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pursuant to dividend or interest reinvestment plans, please check the following box.
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earlier effective registration statement for the same offering.
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statement filed pursuant to General Instruction I.C. filed to register additional securities or additional classes of securities
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RISK FACTORS
Investing in our securities involves
risks. Before making an investment decision to invest in any securities that may be offered pursuant to this prospectus, you should
read and carefully consider the risk factors described in Item 3.D of our Annual Report on Form 20-F for the fiscal year ended
December 31, 2012 (our “2012 Form 20-F”), as supplemented and amended by the risk factors set forth below, and, if
applicable, risk factors in any accompanying prospectus supplement, as well as other information we include or incorporate by reference
in this prospectus. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also
may affect our business, financial condition and/or future operating results.
Risks Relating to Our Business
Our business is sensitive to the current global economic
crisis. A severe or prolonged downturn in the global economy could materially and adversely affect our revenues and results of
operations.
Despite improved global market and economic
conditions and reduced short-term risks, the global economy is expected to remain subdued, and recovery will only be mild in 2013.
Continued concerns about the systemic impact of potential long-term and wide-spread recessions, energy costs, geopolitical issues,
the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility
and diminished expectations for economic growth around the world.
The European sovereign debt crisis has escalated
since 2011 and it is unclear whether the European sovereign debt crisis will be contained and what effects it may have. There is
considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by
the central banks and financial authorities of some of the world’s leading economies, including China’s. Economic conditions
in China are sensitive to global economic conditions, and it is impossible to predict how the Chinese economy will develop in the
future and whether it might experience any financial crisis in a manner and scale similar to that in the United States.
Any slowdown in China’s economic development
might lead to tighter credit markets, increased market volatility, sudden drops in business and consumer confidence and dramatic
changes in business and consumer behaviors. In response to their perceived uncertainty in economic conditions, consumers might
delay, reduce or cancel purchases of homes, and our homebuyers may also defer, reduce or cancel purchases of our units. We have
experienced some volatilities in demand from time to time in the recent years due to strict mortgage policy and other measures
taken by the PRC government to slow down the rapid increase in housing prices. We remain optimistic about the Chinese economy,
but to the extent any fluctuations in the Chinese economy significantly affect homebuyers’ demand for our units or change
their spending habits, our results of operations may be materially and adversely affected.
The PRC economy also faces challenges in
the short to medium term. Continued turbulence in the international markets and prolonged declines in consumer spending, including
home purchases, as well as any slowdown of economic growth in China, may adversely affect our liquidity and financial condition.
With our expansion into the U.S. market
in 2012, we will be increasingly sensitive to the general economic conditions in the U.S. and industry conditions of the U.S. housing
market in particular. The U.S. housing industry is highly cyclical and is significantly affected by changes in industry conditions,
as well as in global and local economic conditions, such as changes in employment and income levels, availability of financing
for buyers, interest rates, levels of new and existing homes for sale demographic, trends and housing demand. The U.S. market experienced
a significant downturn in recent years. Although certain markets in the U.S. have begun to recover, including our targeted areas
of New York and California, the housing market remains depressed and the duration and ultimate speed of recovery remain uncertain.
Deterioration in industry conditions in the U.S. or in broader economic conditions could have additional material adverse effects
on our business expansion in the U.S. and financial results.
We are a holding company that depends on dividend payments
from our subsidiaries for funding.
We are a holding company established in
the Cayman Islands and operate most of our business and operations through our subsidiaries in China. Therefore, our ability to
pay dividends to our shareholders and to service our indebtedness outside of China depends significantly upon dividends that we
receive from our subsidiaries in China. To the extent our U.S. operation continues to grow, we may in the future also depend on
dividends from our U.S. subsidiaries. If our subsidiaries incur indebtedness or losses, such indebtedness or losses may impair
their ability to pay dividends or other distributions to us. As a result, our ability to pay dividends and to service our indebtedness
will be restricted. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in
accordance with accounting standards and regulations in China. Each of our PRC subsidiaries, including wholly foreign-owned enterprises
and domestic companies, is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each
year to its general reserves or statutory capital reserve fund until the accumulative amount of such reserves reaches 50.0% of
its registered capital. As of December 31, 2012 and June 30, 2013, our statutory reserves under PRC generally accepted accounting
principles amounted to US$49.6 million. Our statutory reserves are not distributable as cash dividends. In addition, restrictive
covenants in bank credit facilities, joint venture agreements or other agreements that we or our subsidiaries currently have or
may enter into in the future may also restrict the ability of our subsidiaries to make contributions to us and our ability to receive
distributions. Therefore, these restrictions on the availability and usage of our major source of funding may impact our ability
to pay dividends to our shareholders and to service our indebtedness.
Our business requires access to substantial financing.
Our failure to obtain adequate financing in a timely manner could severely adversely (1) restrict our ability to complete existing
projects, expand our business, or repay our obligations and (2) affect our financial performance and condition.
Our property development business is capital
intensive. To date, we have funded our operations primarily through bank borrowings, proceeds from sales and pre-sales of our properties
and proceeds from issuance of equity and debt securities. We obtain commercial bank financing for our projects through credit lines
extended on a case-by-case basis. Our ability to secure sufficient financing for land use rights acquisition and property development
and repayment of our existing onshore and offshore debt obligations depends on a number of factors that are beyond our control,
including lenders’ perceptions of our creditworthiness, sufficiency of the collateral, if any, market conditions in the capital
markets, investors’ perception of our securities, the PRC economy and PRC government regulations that affect the availability
and cost of financing for real estate companies or property purchasers.
Since 2003, PRC commercial banks have been
prohibited, under the guidelines of the People’s Bank of China, or PBOC, from advancing loans to fund the payment of land
use rights. In addition, the PRC State Council has taken and may continue to take action to curb speculation in the housing market
and housing price increases. Among other actions, as of March 25, 2011, the PBOC raised the reserve requirement ratio for large
commercial banks by 0.5% to 20%, and small and middle sized financial institutions by 0.5% to 16.5% and on June 20, 2011, the reserve
requirement ratio was raised to its peak of 21.5% for large commercial banks and 18% for small and middle sized financial institutions.
As of May 18, 2012, the reserve requirement ratios have been reduced to 20.0% for large commercial banks and 16.5% for small and
middle sized financial institutions. Notwithstanding the recent reduction in reserve requirement amount, the overall increases
in the reserve requirement ratio will reduce the amount of commercial bank credit available to businesses in China, including us.
We generate significant cash flow through pre-sales, which are subject to government restrictions. In particular, PRC regulations
on the pre-sales of properties generally provide that the proceeds from the pre-sales of a real estate project may only be used
for the construction of such project. Any additional potential government restrictions on pre-sales could significantly increase
our financing needs. Moreover, our ability to move cash through inter-company transfers or transfer funds from onshore subsidiaries
to our offshore parent company is limited by PRC government regulations, which limits our ability to use excess cash resources
in one subsidiary to fund the obligations of another subsidiary or our offshore parent company.
Furthermore, various other PRC regulations
restrict our ability to raise capital through external financing and other methods, including, without limitation, the following:
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we cannot borrow from a PRC bank for a particular project if we do not have the land use rights certificate for that project;
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we cannot pre-sell uncompleted residential units in a project prior to achieving certain development milestones specified in
related regulations;
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we cannot borrow from a PRC bank for a particular project unless we fund at least 35% of the total investment amount of that
project from our own capital;
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property developers are strictly restricted from using the proceeds from a loan obtained from a local bank to fund property
developments outside the region where that bank is located; and
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PRC banks are prohibited from accepting properties that have been vacant for more than three years as collateral for loans.
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As of June 30, 2013, our contractual obligations
amounted to US$841.7 million, primarily arising from contracted construction costs or other capital commitments for future property
development, a corporate aircraft and debt obligations. Of this amount, US$415.6 million was due within one year.
There can be no assurance that our internally
generated cash flow and external financing will be sufficient for us to meet our contractual and financing obligations in a timely
manner. Due to the current measures imposed (as well as other measures that may be imposed by the PRC government in the future)
which limit our access to additional capital, we cannot assure you that we will be able to obtain sufficient funding to finance
intended purchases of land use rights, develop future projects or meet other capital needs as and when required at a commercially
reasonable cost or at all. Our failure to obtain adequate financing in a timely manner and on reasonable terms could severely adversely
(1) restrict our ability to complete existing projects, expand our business, or repay our obligations and (2) affect our cash flow,
liquidity, financial performance and condition.
If we are unable to successfully manage our expansion
into other cities in China, we will not be able to execute our business plan.
Historically, our business and operations
were concentrated in Zhengzhou. Since 2006, we have expanded our residential property development operations into other Tier II
and Tier III cities, consisting of Chengdu in Sichuan Province, Hefei in Anhui Province, Ji’nan in Shandong Province, and
Suzhou, Kunshan and Xuzhou in Jiangsu Province. In 2012, we purchased land in a satellite city in the suburb of Beijing, and, while
our focus remains on Tier II and Tier III cities, we may make other purchases in areas outside or around Tier I cities in the future
if attractive opportunities arise. We plan to expand into other cities as suitable opportunities arise. The development of real
estate projects in other cities will impose significant demands on our management and other operational resources. Moreover, we
will face additional competition and will need to establish brand recognition and market acceptance for our developments in these
new markets. Each of these cities has its own unique market conditions, customer requirements and local regulations related to
the local real estate industry. If we are unable to successfully develop and sell projects outside of our existing markets, our
future growth may be limited and we may not generate adequate returns to cover our investments in these new markets. In addition,
if we expand our operations to other cities with higher land prices, our costs may increase, which may lead to a decrease in our
profit margin, or impairments resulting from land value decreases.
We are in the early stages of expanding into the U.S.
market, a market in which we have no development experience and which may require us to spend significant resources, and there
can be no assurance that we will be able to succeed in the U.S. market.
While our primary focus continues to be
residential real estate markets in the Tier II and Tier III cities in China, in 2012 we expanded to the U.S. market and have opportunistically
secured three real estate properties. Two of these projects are acquired for resale and the other one is a residential real estate
development project in Williamsburg, Brooklyn, New York. For the six months ended June 30, 2013, our U.S. operations had not acquired
any new projects for resale or development. We are in the early stage of expanding into the U.S. and there can be no assurance
that we will be able to succeed in the U.S. market. We have limited experience in the U.S. real estate market and may not be able
to develop and implement an effective property development process appropriate for the U.S. market. In addition, given our limited
experience in the U.S. market, it may be difficult for us to accurately forecast our future revenues and expenses related to existing
and future projects in the U.S. Whenever our U.S. operations are profitable, we are subject to U.S. federal and, where applicable,
state and local income taxes on our U.S. business, which could be significant. Our ability to locate appropriate future projects
in the U.S. and generate future revenues from such projects may require us to expend significant capital and management resources.
In addition, our ability to develop a successful
U.S. property developments business will depend on a number of factors outside of our control, including the status of the U.S.
economy in general and in our target markets, consumer confidence levels unemployment levels, interest rates and the ability of
potential purchasers to obtain mortgage financing. Future increase in interest rates, decreased availability of mortgage financing
or of certain mortgage programs, higher down payment requirements or increased monthly mortgage costs may lead to reduced demand
by potential purchasers for any properties we may develop in the U.S.
Furthermore, any change in federal income
tax laws that increase the effective costs of owning a home would have an adverse effect on the demand for homes in the U.S. which
could negatively affect any properties we may develop in the U.S. Current U.S. tax laws generally permit significant expenses associated
with owning a home, principally mortgage interest expenses and real estate taxes, to be deducted for the purposes of calculating
an individual’s U.S. federal and, in some cases, state taxable income. Various proposals have been publicly discussed to
limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. If any such proposals
were enacted without offsetting provisions, the after-tax costs of owning a home in the U.S. would increase for many potential
customers. Enactment of any such proposals may have an adverse effect on the homebuilding industry in general, as the loss of or
reduction of homeowner tax deductions could decrease the demands for new homes.
We may be unable to acquire desired development sites
at commercially reasonable costs.
Our revenue depends on the completion and
sale of our projects, which in turn depends on our ability to acquire development sites. Our land costs are a major component of
our cost of real estate sales and increases in such costs could diminish our gross margin. In China, the PRC government controls
the supply of land and regulates land sales and transfers in the secondary market. As a result, the policies of the PRC government,
including those related to land supply and urban planning, affect our ability to acquire, and our costs of acquiring, land use
rights for our projects. In recent years, the government has introduced various measures attempting to moderate investment in the
property market in China. Although we believe that these measures are generally targeted at the luxury property market and speculative
purchases of land and properties, we cannot assure you that the PRC government will not introduce other measures in the future
that would adversely affect our ability to obtain land for development. We currently acquire our development sites primarily by
bidding for government land. Under current regulations, land use rights acquired from government authorities for commercial and
residential development purposes must be purchased through a public tender, auction or listing-for-sale. Competition in these bidding
processes has resulted in higher land use rights costs for us over the past few years. In addition, we may not successfully obtain
desired development sites due to the increasingly intense competition in the bidding processes. In the future, we may also need
to acquire land use rights through acquisition, which could increase our costs. Moreover, the supply of potential development sites
in any given city will diminish over time, and we may find it increasingly difficult to identify and acquire attractive development
sites at commercially reasonable costs in the future.
We may not be able to procure land successfully or receive
expected return through our new land acquisition model.
Since the second half of 2012, we have
developed a new model to acquire land through direct negotiation with local governments prior to land auctions in response to
local governments' need for funding undeveloped land preparation. Under the direct negotiation model, we enter into a framework
cooperation agreement with the local government, pursuant to which we provide land planning advice to the local government with
respect to a particular piece of undeveloped land that the government plans to develop. Based on the government's land development
plan, the underlying land may be divided into several tranches to be developed on a tranche by tranche basis. Following the government's
development plan, we will provide funding in terms of advance payments to the government for land preparation of a particular
tranche approximately three to six months before the land auction for that tranche. The advance payment usually ranges from 20%
to 50% of the estimated opening auction price. The final disposition of the tranche occurs through public auction. Pursuant to
the framework cooperation agreement, if we successfully acquire the land through the auction, the advance payment will become
part of the land transfer payment. If we fail to acquire the land, we will be refunded the advance payment with an annual interest
rate of approximately 10% to 12%. We believe that under the direct negotiation model, we are often in better position to identify
and undertake initial planning with respect to targeted parcels as a result of direct involvement in and interaction with the
government regarding the development stage of undeveloped lands. As of December 31, 2012, we have entered into three framework
cooperation agreements with local governments, pursuant to which we have made advance payments in the aggregate amount of US$44.5
million. In the six months ended June 30, 2013, one of the framework agreements terminated and we made deposits in the aggregate
amount of US$127.4 million under the other two framework agreements.
