UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2015

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report:

 

COMMISSION FILE NUMBER: 001-34862

 

 

SouFun Holdings Limited

(Exact name of registrant as specified in its charter)

 

 

N/A

(Translation of Registrant’s name into English)

 

Cayman Islands

(Jurisdiction of incorporation or organization)

 

F9M, Building 5, Zone 4, Hanwei International Plaza

No. 186 South 4th Ring Road

Fengtai District, Beijing 100160

The People’s Republic of China

(Address of principal executive offices)

 

Contact Person: Executive Chairman

Telephone: +86-10-5631 8000

Fax: +86-10-5631 8010

(Telephone, E-mail and/or Facsimile Number of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
American depositary shares (five American depositary
shares representing one Class A ordinary share,
parvalueHK$1.00 each)
The New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

Class A ordinary shares, par value HK$1.00 each   70,731,239 
      
Class B ordinary shares, par value HK$1.00 each   24,336,650 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes x No ¨

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Yes ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      x Accelerated filer      ¨ Non-accelerated filer      ¨

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ Other ¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
Introduction - 1 -
   
Forward Looking Statements - 2 -
   
PART I  
     
Item 1. Identity of Directors, Senior Management and Advisers - 4 -
     
Item 2. Offer Statistics and Expected Timetable - 4 -
     
Item 3. Key Information - 4 -
     
Item 4. Information on the Company - 51 -
     
Item 4A. Unresolved Staff Comments - 83 -
     
Item 5. Operating and Financial Review and Prospects - 83 -
     
Item 6. Directors, Senior Management and Employees - 114 -
     
Item 7. Major Shareholders and Related Party Transactions - 132 -
     
Item 8. Financial Information - 138 -
     
Item 9. The Offer and Listing - 139 -
     
Item 10. Additional Information - 140 -
     
Item 11. Quantitative and Qualitative Disclosures About Market Risk - 151 -
     
Item 12. Description of Securities Other Than Equity Securities - 152 -
     
PART II  
     
Item 13. Defaults, Dividend Arrearages and Delinquencies - 155 -
     
Item 14. Material Modifications to The Rights of Security Holders and Use of Proceeds - 155 -
     
Item 15. Controls and Procedures - 155 -
     
Item 16A. Audit Committee Financial Expert - 156 -
     
Item 16B. Code of Ethics - 156 -
     
Item 16C. Principal Accountant Fees and Services - 156 -
     
Item 16D. Exemptions from the Listing Standards for Audit Committees - 156 -
     
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers - 157 -
     
Item 16F. Change in Registrant’s Certifying Accountant - 157 -
     
Item 16G. Corporate Governance - 157 -
     
Item 16H. Mine Safety Disclosure - 158 -
     
PART III  
     
Item 17. Financial Statements - 159 -
     
Item 18. Financial Statements - 159 -
     
Item 19. Exhibits - 159 -
     
Signatures - 165 -

 

 -i- 

 

 

INTRODUCTION

 

Except where the context otherwise requires and for purposes of this annual report on Form 20-F only:

 

·“we,” “us,” “our company,” “our,” “SouFun” or “Fang” refers to SouFun Holdings Limited (formerly known as SouFun.com Limited), its subsidiaries, and, in the context of describing our operations and consolidated financial information, our consolidated controlled entities in China (also referred to as the PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries in our consolidated financial statements and related notes included elsewhere in this annual report);

 

·“2018 Notes” refers to our $400 million aggregate principal amount of convertible senior notes due 2018;

 

·“2022 Notes” refers to our $300 million aggregate principal amount of convertible notes due 2022;

 

·“ADSs” refers to our American depositary shares, with five ADSs representing one Class A ordinary share, and “ADRs” refers to American depositary receipts, which, if issued, evidence our ADSs;

 

·“CSRC” refers to the China Securities Regulatory Commission;

 

·“China” or “PRC” or “Chinese” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan;

 

·“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

 

·“Hong Kong dollars” or “HK$” refers to the legal currency of the Hong Kong Special Administrative Region;

 

·“MIIT” refers to the Ministry of Industry and Information Technology and its competent local branches;

 

·“MOFCOM” refers to the Ministry of Commerce and its competent local branches;

 

·“MOHURD” refers to the Ministry of Housing and Urban-Rural Development and its competent local branches;

 

·“notes” refers to 2018 Notes and 2022 Notes, collectively;

 

·“PBOC” refers to People’s Bank of China;

 

·“RMB” or “Renminbi” refers to the legal currency of China;

 

·“SAFE” refers to the State Administration of Foreign Exchange and its competent local branches;

 

 - 1 - 

 

 

·“SAIC” refers to the State Administration for Industry and Commerce and its competent local branches;

 

·“SAT” refers to the State Administration of Taxation and its competent local branches;

 

·“SEC” refers to the U.S. Securities and Exchange Commission;

 

·“Securities Act” refers to the Securities Act of 1933, as amended;

 

·“shares” or “ordinary shares” refers to our ordinary shares, including both Class A ordinary shares and Class B ordinary shares;

 

·“sq.m.” refers to square meter(s);

 

·“U.S. dollars,” “US$” or “$” refers to the legal currency of the United States of America; and

 

·“Wanli” refers to Chongqing Wanli New Energy Co., Ltd., a PRC company listed on the Shanghai Stock Exchange (stock code: 600847).

 

This annual report includes our audited consolidated statements of comprehensive income for 2013, 2014 and 2015, our audited consolidated balance sheets as of December 31, 2014 and 2015, and our audited consolidated statements of cash flows for 2013, 2014 and 2015. On April 7, 2014, our ADSs ratio changed from one ADS for one Class A ordinary share to five ADSs for each Class A ordinary share. The data throughout this annual report has been revised to reflect the ratio change as if it had occurred prior to the historical periods presented herein.

 

FORWARD LOOKING STATEMENTS

 

This annual report contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “is expected to,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to:

 

·our anticipated growth strategies including our new services and expansion from a media platform to media transaction and financial platforms;

 

·our anticipated expansion into direct real estate brokerage activities;

 

 - 2 - 

 

 

·our anticipated acquisition of a controlling stake in Wanli and the sale of a portion of our assets to Wanli;

 

·our anticipated business activities and the expected impact of these actions on our results of operations and financial condition;

 

·expected changes in our revenues and certain cost or expense items;

 

·our ability to attract clients and further enhance our brand recognition;

 

·trends and competition in the real estate, home furnishings and improvement sites and online advertising industries; and

 

·PRC laws, regulations and policies relating to the real estate, home furnishings and improvement sites and advertising and financing industries and the use of the Internet to conduct these activities.

 

You should read this annual report and the documents that we refer to in this annual report thoroughly and with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this annual report, including the section titled “Risk factors” beginning on page 7, include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. Except as required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 - 3 - 

 

 

MARKET AND INDUSTRY DATA

 

Market data and certain industry forecasts used in this annual report were obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry forecasts and market research, while believed to be reliable, have not been independently verified, and we make no representation as to the accuracy of such information.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We are subject to periodic reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders, and Section 16 short swing profit reporting for our officers and directors and for holders of more than 10% of our ordinary shares. All information filed with the SEC can be obtained over the Internet at the SEC’s website at www.sec.gov or inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 or visit the SEC website for further information on the operation of the public reference rooms.

 

We furnish JPMorgan Chase Bank, N.A., the depositary, with our annual reports, which include a review of operations and annual audited consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”), and all notices of shareholders’ meeting and other reports and communications that are made generally available to our shareholders. The depositary makes such notices, reports and communications available to holders of ADSs and, upon our request, mails to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

We have derived our selected consolidated statement of comprehensive income data (except for ADS information) for 2013, 2014 and 2015 and our selected consolidated balance sheet data as of December 31, 2014 and 2015, from our audited consolidated financial statements included in this annual report. Our selected statement of comprehensive income data (except for ADS information) for 2011 and 2012 and our selected consolidated balance sheet data as of December 31, 2011, 2012 and 2013, have been derived from our audited consolidated financial statements not included in this annual report. Our financial statements have been prepared in accordance with U.S. GAAP and have been audited by Ernst & Young Hua Ming LLP, an independent registered public accounting firm.

 

 - 4 - 

 

 

Since January 1, 2012, we have reclassified the revenues from SouFun membership services from other value-added services to e-commerce services in our consolidated statements of comprehensive income. The reclassification provides better operating information and is in line with the current development of our business. The change in presentation has been applied retrospectively to all periods presented.

 

Since January 1, 2015, we have separated the revenues from financial services from other value-added services in our consolidated statements of comprehensive income. The separation provides better operating information and is in line with the current development of our business. The change in presentation has been applied retrospectively to all periods presented.

 

You should read the following information in conjunction with our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” in this annual report. Our historical operating results presented below are not necessarily indicative of the results to be expected for any future fiscal period.

 

   Year Ended December 31, 
   2011   2012   2013   2014   2015 
  (U.S. dollars in thousands, except share data and per ADS data) 
Consolidated statement of comprehensive income data:    
Revenues:                         
E-commerce services   24,170    102,162    188,107    244,344    474,810 
Marketing services   246,634    249,861    278,322    294,484    249,862 
Listing services   67,125    72,874    161,547    145,654    107,922 
Financial services   -    -    -    3,235    29,582 
Other value-added services   5,897    5,361    9,403    15,165    21,373 
Total revenues   343,826    430,258    637,379    702,882    883,549 
Cost of revenue:                         
Cost of services   (66,571)   (80,863)   (102,488)   (145,739)   (555,389)
Total cost of revenues   (66,571)   (80,863)   (102,488)   (145,739)   (555,389)
Gross profit   277,255    349,395    534,891    557,143    328,160 
Operating income (expenses):                         
Selling expenses   (67,207)   (80,056)   (101,935)   (147,874)   (236,603)
General and administrative expenses   (69,611)   (70,780)   (83,384)   (100,571)   (125,405)
Other income (loss)           786    835    (625)
Operating income (loss)   140,437    198,559    350,358    309,533    (34,473)
Foreign exchange gain (loss)   1    90    3    (44)   1,464 
Interest income   10,483    19,406    27,803    43,857    22,221 
Interest expenses   (4,026)   (11,630)   (14,675)   (17,308)   (16,519)
Realized (loss) gain on available-for-sale securities (including accumulated other comprehensive income reclassifications for unrealized (loss) gain on available-for-sale securities of (US$721), nil, US$821, nil and nil for the year ended December 31, 2011, 2012, 2013, 2014 and 2015, respectively)   (721)       821         
Realized gain—trading securities   263                 
Government grants   1,399    1,298    4,031    7,205    4,936 
Investment income                   1,333 
Other-than-temporary impairment on available-for-sale securities   (3,622)   (14)       (8,417)    
Gain on bargain purchase           102         
Income (loss) before income taxes and noncontrolling interests   144,214    207,709    368,443    334,826    (21,038)
Income tax (expenses) benefit   (42,617)   (55,905)   (69,781)   (81,609)   5,905 
Net income (loss)   101,597    151,804    298,662    253,217    (15,133)
Net (loss) income attributable to noncontrolling interests   (28)   (6)   53        (37)
Net income (loss) attributable to SouFun Holdings Limited’s shareholders   101,625    151,810    298,609    253,217    (15,096)
Other comprehensive income, before tax:                         
Foreign currency translation adjustments   10,839    1,378    20,150    (4,323)   (55,928)
Unrealized gain (loss) on available-for-sale securities       743    78    10,508    (4,002)
Reclassification adjustment for loss (gain) included in net income   721        (821)        
Other comprehensive income, before tax   11,560    2,121    19,407    6,185    (59,930)
Other comprehensive income, net of tax   11,560    2,121    19,407    6,185    (59,930)
Comprehensive income (loss)   113,157    153,925    318,069    259,402    (75,063)
Comprehensive (loss) income attributable to noncontrolling interests   (28)   (6)   53        (37)
Comprehensive income (loss) attributable to SouFun Holdings Limited’s shareholders   113,185    153,931    318,016    259,402    (75,026)
Earnings (loss) per share for Class A and Class B ordinary shares:                         
Basic   1.33    1.96    3.82    3.08    (0.18)
Diluted(1)   1.24    1.85    3.54    2.87    (0.18)
Dividend declared per ordinary share(2)   1.98    0.98    0.99    1.00    0.87 
Earnings (loss) per ADS:                         
Basic   0.27    0.39    0.76    0.62    (0.04)
Diluted(1)   0.25    0.37    0.71    0.57    (0.04)
Weighted average number of Class A and Class B ordinary shares outstanding:                         
Basic   76,492,272    77,365,156    78,101,205    82,163,135    85,170,886 
Diluted   82,215,832    81,924,565    84,602,678    92,208,620    85,170,886 
Weighted average number of outstanding ADS:                         
Basic   382,461,360    386,825,780    390,506,025    410,815,675    425,854,430 
Diluted   411,079,160    409,622,825    423,013,390    461,043,100    425,854,430 
Share-based compensation expenses included in:                         
Cost of revenues   1,103    1,162    1,143    782    471 
Selling expenses   1,506    1,626    1,621    1,122    446 
General and administrative expenses   4,561    4,361    4,264    2,779    3,485 

 

 

(1)     Earnings (loss) per share for Class A and Class B ordinary shares (diluted) and earnings (loss) per ADS (diluted) for each year from 2011 to 2015 have been computed, after considering the dilutive effect of the shares underlying employees’ share options and convertible senior notes.

(2)     Dividend declared per ordinary share represents the dividend declared divided by the number of outstanding ordinary shares as of the period end.

 

 - 5 - 

 

 

   As of
December 31,
 
   2013   2014   2015 
  (U.S. dollars in thousands) 
Consolidated Balance Sheet Data:    
Cash and equivalents and short-term investments   591,148    809,944    880,480 
Total current assets   963,653    1,179,891    1,514,738 
Total assets   1,505,089    1,744,239    2,295,326 
Long term loans   180,750    100,000     
Convertible senior notes   350,000    400,000    687,887 
Total SouFun shareholder’s equity   443,467    632,609    853,766 

 

Exchange Rate Information

 

Our business is conducted in China and substantially all of our revenues and expenses are denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the readers. The exchange rates of Renminbi into U.S. dollars are based on the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. As of May 13, 2016, the noon buying rate was RMB6.5285 to US$1.00.

 

The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollars for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.

 

   Noon Buying Rate 
   Period
End
  

Average(1)

   Low   High 
   (RMB per US$1.00) 
2011   6.2939    6.4475    6.6364    6.2939 
2012   6.2301    6.2990    6.3879    6.2221 
2013   6.0537    6.1478    6.2438    6.0537 
2014   6.2046    6.1620    6.2591    6.0402 
2015   6.4778    6.2869    6.5932    6.1870 
November   6.3883    6.3640    6.3945    6.3180 
December   6.4778    6.4491    6.4896    6.3883 
2016                    
January   6.5752    6.5726    6.5932    6.5219 
February   6.5525    6.5501    6.5795    6.5154 
March   6.4480    6.5027    6.5500    6.4480 
April   6.4738    6.4754    6.5004    6.4571 
May (through May 13)   6.5285    6.5021    6.5285    6.4738 

Source: Federal Reserve Board.

 

 

(1)Annual averages are calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are calculated by using the average of the daily rates during the relevant month.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

 - 6 - 

 

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

An investment in our ADSs or notes involves risks. You should carefully consider the risks described below, as well as the other information included or incorporated by reference in this annual report, before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The market or trading price of our ADSs or notes could decline due to any of these risks, and you may lose all or part of your investment. In addition, the risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. You should also review the section of this annual report captioned “Forward-Looking Statements.” Please note that additional risks not presently known to us, that we currently deem immaterial or that we have not anticipated may also impair our business and operations.

 

Risks related to our business

 

We may continue to incur losses in the future, and may not be able to return to profitability, which may cause the market price of our ADSs to decline.

 

We incurred an operating loss of US$34.5 million in 2015, primarily due to a significant increase in our cost of services from the increased headcount, material costs, third-party contractor costs and commission costs to support our transformation while we did not generate sufficient revenues from our newly launched services. The new services we launched since the beginning of 2015, including online real estate brokerage services, online home-decorating services and online sublease services, generally entail higher costs associated with human resources, materials, third-party contractors and commission, and therefore may result in lower profit margin compared with our traditional service offerings, which involve primarily online advertising and listing. Our ability to achieve profitability, therefore, depends on the competitiveness of our products and services as well as our ability to control costs and to provide new products and services to meet the market demands and attract new customers. Due to the numerous risks and uncertainties associated with the transformation of our business, we cannot guarantee that we may be able to return to profitability in the short-term or long-term, which may cause the market price of our ADSs to decline.

 

We face certain risks and challenges in relation to our transformation from an Internet information platform to a transaction-oriented platform.

 

In early 2015, we began a transformation from a pure Internet information platform to a transaction-oriented platform that spans online information provision, transaction and financial services, and as a result, our e-commerce businesses have grown rapidly and became the largest source of our revenues in 2015. As part of our effort to develop our transaction platform, we began to offer online real estate brokerage services in January 2015 and online home-decorating services and online sublease services in the second quarter of 2015.

 

 - 7 - 

 

 

Our transformation may expose us to a number of risks and challenges, including, among other things:

 

·our potential inability to obtain necessary licenses or comply with applicable regulations in relation to our new service offerings;

 

·availability of qualified staff to support our new service offerings;

 

·potential inability to integrate our new services, operations and employees;

 

·potential inability to generate sufficient revenues to offset the new costs; and

 

·potential loss of or harm to relationships with both employees and customers resulting from our integration of new service and operations.

 

As a result of the foregoing risks and challenges, we may not be able to fulfill our expectations regarding the business transformation, which may be delayed or aborted, and the new business model may not be viable or generate sufficient revenues to offset the lower margins associated with these businesses. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

 

Our anticipated acquisition of a controlling stake in Wanli, a company listed on the Shanghai Stock Exchange, may not be approved and consummated and may subject us to certain risks and challenges unique to the transaction structure and the PRC regulatory regime.

 

In January 2016, certain wholly-owned subsidiaries of our company (the “Fang Subsidiaries”) entered into a series of transaction documents in connection with our proposed acquisition of a controlling stake in Wanli. Under the proposed transaction structure, we agreed to subscribe for shares to be newly issued by Wanli in exchange for the transfer of the equity interests in five wholly-owned subsidiaries of the Fang Subsidiaries that operate as our service platforms for online advertising business (the “Target Companies”). Wanli agreed that it would concurrently dispose of all of its existing non-cash assets and liabilities to a PRC entity unaffiliated with us. To support the future business growth following the proposed acquisition, Wanli also agreed to issue new shares to certain professional investors for cash consideration. Following the consummation of the foregoing transactions, the Fang Subsidiaries will collectively hold approximately 70.0% of the share capital of Wanli, allowing us to consolidate Wanli’s financial results as Wanli will become a majority-owned indirect subsidiary of our company.

 

The foregoing transactions remain subject to the requisite internal approvals of the relevant parties, including the approval by the shareholders’ meeting of Wanli, and regulatory clearance, including that by the CSRC and other applicable regulatory authorities. As the transaction structure is tailor-made to meet the needs of the transacting parties, and there may be no precedent transaction in China, we cannot assure you that these approvals or regulatory clearance will be obtained within an expected timeframe, or at all.

 

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The consummation of the foregoing transactions may also subject us to certain risks and challenges that are unique to the transaction structure and the PRC regulatory regime, including, among other things:

 

·As a listed company, Wanli will continue to be subject to the listing rules of the Shanghai Stock Exchange and applicable PRC laws and regulations regarding securities and listed companies, which may significantly increase our regulatory compliance costs. For example, if the proposed transactions are consummated as planned, we will be required to maintain separate management for Wanli and incur higher operating costs, such as hiring additional experienced personnel and engaging extra professional third parties, to comply with periodic reporting and other obligations under both U.S. and PRC securities laws. Furthermore, Wanli will prepare its financial statements in accordance with the generally accepted accounting principles in China, while we prepare our financial statements in accordance with the U.S. GAAP, and we may be required to engage separate accountants for Wanli to satisfy its own reporting obligations, which may significantly increase our financial reporting costs. The dual regulatory and reporting systems will likely render it difficult for Wanli to fully integrate into our group.

 

·As required by the relevant PRC regulations and regulatory authorities, we also entered into a profit compensation agreement, under which we undertook to compensate Wanli if the Target Companies were unable to generate sufficient revenues to meet the predetermined profit targets in the year when the transactions are consummated and the two years thereafter (the “Compensation Years”) or were to incur impairment loss upon the expiration of the Compensation Years, by transferring back the shares in Wanli, to the extent subscribed by the Fang Subsidiaries, for nominal price. Although we believe that such profit targets are reasonable and there is currently no indication that the Target Companies will not be able to achieve such targets, we cannot guarantee that the Target Companies will meet these targets or that we will not incur impairment loss, given the ongoing transformation of our business and the overall market conditions. If the Target Companies fail to meet the profit targets or were to incur impairment loss, the Fang Subsidiaries would be required to transfer back the shares in Wanli, which might, depending on the shortfall amounts, render us unable to consolidate Wanli’s financial results.

 

·To support the future business growth of the Target Companies following the proposed acquisition, Wanli will concurrently raise additional capital from certain professional investors by issuing new shares to the investors. We cannot assure you that the anticipated share issuance will be eventually approved and/or consummated, and any failure to raise sufficient capital will likely constrain the future growth of the Target Companies. Wanli may also need to raise additional capital from time to time from third-party investors, which may dilute our equity ownership in Wanli and render us unable to consolidate Wanli’s financial results.

 

  · In April 2016, Shanghai Jing Rong, a majority-owned subsidiary of one of the Target Companies, acquired the domain name “fang.com” from Beijing Technology. It also completed the Internet content provider (“ICP”) filing procedure for “fang.com,” allowing it to provide relevant value-added telecommunications services as permitted by applicable PRC laws under such domain name. Going forward, pursuant to certain cooperation agreement between the Target Companies and Beijing Technology, Shanghai Jing Rong shall, via “fang.com,” provide us with services that may only be performed by an ICP license holder under applicable laws and regulations free of charge. In the event that we are unable to enforce such arrangements, or if we experience significant delays or other difficulties in enforcing such arrangements, the business of our company that relies on ICP-related services via “fang.com” will be disrupted, which could materially and adversely affect our financial condition and results of operations.

