval of the relevant tax authority. Based on the Notice on Certain Issues with respect to the Enforcement of Dividend Provisions in Tax Treaties, or Circular 81, issued on February20, 2009 by the State Administration of Taxation, or SAT, the relevant PRC tax authorities may deny such tax treaty benefits to ;conduit 30 Table of Contents companies; or shell companies without business substance. Furthermore, SAT promulgated the Circular on How to Interpret and Recognize the ;Beneficial Owners; in Tax Treaties, or Circular 601, issued by SAT in October 2009 which provides guidance for determining whether a resident of a contracting state is the ;beneficial owner; of an item of income under the PRC's tax treaties and tax arrangements. According to Circular 601, a beneficial owner generally must be engaged in substantive business activities. A ;conduit company; will not be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits. A ;conduit company; normally refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. It is unclear whether any dividends distributed by our PRC subsidiaries to us will be entitled to the benefits under the Double Tax Avoidance Arrangement and other applicable PRC laws. Accordingly, it is uncertain whether LC Industrial Investment Limited, or LCIndustrial, our wholly owned subsidiary incorporated in Hong Kong will be entitled to the 5% reduced tax rate. If we were to pay dividends and dividends paid to LCIndustrial were subject to 10% tax rate instead of the 5% tax rate, our financial condition will be negatively affected. We may be classified as a ;PRC resident enterprise; for PRC enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income tax. The New EIT Law provides that an enterprise established outside China whose ;de facto management body; is located in China is considered a ;PRC resident enterprise; and will generally be subject to the uniform 25% enterprise income tax rate, or EIT rate, as to its global income. Under the implementation rules, ;de facto management body; is defined as the organization body that effectively exercises management and control over such aspects as the production and business operations, personnel, accounting and properties of the enterprise. On April22, 2009, SAT released the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, that sets out the standards and procedures for determining whether the ;de facto management body; of an enterprise registered outside of the PRC and controlled by PRC enterprises or PRC enterprise groups is located within the PRC. Under Circular 82, a foreign enterprise controlled by a PRC enterprise or PRC enterprise group is considered a PRC resident enterprise if all of the following apply: (i)the senior management and core management departments in charge of daily operations are located mainly within the PRC; (ii)financial and human resources decision are subject to determination or approval by persons or bodies in the PRC; (iii)major assets, accounting books, company seals and minutes and files of board and shareholders' meeting are located or kept within the PRC; and (iv)at least half of the enterprise's directors with voting rights or senior management reside within the PRC. Although Circular82 explicitly provides that the above standards apply to enterprises which are registered outside the PRC and funded by PRC enterprises or PRC enterprise groups as controlling investors, Circular 82 may reflect SAT's criteria for determining the tax residence of foreign enterprises in general. Further, we currently do not believe that we are, or our Hong Kong subsidiary is, a PRC resident enterprise because we do not believe that we or our Hong Kong subsidiary meet all of the conditions above but there is no assurance in this regard. If the PRC tax authorities successfully challenge our position, we will be subject to PRC enterprise income tax reporting obligations and 25% PRC enterprise income tax on our global income. If we are treated as a PRC resident enterprise, it is not entirely clear whether dividends received from our PRC subsidiaries will be exempted from the income tax. If we are treated as a PRC 31 Table of Contents resident enterprise and dividends received from our PRC subsidiaries are not exempt from the income tax, the 25% tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability. You may be subject to PRC income tax on dividends from us or on any gain realized on the transfer of our ADSs or ordinary shares. Under the New EIT Law and related implementation rules, subject to any applicable tax treaty or similar arrangement between the PRC and your jurisdiction of residence that provides for a different income tax arrangement, PRC withholding tax at the rate of 10% is normally applicable to dividends from PRC sources payable to investors that are non-PRC resident enterprises, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business if the relevant income is not effectively connected with the establishment or place of business. Any gain realized on the transfer of ADSs or shares by such investors is subject to 10% PRC income