The land preparation process may be delayed
after we have provided an advance payment, placing undue burden on our cash flow. In addition, as the procurement of land is eventually
through the standard auction process, we may not be able to successfully acquire the land for which we have provided advance payment.
In that case, we may have lost other opportunities for which we could have deployed the funds used to make the advance payment.
If we fail to acquire any land for which we have made an advance payment, we cannot assure you that we will be able to receive
the expected return on the advance payment or that there will not be any delay in receiving the refund. Furthermore, we may no
longer be able to conduct direct negotiation with the government as result of any change in government regulations and policies
prohibiting or restricting such business model in the future.
We rely on third-party contractors.
Substantially all of our project construction
and related work are outsourced to third-party contractors. We are exposed to risks that the performance of our contractors may
not meet our level of standards or specifications. Negligence, delay or poor work quality by contractors may result in defects
in our buildings or residential units, which could in turn cause us to suffer financial losses, harm our reputation or expose us
to third-party claims. If the performance of any third party contractor is not satisfactory or is delayed, we may need to replace
such contractor or take other actions to remedy the situation, which could adversely affect the cost and construction progress
of our projects. Moreover, the completion of our property developments may be delayed. In addition, we work with multiple contractors
on different projects and we cannot guarantee that we can effectively monitor their work at all times. Although our construction
and other contracts contain provisions designed to protect us, we may be unable to successfully enforce these rights and, even
if we are able to successfully enforce these rights, the third-party contractors may not have sufficient financial resources to
compensate us. Moreover, the contractors may undertake projects from other property developers, engage in risky undertakings or
encounter financial or other difficulties, such as supply shortages, labor disputes or work accidents, which may cause delays in
the completion of our property projects or increases in our costs. For the year ended December 31, 2012, we experienced three projects
late delivery caused by contractors’ failure to meet with applicable quality standards and incurred US$9.9 million in compensation
to our customers. In the six months ended June 30, 2013, we experienced one project late delivery caused by contractors’
failure to meet with applicable quality standards and incurred US$1.8 million in compensation to our customers. We cannot assure
you that we will not have similar incidents in the future, which could have a material adverse effect on our business, financial
condition and results of operations.
We may be unable to complete our property developments
on time or at all.
The progress and costs for a development
project can be adversely affected by many factors, including, without limitation:
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delays in obtaining necessary licenses, permits or approvals from government agencies or authorities;
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shortages of materials, equipment, contractors and skilled labor or increased labor or raw material costs;
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disputes with our third-party contractors;
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failure by our third-party contractors to comply with our designs, specifications or standards;
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difficult geological situations or other geotechnical issues;
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onsite labor disputes or work accidents; and
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natural catastrophes or adverse weather conditions, including strong winds, storms, floods, and earthquakes.
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Any construction delays, or failure to complete
a project according to our planned specifications or budget, may delay our property sales, which could adversely affect our revenues,
cash flows and our reputation.
Under PRC laws and regulations and our pre-sale
contracts, we are required to compensate purchasers for late delivery of or failure to complete our pre-sold units. If the delay
extends beyond the contractually specified period, the purchasers may become entitled to terminate the pre-sale contracts and claim
damages. For the year ended December 31, 2012, we incurred an aggregate amount of approximately US$9.9 million of compensation
to our customers due to late delivery. In the six months ended June 30, 2013, we experienced one project late delivery caused by
contractors’ failure to meet with applicable quality standards and incurred US$1.8 million in compensation to our customers.
Proceeds from pre-sale of our properties
are an important source of financing for our property developments. Under PRC laws, we are not permitted to commence pre-sales
until we have completed certain stages of the construction process for a project. Consequently, a significant delay in the construction
of a project could restrict our ability to pre-sell our properties, which could extend the recovery period for our capital outlay.
This, in turn, could have an adverse effect on our cash flow, business and financial position.
Changes of laws and regulations with respect to pre-sales
may adversely affect our cash flow position and performance.
We depend on cash flows from pre-sale of
properties as an important source of funding for our property development projects. Under current PRC laws and regulations, property
developers must fulfill certain conditions before they can commence pre-sale of the relevant properties and may only use pre-sale
proceeds to finance the construction of the specific developments. On August 5, 2005, the PBOC issued a report entitled “2004
Real Estate Financing Report,” in which it recommended that the practice of pre-selling uncompleted properties be discontinued
because, according to the report, such activity creates significant market risks and generates transactional irregularities. This
and other PBOC recommendations have not been adopted by the PRC government and have no enforceability. However, there can be no
assurance that the PRC government will not ban the practice of pre-selling uncompleted properties or implement further restrictions
on the pre-sale of properties, such as imposing additional conditions for a pre-sale permit or further restrictions on the use
of pre-sale proceeds or that cities will not voluntarily suspend or restrict pre-sales. For example, the Housing and Construction
Department in Guangxi Province (in which we do not have any operations) announced in 2010 that it was considering suspending pre-sales
of commercial properties, starting in Nanning municipality on a trial basis. Any measures prohibiting or further restricting pre-sales
by the PRC government or province or city government affecting cities in which we operate will adversely affect our cash flow position
and force us to seek alternative sources of funding for much of our property development business.
The results of our operations may fluctuate from period
to period as we derive our revenue principally from the sale of properties and we rely on our unsold inventory of units.
We derived the majority of our revenue from
the sale of properties that we have developed. Our results of operations tend to fluctuate from period to period due to a combination
of factors, including the overall schedule of our property development projects, the timing of the sale of properties that we have
developed, the size of our land bank, our revenue recognition policies and changes in costs and expenses, such as land acquisition
and construction costs. The number of properties that we can develop or complete during any particular period is limited due to
the size of our land bank, the substantial capital required for land acquisition and construction, as well as the development periods
required before positive cash flows may be generated. We recognize our real estate revenue based on the full accrual method and
the percentage of completion method, both of which require us to estimate total costs and revenue which may be reviewed or revised
periodically and may result in changes from period to period. In addition, several properties that we have developed or that are
under development are large scale and developed in multiple phases over the course of one to several years. The selling prices
of the residential units in larger scale property developments tend to change over time, which may impact our sales proceeds and,
accordingly, our revenues for any given period.
The recognition of our real estate revenue and costs is
dependent upon our estimation of our total project revenue and costs.
We recognize our real estate revenue based
on the full accrual method and the percentage of completion method depending on the estimated project construction period and timing
of collection of sales prices. See “ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS – Critical Accounting Policies”
in our 2012 Form 20-F. Under both methods, revenue and costs are calculated based on an estimation of total project costs and total
project revenues, which are revised on a regular basis as the work progresses. Any material deviation between actual and estimated
total project revenues and costs may result in an increase, a reduction or an elimination of reported revenues or costs from period
to period, which will affect our gross profit and net income.
We face risks related to our back-to back loans.
Since expanding our operations into the
U.S. market in 2012, we became and will continue to be in increasing need for U.S. dollar financings with respect to project developments
and future expansions. We currently satisfy our U.S. dollar denominated financing through two ways: dividends distributions from
our PRC subsidiaries, which are subject to 10% withholding tax payment or back-to-back loan arrangements. Under back-to-back loan
arrangements, our PRC subsidiaries make deposits denominated in RMB into banks in China as collateral to request the banks in China
to issue standby letters denominated in U.S. dollars in the same amount as the RMB collateral to their outbound branches, and our
U.S. project companies enter into loans denominated in U.S. dollars with such outbound branches in the same amount specified in
such standby letters. Although the Chinese government currently does not have significant restrictions on this type of transaction,
any change in laws or regulations to restrict or forbid back-to-back loan transactions in the future may adversely affect our U.S.
projects’ financing. In addition, we are exposed to the foreign exchange control risks under the current outbound financing
model, which may adversely affect our business condition and results of operation.
We rely on our key management members.
We depend on the services provided by key
management members. Competition for management talent is intense in the property development sector. In particular, we are highly
dependent on Mr. Yong Zhang, our founder, Chairman and, until September 2013, our Chief Executive Officer, Mr. Xinqi Wang, who
became our Chief Executive Officer in September 2013, Dr. Yong Cui, a Director and, as of September 2013, our Presiden
t
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Ms. Yinfei Hao, a Director and Executive Vice President, and Mr. Kevin Wei, our Chief Financial Officer. We do not maintain key
employee insurance. In the event that we lose the services of any key management member, we may be unable to identify and recruit
suitable successors in a timely manner or at all, which will adversely affect our business and operations. Moreover, we may need
to employ and retain more management personnel to support an expansion into other Tier II and Tier III cities on a much larger
geographical scale as well as our expansion in the U.S. If we cannot attract and retain suitable personnel, especially at the management
level, our business and future growth will be adversely affected.
We provide guarantees for the mortgage loans of our customers
which expose us to risks of default by our customers.
We pre-sell properties before actual completion
and, in accordance with industry practice, our customers’ mortgage banks require us to guarantee our customers’ mortgage
loans. Typically, we provide guarantees to PRC banks with respect to loans procured by the purchasers of our properties for the
total mortgage loan amount until the completion of the registration of the mortgage with the relevant mortgage registration authorities,
which generally occurs within six to 12 months after the purchasers take possession of the relevant properties. In line with what
we believe to be industry practice, we rely on the credit evaluation conducted by mortgagee banks and do not conduct our own independent
credit checks on our customers. The mortgagee banks typically require us to maintain, as restricted cash, up to 10% of the mortgage
proceeds paid to us as security for our obligations under such guarantees. If a purchaser defaults on its payment obligations during
the term of our guarantee, the mortgagee bank may deduct the delinquent mortgage payment from the security deposit. If the delinquent
mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple purchasers default
on their payment obligations, we will be required to make significant payments to the banks to satisfy our guarantee obligations.
Factors such as a significant decrease in housing prices, increase in interest rates or the occurrence of natural catastrophes,
among others, could result in a purchaser defaulting on its mortgage payment obligations. If we are unable to resell the properties
underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we
will suffer financial losses. We paid US$95,563, US$41,793, US$273,987 and US$145,187 to satisfy guarantee obligations related
to customer defaults for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013, respectively.
As of December 31, 2010, 2011 and 2012 and
June 30, 2013, our outstanding guarantees in respect of our customers’ mortgage loans amounted to US$666.4 million, US$709.5
million, US$951.1 million and US$1,016.9 million, respectively. If substantial defaults by our customers occur and we are called
upon to honor our guarantees, our financial condition, cash flow and results of operations will be materially adversely affected.
Our substantial indebtedness could have an adverse effect
on our financial condition, diminish our ability to raise additional capital to fund our operations and limit our ability to explore
business opportunities.
As of June 30, 2013, on a pro forma basis
after giving effort to our issuance of the Convertible Note on September 19, 2013, the outstanding balance of our total indebtedness
amounted to US$586.5 million. Our level of indebtedness could have an adverse effect on us. For example, it could:
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require us to dedicate a large portion of our cash flow from operations to fund payments on our debt, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
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increase our vulnerability to adverse general economic or industry conditions;
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limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;
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limit our ability to raise additional debt or equity capital in the future or increase the cost of such funding;
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restrict us from making strategic acquisitions or exploring business opportunities; and
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make it more difficult for us to satisfy our obligations with respect to our debt.
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The instruments governing our senior debt contain certain
financial and other covenants that restrict our ability to pay dividends, raise further debt and take other corporate actions which
may adversely affect our business.
On May 3, 2013,
we issued US$200 million aggregate principal amount of 13.25% Senior Notes due 2018 (the “13.25% Senior Notes”), and
on September 19, 2013, we issued the Convertible Note. Both the Convertible Note and the indenture governing the 13.25% Senior
Notes contain a number of significant financial and other covenants. Such covenants restrict, among other things, our ability and
the ability of our subsidiaries to incur additional debt or guarantees, make restricted payments, make investments, pay dividends
or distributions on our or our subsidiaries’ capital stock, repurchase our or our subsidiaries’ capital stock, pay
subordinated indebtedness, make or repay inter-company loans or enter into non-ordinary course business transactions. Among other
restrictions, we are limited in the dollar amount of mortgage guarantees we may provide if we do not maintain a minimum consolidated
interest expense coverage ratio, or interest coverage ratio.
As a result of
the covenants, our ability to pay dividends or other distributions on our common shares and the ADSs may be limited. These covenants
also restrict our ability to raise additional capital in the future through bank borrowings and debt and equity issuances and may
restrict our ability to engage in some transactions that we expect to be of benefit to us. The covenants may also limit the amount
of units we may sell in any period by limiting the amount of mortgage guarantees we can provide to purchasers if we do not maintain
the requisite interest coverage ratio.
The 13.25% Senior
Notes and the Convertible Note constitute pari passu senior indebtedness. They are each guaranteed by certain of our subsidiaries
and secured by the capital stock of certain of our subsidiaries, including the capital stock of certain of the guarantors. A breach
of any of the covenants in the documents governing either issue of our senior debt (i.e., under the indenture governing the 13.25%
Senior Notes or in the Convertible Note themselves) could result in a default and acceleration of such debt, which could, in turn,
create a default and acceleration of the other issue of our senior debt. If we default under the 13.25% Senior Notes or the Convertible
Note in the future, the holders may enforce their claims against the guarantors and the pledged capital stock to satisfy our obligations
to them. In such an event, the holders of our senior debt could gain ownership of the capital stock of certain of our wholly owned
subsidiaries and enforce their claims against the assets of the guarantors. We conduct substantially all of our operations in China
and substantially all of our assets are located in China and, if we default under our senior debt, we would lose control or ownership
of our assets and operations in China and there may be few or no assets remaining with which we could conduct our business or from
which the claims of our other creditors could be satisfied.
Our financing costs are subject to changes in interest
rates.
The rates of interest payable on our long-term
bank loans are adjustable based on the range of 95% to 120% of the PBOC benchmark rate, which fluctuates from time to time. At
June 30 , 2013, the PBOC benchmark rate for a one year loan was 6.00% and ranged from 6.15% to 6.55% for loans of more than one
year. As of June 30, 2013, the principal amount of our aggregate outstanding variable rate debt was US$171.7 million. A hypothetical
1% increase in annual interest rates would increase our interest expenses by US$1.7 million based on our debt level at June 30,
2013. In connection with our expansion in to the U.S. beginning in 2012, we anticipate entering into U.S. dollar denominated loans
in the future, which will subject us to additional interest rate fluctuation risks, including fluctuations of London Interbank
Offered Rate, or LIBOR.
We are subject to potential environmental liability.