 

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·During the internal restructuring undertaken in anticipation of the proposed acquisition, the Target Companies adopted certain business arrangements related to the online video broadcasting related business with certain consolidated controlled entity of our company that currently holds licenses on online video recording and broadcasting. For details of the risks from such arrangements, see “—Risks related to our corporate structure—Our business may suffer if we fail to carry out our newly adopted business arrangements related to the Target Companies’ online video broadcasting related business with certain consolidated controlled entity of our company.”

 

·In connection with our proposed transactions with Wanli, our company, Mr. Mo and Wanli entered into a non-compete agreement, pursuant to which neither Mr. Mo nor our company may engage in online advertising business within or outside of China following the consummation of the proposed transactions except to the extent required by regulatory compliance. We were also required to cause the relevant subsidiaries to cease the operation of such business upon the execution of the non-compete agreement. Although Wanli will continue to operate the online advertising business following the consummation of the transactions, we cannot assure you that the exclusion of such business from the service scope of our other subsidiaries and consolidated controlled entities will not affect our overall business operations and strategic planning, nor can we assure you that we will not lose any potential business opportunities due to such restrictions. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

·Our shareholders may face increased difficulty in achieving an exit as any potential buyer proposing to acquire our company may need to obtain two sets of regulatory approvals and accept a two-tier listing structure.

 

Our future growth depends on our ability to continue to expand our e-commerce services business.

 

Revenues from e-commerce services accounted for 29.5%, 34.8% and 53.7% of our total revenues for 2013, 2014 and 2015, respectively, and represented our largest source of revenues in 2015. We generate a significant majority of our e-commerce services revenues from paid SouFun membership services, which primarily include offers to purchase properties with discounts from our partner developers and dedicated information and related services to facilitate property purchases. Although we generally have been able to maintain contractual arrangements with third-party property developers that provide discounts to our registered members and direct sales properties on acceptable terms, there can be no assurance that we will continue to be able to do so in the future. In addition, we cannot control the accuracy of information provided by the property developers, the quality of their properties or how they treat our registered members and customers in their transactions with them. In addition, we began to offer direct sales services for new homes in August 2014 and online real estate brokerage services in January 2015. We may not be able to attract and retain listings and sufficient home buyers to make our direct sales and online real estate brokerage services successful. The business of providing these e-commerce services is still relatively new and evolving, and their growth depends on our ability to manage these services effectively. Customer complaints or negative publicity about our e-commerce services could diminish consumer confidence in and use of our services. If we are unable to maintain or increase the number of partner developers or property developments for which discounts on purchase price and direct sales services are offered, increase our penetration of direct home sales and online real estate brokerage services and grow our member base and increase transaction volume, our business and revenue growth prospects could be materially and adversely impacted.

 

Our business depends substantially on revenues from our marketing services, and participants in the real estate and home-related sectors may choose other advertising media over online advertising or other online advertisers, which could lead to a decline in our revenues.

 

All of our marketing service revenues are generated through our websites and mobile apps, and we expect to continue to derive a significant portion of our revenues from marketing services. Marketing services represented our second largest source of revenues in 2015, accounting for 43.7%, 41.9% and 28.3% of our revenues in 2013, 2014 and 2015, respectively. In particular, our new home business accounted for 92.9%, 88.4% and 87.7% of our marketing service revenues in 2013, 2014 and 2015, respectively. Our new home business primarily consists of sales of marketing services to residential property developers and their sales agents who are in the process of promoting newly developed properties for sale.

 

Although the online marketing industry in China has been growing, advertisers in the real estate sector in China have typically relied on traditional forms of advertising media, such as newspapers, magazines and outdoor advertising. If we are unable to retain and develop our base of advertising customers, including real estate developers, our business may not grow as quickly as we expect. Moreover, advertisers may not continue to do business with us if they do not perceive our marketing services to be effective or our user demographics to be desirable.

 

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Our ability to continue to generate and maintain marketing service revenues depends on a number of factors, many of which are beyond our control, including:

 

·the amount of user traffic on our websites and mobile apps, our ability to achieve user demographic characteristics that are attractive to advertisers, and our ability to demonstrate such user traffic and demographic characteristics through our website traffic tracking tools and reporting systems;

 

·potential downward pressure on online marketing pricing due to increased competition from other online advertisers and traditional advertising media; and

 

·widespread adoption of technologies that permit Internet users to selectively block unwanted web views, including advertisements on web pages.

 

If we are unable to remain competitive and provide value to our advertisers, they may stop placing advertisements with us, which would have a material adverse effect on our business, financial condition and results of operations.

 

If we are unable to continue to obtain listings from our key customer groups, including real estate developers, agents, brokers and property owners and managers, our business, financial condition and results of operations could be materially and adversely affected.

 

We derive a significant portion of our revenues from our listing services. In 2013, 2014 and 2015, listing service revenues represented approximately 25.3%, 20.7% and 12.2% of our total revenues, respectively. The success of the listing service business depends on our ability to persuade real estate developers, real estate agents, brokers, developers and property owners and managers to list their properties on our websites and mobile apps. We believe having large numbers of high-quality listings from such real estate professionals attracts users to our websites and mobile apps, thereby enhancing our attractiveness to advertisers and other real estate market participants. However, substantially all of our listing agreements are nonexclusive. Our listing customers may stop using our listing services and may choose to use the services of one or more of our competitors or alternative means of listing, such as real estate magazines or newspapers. For example, amid a slowdown of the housing market in China in 2014, a number of real estate agencies stopped purchasing our listing services for certain regional markets. To increase the competitiveness of our listing services and retain customers, we began to offer a 40% discount on our services in June 2014. If owners of large numbers of property listings, such as major developers or large brokers or property owners in key real estate markets, choose not to renew their existing agreements with us, our websites and mobile apps could become less attractive to users. As we build our own real estate brokerage and home sales services, real estate agents and brokers may view us as competing with them and may reduce their use of our listing services. If we experience reduced user traffic on our websites and mobile apps, advertisers and other real estate market participants may discontinue the use of or be unwilling to pay for our services. In such an event, our competitive position could be significantly weakened and our business, financial condition and results of operations could be materially and adversely affected.

 

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Our business could be materially and adversely affected by fluctuations in, and government measures influencing, China’s real estate industry.

 

We conduct our real estate services business primarily in China, and our business depends substantially on conditions of the PRC real estate market. In particular, our new home business, which accounted for 70.6%, 72.7% and 57.7% of our total revenues in 2013, 2014 and 2015, respectively, depends upon growth in the real estate-related industry nationwide and in specific regions in China. Demand for private residential property in China has grown rapidly in recent years, but such growth is often coupled with volatility in market conditions and fluctuation in property prices. Fluctuations of supply and demand in China’s real estate market are caused by economic, social, political and other factors. To the extent fluctuations in the real estate market adversely affect the demand for real estate and home-related products and services and for real estate- and home-related advertising, demand for our products and services, as well as the level of our growth and profitability, may be materially reduced.

 

The real estate market in China is typically affected by changes in government policies affecting the real estate and financial markets and related areas. In the past, the PRC government has adopted various administrative measures to curb what it perceived as unsustainable growth in the real estate market, particularly when the real estate market in China experienced rapid and significant increases in home sales as well as prices. In February 2013, for example, the State Counsel announced certain plans to address the rapid increase in property prices in certain cities since late 2012, including raising minimum down-payments and loan rates for second home buyers in cities where prices experienced a rapid increase and enforcing a 20% capital gains tax on the sale of existing homes. In part due to these policies, the real estate market in China experienced a slowdown and real estate development declined in 2014. While the PRC government issued a new policy in March 2015 to reduce the down-payment requirements and exempt certain home owners from paying sales taxes if they sell after owning the property for two years, it is unclear when and if the PRC real estate market will stabilize and rebound.

 

In addition to government policies aimed specifically at controlling growth in real estate markets in China, our business, financial condition and results of operations may also be negatively affected by other macroeconomic and regulatory measures. Any future policies in the following areas could cause a decline in home sales and prices, which in turn could affect the demand for our services and negatively impact our business, financial condition and results of operation:

 

·restrictive monetary policies adopted by the PRC government, including any significant increase in interest rates;

 

·adverse developments in the credit markets and/or mortgage financing markets resulting from PRC government policies;

 

·policies regarding land supply;

 

·significant increases in transaction costs as a result of changes in PRC government policies regarding transaction taxes, such as the sales tax on residential property sales by individuals within two years of purchase;

 

·adverse changes in PRC government policies regarding the acquisition and/or ownership of real estate;

 

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·adverse changes in PRC national or local government policies or practices regarding brokerage, referral or franchise business or related fees and commissions; or

 

·other PRC government policies or regulations that burden real estate transactions or ownership.

 

We derive a substantial portion of our revenues from several major urban centers in China, in particular, Beijing, Shanghai, Chengdu, Chongqing, Tianjin and Shenzhen and we face market risks due to concentration of our revenues in these major urban areas.

 

We derive a substantial portion of our revenues from several major urban centers in China, including Beijing, Shanghai, Chengdu, Chongqing, Tianjin and Shenzhen. In 2013, 2014 and 2015, we generated revenues of US$367.5 million, US$364.9 million and US$468.65 million from these six urban centers, respectively, representing 57.7%, 51.9% and 53.0%, respectively, of our total revenues. We expect these six urban centers to continue to be important regional sources of revenues in all of our revenue categories. If any of these major urban centers experience events which negatively impact the real estate industry or online advertising, such as a serious economic downturn or contraction, a natural disaster, or slower growth due to adverse governmental policies or otherwise, demand for our services could decline significantly and our business and revenue growth prospects could be materially and adversely impacted.

 

We may fail to compete successfully against current or future competitors, which could significantly reduce our market share and materially and adversely affect our business, financial condition and results of operations.

 

We face competition from other companies in each of our primary business activities. In particular, the online real estate Internet service market in China is becoming increasingly competitive. For example, in March 2015, 58.com, an online marketplace, acquired Anjuke.com, an online real estate sales and rental service provider in China, which will likely increase competition in our market. The barriers of entry for establishing Internet-based businesses are low, thereby allowing new entrants to emerge rapidly. As the online real estate Internet service industry in China is relatively new and constantly evolving, our current or future competitors may be able to better position themselves to compete as the industry matures. We also face competition from companies in other media that offer online advertising, online listing and similar services. Any of these competitors may offer products and services that provide significant advantages over those offered by us in terms of performance, price, scope, creativity or other advantages. These products and services may achieve greater market acceptance than our service offerings, and thus weaken our brand. Increased competition in the online real estate Internet service industry in China could make it difficult for us to retain existing customers and attract new customers, and could lead to a reduction in our fees. Furthermore, our current competitors include major Internet portals in China that provide real estate Internet services, such as Sina.com and Sohu.com, which may have more established brand names, larger visitor numbers and more extensive Internet distribution channels than we do.

 

In addition, we have faced and may continue to face strong competition from regionally focused websites and mobile apps providing regional real estate listings together with localized services. Any of our current or future competitors may also receive investments from or enter into other commercial or strategic relationships with larger, well-established and well-financed companies and obtain significantly greater financial, marketing and content licensing and development resources than us. Furthermore, some of our competitors receive support from local governments, which may place us at a disadvantage when competing with them in their local markets. We cannot assure you that we will be able to compete successfully against our current or future competitors. Any failure to compete effectively in the real estate Internet services market in China would have a material adverse effect on our business, financial condition and results of operations.

 

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Failure to maintain and enhance brand awareness for our websites and mobile apps could lead to loss of existing customers and qualified personnel.

 

We believe maintaining and enhancing our brand name as a leading real estate Internet company in China is a critical part of our strategy. In July 2014, we changed the address of our principal website from www.soufun.com to www.fang.com. “Fang” means “home” in Chinese. In conjunction with our change of web address, we also launched our new “Fang Tian Xia” brand (“房天下” in Chinese, which can be approximately translated as “world of homes” in English). We believe that this new and simplified address will be much easier for Chinese users to remember and access, thereby improving our brand recognition. In addition to promoting our websites and brand through our direct sales force, we also intend to continue to pursue other means to enhance brand awareness, including publication of real estate research reports, event sponsorships, portal collaboration arrangements, and advertising and marketing activities. We cannot assure you that our efforts will be successful in maintaining or enhancing our brand awareness. If our brand enhancement strategy is unsuccessful, or if other brands surpass our brand in market recognition in one or more cities in which we operate, we may fail to attract new or retain existing users, customers or qualified personnel, which could materially decrease our revenues and profitability.

 

Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may materially and adversely affect our business, financial condition, results of operations, reputation and competitive advantage.

 

Our copyrights, trademarks, trade secrets, domain names and other intellectual property are important to our business. Unauthorized use of such intellectual property, whether owned by us or licensed to us, may materially and adversely affect our business, financial condition, results of operations, reputation and competitive advantages. We rely on intellectual property laws and contractual arrangements with our key employees and certain of our customers, collaborators and others to protect our intellectual property rights. The measures we take to protect our intellectual property rights may not be adequate and policing the unauthorized use of our intellectual property is difficult and expensive.

 

In addition, the validity, enforceability and scope of protection of intellectual property in Internet-related industries in China are uncertain and still evolving, and could involve substantial risks. The laws and enforcement procedures in China are not yet well developed, and do not protect intellectual property rights to the same extent as laws and enforcement procedures in the United States and other jurisdictions. Furthermore, litigation may be necessary in the future to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources and have a material adverse effect on our business, financial condition and results of operations. If we are unable to adequately protect the intellectual property rights that we own or use, we may lose these rights and our business, growth prospects and profitability may suffer.

 

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Regulation of the Internet industry in China, including censorship of information distributed over the Internet, may materially and adversely affect our business.

 

China has enacted laws, rules and regulations governing Internet access and the distribution of news, information or other content, as well as products and services, through the Internet. In the past, the PRC government has prohibited the distribution of information through the Internet that it deems to be in violation of applicable PRC laws, rules and regulations. In particular, under regulations promulgated by the State Council, the MIIT, the General Administration of Press and Publication (formerly the State Press and Publications Administration) and the Ministry of Culture, Internet content providers and Internet publishers are prohibited from posting or displaying content over the Internet that, among other things: (1) opposes the fundamental principles of the PRC constitution, (2) compromises state security, divulges state secrets, subverts state power or damages national unity, (3) disseminates rumors, disturbs social order or disrupts social stability, (4) propagates obscenity, pornography, gambling, violence, murder or fear or incites the commission of crimes, or (5) insults or slanders a third party or infringes upon the lawful right of a third party.

 

If any Internet content we offer through our consolidated controlled entities were deemed by the PRC government to violate any of such content restrictions, we would not be able to continue such offerings and could be subject to penalties, including confiscation of illegal revenues, fines, suspension of business and revocation of required licenses, which could have a material adverse effect on our business, financial condition and results of operations. We may also be subject to potential liability for any unlawful actions of our customers or affiliates or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, and if we are found to be liable, we may be forced to cease operation of our websites and mobile apps in China.

 

If any of our consolidated controlled entities fails to maintain the applicable licenses and approvals held by it under the complex regulatory environment for Internet-based businesses and online advertising businesses in China, or any of our PRC subsidiaries or consolidated controlled entities fail to pass its annual government inspection or obtain renewal of its business license, our business, financial condition and results of operations would be materially and adversely affected.

 

The Internet and online advertising industries in China are still at a relatively early stage of development and are highly regulated by the PRC government. Various regulatory authorities of the PRC government, such as the State Council, the MIIT, the SAIC, the General Administration of Press, Publication, Radio, Film and Television, and the Ministry of Public Security, are empowered to issue and implement regulations governing various aspects of the Internet and advertising industries. Moreover, new laws, rules and regulations may be adopted, or new interpretations of existing laws, rules and regulations may be released, to address issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of any current and future PRC laws, rules and regulations applicable to the Internet and online advertising industries.

 

Our consolidated controlled entities are required to obtain applicable licenses or approvals from various regulatory authorities in order to provide advertising and other value-added services and products. These licenses or approvals are essential to the operation of our business and are generally subject to annual review by the relevant PRC governmental authorities. For example, each of Beijing Internet, Beijing Technology, Beijing JTX Technology, Beijing China Index and Shanghai Jing Rong (our majority-owned subsidiary permitted to provide value-added telecommunications services based in China (Shanghai) Pilot Free Trade Zone) currently holds an ICP license, as required under the applicable PRC laws, rules and regulations; and each of Beijing Internet, Beijing Technology, Beijing JTX Technology, Beijing China Index and Beijing Advertising currently holds an approval for operating electronic bulletin board services as required under the applicable PRC laws, rules and regulations. Beijing Advertising, Beijing Internet, Shanghai Advertising and certain other consolidated controlled entities are allowed to provide marketing services in accordance with the business scope indicated in each of their respective business licenses.

 

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Some of our consolidated controlled entities, however, may be required to obtain additional licenses. For example, since our websites and mobile apps include online residential communities that allow visitors to post information, including graphics or weblinks to videos, other websites and mobile apps or data in microblogs or online discussion forums, on our websites and mobile apps for discussion with other users, the release of such information on our websites and mobile apps may be deemed as providing Internet publication services and therefore require Internet publication licenses. Similarly, if we or third parties post information that may be viewed as news information, the release of such information on our websites and mobile apps may be deemed as Internet news information services and therefore require Internet news information licenses. We, like many other similarly situated business operators, have been operating our businesses without such licenses. Certain of our relevant consolidated controlled entities have applied to the relevant government authorities for Internet publication licenses again in accordance with applicable PRC laws, rules and regulations, and pursuant to the request by the relevant governmental authorities, we are now preparing the relevant supplementary materials for such application. In addition, we are still in discussion with the relevant government authorities on our application for, and the authorities’ issuance of, Internet news information service licenses.

 

Under the applicable PRC laws, rules and regulations, the failure to obtain and/or maintain business licenses, an Internet publication licenses and/or Internet news information service licenses may subject the entity to various penalties, including confiscation of revenues, imposition of fines and/or restrictions on the entity conducting such activities’ business operations, or the discontinuation of their operations. Although our relevant consolidated controlled entities have not received any revenues directly from Internet publication services or Internet news information services, we cannot assure you that the PRC regulatory authorities will not impose any such penalties. Any such disruption in the business operations of our consolidated controlled entities could materially and adversely affect our business, financial condition and results of operations.

 

Unexpected network interruptions or security breaches, including “hacking” or computer virus attacks, may cause delays or interruptions of service, resulting in reduced use and performance of our websites and mobile apps and damage our reputation and brands.

 

Our business depends heavily on the performance and reliability of China’s Internet infrastructure, the continued accessibility of bandwidth and servers on our service providers’ networks and the continuing performance, reliability and availability of our technology platform. Any failure to maintain the satisfactory performance, reliability, security and availability of our computer and hardware systems may cause significant harm to our reputation and our ability to attract and maintain customers and visitor traffic. Major risks related to our network infrastructure include:

 

·any breakdown or system failure resulting in a sustained shutdown of our servers, including failures which may be attributable to sustained power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware;

 

·any disruption or failure in the national backbone network, which would prevent our customers and users from accessing our websites and mobile apps;

 

·any damage from fire, flood, earthquake and other natural disasters; and

 

·computer viruses, hackings and similar events.

 

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Computer viruses and hackings may cause delays or other service interruptions and could result in significant damage to our hardware, software systems and databases, disruptions to our business activities, such as to our e-mail and other communication systems, breaches of security and inadvertent disclosure of confidential or sensitive information, inadvertent transmissions of computer viruses and interruptions of access to our websites and mobile apps through the use of denial-of-service or similar attacks. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability. All of our servers and routers, including back-up servers, are currently hosted by third-party service providers in Beijing and Shanghai and all information on our websites and mobile apps is backed up periodically. Any hacking, security breach or other system disruption or failure which occurs in between our backups could disrupt our business or cause us to lose, and be unable to recover, data such as real estate listings, contact information and other important customer information.

 

We also do not maintain insurance policies covering losses relating to our systems and do not have business interruption insurance. Moreover, the low coverage limits of our property insurance policies may not be adequate to compensate us for all losses, particularly with respect to any loss of business and reputation that may occur. To improve our performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or create one or more copies of our websites and mobile apps to mirror our online resources, either of which could increase our expenses and reduce our net income.

 

Breaches of security in connection with our websites could expose us to potential liability and harm our reputation.

 

Ensuring secured transmission of confidential information through public networks is essential to maintaining the confidence of our customers and users. Our existing security measures may not be adequate to protect such confidential information. In addition, computer and network systems are susceptible to breaches by computer hackers. Security breaches could expose us to litigation and potential liability for failing to secure confidential customer information, and could harm our reputation and reduce our ability to attract customers and users. Any future security breaches, if any, may result in a material adverse effect on our business, financial condition and results of operations.

 

The successful operation of our business depends upon the performance and reliability of the Internet infrastructure and telecommunications networks in China.

 

Our business depends on the performance and reliability of the Internet infrastructure in China. Substantially all access to the Internet is maintained through state-controlled telecommunication operators under the administrative control and regulatory supervision of MIIT. In addition, the national networks in China are connected to the Internet through international gateways controlled by the PRC government. These international gateways are generally the only channels through which a domestic user can connect to the Internet. We cannot assure you that a more sophisticated Internet infrastructure will be developed in China. We may not have access to alternative networks in the event of disruptions, failures or other problems with China’s Internet infrastructure. In addition, the Internet infrastructure in China may not support the demands associated with continued growth in Internet usage.

 

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We also rely on China Telecommunications Corporation (“China Telecom”), and China United Network Communications Group Co., Ltd. (“China Unicom”) to provide us with data communications capacity primarily through local telecommunications lines and Internet data centers to host our servers. We do not have access to alternative services in the event of disruptions, failures or other problems with the fixed telecommunications networks of China Telecom and China Unicom, or if China Telecom or China Unicom otherwise fails to provide such services. Any unscheduled service interruption could disrupt our operations, damage our reputation and result in a decrease in our revenues. Furthermore, we have no control over the costs of the services provided by China Telecom and China Unicom. If the prices that we pay for telecommunications and Internet services rise significantly, our gross margins could be significantly reduced. In addition, if Internet access fees or other charges to Internet users increase, our user traffic may decrease, which in turn may cause our revenues to decline.

 

You should not rely on our quarterly operating results as an indication of our future performance because our quarterly financial results are subject to fluctuations.

 

The real estate sector in China is characterized by seasonal fluctuations, which may cause our revenues to fluctuate significantly from quarter to quarter. The first quarter of each year generally contributes the smallest portion of our annual revenues due to reduced advertising and marketing activity of our customers in the PRC real estate industry during and around the Chinese Lunar New Year holiday, which generally occurs in January or February of each year. Furthermore, as we are substantially dependent on sales of e-commerce, marketing and listing services, our quarterly revenues and results of operations are likely to be affected by:

 

·seasonality of the real estate market and real estate consumers’ purchasing patterns;

 

·our ability to retain existing customers and attract new customers for our e-commerce, marketing and listing services;

 

·our ability to successfully introduce new service offerings on our platform;

 

·the amount and timing of our operating expenses and capital expenditures;

 

·the adoption of new, or changes to existing, governmental regulations;

 

·a shortfall in our revenues relative to our forecasts and a decline in our operating results; and

 

·economic conditions in general and specific to the real estate industry and to China.

 

These factors are difficult to discern in our historical results since our revenues have grown rapidly in recent years. As a result, you should not rely on our quarter-to-quarter comparisons of our results of operations as indicators of likely future performance.

 

Failure to continue to develop and expand our content, service offerings and features, and to develop or incorporate the technologies that support them, could jeopardize our competitive position.

 

As an Internet portal company, we participate in an industry characterized by rapidly changing technology and new products and services. To remain competitive, we must continue to develop and expand our content and service offerings. We must also continue to enhance and improve the user interface, functionality and features of our websites and mobile apps. These efforts may require us to develop internally, or to license, increasingly complex technologies. In addition, many of our competitors are continually introducing new Internet-related products, services and technologies, which will require us to update or modify our own technology to keep pace. Developing and integrating new products, services and technologies into our existing businesses could be expensive and time-consuming. Furthermore, such new features, functions and services may not achieve market acceptance or serve to enhance our brand loyalty. We may not succeed in incorporating new Internet technologies, or, in order to do so, we may incur substantial expenses. If we fail to develop and introduce or acquire new features, functions, services or technologies effectively and on a timely basis, we may not continue to attract new users and may be unable to retain our existing users, which could affect our marketability as a popular advertising and listing media. If we are not successful in incorporating new Internet technologies, our future profitability and revenue growth could be materially and adversely affected.

 

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Our revenues and profitability could suffer if we are unable to successfully implement our growth strategies or manage our growth effectively.

 

We intend to grow our business by rolling out our full suite of services, including marketing, listing and e-commerce services to more cities across China. We also plan to expand into new sectors. For example, we recently launched our financing business with a focus on real estate purchases. However, some of our growth strategies relate to new services and technologies for which there are no established markets in China or relate to services, technologies, new geographic markets or new businesses in which we have limited or no experience. We do not have experience providing these services and may not select the right third parties to partner with. Moreover, due to the breadth and diversity of the PRC real estate market and the PRC microfinance market as well as other industries and sectors we plan to expand into, our business model may not be successful in new and untested markets as demand and preferences may vary significantly by region. As a result, we may not be able to leverage our experience to expand into other parts of China or to enter into businesses with respect to new products or services. We cannot assure you that we will be able to successfully grow our business in our existing cities. There can be no assurance that we will be able to enter new geographic markets or deliver new services and technologies on a commercially viable basis or in a timely manner, or at all. If we are unable to successfully implement our growth strategies, our revenues and profitability may not grow as we expect, and our competitiveness may be materially and adversely affected.

 

Increases in the volume of our website traffic as a result of our expansion into new geographic regions could also strain the capacity of our existing computer systems, which could lead to slower response times or system failures. This would cause the number of real estate search inquiries, advertising impressions, other revenue producing offerings and our informational offerings to decline, any of which could significantly reduce our revenue growth and our brand loyalty. We may need to incur additional costs to upgrade our computer systems in order to accommodate increased demand if our systems cannot handle current or higher volumes of traffic. Mismanagement of any of our services in new or existing markets or the deterioration of the quality of our services could significantly damage our brand names and reputation and adversely impact our ability to attract and retain customers and visitor traffic.

 

Our growth plans place a significant demand on our management, systems and other resources. In addition to training and managing a growing workforce, we will need to continue to develop and improve our financial and management controls and our reporting systems and procedures. We cannot assure you that we will be able to efficiently or effectively manage the growth of our operations, and any failure to do so may limit our future growth and have a material adverse effect on our business, financial condition and results of operations.

 

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We rely on the creditworthiness of our borrowers, which may limit our ability to recover from a defaulting borrower.

 

We recently launched our financial services focusing on the provision of loans to home buyers, real estate developers and other borrowers. A significant portion of our loan portfolio consists of unsecured loans. As of December 31, 2015, 94.2% of our outstanding loans receivable were unsecured. We have implemented credit evaluation procedures to enable us to select borrowers based on their creditworthiness. However, we do not have significant experience with assessing creditworthiness and loan underwriting and, as a result, our evaluation may not be reliable. We also do not have experience in collecting loans in default or working with borrowers to resolve payment difficulties with their loans. Our ability to recover payments from defaulting borrowers of unsecured loans may be more limited than those secured by collateral or mortgage. For our secured loans, the value of collateral securing our loans is subject to change, and may fall below the outstanding amount of the loans and thus be insufficient to cover our loss in the event of a customer default.

 

Our borrowers’ ability to repay our loans is affected by a number of factors including economic development in the regions where these borrowers reside or operate, market conditions in the industries where these borrowers conduct business, development of these borrowers’ businesses, borrowers’ employment situations and, in particular, the conditions of the real estate market in China. If our borrowers default, we may apply to enforce our claims against the defaulting borrowers and their assets, including the collateral pledged to us, through court proceedings. However, the procedures for enforcing the assets and liquidating or otherwise realizing the value of the assets may be protracted or ultimately unsuccessful, and the enforcement process may be difficult for various reasons. As a result, if our borrowers default for any reason, our business, results of operations and financial condition may be materially and adversely affected.

 

As our financing business focuses on individuals for real estate purchases, we are exposed to greater credit risk than lenders that have a more diversified loan portfolio.

 

There are inherent risks associated with our financing business, including credit risk, which refers to the risk that a borrower may default on the repayment of our loan. Our newly launched financing business focuses on the provision of financial solutions to individuals for real estate purchases. These borrowers generally have limited financial resources to weather any adverse change in their financial condition, and therefore may expose us to greater credit risk compared to lenders focusing on corporate lending where the borrower has greater financial resources. Conditions such as inflation, economic downturn, local policy changes, and other factors beyond our control may also increase our credit risk more than such events would affect lenders with a more diversified loan portfolio.

 

In addition, since we provide financial solutions primarily to support real estate purchases, our financing business is indirectly affected by the overall conditions of the real estate market in China. In recent years, the PRC government has adopted policies aimed specifically at controlling growth in the real estate market, and as a result the PRC real estate market experienced a slowdown and real estate development declined in 2014. Although commencing in the second half of 2014, the PRC government has begun to loosen mortgage restrictions, the demand in the real estate market in China has weakened, particularly in tier 3 and tier 4 cities. These economic trends may negatively affect the demand for our financial solutions, the value of the borrowers’ real estate assets, including collateral used to secure our loans, and the borrowers’ ability to repay our loans, thereby exposing us to greater credit risk than lenders that have a more diversified loan portfolio.

 

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Changes in the interest rates and spread could negatively affect the revenue generated from our financing business.

 

Our financing business generates revenue primarily from interest income. The interest rates we charge the borrowers are linked to the PBOC benchmark rate, which may fluctuate significantly due to changes in the PRC government’s monetary policies. If we are required to lower the interest rates we charge our borrowers to reflect the decrease in the PBOC benchmark interest, the interest earned from our loans will decline. Furthermore, we may face fierce price competition, and as a result we may also lower our interest rates. Either case could negatively affect the revenue generated from our financing business.

 

We face intense competition in the real estate brokerage business in China.

 

Competition in the real estate service industry in China is intense, especially in major urban centers. Our newly launched online real estate brokerage services compete with nationwide real estate brokerage firms and regional competitors in each of the regions where we operate. Real estate brokers compete for sales and marketing business primarily on the basis of the services offered, reputation, brand recognition, sales network, local expertise and brokerage commission rates. Many of these companies have longer operating history, stronger brand recognition, more extensive sales networks and broader service offerings. Some of them may also have greater financial resources than we do. Competition could force us to reduce commission rates and increase expenses for recruiting and retaining sales professionals.

 

In addition, some of the real estate brokerage companies that we compete with are also customers of our listing and other services. As we expand our online real estate brokerage business, these customers may cease doing business with us and change to other marketing platforms, which would materially and adversely affect our business, our financial condition and results of operations.

 

The members of our senior management team, in particular, Mr. Vincent Tianquan Mo (“Mr. Mo”), our founding shareholder, director, executive chairman and chief executive officer, have played an important role in the growth and development of our business, and if we are unable to continue to retain their services, our business, financial condition and results of operations could be materially and adversely affected.

 

Our future success is significantly dependent upon the continued services of our senior management. In particular, Mr. Mo has played an important role in the growth and development of our business. To date, we have relied heavily on the expertise and experience of Mr. Mo and other senior management personnel in our business operations, including their extensive knowledge of the PRC real estate market, their strong reputation in the PRC real estate industry, and their relationships with our employees, relevant regulatory authorities and many of our customers. If Mr. Mo or other senior management personnel are unable or unwilling to continue in their present positions, we may not be able to locate suitable or qualified replacements and may incur additional expenses to identify their successors. In addition, if Mr. Mo or other senior management personnel joins a competitor or forms a competing company, we may lose our customers, and our collaboration arrangements may be disrupted, which would have a material adverse effect on our business, financial condition and results of operations. We do not maintain key-man insurance for Mr. Mo or other senior management personnel.

 

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Failure to attract and retain qualified personnel could jeopardize our competitive position.

 

As our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to attract and retain quality sales, technical and other operational personnel in the future. We have from time to time in the past experienced, and we expect in the future to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. We cannot assure you we will be able to attract or retain the quality personnel that we need to achieve our business objectives. If we fail to successfully attract new personnel or retain and motivate our current personnel, we may lose competitiveness and our business, financial condition and results of operations could be materially and adversely affected.

 

We may be subject to intellectual property infringement or misappropriation claims by third parties, which may force us to incur substantial legal expenses and, if determined adversely against us, could materially disrupt our business.

 

We cannot be certain that our services and information provided on our websites and mobile apps do not or will not infringe patents, copyrights or other intellectual property rights held by third parties. From time to time, we may be subject to legal proceedings and claims alleging infringement of patents, trademarks or copyrights, or misappropriation of creative ideas or formats, or other infringement of proprietary intellectual property rights.

 

We have applied to register in China the Chinese and English dual-language “SouFun” trademark as well as “SouFun” in English and “搜房” (“SouFun” in Chinese) individually, and have successfully registered such trademarks in some industry categories, but our applications for certain other industry categories conflict with existing registrations or applications for similar trademarks by another PRC company in such industry categories, which have resulted in ongoing litigations. In 2015, we obtained new trademarks “Fang.com” in English and “房天下” (“Fang Tian Xia” in Chinese) and began to market our services under these new brands in connection with the transformation of our business model. We therefore do not currently expect our business would be materially and adversely affected even if we eventually do lose the right to use the trademark relating to “SouFun” in certain limited industry categories.

 

Moreover, we have previously been involved in disputes arising from alleged infringement of third parties’ copyrights on our websites and mobile apps, such as the use of photos or articles to which we did not have the rights, which led to judgments against us. We could be subject to similar claims, suits or judgments in the future if we post information to which we do not have the rights. Any such claims, regardless of merits, may involve us in time-consuming and costly litigation or investigation and divert significant management and staff resources. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property and may also be ordered to pay fines or monetary damages. As a result, we would be required to enter into expensive royalty or licensing arrangements or to develop alternative technologies, business methods, content or other intellectual property. We expect that the likelihood of such claims may increase as the number of competitors in our markets grows and as related patents and trademarks are registered and copyrights are obtained by such competitors. In addition, as we have expanded, and may continue to expand, our business into new geographical markets, we may be exposed to such claims in jurisdictions other than China and the scope of intellectual property protection in these overseas jurisdictions may be different from or greater than that in China. The intellectual property laws in overseas jurisdictions may also impose more stringent compliance requirements and cause more potential damages or penalties than those in China. Such claims in overseas jurisdictions, if successful, could require us to pay significant compensatory and punitive damage awards as well as expose us to costly and time-consuming litigation or investigations, all of which could materially disrupt our business and have a material adverse effect on our growth and profitability.

 

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We are exposed to potential liability for information on our websites and mobile apps and for products and services sold through our websites and mobile apps and we may incur significant costs and damage to our reputation as a result of defending against such potential liability.

 

We provide third-party content on our websites and mobile apps such as real estate listings, links to third-party websites, advertisements and content provided by customers and users of our community-oriented services. We could be exposed to liability with respect to such third-party information. Among other things, we may face assertions that, by directly or indirectly providing such third-party content or links to other websites, we should be liable for defamation, negligence, copyright or trademark infringement, or other actions by parties providing such content or operating those websites. We may also face assertions that content on our websites, including statistics or other data we compile internally, or information contained in websites linked to our websites and mobile apps contains false information, errors or omissions, and users and our customers could seek damages for losses incurred as a result of their reliance upon or otherwise relating to incorrect information. We may also be subject to fines and other sanctions by the government for such incorrect information. Moreover, our relevant consolidated controlled entities, as Internet advertising service providers, are obligated under PRC laws and regulations to monitor the advertising content shown on our websites and mobile apps for compliance with applicable law. Violation of applicable law may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the offending advertisements and orders to publish advertisements correcting the misleading information. In case of serious violations, the PRC authorities may revoke the offending entities’ advertising licenses and/or business licenses. In addition, our websites and mobile apps could be used as a platform for fraudulent transactions and third party products and services sold through our websites and mobile apps may be defective. The measures we take to guard against liability for third-party content, information, products and services may not be adequate to exonerate us from relevant civil and other liabilities.

 

Any such claims, with or without merit, could be time-consuming to defend and result in litigation and significant diversion of management’s attention and resources. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims and suffer damage to our reputation.

 

Potential acquisitions and limited office and training facility purchases, which form part of our strategy, may disrupt our ability to manage our business effectively, including our ability to successfully integrate acquired businesses into our existing operations.

 

Potential acquisitions form part of our strategy to further expand and operate our business. Acquisitions and the subsequent integration of new companies or businesses will require significant attention from our management, in particular to ensure that the acquisition does not disrupt any existing collaborations, or affect our users’ opinion and perception of our services and customer support. In addition, our management will need to ensure that the acquired business is effectively integrated into our existing operations.

 

The diversion of our management’s attention and any difficulties encountered in integration could have a material adverse effect on our ability to manage our business. In addition, acquisitions could expose us to potential risks, including:

 

·risks associated with the assimilation of new operations, services, technologies and personnel;

 

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·unforeseen or hidden liabilities;

 

·the diversion of resources from our existing businesses and technologies;

 

·the inability to generate sufficient revenues to offset the costs and expenses of acquisitions; and

 

·potential loss of, or harm to, relationships with employees, customers and users as a result of the integration of new businesses.

 

For the risks and challenges associated with our anticipated acquisition of a controlling stake in Wanli, see “Item 3.D. Key Information—Risk Factors—Risks related to our business—Our anticipated acquisition of a controlling stake in Wanli, a company listed on the Shanghai Stock Exchange, may not be approved and consummated and may subject us to certain risks and challenges unique to the transaction structure and the PRC regulatory regime.”

 

In addition, in connection with our business expansion, we have acquired office space and facilities for our training and may continue to do so in the future if suitable opportunities arise. For more details on our recent office and training facility acquisitions, please see “Item 5.D. Operating and Financial Review and Prospects — A. Operating Results” and “Item 4. Information on the Company—Facilities” in this annual report. Acquisition of property has inherent risks, including the fluctuation of property value, which could potentially lead to potential asset write-off if the value of such properties were to substantially decrease.

 

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, which could result in harm to our business, loss of investor confidence in our financial reporting and a lower trading price of our ADSs or notes.

 

Effective internal controls are necessary for us to provide accurate and timely financial reports and effectively prevent fraud. We discovered in the past, and may in the future discover, areas of our internal controls involving deficiencies, significant deficiencies or material weaknesses that have required or will require improvements in our procedures on the preparation, review, approval and disclosure of financial reports.

 

Our management has concluded that our internal control over financial reporting was effective as of December 31, 2015. See “Item 15. Control and Procedures” of this annual report. Our independent registered public accounting firm has issued an attestation report on our management’s assessment of our internal control over financial reporting and has concluded that our internal control over financial reporting was effective as of December 31, 2015. A number of our internal control measures were implemented or strengthened recently to improve and address deficiencies in our controls. However, there is no assurance that we will be able to continue to implement effectively these or other new or improved controls or that our management or our independent registered public accounting firm will determine that our disclosure controls and procedures or our internal control over financial reporting will be effective in the future.

 

A lack of effective internal control over financial reporting in the future could result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time or as necessary to correct deficiencies or weaknesses in our controls, we may not be able to provide accurate financial statements, which could cause us to fail to meet our reporting obligations or provide accurate financial statements, and cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our ADSs.

 

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Certain of our leased property interests may be defective and we may be forced to relocate operations affected by such defects, which could cause significant disruption to our business.

 

As of December 31, 2015, we had leased properties in approximately 84 cities in China in addition to our principal executive offices in Beijing, China. A number of these leased properties, all of which were used as offices, contained defects in the leasehold interests. Such defects included the lack of proper title or right to lease and the landlords’ failure to duly register the leases with the relevant PRC government authority. A number of lease agreements were not renewed timely.

 

Under PRC laws, rules and regulations, in situations where a tenant lacks evidence of the landlord’s title or right to lease, the relevant lease agreement may not be valid or enforceable under PRC laws, rules and regulations, and may also be subject to challenge by third parties. In addition, under PRC laws, rules and regulations, the failure to register the lease agreement will not affect its effectiveness between the tenant and the landlord, however, such lease agreement may be subject to challenge by and unenforceable against a third party who leases the same property from the landlord and has duly registered the lease with the competent PRC government authority. Furthermore, the landlord and the tenant may be subject to administrative fines for such failure to register the lease.

 

We have taken steps to renew lease agreements and cause our landlords to procure valid evidence as to the title or right to lease, as well as to complete the lease registration procedures. However, we cannot assure you that such defects will be cured in a timely manner or at all. Our business may be interrupted and additional relocation costs may be incurred if we are required to relocate operations affected by such defects. Moreover, if our lease agreements are challenged by third parties, it could result in diversion of management attention and cause us to incur costs associated with defending such actions, even if such challenges are ultimately determined in our favor.

 

We have limited business insurance coverage in China.

 

The insurance industry in China is still at an early stage of development and PRC insurance companies offer only limited business insurance products. As a result, we do not have any business disruption insurance or litigation insurance coverage for our operations in China. Any business disruption, litigation or natural disaster may cause us to incur substantial costs and result in the diversion of our resources, as well as significantly disrupt our operations, and have a material adverse effect on our business, financial position and results of operations.

 

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Risks related to our corporate structure

 

If the PRC government determines that the structure contracts that establish the structure for our business operations do not comply with applicable PRC laws, rules and regulations, we could be subject to severe penalties or be forced to restructure our ownership structure.

 

As we are a Cayman Islands company and our PRC subsidiaries and their branch companies in China are treated as foreign-invested enterprises under applicable PRC laws, we are subject to ownership limitations as well as special approval requirements on foreign investment. Specifically, other than the exceptions provided in regulations and rules of the China (Shanghai) Pilot Free Trade Zone, see “Item 4.B. Information on the Company—Business Overview—Regulation—Regulation Relating to Our Business” of this annual report, foreign entities are not allowed to own more than a 50.0% equity interest in any PRC company operating an ICP business, and are only allowed to directly own 100.0% of the equity interest of a PRC company operating an advertising business if such foreign entity has at least three years of direct experience operating an advertising business outside China, or less than 100.0% of the equity interest in the advertising business if the foreign investor has at least two years of direct experience operating an advertising business outside China. Currently, we do not directly operate an advertising business outside China and cannot qualify under PRC laws, rules and regulations to invest directly in a PRC entity that provides advertising services in China and our PRC foreign-invested subsidiaries may be prohibited from providing advertising services.

 

To comply with applicable PRC laws, rules and regulations, we conduct our operations in China primarily through our wholly-owned PRC subsidiaries and our consolidated controlled entities. Our wholly-owned PRC subsidiaries, our consolidated controlled entities (excluding their subsidiaries) and their respective shareholders have entered into a series of contractual arrangements, which consist of exclusive technical consultancy and service agreements, equity pledge agreements, operating agreements, shareholders’ proxy agreements, loan agreements and exclusive call option agreements (collectively, the “Structure Contracts”). See “Item 7.B. Major Shareholders and Related Party Transactions—Related Party Transactions—Structure Contracts” of this annual report. As a result of these contractual arrangements, we exercise the ability to control the consolidated controlled entities through our power to direct the activities of consolidated controlled entities that most significantly impact their economic performance, and the obligation to absorb losses of or the right to all the residual benefits of the consolidated controlled entities that could potentially be significant to these entities. Accordingly, we consolidate their results in our financial statements. Our consolidated controlled entities hold the licenses and approvals that are essential to the operation of our Internet content distribution and advertising businesses. As certain agreements with our customers for Internet content distribution and advertising services were entered into directly with our PRC subsidiaries and not our consolidated controlled entities, there can be no assurance that the PRC government will not deem our Internet content distribution and advertising business to be in violation of applicable PRC laws, rules and regulations.