We are subject to a variety of laws and
regulations concerning the protection of health and the environment. The particular environmental laws and regulations that apply
to any given development site vary significantly according to the site’s location and environmental condition, the present
and former uses of the site and the nature of the adjoining properties. Environmental laws and conditions may result in delays,
may cause us to incur substantial compliance and other costs and can prohibit or severely restrict project development activity
in environmentally-sensitive regions or areas. Although the environmental investigations conducted by local environmental authorities
have not revealed any environmental liability that we believe would have a material adverse effect on our business, financial condition
or results of operations to date, it is possible that these investigations did not reveal all environmental liabilities and that
there are material environmental liabilities of which we are unaware. We cannot assure you that future environmental investigations
will not reveal material environmental liability. Also, we cannot assure you that the PRC or U.S. government will not change the
existing laws and regulations or impose additional or stricter laws or regulations, the compliance of which may cause us to incur
significant capital expenditure. See “ITEM 4. INFORMATION ON THE COMPANY—B. Business Overview—Environmental Matters”
in our 2012 Form 20-F.
Our business expansion and business diversification requires
proper allocation of our management resources and qualified employees.
In 2012, we embarked on four new residential
development projects in China, including our first development project in the satellite area of Beijing. We also began to hold
and manage our first retail project, Xinyuan Priority Lifestyle Shopping Center, located in Zhengzhou, Henan Province. In addition,
we expanded our operations into the U.S. market, including a development project in New York, and two resale projects in Reno,
Nevada and Irvine, California. These newly developed projects, with more diversified business focuses in terms of market regions
and types of business, demand proper allocation of our management resources. If our management fails to satisfy these increased
demands, we may not be able to carry out our business expansion and project development successfully. In addition, if we are unable
to recruit or retain a sufficient number of qualified employees for the continuation and expansion of our business, our business
and prospects may be adversely affected.
We may fail to obtain, or may experience material delays
in obtaining, necessary government approvals for any major property development, which will adversely affect our business.
The real estate industry is strictly regulated
by the PRC government. Property developers in China must abide by various laws and regulations, including implementation rules
promulgated by local governments to enforce these laws and regulations. Before commencing, and during the course of, development
of a property project, we need to apply for various licenses, permits, certificates and approvals, including land use rights certificates,
construction site planning permits, construction work planning permits, construction permits, pre-sale permits and completion acceptance
certificates. We need to satisfy various requirements to obtain these approval certificates and permits. To date, we have not encountered
serious delays or difficulties in the process of applying for these approval certificates and permits, but we cannot guarantee
that we will not encounter serious delays or difficulties in the future. In the event that we fail to obtain the necessary governmental
approvals for any of our major property projects, or a serious delay occurs in the government’s examination and approval
progress, we may not be able to maintain our development schedule and our business and cash flows may be adversely affected.
Regulations in the U.S. could increase the cost and limit
the availability of our project development in the U.S. and adversely affect our business or financial results.
As we expand our business into the U.S.
market, we will be subject to extensive and complex regulations in the U.S. that affect land development and home construction,
including zoning, density restrictions, building design and building standards. These regulations often provide broad discretion
to the administering governmental authorities as to the conditions we must meet prior to being approved, if approved at all. We
are subject to determinations by these authorities as to the adequacy of water and sewage facilities, roads and other local services.
New housing developments may also be subject to various assessments for public improvements. Any of these regulatory issues can
limit or delay construction and increase our operating costs. We are also subject to a variety of local, state and federal laws
and regulations concerning protection of health, safety and the environment. These matters may result in delays, may cause us to
incur substantial compliance, remediation, mitigation and other costs or subject us to costs from fines, penalties and related
litigation. These laws and regulations can also prohibit or severely restrict development and homebuilding activity in environmentally
sensitive areas.
Increases in the price of raw materials or labor costs
may increase our cost of sales and reduce our earnings.
We outsource the design and construction
of our projects under development to third-party service providers. Our third-party contractors are responsible for provider labor
and procuring almost all of the raw materials used in our project developments. Our construction contracts typically provide for
fixed or capped payments, but the payments are subject to changes in government-suggested prices for certain raw materials we use,
such as steel and cement. Any increase in labor costs or other costs which may result in adjustments in payments under any of our
construction contracts could result in an increase in our construction costs. In the event that the price of any raw materials,
including cement, concrete blocks and bricks, increase in the future, such increase could be passed on to us by our contractors,
and our construction costs would increase accordingly. Passing such increased costs to our customers may result in reduced sales
and delay our ability to complete sales for our projects. Any input cost increase could reduce our earnings to the extent we are
unable to pass these increased costs to our customers.
Retail and commercial investment properties and properties
held for sale are generally illiquid investments and the lack of alternative uses of such properties could limit our ability to
respond changes in the performance of our properties.
As of June 30, 2013, we had approximately
46,000 square meters of retail investment properties in Zhengzhou province, in China and we had properties held for sale in Nevada
and California in the U.S. in approximately 50 finished lots and 1,627 square meters. We anticipate that we may prudently and gradually
increase our retail and commercial investment properties as appropriate opportunities arise in the future. Any form of real estate
investment is difficult to liquidate and, as a result, our ability to sell our properties in response to changing economic, financial
and investment conditions is limited. In addition, we may also need to incur capital expenditures to manage and maintain our properties,
or to correct defects or make improvements to these properties before selling them. We cannot assure you that we can obtain financing
at a reasonable cost for such expenditures, or at all.
Furthermore, aging of retail and commercial
investment properties or properties held for sale, changes in economic and financial conditions or changes in the competitive landscape
in the PRC or U.S. property markets, may adversely affect the amounts of rentals and revenue we generated from, as well as the
fair value of, these properties. However, our ability to convert any of these properties to alternative uses is limited as such
conversion requires extensive governmental approvals in the PRC or may require zoning or other approvals in the U.S. and involves
substantial capital expenditures for the purpose of renovation, reconfiguration and refurbishment. We cannot assure you that such
approvals and financings can be obtained when needed. These and other factors that impact our ability to respond to adverse changes
in the performance of our retail and commercial investment properties, as well as properties held for sale, may adversely affect
our business, financial condition, cash flow and results of operations.
We may engage in joint ventures, which could result in
unforeseen expenses or disruptive effects on our business.
From time to time, we may consider joint
ventures with other businesses to develop a property. Any joint venture that we determine to pursue will be accompanied by a number
of risks. We may not be in a position to exercise sole decision-making authority regarding the joint ventures. We may not be able
to control the quality of products produced by the joint venture. Depending on the terms of the joint venture agreement, we may
require the consent of our joint venture partners for the joint venture to take certain actions, such as making distributions to
the partners. A joint venture partner may encounter financial difficulties and become unable to meet obligations with regards to
funding of the joint venture. In addition, our joint venture partners and the joint venture themselves may hold different views
or have different interests from ours, and therefore may compete in the same market with us, in which case our interest and future
development may be materially adversely affected.
Any future acquisitions could expose us to unforeseen
risks or place additional strain on the management and other resources.
In late 2010, we completed our acquisition
of Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd., or Jiantou Xinyuan, a joint venture in which we had previously held a 45% interest.
As part of our business strategy, we regularly evaluate investments in, or acquisitions of, subsidiaries, joint ventures, and we
expect that we will continue to make such investments and acquisitions in the future. Any potential future acquisition may be accompanied
by a number of risks, including risks relating to the evolving legal landscape in China. An acquired business may underperform
relative to expectations or may expose us to unexpected liabilities. In addition, the integration of any acquisition could require
substantial management attention and resources. If we were unable to successfully manage the integration and ongoing operations,
or hire and retain additional personnel necessary for the running of the expanded business, the results of our operations and branch
performance could be adversely affected.
Regulations in the PRC may make it more difficult for
us to pursue growth through acquisitions.
On August 8, 2006, six PRC regulatory agencies,
including the CSRC, promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the
M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. Among other things, the M&A Rules
and regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make
merger and acquisition activities by foreign investors more time-consuming and complex. For example, the M&A Rules require
that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control
of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on
Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council on August 3, 2008, are triggered.
According to the Implementing Rules Concerning Security Review on the Mergers and Acquisitions by Foreign Investors of Domestic
Enterprises issued by the Ministry of Commerce in August 2011, mergers and acquisitions by foreign investors involved in an industry
related to national security are subject to strict review by the Ministry of Commerce. These rules also prohibit any transactions
attempting to bypass such security review, including by controlling entities through contractual arrangements. We believe that
our business is not in an industry related to national security. However, we cannot preclude the possibility that the Ministry
of Commerce or other government agencies may publish interpretations contrary to our understanding or broaden the scope of such
security review in the future. From time to time, we may elect to grow our business in part by directly acquiring complementary
businesses in China. Complying with the requirements of these regulations to complete such transactions could be time-consuming,
and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability
to complete such transactions.
Our development plan may be adversely affected in the
event that relocation issues related to government housing expropriations are not successfully settled by the relevant PRC governmental
authorities.
We acquire property for development through
bidding, auctions and listing procedures held by the government or through acquisitions from third parties. Some of the property
we acquire from the government may have been made available through expropriation. On January 21, 2011, the PRC State Council issued
the
Regulations on the Expropriation of Buildings on State-owned Land and Compensation
, which provides that government entities
at the city and county level are responsible for overseeing housing expropriation and compensation within their respective administrative
regions. The regulations mandate that a compensation agreement be entered into between the relevant housing expropriation department
and the entities or individuals whose houses have been expropriated addressing, among others things, the mode of payment and the
amount of compensation, the period of payment, the removal expenses, temporary placement or transitional housing expenses, losses
from the closure of business operations, the time period within which the entities or individuals must vacate the expropriated
premises, the type of transitional accommodation and the period of transition. The compensation payable may not be less than the
market value of property of a similar nature as of the date when the expropriation notice was issued. Under the regulations, property
developers are prohibited from participating in the relocation arrangements. Given the fact that the completion of the relocation
procedures is the condition precedent for the relevant PRC governmental authorities to grant land use rights, any failure of the
PRC governmental authorities in handling the relocation issues may cause substantial delays in the granting process of land use
rights. If we cannot obtain the land use rights from the relevant governmental authorities in time, our development plan may be
delayed and we hence may not be able to complete the development and sell the property according to plan. This will, in turn, adversely
affect our business operations.
We do not have insurance to cover potential losses and
claims.
We do not have insurance coverage against
potential losses or damages with respect to our properties in the PRC before their delivery to customers, nor do we maintain insurance
coverage against liability from tortious acts or other personal injuries on our project sites. Although we require our contractors
to carry insurance, we believe most of our contractors do not comply with this requirement. Our contractors may not be sufficiently
insured themselves or have the financial ability to absorb any losses that arise with respect to our projects or pay our claims.
In addition, there are certain types of losses, such as losses due to earthquakes, which are currently uninsurable in China. While
we believe that our practice is in line with the general practice in the PRC property development industry, there may be instances
when we will have to internalize losses, damages and liabilities because of the lack of insurance coverage, which may in turn adversely
affect our financial condition and results of operations. In addition, while we carry limited insurance on our operations in the
U.S., such insurance may not be adequate to compensate us for any losses, damages and liabilities we might incur with regard to
our properties.
We may suffer a penalty or even forfeit land to the PRC
government if we fail to comply with procedural requirements applicable to land grants from the government or the terms of the
land use rights grant contracts.
According to the relevant PRC laws and regulations,
if we fail to develop a property project according to the terms of the land use rights grant contract, including those relating
to the payment of land premiums, specified use of the land and the time for commencement and completion of the property development,
the PRC government may issue a warning, may impose a penalty or may order us to forfeit the land. Specifically, under current PRC
laws and regulations, if we fail to pay land premiums in accordance with the payment schedule set forth in the relevant land use
rights grant contract, the relevant PRC land bureau may issue a warning notice to us, impose late payment penalties or even require
us to forfeit the related land to the PRC government. The late payment penalties are usually calculated based on the overdue days
for the land premium payments. Furthermore, if we fail to commence development within one year after the commencement date stipulated
in the land use rights grant contract, the relevant PRC land bureau may issue a warning notice to us and impose an idle land fee
on the land of up to 20% of the land premium. If we fail to commence development within two years, the land will be subject to
forfeiture to the PRC government, unless the delay in development is caused by government actions or force majeure. Even if the
commencement of the land development is compliant with the land use rights grant contract, if the developed gross floor area (“GFA”)
on the land is less than one-third of the total GFA of the project or the total capital invested is less than one-fourth of the
total investment of the project and the suspension of the development of the land continues for more than one year without government
approval, the land will also be treated as idle land and be subject to penalty or forfeiture. We and Jiantou Xinyuan, during the
time we owned only 45% of the company, have made late payments of land premiums for which penalties were imposed.
We cannot assure you that circumstances
leading to significant delays in our own land premium payments or development schedules or forfeiture of land will not arise in
the future. If we pay a substantial penalty, we may not be able to meet pre-set investment targeted returns for a given project
and our financial conditions could be adversely affected. If we forfeit land, we will not only lose the opportunity to develop
the property projects on such land, but may also lose a significant portion of the investment in such land, including land premium
deposits and the development costs incurred.
Any non-compliant GFA of our uncompleted and future property
developments will be subject to governmental approval and additional payments.
The local government authorities inspect
property developments after their completion and issue the completion acceptance certificates if the developments are in compliance
with the relevant laws and regulations. If the total constructed GFA of a property development exceeds the GFA originally authorized
in the relevant land grant contracts or construction permit, or if the completed property contains built-up areas that do not conform
with the plan authorized by the construction permit, the property developer may be required to pay additional amounts or take corrective
actions with respect to such non-compliant GFA before a completion acceptance certificate can be issued to the property development.
We have obtained completion acceptance certificates
for all of our completed properties as of June 30, 2013. However, we cannot be certain that local government authorities will not
determine that the total constructed GFA upon completion of our existing projects under development or any future property developments
exceed the relevant authorized GFA. Any such non-compliance could lead to additional payments or penalty, which would adversely
affect our financial condition. We have not materially incurred any such payments or penalties since the founding of the company.
We may not be able to continue obtaining qualification
certificates, which will adversely affect our business.
Real estate developers in the PRC must obtain
a formal qualification certificate in order to carry on a property development business in the PRC. According to the PRC regulations
on qualification of property developers issued in 2000, a newly established property developer must first apply for a temporary
qualification certificate with a one-year validity, which can be renewed for not more than two years. If, however, the newly established
property developer fails to commence a property development project within the one-year period during which the temporary qualification
certificate is in effect, it will not be allowed to renew its temporary qualification certificate. All qualification certificates
are subject to renewal on an annual basis. Under government regulations, developers must fulfill all statutory requirements before
they may obtain or renew their qualification certificates. In accordance with the provisions of the rules on the administration
of qualifications, the real estate developer qualifications are classified into four classes and the approval system for each class
is tiered. A real estate developer may only engage in the development and sale of real estate within the scope of its qualification
certificate. For instance, a Class I developer is not restricted to the scale of real estate projects to be developed and may undertake
real estate development projects anywhere in the country, while a Class II or below developer may undertake projects with construction
area of less than 250,000 square meters per project. See “ITEM 4. INFORMATION ON THE COMPANY—B. Business Overview—Regulation—Regulations
on Qualifications of Developer” in our 2012 Form 20-F.