 

On July 13, 2006, MIIT publicly released the Notice on Strengthening the Administration of Foreign Investment in Operating Value-Added Telecommunications Business (the “MIIT Notice”), which reiterates certain provisions under China’s Administrative Rules on Foreign-Invested Telecommunications Enterprises prohibiting, among others, the renting, transferring or sale of a telecommunications license to foreign investors in any form. Under the MIIT Notice, holders of valued-added telecommunications business operating licenses, or their shareholders, must also directly own the domain names and trademarks used by such license holders in their daily operations. To comply with this requirement under the MIIT Notice, we have assigned all registered trademarks, trademark applications and domain names relating to “SouFun,” “Jia Tian Xia, ” “Fang.com” and “Fang Tian Xia” to the relevant majority-owned subsidiary or consolidated controlled entities in order to maintain their respective ICP licenses to operate as value-added telecommunication service providers. Due to a lack of interpretative materials from the authorities, we cannot assure you that MIIT will not consider our corporate structure and the contractual arrangements as a kind of foreign investment in telecommunication services, in which case we may be found in violation of the MIIT Notice.

 

In 2011, various media sources reported that the CSRC prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or what they would provide.

 

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Furthermore, in January 2015, MOFCOM published a draft bill of the Foreign Investment Law (the “Draft FIL”) for public comment, suggesting a possible overhaul of the existing foreign investment laws in China. Among other proposed changes, the Draft FIL seeks to introduce new measures to regulate structure contracts. It is not clear, however, when the Draft FIL will become effective, what approach it will adopt and how it will impact the structure contracts through which we hold the ICP licenses and operate the advertising businesses that are critical to our operation.

 

If the past or current ownership structures, Structure Contracts and businesses of our company, our PRC subsidiaries and our consolidated controlled entities are found to be in violation of any existing or future PRC laws, rules or regulations, MIIT and other relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

 

·revoking the business and operating licenses of our PRC subsidiaries or consolidated controlled entities, whose business and operating licenses are essential to the operation of our business;

 

·levying fines and/or confiscating our income or the income of our PRC subsidiaries and/or consolidated controlled entities;

 

·shutting down our servers or blocking our websites;

 

·discontinuing or restricting our operations or the operations of our PRC subsidiaries and/or consolidated controlled entities;

 

·imposing conditions or requirements with which we, our PRC subsidiaries and/or consolidated controlled entities may not be able to comply;

 

·requiring us, our PRC subsidiaries and/or consolidated controlled entities to restructure the relevant ownership structure, operations or contractual arrangements; and

 

·taking other regulatory or enforcement actions that could be harmful to our business.

 

We cannot assure you that the relevant PRC regulatory authorities will not require that we amend our Structure Contracts to comply with the MIIT Notice or that we can restructure our ownership structure without material disruption to our business. In addition, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. The imposition of any of these penalties and the effect of any new PRC laws, rules and regulations applicable to our corporate structure and contractual arrangements could materially disrupt our ability to conduct our business and have a material adverse effect on our financial condition and results of operations.

 

We cannot assure you that we will be able to enforce the Structure Contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are open to varying interpretations and the relevant government authorities have broad discretion in interpreting these laws and regulations.

 

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Substantial uncertainties exist with respect to the adoption of new or revised of PRC laws relating to our corporate structure, corporate governance and business operations.

 

In January 2015, MOFCOM published the Draft FIL, together with an accompanying explanatory note, for public comments until February 17, 2015, suggesting a possible overhaul of the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Draft FIL embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. As of the date of this annual report, MOFCOM had completed solicitation of comments from the public on the Draft FIL, but substantial uncertainties still exist with respect to its enactment timetable, interpretation and implementation. The Draft FIL, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

 

Among other changes, the Draft FIL expands the definition of foreign investment and introduces the principle of “actual control” in determining whether an investment is considered a foreign investment or domestic investment. The Draft FIL specifically provides that an entity established in China but “controlled” by foreign investors will be treated as a foreign investor, whereas an entity set up in a foreign jurisdiction but “controlled” by PRC entities and/or citizens would nonetheless be treated as PRC investors, provided that the entity should obtain such determination upon market entry clearance by the competent foreign investment authority. Our controlling shareholders, Media Partner and Next Decade, are owned by two irrevocable discretionary family trusts established by Mr. Mo, a PRC citizen; however, until the new PRC laws are finalized, we do not know if our company would be considered as ultimately controlled by PRC investor(s) or if the provisions for control by PRC investors will be adopted. The Draft FIL has not taken a position on what actions will be taken with respect to the existing companies with structure contracts, whether or not these companies are controlled by PRC investors. If the enacted version of the Foreign Investment Law mandates further actions, such as the MOFCOM market entry clearance or certain restructuring of corporate structure and operations, to be completed by companies with existing structure contracts like us, we may face substantial uncertainties as to whether these actions can be timely completed, or at all, and our business and financial condition may be materially and adversely affected.

 

The Draft FIL has no legal effect and it is unclear whether and how the legislative progress will proceed. However, if enacted as proposed, it may materially impact our corporate governance practice and increase our compliance costs. For instance, the Draft FIL includes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable foreign-invested enterprises. Aside from investment implementation reports and investment amendment reports that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

 

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We may lose the ability to utilize assets held by our consolidated controlled entities that are important to the operation of our business if any of these entities goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

 

Our wholly-owned PRC subsidiaries are considered foreign-invested enterprises in China and are, therefore, not permitted under PRC law to hold the ICP licenses (except for Shanghai Jing Rong, our majority-owned subsidiary, which are permitted to provide certain value-added telecommunications services based in China (Shanghai) Pilot Free Trade Zone) and to operate the online advertising businesses that are critical to our operations. As a result, our consolidated controlled entities are the holders of the ICP licenses required for operating our websites and our advertising business in China. We do not have any direct or indirect shareholding interests in these consolidated controlled entities. They are instead held directly or indirectly by Mr. Mo, our founder, executive chairman and chief executive officer, and Richard Jiangong Dai (“Mr. Dai”), our director (until February 2016 when he resigned) and former chief executive officer. Mr. Dai is a nephew of Mr. Mo. Both Mr. Mo and Mr. Dai are PRC citizens. Through the Structure Contracts, we exercise management, financial and voting control over these consolidated controlled entities through our rights to all the residual benefits of the consolidated controlled entities and our obligation to fund losses of the consolidated controlled entities and also have a contractual right, to the extent permitted by PRC laws, rules and regulations, to acquire the equity interests in these entities. Consequently, if any of these consolidated controlled entities goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of our consolidated controlled entities undergoes a voluntary or involuntary liquidation proceeding, the shareholders or unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

Contractual or other arrangements among our affiliates may be subject to scrutiny by PRC tax authorities, and a finding that we or our affiliates owe additional taxes could substantially reduce our profitability and the value of your investment.

 

As a result of the Structure Contracts, we are entitled to substantially all of the economic benefits of ownership of the consolidated controlled entities and also bear substantially all of the economic risks associated with consolidated controlled entities. If the PRC tax authorities determine that the economic terms, including pricing, of our arrangements with our consolidated controlled entities were not determined on an arm’s length basis, we could be subject to significant additional tax liabilities. In particular, the PRC tax authorities may perform a transfer pricing adjustment, which could result in a reduction, for PRC tax purposes, of deductions recorded by our consolidated controlled entities. Such a reduction could increase the tax liabilities of our consolidated controlled entities without reducing the tax liabilities of our PRC subsidiaries. This increased tax liability could further result in late payment fees and other penalties to our consolidated controlled entities for underpaid taxes. Any of these events could materially reduce our net income.

 

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Contractual arrangements, including voting proxies, with our consolidated controlled entities for our Internet content distribution and marketing businesses may not be as effective in providing operational control as direct or indirect ownership.

 

Since the applicable PRC laws, rules and regulations restrict foreign ownership in the Internet content distribution and marketing businesses, we conduct our Internet content distribution and advertising businesses and derive related revenues through the Structure Contracts with our consolidated controlled entities. As we have no direct or indirect ownership interest in our consolidated controlled entities, these Structure Contracts, including the voting proxies granted to us, may not be as effective in providing us with control over these companies as direct or indirect ownership. If we were the controlling shareholders of these companies with direct or indirect ownership, we would be able to exercise our rights as shareholders to effect changes in the board of directors, which in turn could effect change, subject to any applicable fiduciary obligations, at the management level. However, if any of our consolidated controlled entities or their shareholders fail to perform their obligations under these contractual arrangements, or if they were otherwise to act in bad faith towards us, we may be forced to (1) incur substantial costs and resources to enforce such arrangements, or if they were otherwise to act bad faith towards us, including the voting proxies, and (2) rely on legal remedies available under PRC law, including exercising our call option right over the equity interests in our consolidated controlled entities, seeking specific performance or injunctive relief, and claiming monetary damages.

 

Furthermore, pursuant to the equity interest pledge agreements between certain of our PRC subsidiaries and the individual shareholders of our consolidated controlled entities, each individual shareholder of our consolidated controlled entity agrees to pledge his equity interests in the consolidated controlled entities to our subsidiaries to secure the relevant consolidated controlled entities’ performance of their obligations under the exclusive technical consultancy and service agreements of the Structured Contracts. The equity interest pledges of shareholders of consolidated controlled entities under these equity pledge agreements have been registered with the relevant local branch of SAIC. The equity interest pledge agreements with the consolidated controlled entities’ individual shareholders provide that the pledged equity interest shall constitute security for consulting and service fees under the exclusive technical consultancy and service agreements. The scope of pledge is not limited by the amount of the registered capital of that consolidated controlled entity. However, it is possible that a PRC court may take the position that the amount listed on the equity pledge registration forms represents the full amount of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity interest pledge agreements in excess of the amount listed on the equity pledge registration forms could be determined by the PRC court as unsecured debt, which takes last priority among creditors. Such a decision could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

In anticipation of our proposed acquisition of a controlling stake in Wanli and the sale of a portion of our equity interest in the Target Companies to Wanli, in December 2015, we underwent an internal restructuring, whereby we terminated all of our previous structure contracts and caused Beijing Zhong Zhi Shi Zheng and Jia Tian Xia Network, our wholly-owned PRC subsidiaries, to enter into the current Structure Contracts with our consolidated controlled entities, with terms and conditions substantially similar to those of our previous structure contracts. See “Item 7.B. Major Shareholders and Related Party Transactions—Related Party Transactions—Structure Contracts” of this annual report. We believe that our contractual arrangements with our consolidated controlled entities for our Internet content distribution and marketing businesses are not materially affected by our internal restructuring. We cannot assure you, however, that our current Structure Contracts are as effective as the previous ones in terms of controlling our Internet content distribution and marketing businesses, nor can we assure you that these contractual arrangements will not be further modified in response to the development of our anticipated transactions with Wanli. Any modification could potentially adversely affect our control, or result in our loss of control, over the Internet content distribution and marketing businesses. In the event that we are unable to enforce these contractual arrangements, or if we experience significant delays or other obstacles in the process of enforcing these contractual arrangements, our business, financial condition and results of operations could be materially and adversely affected.

 

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Our business may suffer if we fail to carry out our newly adopted business arrangements related to the Target Companies’ online video broadcasting related business with certain consolidated controlled entity of our company.

 

In anticipation of our proposed transactions with Wanli, to continue their online video broadcasting related business, the Target Companies will cooperate with Beijing Technology, which holds licenses of online video recording and broadcasting, pursuant to certain business cooperation agreement, under which Beijing Technology will be responsible for the operation of online video broadcasting, while the Target Companies will be responsible for relevant technical support. During its possession of the domain name “fang.com,” Beijing Technology published online videos by embedding videos on webpages or placing video links on “fang.com.” After Shanghai Jing Rong acquired the domain name “fang.com” from Beijing Technology in April 2016, Beijing Technology has ceased to embed videos on “fang.com” and will conduct its online video broadcasting business only by placing video links through “fang.com”.

 

Although such business cooperation agreement does not violate current PRC laws and regulations regarding online broadcasting and recording, we cannot assure you that due to any change of laws and regulatory policies, the abovementioned business cooperation agreement will not be deemed void, revocable or unenforceable under then applicable PRC laws or by regulatory authorities in the future. Should any of the above occur, the relevant business of the Target Companies will be impaired, which would have a material adverse effect on our business, financial condition and results of operations.

 

The shareholders of our consolidated controlled entities may have potential conflicts of interest with us, and if any such conflicts of interest are not resolved in our favor, our business may be materially and adversely affected.

 

We operate through a number of consolidated controlled entities in China. Messrs. Mo and Dai together hold 100.0% of the equity interest in these consolidated controlled entities. The interests of Messrs. Mo and Dai as the controlling shareholders of the consolidated controlled entities may differ from the interests of our company as a whole, as what is in the best interests of our consolidated controlled entities may not be in the best interests of us and our other shareholders. We cannot assure you that when conflicts of interest arise, Messrs. Mo and Dai will act in the best interests of our company or that conflicts of interest will be resolved in our favor. In addition, Messrs. Mo and Dai may breach or cause our consolidated controlled entities and their respective subsidiaries to breach or refuse to renew the existing contractual arrangements with us. We rely on Messrs. Mo and Dai to comply with the laws of China, which protect contracts and provide that directors and executive officers owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains. We also rely on Mr. Mo to abide by the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict between the laws of China and the Cayman Islands regarding which corporate governance regime controls. If we cannot resolve any conflicts of interest or disputes between us and Messrs. Mo and Dai, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

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In addition, Mr. Dai continued to be a nominee shareholder of our consolidated controlled entities following his resignation from our board of directors in February 2016. We did not exercise, nor did we designate any third party to exercise, the call option under the Structure Contracts to acquire from Mr. Dai the equity interests he holds in our consolidated controlled entities. Although the relevant Structure Contracts to which Mr. Dai is a party remain to be effective and binding, we cannot assure you that we will be able to fully exercise our contractual rights against Mr. Dai (e.g., to request him to sell his equity interests in our consolidated controlled entities to us when permitted by applicable PRC laws). Nor can we assure you that Mr. Dai will not act against the best interests of us and our other shareholders in the future since he no longer owes any fiduciary duties to our company. Should we encounter any difficulties in exercising our contractual rights under the Structure Contracts against Mr. Dai to retain our control over the consolidated controlled entities, our business, financial condition and results of operations will be materially and adversely affected.

 

We are controlled by our significant shareholders and their affiliated entities, whose interests may differ from our other shareholders.

 

As of March 31, 2016, Mr. Mo may be deemed to have voting and dispositive power with respect to: (1) 1,277,518 Class A ordinary shares and 11,355,645 Class B ordinary shares owned by Media Partner Technology Limited (“Media Partner”), with respect to Mr. Mo and his family members, (2) 2,171,482 Class A ordinary shares and 11,985,145 Class B ordinary shares owned by Next Decade Investments Limited (“Next Decade”), with respect to Mr. Mo and his family members, (3) 1,738,706 Class A ordinary shares owned by Safari Group Holdings Limited (“Safari”) and Safari Group CB Holdings Limited (“Safari CB”), (4) 3,005,596 Class A ordinary shares owned by IDG Alternative Global Limited (“IDG Alternative”), and (5) 926,461 Class A ordinary shares owned by Karistone Limited, collectively presenting approximately 32.1% of our outstanding share capital and approximately 72.2% of our voting power under our dual-class ordinary share structure. The shares in Media Partner and Next Decade are held in irrevocable discretionary trusts, for which Mr. Mo acts as a protector. Media Partner and Next Decade could exert substantial influence over the outcome of any corporate transaction or other matters submitted to the shareholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs or notes. These actions may be taken even if they are opposed by our other shareholders, including the investors in the ADSs.

 

The continuing cooperation of our significant shareholders on an on-going basis, including Media Partner and Next Decade, is important to our businesses. Without their consent or cooperation, we could be prevented from entering into transactions or conducting business that could be beneficial to us. We cannot assure you, however, that the interests of our significant shareholders would not differ from the interests of our other shareholders, including investors in the ADSs.

 

Risks related to doing business in China

 

China’s economic, political and social conditions, as well as government policies, could have a material adverse effect on our business, financial condition and results of operations.

 

Our business and operations are primarily conducted in China. Accordingly, our financial condition and results of operations have been, and are expected to continue to be, affected by the economic, political and social developments in relation to the Internet, online marketing and real estate industries in China. A slowdown of economic growth in China could reduce the sale of real estate and related products and services, which in turn could materially and adversely affect our business, financial condition and results of operations.

 

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The PRC economy differs from the economies of most developed countries in many respects, including: a higher level of government involvement; the on-going development of a market-oriented economy; a rapid growth rate; a higher level of control over foreign exchange; and a less efficient allocation of resources.

 

While the PRC economy has experienced significant growth since the late 1970s, growth has been uneven, both geographically and among various sectors of the economy. Growth rates in China were lower in 2014 and may be lower in 2015 than in past years. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. These measures are intended to benefit the overall PRC economy, but may also have a negative effect on us. For example, our business, financial condition and results of operations could be adversely affected by PRC government control over capital investments or changes in tax regulations that are applicable to us.

 

The PRC economy has been transitioning from a centrally-planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s which emphasize the utilization of market forces for economic reform, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

 

The discontinuation of any of the preferential tax treatments currently available to us in China could materially and adversely affect our financial condition and results of operations

 

In March 2007, the National People’s Congress of China enacted the PRC Enterprise Income Tax Law (the “New EIT Law”), which became effective on January 1, 2008. In April 2008, the relevant PRC governmental authorities released qualification criteria and application and assessment procedures for “high and new technology enterprises,” which would be entitled to a statutory tax rate of 15.0%. Currently, six of our PRC subsidiaries or consolidated controlled entities are qualified as “high and new technology enterprises.” We cannot assure you that our PRC subsidiaries or consolidated controlled entities will continue to be entitled to preferential tax rates as qualified “high and new technology enterprises” under the New EIT Law. We also cannot assure you that the tax authorities will not, in the future, discontinue any of our preferential tax treatments, potentially with retroactive effect. In the event that preferential tax treatment for any of our subsidiaries or consolidated controlled entities is discontinued, the affected entity will become subject to a 25.0% standard enterprise income tax rate, which would increase our income tax expenses and could materially reduce our net income and profitability. See also “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Components of our Results of Operations—Taxation—China” of this annual report.

 

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We may be treated as a resident enterprise for PRC tax purposes under the New EIT Law and therefore be subject to PRC taxation on our worldwide income.

 

We are incorporated under the laws of the Cayman Islands. Under the New EIT Law and its implementation rules, an enterprise incorporated in a foreign country or region may be classified as either a “non-resident enterprise” or a “resident enterprise.” If any enterprise incorporated in a foreign country or region has its “de facto management bodies” located within the PRC territory, such enterprise will be considered a PRC tax resident enterprise and thus will normally be subject to enterprise income tax at the rate of 25.0% on its worldwide income. The relevant implementing rules provide that “de facto management bodies” means the bodies which exercise substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties and other factors of an enterprise. In April 2009, the SAT issued a Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies (“Circular 82”), which sets forth certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. However, Circular 82 only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners in China, such as our company. See “Item 10.D. Additional Information—Exchange Controls—Regulations relating to Foreign Exchange, Taxation and Dividend Distribution—Taxation and Dividend Distribution” of this annual report. Substantially all of the members of our management are currently located in China and we expect them to continue to be located in China. Due to the lack of clear guidance on the criteria pursuant to which the PRC tax authorities will determine our tax residency under the New EIT Law, it remains unclear whether the PRC tax authorities will treat us as a PRC resident enterprise. As a result, our PRC legal counsel is unable to express an opinion as to the likelihood that we will be subject to the tax applicable to resident enterprises or non-resident enterprises under the New EIT Law. If we are deemed to be a PRC tax resident enterprise, we will be subject to an enterprise income tax rate of 25.0% on our worldwide income, which would have an impact on our effective tax rate and an adverse effect on our net income and results of operations. The New EIT Law provides that dividend income between qualified resident enterprises is exempt income, which the implementing rules have clarified to mean a dividend derived by a resident enterprise on an equity interest it directly owns in another resident enterprise. It is possible, therefore, that dividends we receive through our offshore subsidiaries from our PRC subsidiaries, would be exempt income under the New EIT Law and its implementing rules if our offshore subsidiaries are deemed to be a “resident enterprise.” If we are deemed to be a PRC tax resident enterprise, we would then be obliged to withhold PRC withholding income tax on the gross amount of dividends we pay to shareholders who are non-PRC tax residents. The withholding income tax rate is 10.0% for non-resident enterprises and 20.0% for non-resident individuals, unless otherwise provided under the applicable double tax treaties between China and the governments of other jurisdictions.

 

We rely primarily on dividends and other distributions on equity paid by our subsidiaries, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business as well as our liquidity.

 

As a holding company, we rely primarily on dividends and other distributions on equity paid by our subsidiaries for our cash and financing requirements, which include funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and to pay our operating expenses. If our subsidiaries incur debt in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

 

Our subsidiaries are primarily entities incorporated and established in China and therefore, are subject to certain limitations with respect to dividend payments. PRC regulations currently allow payment of dividends only out of accumulated profits determined in accordance with accounting standards and regulations in China. Each year, our subsidiaries in China and our consolidated controlled entities are required to allocate a portion of their after-tax profits to their respective reserve funds, until the reserves reach 50.0% of their respective registered capital. Allocations to these reserves and funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Such restrictions on the ability of our subsidiaries and consolidated controlled entities to transfer funds to us could adversely limit our ability to grow, pay dividends, make investments or acquisitions that could benefit our businesses or otherwise fund and conduct our businesses.

 

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Under the relevant PRC tax law applicable to us prior to January 1, 2008, dividend payments to foreign investors made by foreign-invested enterprises were exempted from PRC withholding tax. However, under the New EIT Law and its implementing rules, non-resident enterprises without an establishment in China, or whose income has no connection with their institutions and establishment inside China, are subject to withholding tax at the rate of 10.0% with respect to their PRC-sourced dividend income, subject to applicable tax agreements or treaties between the PRC and other tax jurisdictions. Similarly, any gains realized on the transfer of shares by such investors are also subject to a 10.0% PRC income tax if such gains are regarded as income from sources within China.

 

According to the Mainland and Hong Kong Special Administrative Region Arrangement on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Avoidance of Double Taxation Arrangement”), dividends derived by a Hong Kong resident enterprise from a PRC resident enterprise are subject to withholding tax at the rate of 5.0%, provided that such Hong Kong resident enterprise directly owns at least 25.0% of the equity interest in the PRC resident enterprise. However, under the New EIT Law and its implementation rules, as well as Circular No. 601 issued by SAT in October 2009 (“Circular 601”) dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiaries may be subject to withholding tax at a rate of 10.0% if our Hong Kong subsidiaries cannot be considered as a “beneficial owner.” In June 2012, SAT further promulgated the Announcement on Determining the Beneficial Owners in Tax Agreement (“Circular 30”), which provides that the tax authorities shall make the decision based on a comprehensive consideration of all determining factors provided in Circular 601 rather than the status of a single determining factor.

 

We have obtained approval for a reduced withholding rate of 5.0% on the payment of dividends by two of our wholly-owned PRC subsidiaries through 2015. In the event that we were unable to renew this approval, the cost of moving our profits from our PRC entities outside of the PRC would increase substantially.

 

We hold equity interests in several of our major PRC subsidiaries indirectly through subsidiaries incorporated in Hong Kong. Neither we nor our PRC legal counsel is certain as to whether it is more likely than not that PRC tax authorities would require or permit our Hong Kong-incorporated subsidiaries to be treated as PRC resident enterprises. To the extent that such Hong Kong-incorporated subsidiaries are each considered a “non-resident enterprise” under the Avoidance of Double Taxation Arrangement, dividends derived by such Hong Kong-incorporated subsidiaries from our PRC subsidiaries may be subject to a maximum withholding tax rate of 10.0%. See “Item 10.E. Additional Information—Taxation—Regulation of Foreign Exchange, Taxation and Dividend Distribution—Taxation and Dividend Distribution” of this annual report.

 

The discontinuation of the previously available exemption from withholding tax as a result of the New EIT Law and its implementing rules have and will increase our income tax expenses and reduce our net income, and may materially reduce our profitability.

 

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PRC regulations on loans to PRC entities by offshore holding companies may affect our ability to capitalize or otherwise fund our PRC operations.

 

On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises (“SAFE Circular 142”), regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within China. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties.

 

On March 30, 2015, SAFE promulgated the Circular on the Reform of Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises (“SAFE Circular 19”), which will become effective on June 1, 2015. SAFE Circular 19 abolishes the SAFE Circular 142, provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise shall be used for purposes within its approved business scope, and allows a foreign-invested enterprise to use the RMB capital converted from its foreign currency registered capital for equity investments within China. However, such converted RMB capital still cannot be used to repay RMB loans between enterprises under the SAFE Circular 19. As SAFE Circular 19 was recently promulgated, it remains unclear how it will be interpreted and implemented.

 

In light of the various requirements imposed by PRC regulations on loans to PRC entities by offshore holding companies, we may not be able to obtain the necessary government approvals with respect to future loans by us to our wholly-owned subsidiaries or consolidated controlled entities or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

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We may be subject to fines and legal or administrative sanctions in connection with certain historical intra-group funding transactions.

 

We have occasionally engaged in intra-group funding transactions, including dividend distributions from our consolidated controlled entities and payment advances made by one subsidiary on behalf of another. These transactions are typically deemed as non-interest bearing loans and receivables from the relevant “debtors.”

  

Pursuant to the General Lending Code implemented in August 1996 by the PBOC, the central bank of China, commercial lending in China must be made by or through a PRC-qualified financial institution as defined under the General Lending Code. As none of the payors in our intra-group transactions is or was at the relevant time a PRC qualified financial institution as defined under the General Lending Code, the PBOC may impose a fine for non-compliance on each of the payors in an amount equal to one to five times the value of any income received from its non-compliance, and the payors may be required to terminate such loans. On August 6, 2015, the Supreme People's Court issued the Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases (the “Provisions”), which provides that if the purpose of a lending contract concluded between two enterprises is for their business operation, and the lending contract does not contain the circumstances as stipulated in Article 52 of the PRC Contract Law and Article 14 of the Provisions, i.e., those that will result in contracts being null and void, the people's court shall consider such lending contract to be effective. As the General Lending Code has not been repealed and the Provisions were issued by the Supreme People’s Court as guidance for courts’ trial in private lending cases, it remains uncertain how the General Lending Code will be interpreted and implemented. If the PBOC and/or other governmental authorities decide to apply the General Lending Code and thereby instruct the payors to terminate such transactions, we have to fully repay the funds advanced in such transactions.

 

Moreover, pursuant to the PRC Foreign Currency Administration Regulations promulgated by the State Council in January 1996, and amended in August 2008, a PRC entity is required to apply for SAFE approval prior to extending commercial loans to offshore entities such as our company. As there is no specific definition of “commercial loans” under the Foreign Currency Administration Regulations and PRC governmental authorities have not issued any implementation rules with respect to the provision of commercial loans to offshore entities. Accordingly, it is not clear whether such provision will be applied to the non-interest bearing loans described above. Under the Foreign Currency Administration Regulations, an entity may be required to correct the violation and be subject to a warning and/or a fine for the violation of the foreign registration administrative regulations. If SAFE determines that the PRC Foreign Currency Administration Regulations do apply to us, it may require us to register the deemed overseas loans and require us to rectify any prior non-compliance by properly obtaining SAFE approval. SAFE may also impose a warning and/or fine based on the PRC Foreign Currency Administration Regulations. We cannot assure you that we will be able to complete the necessary registration and filing procedures required by the PRC Foreign Currency Administration Regulations. In addition, it is not clear whether SAFE may consider the making of payments in Renminbi which should have been made in foreign currency to be foreign currency arbitrage, which may be deemed a violation and may subject a violator to warnings, penalties or other sanctions. Due to a general uncertainty over the interpretation and implementation of the PRC Foreign Currency Administration Regulations as well as the broad enforcement discretion granted to SAFE, we cannot assure you that we will not be subject to such warnings, penalties or other administrative penalties resulting from our intra-group transactions that may be deemed as overseas loans.

 

According to the New EIT Law, loan arrangements between related parties without interest are not considered arms-length transactions. Therefore, the PRC taxation authorities could impose enterprise income and business taxes on the payors for the deemed interest income with regard to the arrangements for our intra-group transactions. The deemed interest rate would be determined by reference to the lending rate over the relevant period published by the PBOC. We cannot assure you that we will not be subject to fines, or legal or administrative sanctions as a result of non-compliance with the General Lending Code and the Foreign Currency Administration Regulations. Further, we cannot assure you that the PRC taxation authorities will not impose enterprise income and business taxes on the payors for any deemed interest income with respect to for our intra-group transactions. Because the applicable PRC laws, rules and regulations do not provide clear definitions for several key terms and because the relevant PRC regulatory authorities have significant discretion on the interpretation of such matters, we cannot predict the likelihood that the risks described here will materialize.

 

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The PRC legal system embodies uncertainties, which could limit the legal protections available to you and us.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past 36 years has significantly enhanced the protections afforded to various forms of foreign investment in China. Our PRC operating subsidiaries are subject to laws and regulations applicable to foreign-invested enterprises in China. In particular, they are subject to PRC laws, rules and regulations governing foreign companies’ ownership and operation of Internet content distribution and advertising businesses as well as of the real estate sector. Such laws and regulations are subject to change, and their interpretation and enforcement involve uncertainties, which could limit the legal protections available to us and our investors. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of such laws, or the preemption of local regulations by PRC laws, rules and regulations.

 

Moreover, China has a civil law system based on written statutes, which, unlike common law systems, is a system in which decided judicial cases have little precedential value. Furthermore, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. The relative inexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of litigation. In addition, enforcement of existing laws or contracts based on existing laws may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement within China. All such uncertainties could materially and adversely affect our business, financial condition and results of operations.

 

Government control of currency conversion may limit our ability to utilize our revenues effectively.

 

Substantially all of our revenues and operating expenses are denominated in Renminbi. Under applicable PRC law, the Renminbi is freely convertible to foreign currencies with respect to “current account” transactions, but not with respect to “capital account” transactions. Current account transactions include ordinary course import or export transactions, payments for services rendered and payments of license fees, royalties, interest on loans and dividends. Capital account transactions include cross-border investments and repayments of the principal of loans.

 

Accordingly, our PRC subsidiaries currently may purchase foreign currencies for settlement of current account transactions, including payment of dividends to us, without prior SAFE approval by complying with certain procedural requirements. However, we cannot assure you that the relevant PRC governmental authorities will not limit or eliminate the ability of our PRC subsidiaries to purchase and retain foreign currencies in the future. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from or registration with relevant government authorities. This could affect our PRC subsidiaries’ ability to obtain debt or equity financing from outside China, including by means of loans or capital contributions from us.

 

Since substantially all of our revenues are denominated in Renminbi, including fees and payments from our PRC consolidated controlled entities pursuant to the Structure Contracts, existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund expenditures denominated in foreign currencies, including any dividends that our PRC subsidiaries may pay to us in the future.

 

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If SAFE determines that its foreign exchange regulations apply to us and our shareholding structure, a failure by our shareholders who are PRC citizens or residents to comply with these regulations may restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which may materially and adversely affect our business, financial position and results of operations.

 

Pursuant to the Circular on Relevant Issues concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic Residents through Overseas Special Purpose Vehicle (“Circular 37”), which was promulgated by SAFE and became effective on July 4, 2014, (1) a PRC resident must register with the local SAFE branch before such PRC resident contributes assets or equity interests in an overseas special purpose vehicle (“an Overseas SPV”), that is directly established or controlled by the PRC resident for the purpose of conducting investment or financing, and (2) following the initial registration, the PRC resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, a change in the PRC-resident shareholder of the Overseas SPV, name of the Overseas SPV, term of operation, or any increase or reduction of the registered capital of the Overseas SPV, share transfer or swap, and merger or division. Pursuant to Circular 37, failure to comply with these registration procedures may result in penalties, including the imposition of fines, criminal liability, and restrictions on the ability of the PRC subsidiary of the Overseas SPV to distribute dividends to its overseas parent. Circular 37 replaced a former SAFE circular commonly referred to as Circular 75 which became effective on November 1, 2005 and the relevant implementation notice.SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended Circular 37, requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

 

It remains unclear how Circular 37 will be interpreted and implemented, and how or whether SAFE will apply it to us. For example, the shares of Media Partner and Next Decade, two of our shareholders, are held in irrevocable discretionary family trusts established by Mr. Mo, of which Mr. Mo has represented that none of the trustees and beneficial owners is a PRC resident. However, since Mr. Mo, a PRC resident, was our indirect shareholder before the establishment of the family trusts, we have not been able to obtain confirmation from SAFE as to whether Circular 37 applies to us or Mr. Mo. We cannot predict how Circular 37 will affect our business operations or future strategies. If SAFE determines that Circular 37 does apply to us, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as any remittance of dividends or foreign currency-denominated borrowings, may be subject to compliance with Circular 37 requirements of our PRC resident shareholders. We cannot assure you that our PRC resident shareholders will be able to complete the necessary registration and filing procedures required by Circular 37. If Circular 37 is determined to apply to us or any of our PRC resident shareholders, a failure by any of our shareholders or beneficiary owners to comply with Circular 37 may subject the relevant shareholders or beneficiaries to penalties under PRC foreign exchange administrative regulations, and may subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which would have a material adverse effect on our business, financial condition, results of operations and liquidity as well as our ability to pay dividends or make other distributions to our shareholders.

 

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Regulations in China may make it more difficult for us to pursue growth through acquisitions.

 

On August 8, 2006, six PRC regulatory agencies promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules and other 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 MOFCOM 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 Notice regarding the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors issued by the General Office of the State Council in February 2011 and the Implementing Rules Concerning Security Review on the Mergers and Acquisitions by Foreign Investors of Domestic Enterprises issued by MOFCOM in August 2011, mergers and acquisitions by foreign investors involved in an industry related to national security are subject to strict review by MOFCOM. 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 MOFCOM or other government agencies may publish interpretations contrary to our understanding or broaden the scope of such security review in the future. Although we have no current plans to make any acquisitions, we may elect to grow our business in the future 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 MOFCOM, may delay or inhibit our ability to complete such transactions.

 

We may be subject to fines and legal or administrative sanctions if we or our PRC citizen employees fail to comply with PRC regulations with respect to the registration of such employees’ share options and restricted share units.

 

In February 2012, SAFE promulgated the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company (the “Stock Option Rule”). Under the Stock Option Rule, a Chinese entity’s directors, supervisors, senior management officers, other staff, or individuals which have an employment or labor relationship with such Chinese entity who are granted stock options by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures. Our local employees who have been granted stock options are subject to these regulations. We have designated our relevant PRC subsidiaries to handle the registration and other procedures required by the Stock Option Rule. If we or our PRC option holders fail to comply with these rules, we and our PRC option holders may be subject to fines and other legal or administrative sanctions. See “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations relating to Employee Share Options” of this annual report.

 

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We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies. Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

  

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (“Circular 698”) issued by the State Administration of Taxation, which became effective retroactively as of January 1, 2008, where a non-resident enterprise investor transfers equity interests in a PRC resident enterprise indirectly by way of disposing of equity interests in an overseas holding company, the non-resident enterprise investor, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at the rate of up to 10.0%. In addition, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.

 

On February 3, 2015, the State Administration of Tax issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises (“Public Notice 7”). Public Notice 7 has introduced a new tax regime that is significantly different from that under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Public Notice 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may re-characterize such indirect transfer as a direct transfer of the equity interests in the PRC tax resident enterprise and other properties in China. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of up to 10.0% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

We face uncertainties with respect to the reporting and consequences of private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. Our company and other non-resident enterprises in our group may be subject to filing obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions, and may be subject to withholding obligations if our company and other non-resident enterprises in our group are transferees in such transactions, under Circular 698 and Public Notice 7. For the transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Circular 698 and Public Notice 7. As a result, we may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company and other non-resident enterprises in our group should not be taxed under these circulars. The PRC tax authorities have the discretion under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under Circular 698 and Public Notice 7, our income tax costs associated with such transactions will be increased, which may have an adverse effect on our financial condition and results of operations. We have made acquisitions in the past and may conduct additional acquisitions in the future. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance to them for the investigation of any transactions we were involved in. Heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

 

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Our independent registered public accounting firm, Ernst & Young Hua Ming LLP, 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, Ernst & Young Hua Ming LLP, which issues the audit reports included in certain of our reports filed with the 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 (“PCAOB”), is required by the laws of the United States to undergo regular inspections by 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 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 PCAOB.

 

Inspection of other firms that 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 audit quality. The inability of 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 procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

Our independent registered accounting firm may be temporarily suspended from practicing before the SEC if it is unable to continue to satisfy SEC investigation requests in the future or involved in future dispute between the SEC and China-based accounting firms, which could create additional uncertainty about the status of audits of U.S.-listed PRC-based companies and may materially and adversely affect the liquidity and value of our ADSs.

 

In December 2012, the SEC instituted administrative proceedings against five PRC-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit papers and other documents related certain PRC-based companies that were publicly traded in the United States and which were the subject of certain ongoing SEC investigations. On January 22, 2014, an administrative law judge issued a decision, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months, including our independent registered public accounting firm. The administrative law judge’s decision was neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, the accounting firms filed an appeal with the SEC regarding the administrative law judge’s decision. On February 6, 2015, the accounting firms agreed to pay $500,000 each to settle this dispute with the SEC, which allows them to avoid a temporary suspension of their right to audit U.S.-traded firms. As part of the settlement, the SEC censured the accounting firms, requiring them to perform specific steps to satisfy SEC requests for documents over the next four years. We were not and are not the subject of any SEC investigations regarding the independent accounting firms nor are we involved in the proceedings brought by the SEC against the accounting firms. If the accounting firms including our independent registered public accounting firm were denied, temporarily or permanently, the ability to practice before the SEC, and we are unable to find timely another registered public accounting firm which can audit and issue a report on our financial statements, our financial statements could be determined to not be in compliance with the requirements for financial statements of public companies registered under the Exchange Act. Such a determination could ultimately lead to the delisting of our common stock from the New York Stock Exchange or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our common stock in the United States.

 

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Fluctuations in the exchange rates of the Renminbi could materially and adversely affect the value of our shares, ADSs or notes and result in foreign currency exchange losses.

 

Substantially all of our revenues, cash and cash equivalent assets, costs and expenses, are denominated in Renminbi, and the functional currency of our principal operating subsidiaries and consolidated controlled entities is the Renminbi. On the other hand, a portion of our expenditures are denominated in foreign currencies, primarily the U.S. dollar, and we use the U.S. dollar as our functional and reporting currency. The ADSs and our notes are also traded in U.S. dollars. As a result, the value of your investment in our ADSs or notes will be affected by fluctuations in exchange rates, particularly appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar and other foreign currencies, without giving effect to any underlying change in our business or results of operations.

 

The exchange rates between the Renminbi and the U.S. dollar and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. In July 2005, the PRC government discontinued pegging the Renminbi to the U.S. dollar. However, the PBOC regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate. Between July 2008 and June 2010, the exchange rate between the Renminbi and the U.S. dollar had been stable and traded within a narrow range. However, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the Renminbi had started to slowly appreciate against the U.S. dollar, though there have been periods when the U.S. dollar has appreciated against the Renminbi. On August 11, 2015, the PBOC allowed the Renminbi to depreciate by approximately 2% against the U.S. dollar. It is therefore difficult to predict how long such depreciation of Renminbi against the U.S. dollar may last and when and how the relationship between the Renminbi and the U.S. dollar may change again. Under China’s current exchange rate regime, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.

 

There remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from offshore financing transactions into Renminbi to pay our operating expenses, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs. Fluctuations in the exchange rate will also affect the relative value of any dividend we declare and distribute that will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make in the future. To the extent that we need to convert future financing proceeds into Renminbi for our operations, any appreciation of the Renminbi against the relevant foreign currencies would materially reduce the Renminbi amounts we would receive from the conversion. On the other hand, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments of dividends on our shares or for other business purposes when the U.S. dollar appreciates against the Renminbi, the amounts of U.S. dollars we would receive from such conversion would be reduced. In addition, any depreciation of our U.S. dollar-denominated monetary assets could result in a charge to our income statement and a reduction in the value of our assets.

 

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In addition, very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

 

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.

 

We are a company incorporated under the laws of the Cayman Islands. We conduct our operations in China and substantially all of our assets are located in China. In addition, certain of our directors and executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these directors and executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Our PRC legal counsel has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. Currently, there are no treaties between the United States and China for the recognition or enforcement of U.S. court judgments in China. As a result, recognition and enforcement in China of judgments of a court in the United States or any other jurisdiction in relation to any matter not subject to a binding arbitration agreement may be difficult. Pursuant to the PRC Civil Procedure Law, any matter, including matters arising under U.S. federal securities laws, in relation to assets or personal relationships may be brought as an original action in China, only if the institution of such action satisfies the conditions specified in the PRC Civil Procedure Law. As a result of the conditions set forth in the PRC Civil Procedure Law and the discretion of the PRC courts to determine whether the conditions are satisfied and whether to accept the action for adjudication, there remains uncertainty as to whether an investor will be able to bring an original action in a PRC court based on U.S. federal securities laws. In addition, in the event that foreign judgments contravene the basic principles of laws of China, endanger PRC state sovereignty or security, or are in conflict with the public interest of China, PRC courts will not recognize and enforce such foreign judgments.

 

Risks related to our ADSs, ordinary shares and notes

 

The market price movement of our ADSs and notes may be volatile.

 

The market prices of our ADSs and/or notes may be volatile and subject to wide fluctuations. Among the factors that could affect the prices of our ADSs and/or notes are risk factors described in this section and other factors, including:

 

·announcements of competitive developments;

 

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·regulatory developments in our target markets in China which affect us, our users, our customers or our competitors;

 

·actual or anticipated fluctuations in our quarterly results of operations;

 

·market acceptance of our existing and new services and our expansion from a media platform to media, transaction and financial platforms;

 

·failure of our quarterly financial and results of operations to meet market expectations or failure to meet our previously announced guidance;

 

·changes in financial estimates by securities research analysts;

 

·changes in the economic performance or market valuations of other online or offline real estate and home-related services companies;

 

·additions or departures of our executive officers and other key personnel;

 

·announcements regarding intellectual property litigation (or potential litigation) involving us or any of our directors and officers;

 

·negative publicity and short seller reports that make allegations against us or our affiliates, even if unfounded;

 

·fluctuations in the exchange rates between the U.S. dollar and the Renminbi;

 

·fluctuations in short or long-term interest rates;

 

·sales or perceived sales of additional ordinary shares, ADSs or notes, including under the registration statement we have on file with the SEC to enable certain of our affiliates to sell their shares; and/or

 

·following the anticipated acquisition of a controlling stake in Wanli, the market price of Wanli’s shares and the PRC stock market conditions.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular industries or companies. For example, the capital and credit markets have experienced significant volatility and disruption in recent years. In September 2008, such volatility and disruption reached extreme levels and developed into a global crisis. As a result, stock prices of a broad range of companies worldwide, whether or not they were related to financial services, declined significantly. Future market fluctuations may also have a material adverse effect on the market prices of our ADSs and/or notes.

 

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We may need additional capital, and the sale of additional ADSs, convertible notes or other equity securities could result in additional dilution to our shareholders, while the incurrence of debt may impose restrictions on our operations.