There can be no assurance that some of our
project companies that are in the process of applying for or renewing proper qualification certificates will be able to obtain
such certificates on a timely basis to commence their planned real estate projects development on schedule. There can be no further
assurance that we and our project companies will continue to be able to extend or renew the qualification certificates or be able
to successfully upgrade the current qualification class to a higher qualification. If we or our project companies are unable to
obtain or renew qualification certificates, the PRC government will refuse to issue pre-sale and other permits necessary for the
conduct of the property development business, and our results of operations, financial condition and cash flows will be adversely
affected. In addition, if any of our project companies engages in the development and sale of real estate outside the scope of
its qualification certificate, it may be ordered to rectify such conduct within a prescribed period, be fined up to RMB100,000,
or even have its qualification certificate and business license revoked.
Our failure to assist our customers in applying for property
ownership certificates in a timely manner may lead to compensatory liabilities to our customers.
We are statutorily required to meet various
PRC regulation requirements within 90 days after delivery of property, or such other period contracted with our customers, in order
for our customers to apply for their property ownership certificates, including passing various governmental clearances, formalities
and procedures. Under our typical sales contract, we are liable for any delay in the submission of the required documents as a
result of our failure to meet such requirements, and are required to compensate our customers for delays. In the case of delays
of submission of required documents, we are required under contracts with our customers to pay compensation to our customers and
our reputation and results of operations may be adversely affected.
The property development business is subject to claims
under statutory quality warranties.
Under PRC law, all property developers in
the PRC must provide certain quality warranties for the properties they construct or sell. We are required to provide these warranties
to our customers. Generally, we receive quality warranties from our third-party contractors with respect to our property projects.
If a significant number of claims were brought against us under our warranties and if we were unable to obtain reimbursement for
such claims from third-party contractors in a timely manner or at all, or if the money retained by us to cover our payment obligations
under the quality warranties was not sufficient, we could incur significant expenses to resolve such claims or face delays in remedying
the related defects, which could in turn harm our reputation, and materially adversely affect our business, financial condition
and results of operations.
We may become involved in legal and other proceedings
from time to time and may suffer significant liabilities or other losses as a result.
We have in the past, and may in future,
become involved in disputes with various parties relating to the acquisition of land use rights, the development and sale of our
properties or other aspects of our business and operations. These disputes may lead to legal or other proceedings and may result
in substantial costs and diversion of resources and management’s attention. Disputes and legal and other proceedings may
require substantial time and expense to resolve, which could divert valuable resources, such as management time and working capital,
delay our planned projects and increase our costs. Third parties that are found liable to us may not have the resources to compensate
us for our incurred costs and damages. We could also be required to pay significant costs and damages if we do not prevail in any
such disputes or proceedings. In addition, we may have disagreements with regulatory bodies in the course of our operations, which
may subject us to administrative proceedings and unfavorable decrees that result in pecuniary liabilities and cause delays to our
property developments.
The relevant PRC tax authorities may challenge the basis
on which we have been paying our land appreciation tax obligations and our results of operations and cash flows may be affected.
Under PRC laws and regulations, our PRC
subsidiaries engaging in property development are subject to land appreciation tax, or LAT, which is levied by the local tax authorities.
All taxable gains from the sale or transfer of land use rights, buildings and their attached facilities in the PRC are subject
to LAT at progressive rates ranging from 30% to 60%. Exemptions are available for the sale of ordinary residential properties if
the appreciation values do not exceed certain thresholds specified in the relevant tax laws. Gains from the sale of commercial
properties, luxury residential properties and villas are not eligible for this exemption.
We have accrued all LAT payable on our property
sales and transfers in accordance with the progressive rates specified in relevant tax laws, less amounts previously paid under
the levy method applied by relevant local tax authorities. However, provision for LAT requires our management to use a significant
amount of judgment with respect to, among other things, the anticipated total proceeds to be derived from the sale of the entire
phase of the project or the entire project, the total appreciation of project value and the various deductible items. Given the
time gap between the point at which we make provisions for and the point at which we settle the full amount of LAT payable, the
relevant tax authorities may not necessarily agree with our apportionment of deductible expense or other bases on which we calculate
LAT. As a result, our LAT expenses as recorded in our financial statements of a particular period may require subsequent adjustments.
If the LAT provisions we have made are substantially lower than the actual LAT amounts assessed by the tax authorities in the future,
our results of operations and cash flows will be materially and adversely affected.
Our operations may be affected by the real property taxes
to be imposed by the PRC government.
In another attempt to cool the real estate
market, the PRC government has been considering imposing real property tax on a nationwide scale and has designated Shanghai and
Chongqing as trial regions. In response, on January 27, 2011 both Shanghai and Chongqing promulgated local rules regarding the
imposition of real property tax, with such rules taking effect on January 28, 2011. On February 20, 2013, the State Council, in
an executive meeting, stated a new policy regarding the real property tax. The government is considering selecting more trial regions
for the real property tax this year. Real property tax regulations may eventually be officially promulgated at the national level;
any such regulation could significantly impact the real estate market. In light of these developments, we cannot guarantee that
our operations will not be adversely affected.
We may be required to pay additional corporate income
taxes in China.
Based on the levy method applied by the
Zhengzhou local tax bureau before 2011, our subsidiaries in Zhengzhou were paying corporate income tax, or CIT, on a deemed profit
basis, where taxable income was deemed to be 15% of cash receipts, regardless of actual income generated in that year. The local
tax authorities may challenge our basis as compared to the actual income basis. Accordingly, we may be subject to CIT on our actual
taxable income for the years prior to 2011. We have made provision for the full amount of applicable CIT calculated in accordance
with the relevant PRC tax laws and regulations, but we paid CIT each year as required by the local tax authorities. The Zhengzhou
local tax authority has provisionally confirmed that it suspended the deemed profit method to our PRC subsidiaries located in Henan
province and turned to the statutory taxable income method at 25% on income for the year ended December 31, 2011. For our subsidiaries
located in Shandong, Jiangsu, Anhui and Sichuan provinces, income tax is levied at the statutory rate of 25% on income as reported
in the statutory financial statements after appropriate tax adjustments for the year ended December 31, 2011. The local authorities
have indicated that they will apply the regulation in the same manner in 2012 and 2013. We cannot guarantee that we will not be
required to pay additional taxes in accordance with the PRC tax laws and regulations or that our accrued deferred tax liabilities
will be sufficient to cover any additional CIT payments we will be required to pay in the future with respect to past financial
periods.
Dividends we receive from our PRC subsidiaries located
in the PRC may be subject to PRC withholding tax.
The PRC Corporate Income Tax Law, or the
CIT Law, and the
Implementation for the CIT Law
issued by the PRC State Council became effective as of January 1, 2008.
The CIT Law provides that a maximum income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are
“non-resident enterprises,” to the extent such dividends are derived from sources within the PRC, and the State Council
has reduced such rate to 10% through the
Implementation for the CIT Law
. We are a Cayman Islands holding company and substantially
all of our income may be derived from dividends we receive from our PRC subsidiaries. Thus, dividends paid to us by our subsidiaries
in China may be subject to the 10% income tax if we are considered a “non-resident enterprise” under the CIT Law. If
we are required under the CIT Law to pay income tax for any dividends we receive from our PRC subsidiaries, it will materially
and adversely affect the amount of dividends received by us from our PRC subsidiaries.
We may be deemed a PRC resident enterprise under the CIT
Law and be subject to the PRC taxation on our worldwide income.
The CIT Law also provides that enterprises
established outside of China whose “de facto management bodies” are located in China are considered “resident
enterprises” and are generally subject to the uniform 25% corporate income tax rate as to their worldwide income (including
dividend income received from subsidiaries). Under the
Implementation for the CIT Law
, “de facto management body”
is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel
and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Under
the
Notice on the Issues Regarding Recognition of Overseas Incorporated Domestically Controlled Enterprises as PRC Resident
Enterprises Based on the De Facto Management Body Criteria
, which was retroactively effective as of January 1, 2008, an overseas
incorporated, domestically-controlled enterprise will be recognized as a PRC resident enterprise if it satisfies certain conditions.
However, it is still unclear whether PRC tax authorities would require us to be treated as a PRC resident enterprise. If we are
treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform
tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations,
although dividends distributed from our PRC subsidiaries to us could be exempt from Chinese dividend withholding tax, since such
income is exempted under the new CIT Law to a PRC resident recipient.
Dividends payable by us to our non-PRC investors and gain
on the sale of our ADSs may become subject to taxes under PRC tax laws.
Under the
Implementation for the CIT
Law
, a PRC income tax rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,”
which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the
relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their
sources within the PRC. Similarly, any gain realized on the transfer of ADSs by such investors is also subject to 10% PRC income
tax if such gain is regarded as income derived from sources within the PRC. If we are considered a PRC “resident enterprise,”
it is unclear whether dividends we pay with respect to our ADSs, or the gain you may realize from the transfer of our ADSs, would
be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the
Implementation
for the CIT Law
to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises,”
or if you are required to pay PRC income tax on the transfer of our ADSs, the value of your investment in our ADSs may be materially
and adversely affected.
If the value of our brand or image diminishes, it could
have a material adverse effect on our business and results of operations.
We intend to continue promoting the “Xinyuan”
brand in selected Tier II and Tier III cities by delivering quality products and attentive real estate-related services to our
customers. Our brand is integral to our sales and marketing efforts. Our continued success in maintaining and enhancing our brand
and image depends to a large extent on our ability to satisfy customer needs by further developing and maintaining quality of our
services across our operations, as well as our ability to respond to competitive pressures. If we are unable to satisfy customer
needs or if our public image or reputation were otherwise hindered, our business transactions with our customers may decline, which
could in turn adversely affect our results of operations.
We may be required to record impairment charges in the
future.
If the projected profitability of a given
project deteriorates due to a decline in the pace of unit sales, a decline in selling prices, or some other factor, such project
is reviewed for possible impairment by comparing the estimated future undiscounted cash flows for the project to its carrying value.
If the estimated future undiscounted cash flows are less than the project’s carrying value, the project is written down to
its estimated fair value. On a quarterly basis we are required to conduct impairment tests on our projects. If business conditions
deteriorate, there is a potential risk that impairment charges will be recorded, which may have a material adverse effect on our
results of operation.
Any unauthorized use of our brand or trademark may adversely
affect our business.
We own trademarks for “
鑫苑
”
in the form of Chinese characters and our company logo in the PRC. We have not registered such trademarks in the U.S. We rely on
the PRC intellectual property and anti-unfair competition laws and contractual restrictions to protect brand name and trademarks.
We believe our brand, trademarks and other intellectual property rights are important to our success. Any unauthorized use of our
brand, trademarks and other intellectual property rights could harm our competitive advantages and business. Historically, China
has not protected intellectual property rights to the same extent as the United States or the Cayman Islands, and infringement
of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized
use is difficult. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application
of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks
to us. If we are unable to adequately protect our brand, trademarks and other intellectual property rights, our reputation may
be harmed and our business may be adversely affected.
We may be subject to additional payments of statutory
employee benefits.
According to PRC laws and local regulations,
we are required to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury
insurance, unemployment insurance and childbearing insurance to designated government agents for the benefit of all our employees.
Since the PRC
Social Insurance Law
came into effect on July 1, 2011, the legal framework regulating employee social insurance
has been further strengthened. Currently, we pay statutory employee benefits based on the contribution ratio stipulated by local
governments and also accrue provisions for unpaid employee benefits based on relevant central government regulations. We cannot
be certain that such accrued amounts will be sufficient to meet any additional employee benefit payments that we are required to
make in the future.
If we provide seller-financing, we face the risk that
our homebuyers may default in their obligations, which could result in a delay of revenue recognition and could negatively affect
our financial results.
Since 2011, due to the restrictions of mortgages
to second home buyers, we employed seller-financed contract arrangements under which homebuyer could pay the purchase price for
the residential unit in installment payments. We performed credit checks on homebuyers to whom we offer seller-financed arrangements
and would likewise do so if we offer seller-financing in the future. However, there is no assurance that the data provided will
be completely accurate or current. Moreover, there is limit as to the extensiveness of the investigation we are able to conduct
with respect to each homebuyer. Our check may not have revealed and any checks in the future may not reveal all the matters that
an in-depth independent investigation performed by a bank or specialist whose primary business is credit review could uncover.
Our risk of monetary loss under any seller-financed
agreement is mitigated by the homebuyers' deposits we hold as collateral and our retention of possession and title to the apartments
until the purchase price is paid in full. However, if any homebuyer to whom we have offered seller financing arrangement defaults,
our ability to recognize revenue from the sale of the affected apartment will be delayed, we may incur additional expenses in selling
the apartment and our financial results could be adversely affected. Were we to offer seller financing arrangement in the future,
we would face similar risks of homebuyer defaults.
Our property development schedule may be delayed and our
development costs may increase as a result of delayed governmental demolition and resettlement processes if we were to acquire
land requiring demolition of existing properties.
According to Urban Housing Resettlement
Administration Regulations and applicable local regulations, in the case where we are responsible for demolishing existing properties
and relocating existing residents, we will be required to pay the corresponding demolition and resettlement costs. If the parties
responsible for and subject to the demolition and resettlement fail to reach agreements, either of them may apply for a ruling
with the relevant governmental authorities; if the parties are not satisfied with the ruling, they may initiate proceedings in
a people's court within three months from the date of such ruling, which may delay the project. Our practice has been to acquire
land where demolition of existing properties and resettlement of residents is not required. However, if we were to acquire land
where such actions are required, issues in the demolition and resettlement processes may affect our reputation, increase our costs
and delay the pre-sales of the relevant project, which may in turn adversely affect our business, financial position and operational
performance.
To the extent demolition and resettlement
are required in any of our future property developments, we will be required to compensate existing residents an amount calculated
in accordance with local resettlement compensations standards. These local standards may change from time to time without advance
notice. If such compensation standards are changed to increase the compensation we are required to pay, our land acquisition costs
may increase, which could adversely affect our financial condition and results of operations. In respect of projects in which the
resettlement cost are borne by us, if we or the local government fail to reach an agreement over the amount of compensation with
any existing owner or resident, any party may apply to the relevant authorities for a ruling on the compensation amount. Dissenting
owners and residents may also refuse to relocate. Any administrative process or resistance or refusal to relocate may delay our
future project development schedules, and an unfavorable final ruling may result in us paying more than the amount required by
the local standards. Any occurrence of the above factors may result in increases in our future development costs, which can adversely
affect our cash flows, financial condition and results of operations.
We could be adversely affected by potential violations
of the U.S. Foreign Corrupt Practices Act.