 

We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue and the expansion of our financial services. If these resources are insufficient to satisfy our cash requirements, we may seek to sell equity or debt securities or obtain a credit facility. The sale of equity securities would result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financing covenants that would restrict our operations.

 

As a foreign private issuer, we are permitted to, and we rely on exemptions from certain corporate governance standards of The New York Stock Exchange applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our ordinary shares, ADSs and notes.

 

We are a “foreign private issuer” under the securities laws of the United States and the rules of The New York Stock Exchange. Under the securities laws of the United States, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled registrants, as well as different financial reporting requirements. Under the rules of The New York Stock Exchange, a “foreign private issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of The New York Stock Exchange permit a “foreign private issuer” to follow its home country practice in lieu of the listing requirements of The New York Stock Exchange. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors or that we have annual meetings to elect directors. We currently rely on the exemptions provided by The New York Stock Exchange to a foreign private issuer and have an audit committee comprised of independent directors, a compensation committee with one non-independent director and a nominating and corporate governance committee with one non-independent director. As a result, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of The New York Stock Exchange.

 

As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which may afford less protection to our shareholders than they would enjoy if we were a U.S. company.

 

As a foreign private issuer, we are exempt from, among other things, the rules prescribing the furnishing and content of proxy statements under the Exchange Act. In addition, our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit and recovery provisions contained in Section 16 of the Exchange Act. We are also not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. As a result, our shareholders may be afforded less protection than they would under the Exchange Act rules applicable to U.S. companies.

 

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Since shareholder rights under Cayman Islands law differ from those under U.S. law, you may have difficulty protecting your shareholder rights.

 

Our corporate affairs are governed by our fifth amended and restated memorandum and articles of association, the Companies Law of the Cayman Islands (the “Cayman Companies Law”) and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us and to our shareholders 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 are under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

As a result, public shareholders of Cayman Islands companies may have more difficulty in protecting their interests in connection with actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.

 

The voting rights of holders of ADSs are limited by the terms of the deposit agreement.

 

A holder of our ADSs may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions of a holder of ADSs in the manner set forth in the deposit agreement and the restricted deposit agreement pursuant to which ADSs are issuable upon conversion of the notes, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under our amended and restated articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is 10 days. When a general meeting is convened, you may not receive sufficient notice to permit you to withdraw your ordinary shares and allow you to cast your vote as a direct shareholder with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if the ordinary shares underlying your ADSs are not voted as you requested.

 

You may not be able to participate in rights offerings and may experience dilution of your holdings.

 

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. We cannot offer or sell securities in the United States unless we register those securities under the Securities Act or unless an exemption from the registration requirements of the Securities Act is available. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the Securities Act. The depositary may, but is not required to, attempt to sell such undistributed rights to third parties in this situation. We can give no assurances that we will be able to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in any rights offerings and may experience dilution of their holdings as a result.

 

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If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

 

You may not receive distributions on ordinary shares or any value for them if it is illegal or impractical to make them available to you.

 

The depositary for our ADSs has agreed to pay to you the cash dividends or other distributions it or its custodian receives on ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. For example, as of the date of this annual report, five ADSs represent one Class A ordinary share. However, the depositary is not required to make such distributions if it decides that it is unlawful or impractical to make a distribution available to any holder of ADSs. For example, it would be unlawful to make a distribution to holders of ADSs if it consisted of securities that required registration under the Securities Act, but were not properly registered or distributed pursuant to an applicable exemption from registration. It could also be impracticable to make a distribution if doing so would entail fees and expenses that would exceed the value of the distribution or the distribution consisted of property that could not be transported or transferred. We have not undertaken any obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities that may be distributed to our shareholders. We also have not undertaken any obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive any distribution we make on our ordinary shares or any value for it if it is illegal or impractical for us to make such distribution available to you, such as if an exemption from registration under the U.S. securities laws is not available. These restrictions may decrease the value of your ADSs.

 

We may be required to withhold PRC income tax on any dividend we pay you, and any gain you realize on the transfer of our ordinary shares and/or ADSs may also be subject to PRC withholding tax.

 

Pursuant to the New EIT Law, we and our offshore subsidiariesmay be treated as a PRC resident enterprise for PRC tax purposes. See “—Risks related to doing business in China—We may be treated as a resident enterprise for PRC tax purposes under the New EIT Law and therefore be subject to PRC taxation on our worldwide income.” If we and our offshore subsidiaries are so treated by the PRC tax authorities, we would be obligated to withhold a 10.0% PRC withholding tax for non-resident enterprises or a 20.0% PRC withholding tax for non-resident individuals, or a withholding tax at a reduced rate as provided under the applicable double tax treaty between China and the governments of other jurisdictions on any dividend we pay to you, subject to completion of the record-filing procedures and approval from the relevant tax authorities, pursuant to a Circular No. 124 issued by SAT in August 2009 (“Circular 124”).

 

In addition, any gain realized by any investors who are non-resident enterprises or non-resident individuals of China from the transfer of our ordinary shares, ADSs and/or notes could be regarded as being derived from sources within China and be subject to a 10.0% or 20.0% PRC withholding tax, respectively. Such PRC withholding tax would reduce your investment return on our ordinary shares, ADSs and/or notes and may also materially and adversely affect the prices of our ADSs and/or notes.

 

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Our dual-class ordinary share structure with different voting rights could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

 

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to 10 votes per share. Five ADSs represent one Class A ordinary share and the number of votes to which each ADS would be entitled to is the number of Class A ordinary shares it represents. A number of our shareholders, including primarily Media Partner and Next Decade, whose shares are held in irrevocable discretionary trusts established by Mr. Mo, hold Class B ordinary shares. We intend to maintain the dual-class ordinary share structure. Each Class B ordinary share is convertible into one Class A ordinary share at any time by its holder and Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a Class B ordinary shareholder to any person or entity which is not a majority-owned and majority-controlled subsidiary of certain of our shareholders as set forth in our amended and restated articles of association, such Class B ordinary shares will be automatically and immediately converted into the equal number of Class A ordinary shares.

 

Due to the disparate voting powers attached to these classes of shares, our shareholders holding Class B ordinary shares have significant voting power over matters requiring shareholder approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. This concentrated control could discourage others from pursuing any potential merger, takeover or other change-of-control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

 

Our articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and ADSs

 

We have included certain provisions in our current articles of association that would limit the ability of others to acquire control of our company. These provisions could deprive our shareholders of the opportunity to sell their ordinary shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions. These provisions include the following:

 

·A dual-class ordinary share structure; and

 

·Our board of directors, without further action by our shareholders, may issue preferred shares with special voting rights compared to our ordinary shares.

 

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Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

 

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

 

We may incur more debt or take other actions which would intensify the risks discussed above.

 

We and our subsidiaries and consolidated controlled entities may incur substantial additional debt in the future, some of which may be secured debt. We will not be restricted under the terms of the indenture governing the notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing the notes that could have the effect of diminishing our ability to make payments on the notes when due.

 

We may not have the ability to raise the funds necessary to repurchase the 2018 Notes and 2022 Notes upon a fundamental change (as defined in the relevant note documents) or on December 15, 2016 (with respect to the 2018 Notes), and our future debt may contain limitations on our ability to repurchase the notes.

 

Holders of certain of our outstanding notes will have the right to require us to repurchase their notes upon the occurrence of a fundamental change (as defined in the relevant note documents) or on December 15, 2016 (with respect to the 2018 Notes) at a repurchase price equal to 100.0% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest under certain circumstances. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered therefor. In addition, our ability to repurchase the notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by the relevant note documents would constitute a default under such documents. A default under the relevant note documents or the fundamental change itself could also lead to a default under agreements governing any future indebtedness. If the repayment of any future indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes.

 

The future sale of substantial amounts of ADSs and/or convertible notes could lower the market price for the ADSs and/or our outstanding notes, as the case may be.

 

Sales of substantial amounts of ADSs and/or notes that may be converted or exchanged into ADSs or ordinary shares in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs, could materially impair our ability to raise capital through equity offerings in the future and could adversely impact the trading price of the ADSs and/or the notes. The ADSs outstanding not held by our affiliates are freely tradable without restriction or further registration under the Securities Act, and shares held by our affiliates may also be sold in the public market in the future subject to the restrictions in Rule 144 under the Securities Act. We may also issue additional options in the future which may be exercised for additional ordinary shares and additional restricted shares and restricted share units. As of March 31, 2016, we had 95,123,655 ordinary shares outstanding, 1,371,000 ordinary shares reserved for issuance under our outstanding share-based awards and 55,100 ordinary shares reserved for issuance under our employee benefit plans for future share-based awards. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs or the trading price of the notes.

 

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We may become a passive foreign investment company (“PFIC”), which could result in adverse U.S. tax consequences to U.S. investors.

 

A non-U.S. corporation is deemed a PFIC for any taxable year if either (1) at least 75% of its gross income for such year is passive income, or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. We operate an active real estate Internet portal in China. Based on the market price of our ADSs, the value of our assets, and the composition of our income and assets, we do not believe we were a PFIC for the taxable year ended December 31, 2015 and we do not believe that we are likely to become one in our current taxable year or any future tax years. The determination of whether a non-U.S. corporation is a PFIC is made on an annual basis after the close of each tax year. There can be no assurance that we will not be a PFIC for our current taxable year or any future tax year. One consequential factor affecting the outcome of annual PFIC determination in current and future tax years will be our market capitalization. Because items of working capital are generally treated as passive assets for PFIC purposes, accumulating cash, cash equivalents and other assets such as short-term and long-term investments that are readily convertible into cash increases the risk that we will be classified as a PFIC for U.S. federal income tax purposes. A determination that we are a PFIC could result in adverse U.S. tax consequences to you if you are a U.S. taxpayer and own our ADSs or ordinary shares, in the form of increased tax liabilities and burdensome reporting requirements. For example, if we were a PFIC, you would generally be taxed at the higher ordinary income rates, rather than the lower capital gain rates, if you dispose of ADSs or ordinary shares at a gain in a later year, even if we are not a PFIC in that year. In addition, a portion of the tax imposed on your gain would be increased by an interest charge. Certain elections may be available to certain of our holders, however, that would mitigate these adverse tax consequences to varying degrees. Also, if we were classified as a PFIC in any taxable year, you would not be able to benefit from any preferential tax rate (if any) with respect to any dividend distribution that you may receive from us in that year or in the following year. Since our business and assets may evolve over time in ways that are different from what we currently anticipate, we cannot assure you that we will not be a PFIC for our current taxable year or any future taxable year. For more information on the tax consequences to you if we were treated as a PFIC, see “Item 10.E. Additional Information—Taxation—U.S. federal income taxation” of this annual report.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

We were incorporated on June 18, 1999 as Fly High Holdings Limited, under the laws of the British Virgin Islands, and on July 14, 1999, we changed our name to SouFun.com Limited. On June 17, 2004, we changed our corporate domicile to the Cayman Islands, becoming a Cayman Islands exempted company with limited liability. On June 22, 2004, we changed our name to SouFun Holdings Limited. Since our inception, we have conducted our operations in China primarily through our PRC subsidiaries and consolidated controlled entities.

 

On September 17, 2010, we completed our initial public offering and listing of 2,933,238 ADSs, each representing four Class A ordinary shares, on the New York Stock Exchange, which are traded under the symbol of “SFUN.” Concurrently with our initial public offering, our majority shareholder, Telstra International Holdings Ltd. (“Telstra International”), an indirect, wholly owned subsidiary of Telstra Corporation Limited, a Fortune Global 500 company, sold to General Atlantic Mauritius Limited (“General Atlantic”), Hunt 7-A Guernsey L.P. Inc. (“Hunt 7-A”), Hunt 7-B Guernsey L.P. Inc. (“Hunt 7-B”), Hunt 6-A Guernsey L.P. Inc. (“Hunt 6-A,” together with Hunt 7-A and Hunt 7-B, “Apax”), Next Decade and Digital Link Investments Limited (“Digital Link”), all of its remaining shares in our company in a private sale at the initial public offering price.

 

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On February 18, 2011, we changed our ADS share ratio from one ADS representing four Class A ordinary shares to one ADS representing one Class A ordinary share.

 

On April 7, 2014, we changed our ADS share ratio from one ADS representing one Class A ordinary share to five ADSs representing one Class A ordinary share.

 

Our principal executive offices are located at F9M, Building 5, Zone 4, Hanwei International Plaza, No. 186 South 4th Ring Road, Fengtai District, Beijing 100160, the People’s Republic of China. Our telephone number at this address is +8610 5631 8000. Our website address is www.fang.com. We do not incorporate the information on our website into this annual report. You can obtain the reports we file with the SEC. See “Where you can find more information.”

 

B. Business Overview

 

Overview

 

We operate the leading real estate Internet portal in China in terms of the number of page views and visitors to our websites in 2015, according to Analysys, an independent market research institution commissioned by us. Our user-friendly websites and mobile apps support active online communities and networks of users seeking information on, and services for, the real estate and home-related sectors in China. Leveraging our Internet platform, we are developing our transaction and financing platforms by offering direct sales services for new homes, online real estate brokerage services and financial services to capture additional growth opportunities in the real estate market. Our service offerings include:

 

·E-commerce services: Our e-commerce services primarily include SouFun membership services, direct sales services for new homes, online real estate brokerage services, online home-decorating services and online sublease services. We provide both free and paid SouFun membership services to our registered members. Our free services include primarily regular updates regarding local property developments, tours to visit property developments and other services relating to property purchases. Our paid services primarily include offers to purchase properties at a discount from our partner developers and dedicated information and related services to facilitate property purchases. In August 2014, we launched our direct sales services, whereby we promote and sell properties primarily through our websites and mobile apps to home buyers for a predetermined percentage of fees charged to our developer clients. As part of our effort to develop our transaction platform, we began to offer online real estate brokerage services in January 2015, online home-decorating services and online sublease services in the second quarter of 2015. In addition, we offer an online marketplace and related e-commerce services to home furnishing and improvement vendors in China through our www.jiatx.com website. E-commerce services were our largest source of revenues in 2015.

 

·Marketing services: We offer marketing services on our websites and mobile apps, mainly through advertisements, to real estate developers in the marketing phase of new property developments, as well as to real estate agencies and suppliers of home furnishing and improvement and other home-related products and services who wish to promote their products and services. Marketing services were our second largest source of revenues in 2015.

 

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·Listing services: We offer basic and special listing services on our websites and mobile apps. Our basic listing services are primarily offered to real estate agents, brokers, developers, property owners and managers and suppliers of home furnishing and improvement and other home-related products and services. Our basic listing services allow our customers to post information of their products and services on our websites. Our special listing services offer customized marketing programs involving both online listings and offline themed events. Listing services were our third largest source of revenues in 2015.

 

·Financial services: We provide financial services though our online financial platform, www.txdai.com, and offline micro loan subsidiaries. We provide secured loans in the form of entrusted loans, mortgage loans and unsecured loans, primarily to home buyers, real estate developers and other borrowers that meet our credit assessment requirements. We launched financial services in August 2014.

 

·Other value-added services: We offer subscription-based access to our information database and research reports and “total web solution” services.

 

We have built a large and active community of users, who are attracted by the comprehensive real estate and home related content available on our portal that forms the foundation of our service offerings. We currently maintain approximately 100 offices across China to focus on local market needs. Our user base has also attracted numerous customers, which include real estate developers, real estate agents and brokers, property owners, property managers, mortgage brokers, lenders and suppliers of home furnishing and improvement and other home-related products and services. Our diverse offerings and broad geographic coverage have resulted in an active and dynamic online community that provides an effective and targeted channel for advertisers to market their products and services, and serves as a centralized source of information, products and services for consumers in the real estate and home furnishing and improvement and other home-related markets. We are further developing our business model to establish transaction and financing platforms. With our leading Internet portal, we believe that we are well positioned to develop integrated media, transaction and financing platforms, increase synergy and capture additional growth opportunities in the real estate market in China.

 

In 2013, 2014 and 2015, we had revenues of US$637.4 million, US$702.9 million and US$883.5 million, respectively, representing a compound annual growth rate (“CAGR”) of 17.7%. During the same periods, our net income (loss) attributable to our shareholders was US$298.6 million, US$253.2 million and (US$15.1million), respectively.

 

Our Services

 

We provide (1) e-commerce services, (2) marketing services, (3) listing services, (4) financial services and (5) other value-added services to participants in the PRC real estate and home-related sectors primarily through our websites and our mobile apps. In early 2015, we began a transformation from a pure Internet information platform to a transaction-oriented platform that spans online information provision, transaction and financial services, and as a result, our e-commerce businesses have grown rapidly and became the largest source of our revenues in 2015.

 

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E-commerce Services

 

Our e-commerce services, first launched in 2011, include SouFun membership services, direct sales services for new homes, online real estate brokerage services, online home-decorating services and online sublease services. Our revenues generated from e-commerce services were US$188.1 million, US$244.3 million and US$474.8 million in 2013, 2014 and 2015, respectively, representing 29.5%, 34.8% and 53.7% of our revenues, respectively.

 

SouFun Membership Services. We provide both free and paid membership services to the registered members of our SouFun cards on our websites and mobile apps. Our free services include primarily regular updates regarding local property developments, tours to visit property developments and other services relating to properties purchases. Our paid services primarily include offers to home buyers to purchase properties with discounts from our partner developers and dedicated information and related services to facilitate property purchases, which we began to offer in 2011. Our membership fees for paid services generally range from RMB5,000 to RMB20,000. The discount is reflected as a fixed amount off, or a percentage discount to, the total purchase price paid by a home buyer for a specified property, or a combination of both, which is determined by us and our partner developers. The discounts are significantly higher than our membership fees, resulting in net savings for our members. Membership fees are refundable until our members use the discounts to purchase properties. Our members pay a specified fee each time in order to be eligible for the discount provided for a particular property. To promote our services and reach additional customers, we may promote the property developments through other advertising channels and pay real estate agents for customer referrals. In 2015, we offered paid SouFun membership services covering approximately 3,000 property developments in 81cities in China. Our revenues from SouFun membership services totaled US$188.1 million, US$230.0 million and US$318.6 million in 2013, 2014 and 2015, respectively, or 29.5%, 32.7% and 36.1% of our total revenues for the same periods.

 

Direct Sales Services. We launched our direct sales services in August 2014. We promote property developments of our developer clients primarily through our websites and mobile apps. Different from our SouFun membership services, potential buyers can register with us free of charge if they are interested in any real estate properties covered by our direct sales services. After they register with us, we provide them with additional information about the properties and related services, such as tours to visit the property developments and other services to facilitate property purchases. By using our direct sales services, individual buyers can enjoy discounted prices for properties that we offer from our developer clients. We charge our developer clients a fee for each property they sold through our direct sales services. Our fee generally is a predetermined percentage of the value of the individual transaction.

 

Online Real Estate Brokerage Services. We launched our online real estate brokerage services in January 2015, which are currently offered in 28 major urban centers in China, such as Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, Chongqing, Wuhan and Nanjing. We plan to gradually expand our services into additional markets. We act as an intermediary between sellers and buyers of secondary real properties, and our services primarily include property listing, advisory services and transaction negotiation and documentation. In addition to property sales, we also assist property owners and potential renters with leasing transactions. Different from conventional real estate brokers in China, we do not maintain extensive physical sales offices and instead rely primarily on our websites and mobile apps to source customers. We believe this represents a significant cost advantage and allows us to offer competitive commission rates to our customers.

 

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Online Home-decorating Services. We launched our online home-decorating services in the second quarter of 2015. Based on our customer’s budget and plan for decoration, we engage third-party contractors to perform interior design, remodeling, renovating, furnishing and other home improvement services. We generally charge our customers a fixed fee based on the square footage of the premises undergoing decoration. We source customers primarily through our websites and mobile apps.

 

Online Sublease Services. We launched our online sublease services in the second quarter of 2015. We promote and market real properties leased from third parties on our websites and mobile apps, and sublease such properties to our customers for rental fees.

 

Online Marketplace Services. We provide online marketplace and related e-commerce services for the home furnishing and improvement sector through www.jiatx.com to third-party merchants of home furnishing and improvement products and services. Products sold on www.jiatx.com primarily include basic raw materials, furniture, home decoration items, hardware, bathroom accessories and kitchen utensils. We earn a commission, which ranges from 5% to 15% of the sales transaction amount, from the third-party merchants when a transaction is completed through our marketplace and online payment platforms.

 

Marketing Services

 

We target our marketing services toward participants in China’s real estate and home-related sectors. Marketing is one of our most important businesses. Revenues from marketing services were US$278.3 million, US$294.5 million and US$249.9 million in 2013, 2014 and 2015, respectively, representing 43.7%, 41.9% and 28.3% of our revenues, respectively. Our marketing services are delivered through our website www.fang.com and our mobile apps, which can be downloaded for both iOS- and Android-based operating systems, and include traditional Internet advertisements such as banners, links, logos and floating signs, as well as featured promotions, which are specially-tailored packages of traditional online advertising tools, such as Internet advertisements, combined with our other services. Customers of our marketing services include a broad range of participants in the PRC real estate and home-related sectors, such as:

 

·real estate developers;

 

·real estate professionals, such as agents and brokers;

 

·retailers and other suppliers of home furnishing and improvement products and services;

 

·home design, decoration and re-modeling companies; and

 

·banks offering residential mortgage loan products.

 

We also combine traditional online advertising tools with our other services to create featured promotion packages for our customers. Using the inherent flexibility of website advertising, we create customized marketing and promotional packages with additional features at the request of our customers to meet the different needs of various customers operating in diverse geographic markets in China. We believe that we have the opportunity to provide additional features to generate additional revenues without incurring significant additional costs. Marketing services have been and will continue to be a growth area for us, as we believe that participants in China’s real estate and home-related sectors are increasingly looking to the Internet and mobile apps as an additional vehicle through which to attract customers.

 

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We generally enter into two main types of marketing contracts with our customers. The first type is a framework contract with payment due on a monthly basis. The second type is a general contract with payment due on either a quarterly or semi-annual basis or with 50% of the contract amount payable within seven days of the execution of the contract and the remainder payable within seven days of the expiration of the contract. Our marketing contracts generally have a one-year term.