The U.S. Foreign Corrupt Practices Act,
or FCPA, generally prohibits companies and their intermediaries from making improper payments to public officials for the purpose
of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate and retain
employees in China and the United States, and we rely on our management structure, regulatory and legal resources and effective
operation of our compliance program to direct, manage and monitor the activities of our employees. Despite our training, oversight
and compliance programs, we cannot assure you that our internal control policies and procedures always will protect us from deliberate,
reckless or inadvertent acts of our employees or agents that contravene on compliance policies or violate applicable laws. Our
continued expansion in China and U.S. could increase the risk of such violations in the future. Violations of the FCPA, or allegations
of such violations, could disrupt our business and result in a material adverse effect on our results of operations or financial
condition.
Risks Relating to the Residential Property Industry in China
Our operations are highly subject to government policies
and regulations in the real estate market.
Since 2010, the PRC government has been
tightening its control of the real estate market with the aim of curbing increases in property prices.
On January 7, 2010, the general office of
the PRC State Council issued a circular to all ministries and provincial-level local governments to control the rapid increase
in housing prices and cool down the real estate market in China. The circular reiterated that the purchasers of a second residential
property for their households must make down payments of not less than 40% of the purchase price and the real estate developers
must commence the sale within the mandated period as set forth in the pre-sale approvals and at the publicly announced prices.
Further, in order to implement the requirements set out in the State Council’s circular, the Ministry of Land and Resources,
or the MLR, issued a notice on March 8, 2010 in relation to increasing the supply of, and strengthening the supervision over, land
for real estate development purposes. The MLR’s notice stipulated that the floor price of a parcel of land must not be lower
than 70% of the benchmark land price set for the area in which the parcel is located, and that real estate developers participating
in land auctions must pay a deposit equivalent to 20% of the land parcel’s floor price.
On April 17, 2010, the general office of
the PRC State Council issued a further circular to all ministries and provincial-level local governments. Among other matters,
the circular provided that purchasers of a first residential property for their households with a gross floor area of greater than
90 square meters must make down payments of 30% of the purchase price; purchasers of a second residential property for their households
must make down payments of at least 50% of the purchase price and the interest rate of any mortgage for such property must equal
at least the benchmark interest rate plus 10%; and for purchasers of a third residential property, both the minimum down payment
amount and applied interest rate must be increased significantly. Moreover, the circular provided that banks could decline to provide
mortgage financing to either a purchaser of a third residential property or a non-local resident purchaser.
On May 26, 2010, the Ministry of Housing
and Urban-Rural Development, or the MOHURD, the PBOC and China Banking Regulatory Commission, or the CBRC, jointly issued a notice
clarifying the criteria for determining what is a “second residential household property.” Among other matters, the
requirements on down payments and interest rates for mortgages on a second residential property will also apply to non-local resident
purchasers (i.e., purchasers who cannot provide proof that they have been making individual income tax payments or social security
payments in the relevant local area for more than one year) applying for housing-related mortgage financing, regardless of whether
there is any residential property under the name of a member of their households at the time of application.
The General Office of the State Council
promulgated the
Circular on Issues Relevant to Improving the Regulation and Control of the Real Property Market
on January
26, 2011, which required each city’s government to appropriately set and publicize its target for controlling the prices
of local, newly built, residential housing units in 2011. In addition, this circular also provided that for a household purchasing
a second residential household property by mortgage financing, the down payment must be at least 60% of the purchase price and
the interest rate for the mortgage on such property must be at least 1.1 times the benchmark interest rate; in municipalities,
the capital city of each province, and other cities where housing prices are too high, a local resident household having one residential
household property or a non-local resident household which is able to provide the requisite certificates showing payment of individual
income tax or social insurance contribution for a certain number of years, may only purchase one additional residential property;
for a local resident household already having two or more residential properties or a non-local resident household that already
has one or more residential properties or is unable to provide the requisite certificates, the purchase of any residential properties
in the local area is not permitted. Localities that have already promulgated their own policies on limiting the purchase of residential
properties must bring those policies in line with the abovementioned principle as soon as possible. Municipalities, capital cities
of each province, and other cities where housing prices are too high must promulgate policies to limit the purchase of residential
properties.
On February 5, 2011, the MLR issued the
Circular on the Issues of the Management and Control of Land Supply for Urban Residential Properties
which imposed strict
controls on the use of land for large commercial housing projects. On March 16, 2011, the National Development and Reform Commission,
or the NDRC, issued the
Provisions on Selling Real Estate at Expressly Marked Prices
, which was implemented on May 1, 2011
to regulate price manipulation and arbitrary price increases by, among other things, requiring developers to re-register with the
appropriate government department before increasing real estate prices. PRC government agencies have also promulgated several other
regulations in a continuous bid to promote the construction of public housing, especially rental housing projects. The urban public
rental housing policy is targeted at low to middle income families, new employees without housing and migrants with stable employment
in urban areas. Several policies, such as increasing financial aid from central finance agencies and local governments, improving
project planning and establishing a sound regulatory mechanism, have been implemented to ensure the successful promotion of affordable
housing projects. With the rapid development of the affordable housing projects, we foresee that this may not only reduce demand
in the market, but it may also make prices go down with regard to residential properties, which may therefore affect our business
operations in the PRC.
In addition to the notice above, local government
authorities of several municipalities and cities such as Beijing, Zhengzhou, Ji’nan, Chengdu and Hefei have successively
promulgated more detailed regulations to restrict residents who have not resided in the local area for a certain period of time
(ranging from 1 year to 5 years, evidenced by their individual income tax payment track records) from purchasing residential property
in that area.
On February 15, 2012, the MLR issued the
Circular on Issues Relevant to the Regulation and Control of the Real Property Market in 2012
, which provides that governments
must strictly maintain the current range of restrictions on the real estate market.
On February 20, 2013, the PRC State Council,
in an executive meeting, stated that it is still a national policy to take action to curb investment and speculation in the housing
market. The State Council required the local governments to continue to stabilize housing prices and restrict the speculation in
the housing market. The meeting also determined that the trial regions for real property tax will be enlarged.
On February 26, 2013, the General Office
of the State Council announced
the Notice on Continuing to Improve the Regulation and Control of the Real Estate Market
,
which, among others, provides the following requirements: (i) limitations on the purchase of commodity properties must be strictly
implemented, and the scope of such limitations must cover all newly constructed commodity properties and second-hand properties
located within the entire administrative area of the city in question; (ii) for those cities with excessive growth in housing prices,
the local counterparts of the PBOC may further increase down payment ratios and interest rates for loans to purchase second properties
in accordance with the price control policies and targets of the corresponding local governments; (iii) the gains generated from
the sale of a self-owned property shall be subject to individual income tax at a rate of 20%, if the original value of such property
can be verified through historical information such as tax filings and property registration.
As of October 23, 2013, echoing the notice
of General Office of the State Council, Guangzhou, Beijing, Shanghai, Shenzhen and Chongqing and other major cities in the PRC
have promulgated, respectively, local implementing policies, which among others, reiterated the requirements regarding: (i) limitations
on the purchase of properties within the local region; (ii) stabilizing price increases of local properties; (iii) strictly implementing
policies on down payment ratios and interest rates for loans to purchase second properties and prohibiting providing loans to purchase
third properties; and (iv) particularly in Beijing, strict enforcement of individual income tax collection on the gains generated
from the sale of a self-owned property.
Given that the price of housing has continued
to increase in major cities in 2013, it is possible that the government agencies may adopt further measures to implement the policies
outlined above. The full effect of these policies on the real estate industry and our business will depend in large part on the
implementation and interpretation of the circulars by governmental agencies, local governments and banks involved in the real estate
industry.
The PRC government’s policies and
regulatory measures on the PRC real estate sector could limit our access to required financing and other capital resources, adversely
affect the property purchasers’ ability to obtain mortgage financing or significantly increase the cost of mortgage financing,
reduce market demand for our properties and increase our operating costs. We cannot be certain that the PRC government will not
issue additional and more stringent regulations or measures or that agencies and banks will not adopt restrictive measures or practices
in response to PRC governmental policies and regulations, which could substantially reduce pre-sales of our properties and cash
flow from operations and substantially increase our financing needs, which would in turn materially and adversely affect our business,
financial condition, results of operations and prospects.
The PRC government has adopted various measures to regulate
the property development industry and may adopt further restrictive measures in the future.
In addition to its policies and measures
implemented to address housing prices, the PRC government has implemented a number of regulations and measures governing the property
development industry.
In July 2006, the MOHURD, the NDRC, the
PBOC, the State Administration for Industry and Commerce, or the SAIC, and the State Administration of Foreign Exchange, or the
SAFE, issued
Opinions on Regulating the Entry and Administration of Foreign Investment in the Real Estate Market
, which
impose significant requirements on foreign investment in the PRC real estate sector. For instance, these opinions set forth requirements
of registered capital of a foreign invested real estate enterprise as well as thresholds for a foreign invested real estate enterprise
to borrow domestic or overseas loans. In addition, since June 2007, a foreign invested real estate enterprise approved by local
authorities is required to file such approvals with the MOFCOM or its provincial branches. We cannot assure you that any foreign
invested real estate enterprise that we establish, or whose registered capital we increase, will be able to complete the filing
with the MOFCOM or its provincial branches.
On July 10, 2007, the SAFE issued the
Notice
on Publicity of the List of the 1st Group of Foreign-Invested Real Estate Projects filed with the MOFCOM
. This notice may strictly
limit our capacity to raise funds offshore for the purpose of funding our PRC subsidiaries by means of increasing their registered
capital or extending shareholders’ loans.
On December 24, 2011, the MOFCOM and the
NDRC jointly issued the
Catalogue of Industries for Guiding Foreign Investment (2011 Revision)
, or the Catalogue 2011, which
took effect on January 30, 2012. Consistent with the provisions of a prior catalogue, Catalogue 2011 restricts the construction
and operation of high-end residential and commercial properties by foreign investment entities. In addition, although it continues
to be a permitted type of investment, the development and construction of ordinary residential properties was removed from the
“encouraged” category of investment.
The PRC government’s restrictive regulations
and measures could increase our operating costs in adapting to these regulations and measures, limit our access to capital resources
or even restrict our business operations. We cannot be certain that the PRC government will not issue additional and more stringent
regulations or measures, which could further adversely affect our business and prospects.
We are heavily dependent on the performance of the residential
property market in China.
The residential property industry in the
PRC is still in a relatively early stage of development. Although demand for residential property in the PRC has been growing rapidly
in recent years, such growth is often coupled with volatility in market conditions and fluctuation in property prices. It is extremely
difficult to predict how much and when demand will develop, as many social, political, economic, legal and other factors, most
of which are beyond our control, may affect the development of the market. The level of uncertainty is increased by the limited
availability of accurate financial and market information as well as the overall low level of transparency in the PRC, especially
in Tier II and Tier III cities, which have lagged in progress in these aspects when compared to Tier I cities.
We face intense competition from other real estate developers.
The property industry in the PRC is highly
competitive. In the Tier II and Tier III cities we focus on, local and regional property developers are our major competitors,
and an increasing number of large state-owned and private national property developers have started entering these markets. Many
of our competitors, especially the state-owned and private national property developers, are well capitalized and have greater
financial, marketing and other resources than we have. Some also have larger land banks, greater economies of scale, broader name
recognition, a longer track record and more established relationships in certain markets. In addition, the PRC government’s
recent measures designed to reduce land supply further increased competition for land among property developers.
Competition among property developers may
result in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled
contractors, oversupply of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which
new property developments will be approved and/or reviewed by the relevant government authorities and an increase in administrative
costs for hiring or retaining qualified personnel, any of which may adversely affect our business and financial condition. Furthermore,
property developers that are better capitalized than we are may be more competitive in acquiring land through the auction process.
If we cannot respond to changes in market conditions as promptly and effectively as our competitors or effectively compete for
land acquisitions through the auction systems, our business and financial condition will be adversely affected.
In addition, risk of property over-supply
is increasing in parts of China, where property investment, trading and speculation have become overly active. We are exposed to
the risk that in the event of actual or perceived over-supply, property prices may fall drastically, and our revenue and profitability
will be adversely affected.
Our sales, revenues and operations will be affected if
our customers are not able to secure mortgage financing on attractive terms, if at all.
A majority of the purchasers of our residential
properties rely on mortgages to fund their purchases. If the availability or attractiveness of mortgage financing is reduced or
limited, many of our prospective customers may not desire or be able to purchase our properties and, as a result, our business,
liquidity and results of operations could be adversely affected. Among other factors, the availability and cost of mortgage financing
may be affected by changes in PRC regulations or policies or changes in interest rates.
The recent circulars issued by the PRC State
Council and related measures taken by local governments and banks have restricted and may continue to restrict the ability of purchasers
to qualify for or obtain mortgage financing. Since January 26, 2011, for a household purchasing a second residential household
property with mortgage financing, the down payment must be at least 60% of the purchase price and the interest rate for the mortgage
on such property must be at least 1.1 times the benchmark interest rate. The notice of the General Office of the State Council
promulgated on February 26, 2013 authorized local counterparts of the PBOC to further increase down payment ratios and interest
rates for loans to purchase second properties in accordance with the price control policies and targets of the corresponding local
governments. For instance, on April 7, 2013, Beijing promulgated new rules regarding housing fund loans, which increased the minimum
down payment to 70% of the purchase price for a household purchasing a second residential household property with housing fund
loans. In addition, the suspension of loans to purchase a third residential property has been continued. In the second half of
2013, many commercial banks suspended or delayed the application for mortgage loans for the second residential household property
and cancelled the discount of the interest rate for mortgage loans for the first residential household property. We cannot predict
how long these policies will continue or what other action, if any, the banks in cities in which we operate may take.
In addition, under existing regulations,
mortgagee banks may not lend to any individual borrower if the monthly repayment of the anticipated mortgage loan would exceed
50% of the individual borrower’s monthly income or if the total debt service of the individual borrower would exceed 55%
of such individual’s monthly income.
Risks Relating to China
PRC economic, political and social conditions as well
as government policies can affect our business.
The PRC economy differs from the economies
of most developed countries in many aspects, including:
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degree of government involvement;
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level and control of capital reinvestment;
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control of foreign exchange; and
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allocation of resources.
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The PRC economy has been transitioning from
a centrally planned economy to a more market-oriented economy. For more than two decades, the PRC government has implemented economic
reform measures emphasizing utilization of market forces in the development of the PRC economy. Although we believe these reforms
will have a positive effect on China’s overall and long-term development, we cannot predict whether changes in the PRC economic,
political and social conditions, laws, regulations and policies will have any adverse effect on our current or future business,
financial condition or results of operations.
Changes in foreign exchange regulations may adversely
affect our ability to transfer funds and subsequently impact the results of our operations.
We currently receive all of our revenues
from operations in the PRC in RMB. The PRC government regulates the conversion between RMB and foreign currencies. Over the years,
the PRC government has significantly reduced its control over routine foreign exchange transactions under current accounts, including
trade and service related foreign exchange transactions and payment of dividends. However, foreign exchange transactions by our
PRC subsidiaries under capital accounts continue to be subject to significant foreign exchange controls and require the approval
of, or registration with, PRC governmental authorities. There can be no assurance that these PRC laws and regulations on foreign
investment will not cast uncertainties on our financing and operating plans in China. Under current foreign exchange regulations
in China, subject to the relevant registration at the SAFE, we will be able to pay dividends in foreign currencies, without prior
approval from the SAFE, by complying with certain procedural requirements. However, there can be no assurance that the current
PRC foreign exchange policies regarding debt service and payment of dividends in foreign currencies will continue in the future.
Changes in PRC foreign exchange policies might have a negative impact on our ability to service our foreign currency-denominated
indebtedness and to distribute dividends to our shareholders in foreign currencies.
In addition, on August 29, 2008, the SAFE
issued a notice with respect to the administration of RMB converted from foreign exchange capital contributions of a foreign invested
enterprise. As a result, unless otherwise permitted by PRC laws or regulations, such converted amount can only be applied to activities
within the approved business scope of the relevant foreign invested enterprise and cannot be used for domestic equity investment
or acquisition. As restricted by the notice, we may not be able to use RMB converted from foreign exchange capital contributions
to fund our PRC subsidiaries.
Fluctuations in the value of RMB will affect the amount
of our non-RMB debt service in RMB terms and affect the value of, and dividends payable on, our ADSs in foreign currency terms.
The value of RMB depends, to a large extent,
on China’s domestic and international economic, financial and political developments and government policies, as well as
the currency’s supply and demand in the local and international markets. Since 2005, the PRC central bank has allowed the
official RMB exchange rate to float within a band against a basket of foreign currencies. There can be no assurance that such
exchange rate will not fluctuate widely against the U.S. dollar or any other foreign currency in the future. Fluctuation of the
value of RMB will affect the amount of our non-RMB debt service in RMB terms since we have to convert RMB into non-RMB currencies
to service our foreign debt. Since substantially all of our income and profits are denominated in RMB, any appreciation of RMB
will also increase the value of, and any dividends payable on, our ADSs in foreign currency terms. Conversely, any depreciation
of RMB will decrease the value of, and any dividends payable on, our ADSs in foreign currency terms. For information regarding
the exchange rate between RMB and the U.S. dollar, see, “ITEM 3. KEY INFORMATION – Selected Financial Data –
Exchange Rate Information” in our 2012 Form 20-F and "Selected Financial Data" in our Report on Form 6-K for the
month of November filed November 1, 2013.
PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to distribute profits to us or otherwise adversely affect us.
On October 21, 2005, the SAFE issued the
Circular of the SAFE on Relevant Issues Concerning Foreign Exchange Administration for Financing and Round-Trip Investment Undertaken
by Domestic Residents Through Overseas Special-Purpose Vehicles
, or the Circular No. 75, requiring PRC residents to register
with the local SAFE branch before establishing or acquiring control of any company outside of China for the purposes of financing
such offshore company to acquire assets or equity interests in a PRC company. Once such a special purpose vehicle, or SPV, undergoes
major changes in capital (including overseas equity or convertible bonds financing), PRC residents must make an application for
the registration of such change within 30 days of the occurrence of the event. On May 20, 2011, the SAFE issued the
Circular
of the SAFE on Operating Rules Concerning Financing and Round-Trip Investment Undertaken by Domestic Residents through Overseas
Special-Purpose Vehicles
, or the Circular No. 19, which took effect on July 1, 2011 and provides that PRC residents can set
up offshore SPVs before obtaining SAFE registration. Circular No. 19 also exempts from the Circular No. 75 registration requirements,
onshore foreign invested enterprises, or FIEs, set up by offshore companies controlled by PRC residents, where the offshore company
was not set up primarily as a financing vehicle for round-trip investments (
e.g.,
those that have undertaken standard overseas
investments and operations, but then incidentally made a re-investment back onshore). Circular No. 19 makes registration possible
for those round-trip SPVs that should have but failed to register as required by Circular No. 75 but indicates that the SAFE will
penalize such offenders; such penalties can be severe, including a fine amounting to a certain percentage of all funds remitted
by the onshore subsidiary to the SPV after November 1, 2005, and possible criminal prosecution. Additionally, as a result of uncertainty
concerning the reconciliation of these notices with other approval or registration requirements, it remains unclear how these notices,
and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the
relevant government authorities. We believe that all of our shareholders who were PRC citizens or residents at the time of our
initial public offering completed their required registrations with the SAFE in accordance with Circular No. 75 prior to, and immediately
after, the completion of our initial public offering. As a publicly traded company in the U.S., we may not at all times know of
the identities of all of our beneficial owners who are PRC citizens or residents, and we may have little control over either our
present or prospective direct or indirect PRC resident beneficial owners or the outcome of such registration procedures. The failure
or inability of these PRC resident beneficial owners to comply with applicable SAFE registration requirements may subject us to
the sanctions described above, including sanctions which may impede our ability to contribute the additional capital from our proceeds
of any future offerings to our PRC subsidiaries, and our PRC subsidiaries’ ability to pay dividends or distribute profits
to us.
Interpretation of PRC laws and regulations involves uncertainty.
Our core business is conducted within China
and is governed by PRC laws and regulations. The PRC legal system is based on written statutes, and prior court decisions can only
be used as a reference. Since 1979, the PRC government has promulgated laws and regulations in relation to economic matters such
as foreign investment, corporate organization and governance, commerce, taxation and trade, with a view to developing a comprehensive
system of commercial law, including laws relating to property ownership and development. However, due to the fact that these laws
and regulations have not been fully developed, and because of the limited volume of published cases and the non-binding nature
of prior court decisions, interpretation of PRC laws and regulations involves a degree of uncertainty. Some of these laws may be
changed without being immediately published or may be amended with retroactive effect. Depending on the government agency or how
an application or case is presented to such agency, we may receive less favorable interpretations of laws and regulations than
our competitors, particularly if a competitor has long been established in the locality of, and has developed a relationship with,
such agency. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources
and management attention. All these uncertainties may cause difficulties in the enforcement of our land use rights, entitlements
under its permits, and other statutory and contractual rights and interests.
The PRC national and regional economies may be adversely
affected by a recurrence of epidemic.
Certain areas of China, including the Tier
II and Tier III cities where we operate, are susceptible to epidemics such as Severe Acute Respiratory Syndrome, or SARS, avian
or swine influenza. A recurrence of SARS, avian or swine influenza or any epidemic in these cities or other areas of China could
result in material disruptions to our property developments, which in turn could materially and adversely affect our financial
condition and results of operations.
We may face PRC regulatory risks relating to our equity
incentive plan and long term incentive plan.
In February 2012, the SAFE promulgated the
Notice on the Administration of Foreign Exchange Matters for Domestic Individuals Participating in the Stock Incentive Plans
of Overseas Listed Companies
, or the Stock Option Notice, which replaced the previous
Application Procedures of Foreign
Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan of Overseas-Listed Company
promulgated
by the SAFE on March 28, 2007. Under the Stock Option Notice, if a PRC resident participates in any employee stock incentive plan
of an overseas listed company, a qualified domestic PRC agent or the PRC subsidiary of such overseas listed company must, among
other things, file, on behalf of such individual, an application with the SAFE or its local counterpart to obtain approval for
an annual allowance with respect to the foreign exchange in connection with the stock holding or share option exercises. Concurrently,
the qualified domestic PRC agent or the PRC subsidiary must also obtain approval from the SAFE or its local counterpart to open
a special foreign exchange account at a PRC domestic bank to hold the funds required in connection with the stock purchase or option
exercise, any returned principal or profits upon the sale of shares, any dividends issued on the stock and any other income or
expenditures approved by the SAFE or its local counterpart. If we, or any of these persons mentioned above, fail to comply with
the relevant rules or requirements, we may be subject to penalties, and may become subject to more stringent review and approval
processes with respect to our foreign exchange activities, such as our PRC subsidiaries’ dividend payment to us or borrowing
foreign currency loans, all of which may adversely affect our business and financial condition.
Our auditor, like other independent registered public
accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board,
and as such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting
firm that issues the audit reports included in our annual reports filed with the U.S. Securities and Exchange Commission, or SEC,
as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting
Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB
to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China,
a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor,
like other independent registered public accounting firms operating in China, is currently not inspected by the PCAOB.
Inspection of other firms that the PCAOB
has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future auditor quality. The inability of the PCAOB to conduct
inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness
of our auditor’s audit procedures or quality control procedure. As a result, investors may be deprived of the benefits of
the PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our
financial statements.
We may be adversely affected by the outcome of the administrative
proceedings brought by the SEC against five accounting firms in China.
In December 2012, the SEC brought administrative
proceedings against five accounting firms in China, alleging that they refused to hand over documents to the SEC for ongoing investigations
into certain other China-based companies. We were not and are not subject to any SEC investigations, nor are we involved in the
proceedings brought by the SEC against the accounting firms. However, our auditor that issues the audit reports included in our
annual reports filed with the SEC is one of the five accounting firms named in the SEC’s proceedings and we may be adversely
affected by the outcome of the proceedings, along with other U.S.-listed companies audited by these accounting firms. If the SEC
prevails in the proceedings, our auditor and other four accounting firms in China that were named in the proceedings may be barred
from practicing before the SEC and hence may be unable to continue to be the auditors for China-based companies like us. If none
of the China-based accounting firms are able to continue to be auditors for China-based companies listed in the U.S., we will not
be able to meet the reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
which may ultimately result in our deregistration from the SEC and delisting from the NYSE.
Risks Relating to Our ADSs
The market price for our ADSs may be volatile.
The market price for our ADSs may be volatile
and subject to wide fluctuations in response to factors such as actual or anticipated fluctuations in our quarterly operating results,
changes in financial estimates by securities research analysts, changes in the economic performance or market valuations of other
real estate developers, announcements by us or our competitors of material acquisitions, strategic partnerships, joint ventures
or capital commitments, fluctuations of exchange rates between RMB and the U.S. dollar, release of transfer restrictions on our
outstanding shares or ADSs, and economic or political conditions in China. In addition, the performance and fluctuation in market
prices of other companies with business operations located mainly in China that have listed their securities in the United States
may affect the volatility in the price of and trading volumes of our ADSs. Furthermore, the securities market has from time to
time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.
These market fluctuations may also materially and adversely affect the market price of our ADSs.
Substantial future sales or the perception of sales of
our ADSs in the public market could cause the price of our ADSs to decline.
Sales of our ADSs or common
shares in the public market, or the perception that such sales could occur, could cause the market price of our ADSs to
decline. As of September 30, 2013, we had 156,542,720, common shares outstanding, including 43,871,359 common shares represented by 87,742,718 ADSs. Pursuant to the Registration Rights
Agreement between us and the Selling Shareholder, we filed a registration statement with the SEC to register for resale the
common shares represented by
the 18,626,835 ADSs to which
this prospectus relates. All other outstanding ADSs are freely transferable without restriction or additional registration
under the Securities Act. The remaining common shares outstanding, other than those held by the Selling Shareholder, are
available for sale, subject to any volume and other restrictions as applicable under Rule 144 under the Securities Act. Upon
effectiveness of the registration statement of which this prospectus is a part, the common shares held by the Selling
Shareholder will be freely transferable pursuant to the registration statement. To the extent that common shares are sold
into the market, the market price of our ADSs could decline.
The interests of our major shareholders may not be aligned
with the interests of our other shareholders.
As of September 30, 2013, Mr. Yong
Zhang, Chairman of our board of directors, together with his spouse, Ms. Yuyan Yang, also a board member and Vice President, beneficially
owned 36.3% of our outstanding share capital. In addition, as of such date, the
Selling Shareholder beneficially owned 20.5% of our outstanding capital (assuming
full conversion of the Convertible Note at the initial conversion price of $3.00 per common share). Accordingly, they have substantial
influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of
our assets, election of directors and other significant corporate actions, and the Convertible Note contains various covenants
that restrict sales of assets, transactions with affiliated parties, material changes in the scope of our business and certain
other transactions. This concentration of ownership by our major shareholders may result in actions being taken even if opposed
by our other shareholders, or blocked by the Convertible Note holder even if supported by our Chairman and other shareholders.
In addition, such ownership, as well as limitations on changes of control contained in the Convertible Note as well as in the 13.25%
Senior Notes may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity
to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs.
If we fail to maintain an effective system of internal
controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
We are subject to reporting obligations
under U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted
rules requiring most public companies to include a management report on such company’s internal controls over financial reporting
in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls
over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness
of the company’s internal controls over financial reporting. Our management may conclude that our internal controls over
our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial
reporting is effective, our independent registered public accounting firm may still issue a report that is qualified or adverse
if it believes that the design or implementation of our internal controls is not effective, or if it interprets the relevant requirements
differently from us.
If we fail to maintain the adequacy of our
internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, effective
internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help prevent
fraud. As a result, our failure to maintain effective internal control over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading
price of our ADSs. Furthermore, we have incurred and expect to continue to incur considerable costs and devote significant management
time and efforts and other resources to comply with Section 404 of the Sarbanes-Oxley Act.
Compliance with rules and regulations applicable to companies
publicly listed in the United States is costly and complex and any failure by us to comply with these requirements on an ongoing
basis could negatively affect investor confidence in us and cause the market price of our ADSs to decrease.
In addition to Section 404, the Sarbanes-Oxley
Act also mandates, among other things, that companies adopt corporate governance measures, imposes comprehensive reporting and
disclosure requirements, sets strict independence and financial expertise standards for audit committee members, and imposes civil
and criminal penalties for companies, their chief executive officers, chief financial officers and directors for securities law
violations. For example, in response to the Sarbanes-Oxley Act, the NYSE has adopted additional comprehensive rules and regulations
relating to corporate governance. Although we are exempt from most of the NYSE governance rules (see “Because we are not
organized under U.S. law, we are subject to certain less detailed disclosure requirements under U.S. federal securities laws,”
below), these laws, rules and regulations have nevertheless increased the scope, complexity and cost of our corporate governance
and reporting and disclosure practices. Our current and future compliance efforts will continue to require significant management
attention. In addition, our board members, chief executive officer and chief financial officer could face an increased risk of
personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining
qualified board members and executive officers to fill critical positions within our company. Any failure by us to comply with
these requirements on an ongoing basis could negatively affect investor confidence in us, cause the market price of our ADSs to
decrease or even result in the delisting of our ADSs from the NYSE.
Because we are not organized under U.S. law, we are subject
to certain less detailed disclosure requirements under U.S. federal securities laws.