 

Listing Services

 

Our listing services include basic listing services and special listing services on our websites and mobile apps. Our revenues from listing services were US$161.5 million, US$145.7 million and US$107.9 million in 2013, 2014 and 2015, respectively, representing 25.3%, 20.7% and 12.2% of our total revenues in those years, respectively.

 

Basic Listing Services. Basic listing services contributed approximately 90.2%, 85.7% and 78.7% of our listing service revenues in 2013, 2014 and 2015, respectively. Real estate agents, brokers, managers, developers, owners and suppliers of home furnishing and improvement products and services subscribe to our basic listing services for a fee, which allow them to post listings for properties or home furnishing and improvement products and services over the subscription periods. All visitors to our websites and mobile apps have access to listing information free of charge.

 

Most of our basic listing subscription contracts are one to three months in duration. We typically collect payments for such subscriptions for our basic listing services upon the signing of a subscription contract. We also offer longer arrangements, such as to certain large real estate agencies. For subscription contracts with longer terms, the contract prices are generally payable in installments every one to three months until the end of the contract term.

 

We offer free trials of our basic listing services. These free trials allow users to experience our basic listing services and high user traffic. While there is no time restriction on our free trials, there are incentives for free trial users to upgrade their free trial accounts to paid subscriptions for our basic listing services because listings posted through free trial accounts are featured in less prominent positions and rankings than those of subscribers. The average number of paying subscribers to our listing services was 173,514, 175,537, and 206,791 in 2013, 2014 and 2015, respectively.

 

In addition, we allow individual property owners to list their own properties for sale or rent on our property listing sections without charge. Such free listings do not enjoy prime positioning and are strictly limited to individual, non-real estate professional home owners. To help prevent real estate professionals from abusing the individual property owner basic listing service, we have created a customer hotline for our users to report any abuse.

 

Our basic listing services help us build our comprehensive database of information regarding new, secondary and rental properties as well as home furnishing and improvement products and services in major urban centers across China. The large amount of our basic listings attracts significant user traffic on our websites and mobile apps, which we believe can be leveraged to yield more marketing and special listing customers and higher marketing and special listing fees from our institutional customers.

 

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We update the listing data on our websites and mobile apps on a daily basis through our proprietary content management process and software. This proprietary content management process is monitored by our listing monitoring team and allows our customers to submit listing information in a specific format. Our listing monitoring team periodically checks all listing information uploaded to our websites and mobile apps to identify common anomalies in posted information in order to limit unreliable data. Once we discover false information in a listing, we liaise with the real estate agent or broker to rectify the listing immediately. If such listing information is not revised on a timely basis, we will move it into a database that cannot be accessed by our users.

 

Special Listing Services. Special listing services are tailor-made marketing campaigns provided primarily to developers marketing new property developments. Revenues from special listing services were US$15.8 million, US$20.8 million and US$23.0 million in 2013, 2014 and 2015, respectively, representing 9.8%, 14.3% and 21.3% of our listing service revenues in those years, respectively.

 

Through collaboration among our research, product development and sales personnel, we identify property developments with similar attributes and create a plan for collectively promoting such property developments in a “special listing,” typically in the form of an online listing combined with an offline event. Once we determine a theme for a special listing program and identify suitable property developments for the program, our marketing and sales staff directly contact the targeted developers to solicit their participation in the special listing program. Each participating developer pays a specified fee to list its development in our special listing section for the duration of the program, which generally ranges from three months to one year. Some examples of our special listings include events and promotions for the top 100 PRC property developers and the China Villa Festival. For details, see “—Brand Awareness and Marketing—Event Sponsorships” below.

 

Financial Services.

 

We introduced our financial services and launched our financing platform through www.txdai.com in August 2014. Revenues from financial services were nil, US$3.2 million and US$29.6 million in 2013, 2014 and 2015, respectively, representing nil, 0.5% and 3.4% of our revenues, respectively. We provide secured loans in the form of entrusted loans and mortgage loans and unsecured loans primarily to home buyers, real estate developers and other borrowers that meet our credit assessment requirements. Our loans to home buyers and other borrowers are primarily originated through our online financial service channel on our website. We also promote our financial services to our customers to provide the increased convenience of one-stop real estate brokerage services. Most of our loans to home buyers are unsecured as they generally also borrow mortgage loans from commercial banks. We generally charge borrowers both interest and service fees. With respect to mortgage loans, after disbursement to the borrowers with our own funds, we will seek to sell them to investors on our website. The purchasers generally will receive interest at the same interest rates charged by us but do not receive any service fees from us or the borrowers. As we remain the holder of the security interest in the collateral, we provide a guarantee to the loan purchasers in case of default by the borrowers. We assess each individual loan receivable for impairment on a quarterly basis. As part of our impairment assessment, we consider the timeliness of collection to date, changes in the value of collateral provided by the borrowers and expected default rates. Our loans to real estate developers are generally secured loans. To comply with restrictions on non-financial institutions’ ability to provide loans to corporate borrowers under PRC law, we generally provide loans to real estate developers using an “entrusted loan” structure. Under our entrusted loan arrangements with commercial banks, we provide loans to borrowers with funds released by the commercial banks from our trust accounts at such banks. Commercial banks collect interest and principal payments from the borrowers on our behalf and receive service fees. We, as opposed to the commercial banks, bear the credit risk of our entrusted loans. See “—Regulation—Regulation on Entrusted Loans.” We obtained approvals to engage in the microfinancing business from government authorities of four cities, including Beihai, Shanghai, Chongqing and Tianjin. Our subsidiaries with microfinancing approvals may provide loans directly to corporate borrowers. There are no similar restrictions on loans to individual borrowers.

 

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Other Value-added Services

 

In addition to e-commerce, marketing, listing and financial services, we also provide other value-added services. Revenues from other value-added services were US$9.4 million, US$15.2 million and US$21.4 million in 2013, 2014 and 2015, respectively, representing 1.5%, 2.1% and 2.4% of our revenues, respectively.

 

Online Content Subscription and Research Services. We utilize our extensive PRC real estate database and research capabilities to provide online content relating to the real estate sector through our websites and mobile apps, such as real estate database access, research services, real estate industry and company-specific research reports and home furnishing and improvement-related research. Our customers include PRC real estate enterprises as well as government entities. Our research group, China Index Academy, combines our research department resources with an advisory panel of leading real estate experts and industry professionals. The advisory panel provides strategic research guidance, identifies key issues facing the PRC real estate market and acts as an advisory board to China Index Academy and us. We provide online content subscription services on either a flat-fee subscription basis for database access or a per-project basis for our research services. We charge subscription fees based on the number of databases that the subscriber would like to access.

 

“Total Web Solution” Services. “Total web solution” services help our customers integrate their services and products into our websites as well as to design their own websites. Customers interested in targeting consumers in the real estate and home furnishing and improvement and other home-related sectors often request our assistance with website management, establishing website traffic tracking tools and electronic bulletin board services, a type of online information service that offers a shared environment where visitors to the website can leave messages, retrieve messages, engage in online discussions and exchange information with other visitors. We believe our total web solution services enable us to enhance our relationship with our customers by providing an additional avenue through which we can cross-sell other services, such as e-commerce, marketing and listing services. We believe our total web solution services also serve as an effective tool to educate and train our customers in marketing strategies. Such training is particularly important for customers located in smaller cities where local Internet penetration and sophistication may be lower than the larger and more developed cities in China.

 

Our Websites

 

Our principal website, www.fang.com, is the leading real estate Internet portal and one of the leading home furnishing and improvement websites in China in terms of visitor traffic. As part of our effort to promote our brand recognition, we changed the address of our principal website from www.soufun.com to www.fang.com in July 2014. “Fang” means “home” in Chinese. We believe that this new and simplified address will be much easier for Chinese users to remember and access, thereby improving our brand recognition. According to Google Analytics, www.fang.com received a monthly average of approximately 100 million unique visitors in the fourth quarter of 2015. In addition, we had approximately 68 million registered members of our www.fang.com website and had about 25 million registered members of our free and paid SouFun membership services as of December 31, 2015.

 

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As of December 31, 2015, our www.fang.com website contained contents covering more than 629 cities across China, as well as Hong Kong, Taiwan, Singapore, Japan, United States, Canada, Australia, United Kingdom and Spain. This website also contains links to other specialized real estate and home furnishing and improvement websites, including our www.jiatx.com website, our e-commerce transaction and payment platform, and our www.txdai.com website, our financing platform.

 

We believe user satisfaction ultimately rests on the appeal, attraction and functionality of our websites. Our Internet technology and sales and marketing teams spend considerable time and resources upgrading and enhancing our websites based on market trends and feedback from users and our marketing and listing customers. We distinguish ourselves from other websites focused on real estate and home-related products and services through the quality and breadth of our content. We also maintain a centralized customer service hotline and e-mail reporting system through which users can obtain assistance or otherwise contact us.

 

Our www.fang.com website covers a wide spectrum of PRC real estate and home furnishing and improvement and other home-related information and constitutes the foundation and gateway for our primary business activities. We aim at providing a central forum of reliable information regarding China’s real estate and home-related markets that is helpful to market participants in the transaction process. Our content, which is generally free to our website users, is designed to assist users with each step of the real estate and home furnishing and improvement and other home-related transaction process. Our extensive home-related content and information is organized into the following sections and categories on our website, which are intended to address the individual needs of our users.

 

Online Property Listings and Search Engines for New Home and Secondary and Rental Properties

 

Our www.fang.com website contains databases for new home, secondary and rental properties, and provides search engines on such properties in our databases.

 

With our on-the-ground capabilities in approximately 100 offices in China, we devote significant resources to collect first-hand real estate market intelligence and listing information in such markets and to update such information on a regular basis. Our user-friendly search engines and website interfaces allow users to tailor their searches to specific types of properties by using search criteria. Users seeking information on properties in specific geographic locations can narrow their searches to a specific city and often to specific districts or areas in the vicinity of a particular subway line within that city by using pull-down menus. Users can further refine their searches using selection criteria, including price range, type of property, number of rooms and size. After selecting search parameters, users are directed to a page listing available properties as well as basic information about each individual property, including location, price, number of rooms and the source of the listing.

 

Information on Home Related Products and Services

 

Our www.fang.com website contains information regarding design firms, contractors, do-it-yourself projects, building materials and a wide range of products and services relevant to home decoration and re-modeling, furniture and other home furnishing and services. We provide an efficient platform for companies in the home-related sector, which primarily include suppliers of furnishing and improvement products and services and are usually small in size, to promote their brands and establish their presence on the Internet. We also provide search tools enabling visitors to search for specific businesses by area of expertise, product or service category. For example, a visitor interested in searching for suppliers and installers of window products in Beijing can use our pull-down search tools to focus their search for businesses providing such products and services.

 

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Other pull-down menus allow visitors to view numerous design concepts, model interior decoration plans or other home improvement ideas. After selecting search parameters, users are directed to a page listing applicable home furnishing and improvement products and services as well as basic information about each home furnishing and improvement product or service, including price, product and service information and the source of the information. Much of the content, pictures and graphics are provided by other users of the website, which allows people interested in home decoration and furnishing to share ideas and information online. Users can also use this section to find and compare the work and experience of architects and interior designers.

 

In early 2011, we launched our e-commerce services for the home furnishing and improvement sector through www.jiatx.com. We offer an online marketplace and related e-commerce services to suppliers of home furnishing and improvement products and services. Products sold on www.jiatx.com include basic suppliers of home raw materials, furniture, home decoration items, hardware, bathroom accessories and kitchen utensils.

 

Real Estate Database and Information

 

Supported by our research group, China Index Academy, our website provides an extensive database for users to search real estate information, as well as general research reports regarding the PRC real estate industry at both the national and regional levels. The research section of our website provides research coverage of different topics within the PRC real estate industry. For example, our research database contains information on topics such as real estate projects, land information, real estate financing information, real estate-related laws and regulations and real estate public company information. We believe our research section serves to raise our profile as experts on the PRC real estate industry. Supported by a dedicated research team and an advisory board of leading real estate experts and industry professionals, our research section offers a collective body of knowledge that we believe is well-known in the PRC real estate industry.

 

Online Residential Communities

 

We offer online residential community services through our website, www.fang.com. Such online residential community services provide a forum for visitors to share personal views, anecdotes and other information regarding different aspects of the PRC real estate market, specific property developments and residential communities and other subjects. They also provide a platform for conducting real estate and home furnishing and improvement and other home-related transactions online. We believe our electronic bulletin board forums, SouFun blogs and other online community-oriented services are valuable means for enhancing loyalty and brand awareness among our users by creating virtual communities sharing a common interest in PRC real estate and home-related topics. In addition to using such forums to increase website traffic, we are also exploring ways to generate new revenue streams from our online forums and community-oriented services.

 

Our Mobile Apps

 

We have developed a series of mobile apps to meet the diverse needs of home buyers, renters and real estate agents. As of March 31, 2016, we had 18 iOS- and 18 Android-based mobile apps, respectively. These mobile apps are downloadable through our websites and major app stores in China. At the end of 2015, approximately 65.0% of the daily active users were accessing our contents through our mobile platform (including WAP and mobile apps).

 

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Our National Coverage

 

Currently we provide real estate-related content, search services, marketing and listing coverage of more than 629 cities across China and have on-the-ground personnel located in approximately 100 offices across China. In addition, we began to offer e-commerce services in 2011, and our SouFun membership services had already extended to 81 cities as of December 31, 2015. We believe this extensive nationwide coverage enhances our national brand image, and enables us to deliver consistent and quality e-commerce, marketing and listing services to customers. The real estate industry is inherently a local industry, and online marketing and online listing services targeted at the real estate industry are most effective when delivered by personnel familiar with and experienced in the relevant local markets. Our local personnel also provide our central office staff with valuable data regarding these local real estate markets, which contributes to our knowledge and expertise about real estate markets throughout China. In addition, our network of branch offices helps us to tailor our e-commerce, marketing and listing services to local conditions and the needs of local real estate developers and real estate professionals, and to provide close after-sales support and services.

 

We have established a strong presence in 11 major cities, including Beijing and Shanghai, which are our level 1 cities, and Shenzhen, Chongqing, Tianjin, Chengdu, Guangzhou, Hangzhou, Wuhan, Suzhou and Nanjing, which are our level 2 cities. We entered these cities in the early stages of our development, and these cities have contributed and are expected to continue to contribute a majority of our revenues in the near future. In most of these cities, we offer our full line of services and target a full range of customers, including new home developers, agents, brokers, property managers and suppliers of home furnishing and improvement and other home-related products and services.

 

We also offer limited listing and other information relating to the real estate markets in Hong Kong, Taiwan, Singapore, Japan, United States, Canada, Australia, United Kingdom and Spain, but these markets do not constitute a material part of our business.

 

As part of our growth strategy, we also intend to expand our coverage areas to include additional cities across China. The expansion will focus on cities with populations of over one million, strong potential for GDP growth and housing development, high attractiveness for real estate and home furnishing and improvement investment, as measured by the scale of property development, and stable Internet infrastructure. We believe this expansion could further solidify our reputation as one of China’s leading real estate and home-related Internet companies, as well as provide us with new markets and sources of revenue.

 

Brand Awareness and Marketing

 

We believe our comprehensive content has made www.fang.com a leading destination website for real estate participants in China. In addition, we seek to promote our websites and mobile apps and the related “Fang Tian Xia” and other brands through our directed selling efforts and other means, including our support for research, academic organizations and the publication of various research reports, event sponsorships, portal collaboration arrangements and marketing alliances. As a result, we believe we have become commonly associated with China’s growing real estate and home-related sectors.

 

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Real Estate Research and Reports

 

We believe our knowledge of China’s real estate and home-related sectors provides a valuable competitive advantage and helps promote our brand name in the PRC real estate and furnishing and improvement market. The attractiveness of our e-commerce, marketing and listing services is rooted in our ability to commercialize various aspects of our databases and industry knowledge to create new and innovative services for our e-commerce, marketing and listing customers. To maintain and extend our leading position in this area, we seek to recruit and retain employees knowledgeable about China’s real estate and home-related sectors through a variety of incentive measures, including share-based compensation plans. Members of our research department produce research reports and provide other information services that help promote our reputation as an informed participant in China’s real estate and home-related sectors.

 

Event Sponsorships

 

We regularly sponsor real estate and home furnishing and improvement events attended by industry participants. We organized and hosted, both online and offline, 12 consecutive China Villa Festivals from 2004 to 2015, each of which is an annual event that attracts media, real estate professionals, economists and industry academics. This special listing event was coupled with a marketing program which promoted and advertised various villa projects across 100 cities in China. In March 2014, we also hosted our tenth annual conference in Beijing to announce the “Top 100 Property Developers in China” together with the Enterprise Economic Research Institute of the Development Research Center of the PRC State Council and the Institute of Real Estate Studies of Tsinghua University, two of China’s leading research institutions. Many PRC real estate developers and government agencies involved in the PRC real estate sector attended this conference. The event also attracted broad media attention and interest from the public in each of the past ten years that we held the event.

 

Portal Collaboration Arrangements

 

We work with well-known Internet portals to attract additional users to our websites and mobile apps. Our portal collaboration arrangements typically have terms ranging from one to three years, with fees paid to our portal collaboration partners in installments every three months.

 

We currently have portal collaboration arrangements with some of China’s larger Chinese-language portals to generate user traffic to our website.

 

Advertising and Marketing

 

We began to conduct general marketing and advertising activities to promote awareness of our new “Fang Tian Xia” and “Fang.com” brands in July 2014. We have also used outdoor advertisements in the Beijing Capital International Airport, bus bulletin boards and subway stations.

 

Our Sales Force

 

We have built a sales and marketing team that is experienced in the online advertising, Internet and real estate industries. As of December 31, 2015, our sales and marketing team consisted of approximately 23,442 persons located in approximately 100 offices across China. We also occasionally engage sales agents for collecting information on local markets or for specific business lines within local markets. Our sales and marketing team, together with these sales agents, work closely with our customers in local markets and help us gain insight into developments in these local markets, the competitive landscape and new market opportunities, which helps us to set our prices and strategies for each locality.

 

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Our sales and marketing personnel are divided into the new homes, secondary and rental properties, home furnishing and improvements and research product groups. This structure allows our sales and marketing personnel to gain expertise with a specific subset of customers within the market sectors that we target, and to effectively design and market tailored services to customers within each subset.

 

To motivate our sales and marketing personnel, a majority of their compensation consists of performance incentives such as commissions and bonuses. Sales quotas are assigned to all sales personnel according to monthly, quarterly and annual sales plans. In addition, we apply a merit based promotion system to motivate our sales personnel.

 

Because sales of online marketing services are highly competitive, we strongly emphasize training programs designed to improve the sales and marketing skills of our staff. We provide three types of training to our sales and marketing personnel: (1) mandatory entrance training for each new sales and marketing employee during a three-month probationary period, (2) rotation training that aims to rotate every sales and marketing employee in different posts for a certain period of time, and (3) regular training in which weekly seminars and case studies are conducted for sales and marketing personnel. Our combination of training, performance-based compensation and a merit based promotion system has been effective in identifying, motivating and retaining strong performers.

 

We also have key account sales representatives in Beijing that serve our approximately 170 key account customers, which are identified based on their reputation, the scope of their operations as well as the amount of their contracts with us. We appoint one designated contact person to serve each key account customer. Key account customers in our new home business are generally entitled to more benefits than our other customers, such as preferential service fee discounts and preferential positioning within our nationwide real estate listings. We also prepare press release and reports for our key account customers.

 

Information Technology Systems and Infrastructure

 

We maintain most of our servers and backup servers in Beijing and Shanghai. We believe our server hosting partners provide significant operating advantages, including high-quality bandwidth, constant room temperature and an enhanced ability to protect our systems from power loss, break-ins and other external causes of service interruption. We have not experienced any material system failures over the past 12 years.

 

To better serve our website visitors, we have utilized our key proprietary technologies and developed a technology platform that is specifically used for our real estate and home related Internet portal services. The key components of our technology platform include:

 

·Search platform. Our search platform is designed to support targeted searches of our listing databases. Besides the key word search function, our search platform provides additional search functions that improve search accuracy with various search criteria, including searches based on the location, price and type of the property. In addition, our search engine is able to refine the search by conditional filtering and aggregation of the search results.

 

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·Large-scale system infrastructure. With a combination of proprietary in-house and third-party solutions, we have designed our system to handle large amounts of data flow with a high degree of scalability and reliability. Our distributed architecture uses parallel computing technology and clusters of low-cost computers to handle high-volume visitor traffic and process large amounts of information.

 

·Anti-fraud and anti-spam technology. We have also developed a proprietary anti-fraud and anti-spam system through which we are able to detect fraudulent activities and identify and filter spam messages. We attempt to continuously improve the accuracy and effectiveness of this technology through machine-learning capability and customizable rules.

 

Seasonality

 

The real estate sector in China is characterized by seasonal fluctuations, which may cause our revenues to fluctuate significantly from quarter to quarter. The first quarter of each year generally contributes the smallest portion of our annual revenues due to reduced advertising and marketing activity of our customers in the PRC real estate industry during and around the Chinese Lunar New Year holiday, which generally occurs in January or February of each year. In contrast, the third quarter of each year generally contributes the largest portion of our annual revenues due to increased advertising and marketing activity of our customers in the PRC real estate industry as most property purchases take place in September and October of each year in terms of monthly transaction volumes. See “Item 3.D. Key Information—Risk Factors—Risks related to our business—You should not rely on our quarterly operating results as an indication of our future performance because our quarterly financial results are subject to fluctuations.”