We are a “foreign private issuer,”
as defined in the SEC’s regulations, and consequently we are not subject
to all of the same disclosure requirements applicable to domestic
companies. Although we prepare annual financial statements and quarterly financial information in accordance with generally accepted
accounting principles in the United States, we are exempt from the SEC’s proxy rules, and our annual reports contain less
detailed disclosure than reports of domestic issuers regarding such matters as management, executive compensation and outstanding
options, beneficial ownership of our securities and certain related party transactions. Also, our officers, directors and beneficial
owners of more than 10% of our equity securities are exempt from the reporting requirements and short-swing profit recovery provisions
of Section 16 of the Exchange Act. We are also generally exempt from most of the governance rules applicable to companies listed
on the NYSE, other than the obligation to maintain an audit committee in accordance with Rule 10A-3 under the Exchange Act. These
limits on available information about our company and exemptions from many governance rules applicable to U.S. domestic issuers
may adversely affect the market prices for our securities.
You may not have the same voting rights as the holders
of our common shares and may not receive voting materials in time to be able to exercise your right to vote.
Holders of our ADSs will not be able to
exercise voting rights attaching to the common shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint
the depositary or its nominee as their representative to exercise the voting rights attaching to the common shares represented
by the ADSs. The depositary has agreed that as soon as practicable after the depositary receives from us a notice of a shareholders’
meeting, it will distribute to registered holders of ADRs a notice stating (a) such information as is contained in such notice
and any solicitation materials, (b) that each registered holder on the record date set for such purpose will, subject to any applicable
provisions of Cayman Islands law, be entitled to instruct the depositary as to the exercise of the voting rights and (c) the manner
in which such instructions may be given, including instructions to give a discretionary proxy to a person designated by us. However,
holders of ADSs may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons
who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
The depositary will not itself exercise any voting discretion in respect of any common shares nor will it provide any instructions
with respect to the common shares represented by any ADSs for which voting instructions were not timely and properly received.
There can be no guarantee that registered holders of ADRs will receive the notice described above with sufficient time to enable
them to return any voting instructions to the depositary in a timely manner. To the extent you hold your ADSs through a bank, broker
or other nominee, you will be relying upon such institutions to give your voting instructions to the depositary with respect to
voting matters.
You may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States
or other foreign laws against us or our management named in the annual report.
We are incorporated in the Cayman
Islands and conduct substantially all of our operations in China through our wholly-owned subsidiaries in China. Most of our assets
are located in China. In addition, many of our directors and senior executive officers reside within China and some or all of the
assets of those persons are located outside of the United States. As a result, it may not be possible to effect service of process
within the United States or elsewhere outside China upon our directors and senior executive officers, including with respect to
matters arising under U.S. federal securities laws or applicable state securities laws. Even if you are successful in bringing
an action of this kind, the respective laws of the Cayman Islands and China may render you unable to enforce a judgment against
our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained
in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a
foreign court of competent jurisdiction without retrial on the merits. Moreover, our PRC counsel has advised us that the PRC does
not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment
of courts.
You may not be able to participate
in rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute
rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary
will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders
are either registered under the Securities Act or are exempt from registration under the Securities Act with respect to all holders
of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or
to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage
of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in
our rights offerings and may experience dilution in their holdings as a result.
You may be subject to limitations
on transfer of your ADSs.
Your ADSs are transferable on the
books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient
in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers
of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable
to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement,
or for any other reason.
We are a Cayman Islands company and, because judicial
precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less
protection of your shareholder rights than you would under U.S. law.
Our corporate affairs are governed
by our memorandum and articles of association and by the Companies Law (2013 Revision) and common law of the Cayman Islands. The
rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities
of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common
law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from
English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders
and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under
statutes or judicial precedents in the United States. In particular, the Cayman Islands have a less developed body of securities
laws as compared to the United States, and provide significantly less protection to investors. In addition, Cayman Islands companies
may not have standing to initiate a shareholder derivative action before the federal courts of the United States.
In mergers and acquisitions where the merged
company or consolidated company will continue to be a Cayman Islands entity, dissenting shareholders have the right to be paid
the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands courts) if they
follow required procedures, subject to certain exceptions. However, these rights have never been tested before the Cayman Islands
court and as a result, they may not be comparable to the appraisal rights that would ordinarily be available to dissenting shareholders
of a U.S. company.
As a result of all of the above, our public
shareholders may have more difficulty in protecting their interests through actions against our management, directors or major
shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
Our articles of association may contain anti-takeover
provisions that could have a material adverse effect on the rights of holders of our common shares and ADSs.
Our amended and restated articles
of association contain provisions limiting the ability of others to acquire control of our company or cause us to engage in change-of-control
transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer
or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue
preferred shares in one or more series and to fix their designations, powers, preferences, privileges and relative participating,
optional or special rights and their qualifications, limitations or restrictions, including dividend rights, conversion rights,
voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with
our common shares, in the form of ADSs or otherwise. Preferred shares could be issued quickly with terms calculated to delay or
prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue
preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our common shares and ADSs may
be materially and adversely affected. See also “The interests of our major shareholders may not be aligned with the interests
of our other shareholders,” above.
We may be classified as a passive
foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or common
shares.
Based on the composition of our assets
and income and the current expectations, while not free from doubt, we believe that we were not a “passive foreign investment
company,” or PFIC, for U.S. federal income tax purposes for our taxable year ending December 31, 2012 and we do not expect
to become a PFIC with respect to our current taxable year or the foreseeable future. The determination of our PFIC status is dependent
upon the composition of our income and assets and, in addition, we must make a separate determination at the close of each taxable
year as to whether we are a PFIC. Accordingly, we cannot assure you that we were not a PFIC for the year 2012 or will not be a
PFIC for our current taxable year ending December 31, 2013 or any future taxable year. A non-U.S. corporation will be considered
a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the value of
its assets is attributable to assets that produce or are held for the production of passive income. If we were treated as a PFIC
for any taxable year during which a U.S. person held an ADS or a common share, certain adverse U.S. federal income tax consequences
could apply to such U.S. person.]
DESCRIPTION
OF AMERICAN DEPOSITARY SHARES
American Depositary Receipts
JPMorgan Chase
Bank, N.A., our depositary, issues the ADSs representing our common shares. Each represents an ownership interest in two shares
which we have deposited with the custodian, as agent of the depositary, under the deposit agreement among ourselves, the depositary
and all registered holders from time to time of ADSs issued thereunder. Each ADS also represents any securities, cash or other
property deposited with the depositary but which it has not distributed directly to ADR holders. Unless specifically requested
by you, all ADSs will be issued on the books of our depositary in book-entry form and periodic statements will be mailed to you
which reflect your ownership interest in such ADSs. In our description, references to American depositary receipts or ADRs shall
include the statements you will receive, which reflect your ownership of ADSs.
The depositary’s
office is located at 1 Chase Manhattan Plaza, Floor 58, New York, NY 10005-1401.
You may hold ADSs
either directly or indirectly through your broker or other financial institution. If you hold ADSs directly, by having an ADS registered
in your name on the books of the depositary, you are an ADR holder. This description assumes you hold your ADSs directly. If you
hold the ADSs through your broker or financial institution nominee, you must rely on the procedures of such broker or financial
institution to assert the rights of an ADR holder described in this section. You should consult with your broker or financial institution
to find out what those procedures are.
As an ADR holder,
we will not treat you as a shareholder of ours and you will not have any shareholder rights. Cayman Island law governs shareholder
rights. Because the depositary or its nominee will be the shareholder of record for the shares represented by all outstanding ADSs,
shareholder rights rest with such record holder. Your rights are those of an ADR holder. Such rights derive from the terms of the
deposit agreement. The obligations of the depositary and its agents are also set out in the deposit agreement. Because the depositary
or its nominee is actually the registered owner of the shares, you must rely on it to exercise the rights of a shareholder on your
behalf. The deposit agreement and the ADSs are governed by New York law.
The following is
a summary of the material terms of the deposit agreement. Because it is a summary, it does not contain all the information that
may be important to you. For more complete information, you should read the entire deposit agreement and the form of ADR which
contains the terms of your ADSs. You may obtain a copy of the deposit agreement at the SEC’s Public Reference Room which
is located at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-732-0330. You may also find the deposit agreement on the SEC’s website at http://www.sec.gov.
Share Dividends and Other Distributions
How will I receive dividends and
other distributions on the shares underlying my ADSs?
We may make various
types of distributions with respect to our securities. The depositary has agreed to pay to you the cash dividends or other distributions
it or the custodian receives on shares or other deposited securities, after converting any cash received in a foreign currency
into U.S. dollars and, in all cases, making any necessary deductions provided for in the deposit agreement. You will receive these
distributions in proportion to the number of underlying securities that your ADSs represent.
Except as stated
below, to the extent the depositary is legally permitted it will deliver such distributions to ADR holders in proportion to their
interests in the following manner:
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Cash.
The depositary will distribute any U.S. dollars available to it resulting from a cash dividend or other cash distribution
or the net proceeds of sales of any other distribution or portion thereof (to the extent applicable), on an averaged or other practicable
basis, subject to (i) appropriate adjustments for taxes withheld, (ii) such distribution being impermissible or impracticable with
respect to certain registered holders and (iii) deduction of the depositary’s expenses in (1) converting any foreign currency
to U.S. dollars to the extent that it determines that such conversion may be made on a reasonable basis, (2) transferring foreign
currency or U.S. dollars to the United States by such means as the depositary may determine to the extent that it determines that
such transfer may be made on a reasonable basis, (3) obtaining any approval or license of any governmental authority required for
such conversion or transfer, which is obtainable at a reasonable cost and within a reasonable time, and (4) making any sale by
public or private means in any commercially reasonable manner. If exchange rates fluctuate during a time when the depositary cannot
convert a foreign currency, you may lose some or all of the value of the distribution.
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Shares.
In the case of a distribution in shares, the depositary will issue additional ADRs to evidence the number of
ADSs representing such shares. Only whole ADSs will be issued. Any shares which would result in fractional ADSs will be sold and
the net proceeds will be distributed in the same manner as cash to the ADR holders entitled thereto.
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Rights to receive additional shares.
In the case of a distribution of rights to subscribe for additional shares or other
rights, if we provide satisfactory evidence that the depositary may lawfully distribute such rights, the depositary will distribute
warrants or other instruments representing such rights. However, if we do not furnish such evidence, the depositary may:
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sell such rights if practicable and distribute the net proceeds as cash; or
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if it is not practicable to sell such rights, do nothing and allow such rights to lapse, in which case ADR holders will receive
nothing.
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We have no obligation to file a registration
statement under the Securities Act in order to make any rights available to ADR holders.
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Other Distributions.
In the case of a distribution of securities or property other than those described above, the
depositary may either (i) distribute such securities or property in any manner it deems equitable and practicable or (ii) to the
extent the depositary deems distribution of such securities or property not to be equitable and practicable, sell such securities
or property and distribute any net proceeds in the same way it distributes cash.
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If the depositary determines that any distribution
described above is not practicable with respect to any specific ADR holder, the depositary may choose any practicable method of
distribution for such ADR holder, including the distribution of foreign currency, securities or property, or it may retain such
items, without paying interest on or investing them, on behalf of the ADR holder as deposited securities, in which case the ADSs
will also represent the retained items.
Any U.S. dollars will be distributed by
checks drawn on a bank in the United States for whole dollars and cents. Fractional cents will be withheld without liability for
interest thereon and dealt with by the depositary in accordance with its then current practices.
The depositary is not responsible if it
decides that it is unlawful or impractical to make a distribution available to any ADR holders.
There can be no assurance that the depositary
will be able to convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a
specified price, nor that any of such transactions can be completed within a specified time period.
Deposit, Withdrawal and Cancellation
How does the depositary issue ADSs?
The depositary
will issue ADSs if you or your broker deposit shares or evidence of rights to receive shares with the custodian and pay the fees
and expenses owing to the depositary in connection with such issuance. In the case of any ADSs to be issued in an offering under
this prospectus and applicable prospectus supplement, we will arrange to have such shares deposited.
Shares deposited
with the custodian must be accompanied by certain delivery documentation, including instruments showing that such shares have been
properly transferred or endorsed to the person on whose behalf the deposit is being made.
The custodian will
hold all deposited shares for the account of the depositary. ADR holders thus have no direct ownership interest in the shares and
only have such rights as are contained in the deposit agreement. The custodian will also hold any additional securities, property
and cash received on or in substitution for the deposited shares. The deposited shares and any such additional items are referred
to as “deposited securities.”
Upon each deposit
of shares, receipt of related delivery documentation and compliance with the other provisions of the deposit agreement, including
the payment of the fees and charges of the depositary and any taxes or other fees or charges owing, the depositary will issue an
ADR or ADRs in the name or upon the order of the person entitled thereto evidencing the number of ADSs to which such person is
entitled. All of the ADSs issued will, unless specifically requested to the contrary, be part of the depositary’s direct
registration system, and a registered holder will receive periodic statements from the depositary which will show the number of
ADSs registered in such holder’s name. An ADR holder can request that the ADSs not be held through the depositary’s
direct registration system and that a certificated ADR be issued.
How do ADR holders cancel an ADS
and obtain deposited securities?
When you turn in
your ADSs at the depositary’s office, or when you provide proper instructions and documentation in the case of direct registration
ADSs, the depositary will, upon payment of certain applicable fees, charges and taxes, deliver the underlying shares at the custodian’s
office or effect delivery by such other means as the depositary deems practicable, including transfer to an account of an accredited
financial institution on your behalf. At your risk, expense and request, the depositary may deliver deposited securities at such
other place as you may request.
The depositary
may only restrict the withdrawal of deposited securities in connection with:
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temporary delays caused by closing our transfer books or those of the depositary or the deposit of shares in connection with
voting at a shareholders’ meeting, or the payment of dividends;
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the payment of fees, taxes and similar charges; or
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compliance with any U.S. or foreign laws or governmental regulations relating to the ADRs or to the withdrawal of deposited
securities.
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This right of withdrawal
may not be limited by any other provision of the deposit agreement.
Our ADSs are listed on the NYSE. At the
present time, our common shares are not listed on any U.S. or foreign stock exchange, nor are quotations available for our common
shares in any quotations system.
Record Dates
The depositary
may fix record dates for the determination of the ADR holders who will be entitled (or obligated, as the case may be):
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to receive any distribution on or in respect of shares,
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to give instructions for the exercise of voting rights at a meeting of holders of shares,
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for the determination of the registered holders who shall be responsible for the fees assessed by the depositary for administration
of the ADR program and for any expenses as provided for in the ADR, or
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to receive any notice or to act in respect of other matters,
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all subject to the provisions of the deposit agreement.
Voting Rights
How do I vote?
If you are an ADR
holder and the depositary asks you to provide it with voting instructions, you may instruct the depositary how to exercise the
voting rights for the shares which underlie your ADSs. After receiving voting materials from us, the depositary will notify the
ADR holders of any shareholder meeting or solicitation of consents or proxies. This notice will state such information as is contained
in the voting materials and describe how you may instruct the depositary to exercise the voting rights for the shares which underlie
your ADSs and will include instructions for giving a discretionary proxy to a person designated by us. For instructions to be valid,
the depositary must receive them in the manner and on or before the date specified. The depositary will try, as far as is practical,
subject to the provisions of and governing the underlying shares or other deposited securities, to vote or to have its agents vote
the shares or other deposited securities as you instruct. The depositary will only vote or attempt to vote as you instruct. The
depositary will not itself exercise any voting discretion. Furthermore, neither the depositary nor its agents are responsible for
any failure to carry out any voting instructions, for the manner in which any vote is cast or for the effect of any vote.
There is no guarantee
that you will receive voting materials in time to instruct the depositary to vote and it is possible that you, or persons who hold
their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
If the depositary
does not receive voting instructions from you by the specified date, it will consider you to have authorized and directed it to
give a discretionary proxy to a person designated by us to vote the number of deposit securities represented by your ADSs. If the
depositary receives an opinion of our counsel to the effect that the granting of the discretionary proxy will be given effect under
Cayman Islands Law and will not result in a violation of Cayman Islands Law, subject the depositary to reporting obligations in
the Cayman Islands or the shares represented by the ADS being considered assets of the depositary under Cayman Islands Law, the
depositary will give a discretionary proxy in those circumstances to vote on all questions to be voted upon unless we notify the
depositary that:
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we do not wish to receive a discretionary proxy;
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we think there is substantial shareholder opposition to the particular question; or
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we think the particular question would materially affect the rights of our shareholders.
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Reports and Other Communications
Will I be able to view our reports?
The depositary
will make available for inspection by ADR holders any written communications from us which are both received by the custodian or
its nominee as a holder of deposited securities and made generally available to the holders of deposited securities. We will furnish
these communications in English when so required by any rules or regulations of the SEC.
Additionally, if
we make any written communications generally available to holders of our shares, including the depositary or the custodian, and
we request the depositary to provide them to ADR holders, the depositary will mail copies of them, or, at its option, English translations
or summaries of them to ADR holders.
Fees and Expenses
What fees and expenses will I be
responsible for paying?
The depositary
may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances
in respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared
by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited
securities, and each person surrendering ADSs for withdrawal of deposited securities in any manner permitted by the deposit agreement,
US$5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The
depositary may sell (by public or private sale) sufficient securities and property received in respect of a share distribution,
rights and/or other distribution prior to such deposit to pay such charge.
The following additional
charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADRs or
to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by our company
or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADRs), whichever is applicable:
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a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
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a fee of US$0.02 or less per ADS (or portion thereof) for any cash distribution made pursuant to the deposit agreement;
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a fee of US$0.05 per ADS (or portion thereof) per calendar year for services performed by the depositary in administering our
ADR program (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs
as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described
in the next succeeding provision);
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any other charge payable by any of the depositary, any of the depositary’s agents, including, without limitation, the
custodian, or the agents of the depositary’s agents in connection with the servicing of our shares or other deposited securities
(which charge shall be assessed against registered holders of our ADRs as of the record date or dates set by the depositary and
shall be payable at the sole discretion of the depositary by billing such registered holders or by deducting such charge from one
or more cash dividends or other cash distributions);
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a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an
amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such
securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof
are instead distributed by the depositary to those holders entitled thereto;
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stock transfer or other taxes and other governmental charges;
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cable, telex and facsimile transmission and delivery charges incurred at your request;
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transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection
with the deposit or withdrawal of deposited securities;
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expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars; and
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such fees and expenses as are incurred by the depositary (including without limitation expenses incurred in connection with
compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited
securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable laws, rules
or regulations.
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We will pay all
other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from
time to time between us and the depositary. The fees described above may be amended from time to time.
The depositary
collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the
purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors
by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary
may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by
charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide services
to any holder until the fees and expenses owing by such holder for those services or otherwise are paid.
Payment of Taxes
ADR holders must
pay any tax or other governmental charge payable by the custodian or the depositary on any ADS or ADR, deposited security or distribution.
If an ADR holder owes any tax or other governmental charge, the depositary may (i) deduct the amount thereof from any cash
distributions, or (ii) sell deposited securities and deduct the amount owing from the net proceeds of such sale. In either
case the ADR holder remains liable for any shortfall. Additionally, if any tax or governmental charge is unpaid, the depositary
may also refuse to effect any registration, registration of transfer, split-up or combination of deposited securities or withdrawal
of deposited securities (except under limited circumstances mandated by securities regulations). If any tax or governmental charge
is required to be withheld on any non-cash distribution, the depositary may sell the distributed property or securities to pay
such taxes and distribute any remaining net proceeds to the ADR holders entitled thereto.
By holding an ADR
or an interest therein, you will be agreeing to indemnify us, the depositary, its custodian and any of our or their respective
directors, employees, agents and affiliates against, and hold each of them harmless from, any claims by any governmental authority
with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced rate of withholding
at source or other tax benefit obtained in respect of or arising out of, your ADSs.
Reclassifications, Recapitalizations
and Mergers
If we take certain
actions that affect the deposited securities, including (i) any change in par value, split-up, consolidation, cancellation
or other reclassification of deposited securities or (ii) any recapitalization, reorganization, merger, consolidation, liquidation,
receivership, bankruptcy or sale of all or substantially all of our assets, then the depositary may choose to:
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amend the form of ADR;
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distribute additional or amended ADRs;
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(3)
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distribute cash, securities or other property it has received in connection with such actions;
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(4)
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sell any securities or property received and distribute the proceeds as cash; or
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If the depositary
does not choose any of the above options, any of the cash, securities or other property it receives will constitute part of the
deposited securities and each ADS will then represent a proportionate interest in such property.
Amendment and Termination
How may the deposit agreement be
amended?
We may agree
with the depositary to amend the deposit agreement and the ADSs without your consent for any reason. ADR holders must be given
at least 30 days notice of any amendment that imposes or increases any fees or charges (other than stock transfer or other taxes
and other governmental charges, transfer or registration fees, cable, telex or facsimile transmission costs, delivery costs or
other such expenses), or prejudices any substantial existing right of ADR holders. If an ADR holder continues to hold an ADR or
ADRs after being so notified, such ADR holder is deemed to agree to such amendment. Notwithstanding the foregoing, if any governmental
body or regulatory body should adopt new laws, rules or regulations which would require amendment or supplement of the deposit
agreement or the form of ADR to ensure compliance therewith, we and the depositary may amend or supplement the deposit agreement
and the ADR at any time in accordance with such changed laws, rules or regulations, which amendment or supplement may take effect
before a notice is given or you otherwise receive notice. No amendment, however, will impair your right to surrender your ADSs
and receive the underlying securities, except in order to comply with mandatory provisions of applicable law.
How may the deposit agreement be
terminated?
The depositary
may, and shall at our written direction, terminate the deposit agreement and the ADRs by mailing notice of such termination to
the registered holders of ADRs at least 30 days prior to the date fixed in such notice for such termination; provided, however,
if the depositary shall have (i) resigned as depositary under the deposit agreement, notice of such termination by the depositary
shall not be provided to registered holders unless a successor depositary shall not be operating hereunder within 45 days of the
date of such resignation, and (ii) been removed as depositary under the deposit agreement, notice of such termination by the
depositary shall not be provided to registered holders of ADRs unless a successor depositary shall not be operating hereunder on
the 60th day after our notice of removal was first provided to the depositary. After termination, the depositary’s only responsibility
will be (i) to deliver deposited securities to ADR holders who surrender their ADRs, and (ii) to hold or sell distributions
received on deposited securities. As soon as practicable after the expiration of six months from the termination date, the depositary
will sell the deposited securities which remain and hold the net proceeds of such sales, without liability for interest, in trust
for the ADR holders who have not yet surrendered their ADRs. After making such sale, the depositary shall have no obligations except
to account for such proceeds and other cash. The depositary will not be required to invest such proceeds or pay interest on them.
Limitations on Obligations and Liability
to ADR holders
Limits on our obligations and the
obligations of the depositary; limits on liability to ADR holders and holders of ADSs
Prior to the issue,
registration, registration of transfer, split-up, combination, or cancellation of any ADRs, or the delivery of any distribution
in respect thereof, we, the depositary and its custodian may require you to pay, provide or deliver:
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payment with respect thereto of (i) any stock transfer or other tax or other governmental charge, (ii) any stock transfer or
registration fees in effect for the registration of transfers of shares or other deposited securities upon any applicable register
and (iii) any applicable fees and expenses described in the deposit agreement;
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the production of proof satisfactory to the depositary and/or its custodian of (i) the identity of any signatory and genuineness
of any signature and (ii) such other information, including without limitation, information as to citizenship, residence, exchange
control approval, beneficial ownership of any securities, payment of applicable taxes or governmental charges, or legal or beneficial
ownership and the nature of such interest, information relating to the registration of the shares on the books maintained by or
on our behalf for the transfer and registration of shares, compliance with applicable law, regulations, provisions of or governing
shares and terms of the deposit agreement and the ADRs, as it may deem necessary or proper; and
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compliance with such regulations as the depositary may establish consistent with the deposit agreement.
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The issuance of
ADRs, the acceptance of deposits of shares, the registration, registration of transfer, split-up or combination of ADRs or the
withdrawal of shares, generally or in particular instances, may be suspended when the ADR register or any register for shares is
closed or when any such action is deemed advisable by the depositary; provided that the ability to withdraw shares may only be
limited under the following circumstances: (i) temporary delays caused by closing transfer books of the depositary or our
transfer books or the deposit of shares in connection with voting at a shareholders’ meeting, or the payment of dividends,
(ii) the payment of fees, taxes, and similar charges, and (iii) compliance with any laws or governmental regulations
relating to ADRs or to the withdrawal of shares.
The deposit agreement
expressly limits the obligations and liability of the depositary, ourselves and our respective agents. Neither we nor the depositary
nor any such agent will be liable if:
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present or future law, rule or regulation of the United States, the Cayman Islands, the People’s Republic of China or
any other country, or of any governmental or regulatory authority or securities exchange or market or automated quotation system,
the provisions of or governing any deposited securities, any present or future provision of our charter, any act of God, war, terrorism
or other circumstance beyond our, the depositary’s or our respective agents’ control shall prevent, delay or subject
to any civil or criminal penalty any act which the deposit agreement or the ADRs provide shall be done or performed by us, the
depositary or our respective agents (including, without limitation, voting);
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it exercises or fails to exercise discretion under the deposit agreement or the ADRs;
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it performs its obligations without gross negligence or bad faith;
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it takes any action or refrains from taking any action in reliance upon the advice of or information from legal counsel, accountants,
any person presenting shares for deposit, any registered holder of ADRs or any other person believed by it to be competent to give
such advice or information; or
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it relies upon any written notice, request, direction or other document believed by it to be genuine and to have been signed
or presented by the proper party or parties.
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Neither the depositary
nor its agents have any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited
securities or the ADRs. We and our agents shall only be obligated to appear in, prosecute or defend any action, suit or other proceeding
in respect of any deposited securities or the ADRs, which in our opinion may involve us in expense or liability, if indemnity satisfactory
to us against all expense (including fees and disbursements of counsel) and liability is furnished as often as may be required.
The depositary and its agents may fully respond to any and all demands or requests for information maintained by or on its behalf
in connection with the deposit agreement, any registered holder or holders of ADRs, any ADSs or otherwise to the extent such information
is requested or required by or pursuant to any lawful authority, including without limitation laws, rules, regulations, administrative
or judicial process, banking, securities or other regulators.
The depositary
will not be responsible for failing to carry out instructions to vote the deposited securities or for the manner in which the deposited
securities are voted or the effect of the vote. In no event shall we, the depositary or any of our respective agents be liable
to holders of ADSs or interests therein for any indirect, special, punitive or consequential damages.
The depositary
may own and deal in deposited securities and in ADSs.
Disclosure of Interest in ADSs
To the extent
that the provisions of or governing any deposited securities may require disclosure of or impose limits on beneficial or other
ownership of deposited securities, other shares and other securities and may provide for blocking transfer, voting or other rights
to enforce such disclosure or limits, you agree to comply with all such disclosure requirements and ownership limitations and to
comply with any reasonable instructions we may provide in respect thereof. We reserve the right to request you to deliver your
ADSs for cancellation and withdrawal of the deposited securities so as to permit us to deal with you directly as a holder of deposited
securities and, by holding an ADS or an interest therein, you will be agreeing to comply with such instructions.
Books of Depositary
The depositary
or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADRs, which register
shall include the depositary’s direct registration system. You may inspect such records at its office during regular business
hours, but solely for the purpose of communicating with other holders in the interest of business matters relating to the deposit
agreement. Such register may be closed from time to time, when deemed expedient by the depositary or when requested by us.
The depositary
will maintain facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADRs. These facilities
may be closed from time to time, to the extent not prohibited by law.
Pre-release of ADSs
The depositary
may issue ADSs prior to the deposit with the custodian of shares (or rights to receive shares). This is called a pre-release of
the ADSs. A pre-release is closed out as soon as the underlying shares (or rights to receive shares from us or from any registrar,
transfer agent or other entity recording share ownership or transactions) are delivered to the depositary. The depositary may pre-release
ADSs only if:
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the depositary has received collateral for the full market value of the pre-released ADSs (marked to market daily); and
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each recipient of pre-released ADSs agrees in writing that he or she
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owns the underlying shares,
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assigns all rights in such shares to the depositary,
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holds such shares for the account of the depositary and
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will deliver such shares to the custodian as soon as practicable, and promptly if the depositary so demands.
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In general, the
number of pre-released ADSs will not evidence more than 30% of all ADSs outstanding at any given time (excluding those evidenced
by pre-released ADSs) and pre-released ADSs are terminable on not more than five business days notice. However, the depositary
may change or disregard such limit from time to time as it deems appropriate. The depositary may retain for its own account any
earnings on collateral for pre-released ADSs and its charges for issuance thereof.
Appointment
In the deposit
agreement, each holder and each person holding an interest in ADSs, upon acceptance of any ADSs (or any interest therein) issued
in accordance with the terms and conditions of the deposit agreement will be deemed for all purposes to:
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be a party to and bound by the terms of the deposit agreement and the applicable ADR or ADRs, and
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appoint the depositary its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions
contemplated in the deposit agreement and the applicable ADR or ADRs, to adopt any and all procedures necessary to comply with
applicable laws and to take such action as the depositary in its sole discretion may deem necessary or appropriate to carry out
the purposes of the deposit agreement and the applicable ADR and ADRs, the taking of such actions to be the conclusive determinant
of the necessity and appropriateness thereof.
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