 

Competition

 

We face competition from other companies in each of our primary business activities. We compete with these companies principally on the basis of website traffic volume, the quality and quantity of real estate and home furnishing and improvement listings and other information content, geographic coverage, service offerings and e-commerce, marketing and listing customers. We also compete for qualified employees with sales, real estate, home furnishing and improvement and other home-related products and services and Internet industry experience. We monitor our market share in the online advertising industry in China through market information gathered internally as well as from independent market research institutions such as Analysys and Talkingdata. Due to the nature of online residential real estate listings and the fact that the PRC market for residential real estate is a developing industry, there is limited independent third-party information on the market share of websites and mobile apps that provide residential real estate listings. To help assess our competitiveness and market position, our listing services division gathers information on the number and prices of paid online listing subscription accounts and similar information on our competitors from public sources for our internal records. Based on these internal records, we believe we are currently one of the leading Internet portals for residential real estate listings in China.

 

Some of our competitors may have greater access to capital markets, more financial and other resources and a longer operating history than us. For instance, major general-purpose Internet portals, such as Sina.com and Sohu.com, which provide real estate and home furnishing and improvement information services, may have an advantage over us due to their more established brand name, larger user base and extensive Internet distribution channels.

 

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Other existing and potential competitors include:

 

·real estate and home furnishing and improvement websites and mobile apps offering listing and marketing services in China including real estate websites and mobile apps sponsored or supported by local governments in China, which may be able to use such government connections to develop relationships with locally-active real estate developers;

 

·traditional advertising media such as general-purpose and real estate-focused newspapers, magazines, television and outdoor advertising that compete for overall advertising spending;

 

·websites and mobile apps focused on real estate research services in China; and;

 

·online listing service providers, including general-purpose Internet portals and regional websites and mobile apps dedicated to online listing. We believe the key players in the markets for online real estate marketing and listing services in China include E-House (China) Holdings, Sohu.com Inc.’s focus.cn, Leju Holdings Limited, Tencent’s fangqq.com, 58.com,Anjuke.com (acquired by 58.com in March 2015), Szhome.com and House365.com.

 

Although the barriers to entry for establishing many types of Internet-based businesses are low, we believe that certain key features of our marketing and listing businesses, together with the complexity of China’s real estate and home-related markets, make it difficult for competitors to grow quickly and compete successfully against us. Specifically, we believe our brand name in China’s real estate and home related Internet industry, the size and growth of our average daily user traffic, our customized e-commerce, marketing, listing and other value-added service offerings, our ownership of what we believe is one of the largest online real estate listing databases in China in terms of geographical coverage, including content coverage of more than 628 urban real estate markets in China as of December 31, 2015, and our relationships and in-depth knowledge of the real estate and home furnishing and improvement sectors provide us with an advantage over our competitors.

 

In addition to Internet based competitors, as we develop our transaction and financing businesses, we believe we will be increasingly competing with conventional real estate brokerage companies and financing companies that focus on providing financing to home buyers. As we are new to the real estate brokerage and financing businesses, many of our competitors have longer operating history, more established and extensive sales network and larger geographic coverage than us. Some of these market participants are also customers of our marketing and listing services. Our competition with them has affected and may continue to affect adversely our business relationships with them.

 

We believe that we and other domestic operators are likely to have a competitive advantage over international service providers who lack operational infrastructure and experience in China. We cannot assure you, however, that this competitive advantage will continue to exist, particularly if international operators establish joint ventures with, form alliances with or acquire domestic operators.

 

Intellectual Property

 

Our copyrights, trademarks, trade secrets, domain names and other intellectual property are important to our business. We rely on intellectual property laws and contractual arrangements with our key employees and certain of our customers, collaborators and others to protect our intellectual property rights. Despite these measures, we cannot assure you that we will be able to prevent unauthorized use of our intellectual property, which would adversely affect our business.

 

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Our applications for the “SouFun” trademark for certain industry categories in China conflict with existing registrations of or applications for similar trademarks, which have resulted in ongoing litigations. In April 2014, the Higher People’s Court of Beijing Municipality reversed a lower court’s judgment in favor of us and ordered the PRC Trademark Review and Adjudication Board of SAIC to reconsider another PRC company’s trademark application for “SOFANG” that it had previously rejected. In April 2015, the Supreme People’s Court of the PRC accepted our application for retrial over the judgment of the Higher People’s Court of Beijing Municipality. The Supreme People’s Court of the PRC is currently in the process of reviewing the supplemental evidence submitted by both parties to determine whether a retrial should be granted. See “Item 3.D. Key Information—Risk Factors—Risks related to our business—Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may materially and adversely affect our business, financial condition, results of operations, reputation and competitive advantage” and “—We may be subject to intellectual property infringement or misappropriation claims by third parties, which may force us to incur substantial legal expenses and, if determined adversely against us, could materially disrupt our business.” In 2015, we obtained new trademarks “Fang.com” in English and “房天下” (“Fang Tian Xia” in Chinese) and began to market our services under these new brands in connection with the transformation of our business model. We therefore do not currently expect our business would be materially and adversely affected even if we eventually do lose the right to use the trademark relating to “SouFun” in certain limited industry categories.

 

As of December 31, 2015, we held 230 registered copyrights and owned or licensed 210 registered trademarks in China. As of the same date, we had 301 trademark applications in various industry categories, pending with the PRC Trademark Office.

 

We have also filed applications to register certain trademarks in a number of other jurisdictions, including Hong Kong, Macao, Taiwan, Canada, Australia, France, Japan, Singapore, Spain, the United Kingdom and the United States.

 

As of December 31, 2015, we owned or licensed 989 registered domain names, including our official website, www.fang.com, and domain names registered in connection with www.jiatx.com, www.landlist.cn and www.txdai.com.

 

As of December 31, 2015, we had two registered patents and five patent applications relating to database maintenance and computer data backup under review by the State Intellectual Property Office of the People’s Republic of China.

 

Facilities

 

Our principal executive offices are located at F9M, Building 5, Zone 4, Hanwei International Plaza, No. 186 South 4th Ring Road, Fengtai District, Beijing 100160, the People’s Republic of China, with approximately 14,640 sq.m. of office space. As of December 31, 2015, we leased or owned properties with an aggregate gross floor area of approximately 517,405 sq.m. for our local offices across China. Our leased properties mainly consist of office premises, all of which are leased from independent third parties. We believe our existing leased and owned premises are adequate for our current business operations and that additional space can be obtained on commercially reasonable terms to meet our future requirements. See “Item 3.D. Key Information—Risk Factors—Risks related to our business—Certain of our leased property interests may be defective and we may be forced to relocate operations affected by such defects, which could cause significant disruption to our business.”

 

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We own an office building with a gross floor area of 325,000 square feet at 72 Wall Street, New York. We have primarily used this building as our global training center.

 

We own certain commercial properties of approximately 3,111 sq.m. in Sanya, Hainan province, China. We primarily use these properties as our local office.

 

We own a portion of a building known as the BaoAn Building located at 800 Dongfang Road, Pudong, Shanghai. The property has usable space of approximately 42,000 sq.m. and is currently used for offices, retail space and a hotel. We acquired the property to support our expansion in Shanghai and the East China region, which consists of 15 cities including Jiangsu provincial capital Nanjing and Zhejiang provincial capital Hangzhou.

 

In December 2013, we entered into an agreement with a real estate developer to purchase 22,402 sq.m. of office space in an office building being developed by the developer in Chengdu, Sichuan province, China for RMB232.5 million (US$38.1 million). In June 2014, we entered into an agreement to purchase an additional 24,226 sq.m. of office space and 373 parking spaces in the same building from the developer for a consideration of RMB345.0 million (US$56.4 million). As of December 31, 2015, we had fully settled the total purchase price of the office building and the parking spaces.

 

In November, 2015, we entered into a commercial properties purchase agreement with a real estate developer to purchase an office building in Beijing to be used as our new headquarters establishment with a total price approximately $243 million. This property has a total usable office space of approximately 70,000 sq.m. and is located at Guogongzhuang Middle Road, Fengtai District, Beijing, which we believe will provide strong support to our fast expanding headcounts and Beijing operations. As of December 31, 2015, the seller had delivered this property to us against a payment of half of the total purchase price totaling US$119.9 million.

 

Insurance

 

We maintain property insurance to cover potential damages to a portion of our property. In addition, we provide medical, unemployment and other insurance to our employees in compliance with applicable PRC laws, rules and regulations. We do not maintain insurance policies covering losses relating to our systems and do not have business interruption insurance.

 

Legal Proceedings

 

We are currently not involved in any material legal or arbitration proceedings, except for otherwise disclosed below. From time to time, we may be subject to claims and legal actions arising in the ordinary course of business, such as intellectual property infringement claims against us for use of others’ articles or photographs and employment disputes. Such claims or legal actions, even if without merit, could result in the expenditure of significant financial and management resources and potentially result in civil liability for damages.

 

In April 2014, the Higher People’s Court of Beijing Municipality reversed a lower court’s judgment in favor of us and ordered the PRC Trademark Review and Adjudication Board of SAIC to reconsider the other PRC company’s trademark application for “SOFANG” that it had previously rejected. In April 2015, the Supreme People’s Court of the PRC accepted our application for retrial over the judgment of the Higher People’s Court of Beijing Municipality. The Supreme People’s Court of the PRC is currently in the process of reviewing the supplemental evidence submitted by both parties to determine whether a retrial should be granted. See “Item 3.D. Key Information—Risk Factors—Risks related to our business—We may be subject to intellectual property infringement or misappropriation claims by third parties, which may force us to incur substantial legal expenses and, if determined adversely against us, could materially disrupt our business.”

 

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In October 2015, a purported securities class action lawsuit was filed in the United States District Court for the Central District of California against our company and two of our officers. The action is titled L&G Rubin Family Trust vs. Soufun Holdings Limited, Vincent Tianquan Mo and Lanying Guan, Case No. 3:2015-cv-08508. The plaintiffs allege that the defendants made false and misleading statements regarding our financial results for the first and second fiscal quarters of 2015, specifically by failing to disclose information concerning alleged “fake contracts” that were allegedly included in our financial results, and assert claims for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder on behalf of those persons and entities who purchased or otherwise acquired our ADSs between May 20, 2015 and October 27, 2015, inclusive. We believe the claims are without merit and intend to vigorously defend ourselves.

 

Regulation

 

Our business is subject to substantial regulation by the PRC government. This section sets forth a summary of certain significant PRC regulations that affect our business and the industries within which we operate. See “Item 3.D. Key Information—Risk Factors” which discusses risks related to regulation of our business and industry.

 

General

 

The telecommunications industry, including Internet information services and Internet access services, is highly regulated by the PRC government. Regulations issued or implemented by the State Council, MIIT and other relevant government authorities cover virtually every aspect of telecommunications network operations, including entry into the telecommunications industry, the scope of permissible business activities, interconnection and transmission line arrangements, tariff policy and foreign investment.

 

MIIT, under the leadership of the State Council, is responsible for, among other things:

 

·formulating and enforcing telecommunications industry policy, standards and regulations;

 

·granting licenses to provide telecommunications and Internet services;

 

·formulating tariff and service charge policies for telecommunications and Internet services;

 

·supervising the operations of telecommunications and Internet service providers; and

 

·maintaining fair and orderly market competition among operators.

 

In addition to the regulations promulgated by the central PRC government, some local governments have also promulgated local rules applicable to Internet companies operating within their respective jurisdictions.

 

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In 1994, the Standing Committee of the National People’s Congress promulgated the PRC Advertising Law. In addition, SAIC and other ministries and agencies have issued regulations that further regulate our advertising business, as discussed below.

 

Restrictions on Foreign Ownership in the Online Advertising Industry

 

Internet Content Provision and Wireless Value-Added Services

 

In September 2000, the State Council promulgated the Telecommunications Regulations, which categorize all telecommunications businesses in China as either basic telecommunications businesses or value-added telecommunications businesses. In February 2003, MIIT amended the original classification of telecommunications business with Internet content provision services and wireless value-added services being classified as value-added telecommunications businesses. In December 2015, MIIT further amended the classification of telecommunications business, which sets out in details of the information service business classification under the category of value-added telecommunications businesses. The Telecommunications Regulations also set forth extensive guidelines with respect to different aspects of telecommunications operations in China.

 

In order to comply with China’s commitments with respect to its entry into the World Trade Organization, the State Council promulgated the Administrative Rules on Foreign-invested Telecommunications Enterprises in December 2001, as amended in September 2008 and February 2016. The Administrative Rules on Foreign-invested Telecommunications Enterprises set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested telecommunications enterprise. Pursuant to these administrative rules, the ultimate capital contribution ratio of the foreign investor or investors in a foreign-invested telecommunications enterprise that aims to provide value-added telecommunications services may not exceed 50.0%. In addition, pursuant to the Foreign Investment Industrial Guidance Catalog issued by the PRC government, the permitted foreign investment in value-added telecommunications service providers may not be more than 50.0%. However, for a foreign investor to acquire any equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating a track record and experience in operating a value-added telecommunications business overseas. Moreover, foreign investors that meet these requirements must obtain approvals from MIIT and MOFCOM or their authorized local counterparts, which retain considerable discretion in granting approvals.

 

In July 2006, MIIT publicly released the MIIT Notice, which reiterates certain provisions under the 2002 Administrative Rules on Foreign-invested Telecommunications Enterprises. According to the MIIT Notice, if any foreign investor intends to invest in a PRC telecommunications business, a foreign-invested telecommunications enterprise must be established and such enterprise must apply for the relevant telecommunications business licenses. Under the MIIT Notice, domestic telecommunications enterprises may not rent, transfer or sell a telecommunications license to foreign investors in any form, nor may they provide any resources, premises, facilities and other assistance in any form to foreign investors for their illegal operation of any telecommunications business in China.

 

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Advertising Services

 

The principal regulations governing foreign ownership in advertising businesses in China include:

 

·The Foreign Investment Industrial Guidance Catalog;

 

·The Administrative Regulations on Foreign-invested Advertising Enterprises; and

 

·The Circular Regarding Investment in the Advertising Industry by Foreign Investors through Equity Acquisition.

 

These regulations require foreign entities that directly invest in the PRC advertising industry to have at least a two-year track record with a principal business in the advertising industry outside China. Since December 2005, foreign investors have been permitted to directly own a 100.0% interest in advertising companies in China, but such foreign investors are also required to have at least a three-year track record with a principal business in the advertising industry outside China. PRC laws, rules and regulations do not permit the transfer of any approvals or licenses, including business licenses containing a scope of business that permits engagement in the advertising business. In the event we are able to qualify to acquire the equity interest in certain consolidated controlled entities under the rules allowing complete foreign ownership, these PRC operating companies would continue to exist as the operators of our advertising business consistent with the current regulatory requirements. However, as a holding company, we have not been involved in advertising outside China for the required number of years.

 

As a result of current PRC laws, rules and regulations that impose substantial restrictions on foreign investment in the Internet and advertising businesses in China, we conduct this portion of our operations through a series of contractual arrangements among our PRC subsidiaries and our consolidated controlled entities.

 

In the opinion of our PRC legal counsel:

 

·each of the Structure Contracts is legal, valid and binding on the contracting parties under applicable PRC laws, rules and regulations;

 

·the execution, delivery, effectiveness, enforceability and performance of each of the Structure Contracts do not violate any published PRC laws, rules and regulations currently in force and effect;

 

·none of our Structure Contracts contravenes any published PRC laws, rules and regulations currently in force and effect; and

 

·no filings, registrations, consents, approvals, permits, authorizations, certificates and licenses of any PRC government authorities are currently required in connection with the execution, delivery, effectiveness, performance and enforceability of each Structure Contract, provided that the pledges of equity interests under the Structure Contracts should be registered with competent PRC government authorities, and provided further that the exercise of the call option in the future must be approved and registered by competent PRC government authorities.

 

However, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws, rules and regulations, including the laws and regulations governing the enforcement and performance of our Structure Contracts in the event of any imposition of statutory liens, bankruptcy and criminal proceedings. Accordingly, we cannot assure you that the PRC regulatory authorities will not ultimately take a contrary view from that of our PRC legal counsel. See “Item 3.D. Key Information—Risk Factors—Risks related to our corporate structure—If the PRC government determines that the structure contracts that establish the structure for our business operations do not comply with applicable PRC laws, rules and regulations, we could be subject to severe penalties or be forced to restructure our ownership structure” and “—Substantial uncertainties exist with respect to the interpretation and application of PRC laws relating to our corporate structure, corporate governance and business operations.”

 

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Regulation Relating to Our Business

 

Internet Content Provision Services

 

The provision of real estate and home-related and other content on Internet websites is subject to applicable PRC laws, rules and regulations relating to the telecommunications industry and the Internet, and regulated by various government authorities, including MIIT and SAIC. The principal regulations governing the telecommunications industry and the Internet include:

 

·The Telecommunications Regulations (Revised in 2016);

 

·The Catalog of Classes of Telecommunications Business;

 

·The Administrative Measures for Telecommunications Business Operating Licenses; and

 

·The Internet Information Services Administrative Measures.

 

Under these regulations, Internet content provision services are classified as value-added telecommunications businesses, and a commercial operator must obtain a telecommunications and information services operating license, or ICP license, from the appropriate telecommunications authority in order to carry out commercial Internet content provision operations in China. If an Internet content provider is not engaged in commercial Internet content operations, it is only required to file a record with the appropriate telecommunications authority. In addition, the regulations also provide that operators involved in Internet content provision in sensitive and strategic sectors, including news, publishing, education, health care, medicine and medical devices, must obtain additional approvals from the relevant authorities in relation to those sectors.

 

Four of our consolidated controlled entities, Beijing Internet, Beijing China Index, Beijing Technology and Beijing JTX Technology, each hold an ICP license issued by the Beijing Telecommunications Administration Bureau, a municipal branch of MIIT.

 

On December 21, 2013, the State Council promulgated the Decision of the State Council on Temporary Adjustments to the Administrative Approval Items or Special Administrative Measures on Access Prescribed in the Relevant Administrative Regulations or State Council’s Documents in China (Shanghai) Pilot Free Trade Zone, which provides that  temporary adjustments shall be made to special administrative measures on access in respect of qualification requirements and restrictions on shareholding proportion under the Administrative Rules on Foreign-invested Telecommunications Enterprises.

 

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Pursuant to the Opinions of the MIIT and the People’s Government of Shanghai Municipality on Further Opening Up Value-added Telecommunications Business in China (Shanghai) Pilot Free Trade Zone (“Pilot Opinions”), which were jointly issued by the MIIT and People’s Government of Shanghai Municipality on January 6, 2014, foreign ownership in telecommunications service business (only include apps stores), which China has committed to opening-up after its WTO entry, may exceed 50% on a pilot basis. Foreign ownership in online data processing and transaction processing (operational electronic commerce) shall not exceed 55%. Except for the Internet connection service business (provision of internet connection service for online users), the scope for other businesses services specified by the Pilot Opinions can be nationwide. On April 15, 2014, the MIIT promulgated the Circular on Printing and Distributing the Administrative Measures of China (Shanghai) Pilot Free Trade Zone for the Pilot Operation of Value-added Telecommunications Business by Foreign Investment, which further provides the requirements and procedures for foreign-invested enterprises to apply for and obtain the approval to conduct value-added telecommunications business based in the China (Shanghai) Pilot Free Trade Zone.

 

On June 19, 2015, MIIT further issued the Circular of the MIIT on Removing the Restrictions on Shareholding Ratio Held by Foreign Investors in Online Data Processing and Transaction Processing (Operational E-commerce) Business, which liberalizes the foreign ownership restrictions in online data processing and transaction processing (operational electronic commerce) business by expanding the business areas from the China (Shanghai) Pilot Free Trade Zone to nationwide, and the foreign ownership may be up to 100%.

 

Our majority-owned subsidiary, Shanghai Jing Rong, holds an Approval of Pilot Foreign Investment in Operating Value-added Telecommunications Business at China (Shanghai) Pilot Free Trade Zone issued by the Shanghai Communications Administration, a municipal branch of MIIT.

 

The MIIT Notice requires that a value-added telecommunications business operator (or its shareholders) must own domain names and trademarks used by it in the value-added telecommunications business, and have premises and facilities appropriate for such business. To comply with the MIIT Notice, all of our related trademarks and domain names are owned directly by Beijing Internet, Beijing China Index, Beijing Technology and Beijing JTX Technology.

 

Furthermore, according to the Administrative Provisions on Online Publishing Services, jointly issued by the MIIT and the State General Administration of Press, Publication, Radio, Film and Television in February 2016, all entities that are engaged in Internet publication services in China must be approved by competent publication administrative department and acquire an Online Publishing Service License.  The online publishing services defined in the Administrative Provisions on Online Publishing Services refer to the provision of online publications to the public through information networks while the Online Publications refer to digitized works with characteristics of publishing, such as editing, production or processing provided to the public through information networks.

 

Advertising Services

 

SAIC is responsible for regulating advertising activities in China. The principal regulations governing advertising in China, including online advertising, include:

 

·the Advertising Law (Revised in 2015);

 

·the Administration of Advertising Regulations; and

 

·the Implementation Rules for the Administration of Advertising Regulations.

 

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These regulations stipulate that companies that engage in advertising activities in China must obtain from SAIC or its local branches a business license which specifically includes operating an advertising business within its business scope. Companies conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of illegal revenues and orders to cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation.

 

The business scope of each of Beijing Advertising, Beijing Technology, Beijing JTX Technology, Shanghai Advertising, Beijing China Index, Beijing Internet, Tianjin JTX Advertising and Beijing Yi Ran Ju Ke includes operating an advertising business, which allows them to engage in the advertising business.

 

Electronic Bulletin Board Services

 

In October 2000, MIIT adopted the Administrative Regulations on Internet Electronic Bulletin Board Services, which required that an Internet content service provider providing online bulletin board service register with, and obtain approval from, local telecommunications authorities. The Administrative Regulations on Internet Electronic Bulletin Board Services was abolished by MIIT on September 23, 2014, and the management of Internet electronic bulletin board services is currently governed by the Telecommunications Regulations, the Internet Information Services Administrative Measures and the Administrative Measures for Telecommunications Business Operating Licenses, which provide that an Internet content provider that intends to provide online bulletin board services shall fulfill the approval formalities. Currently, Beijing China Index is operating electronic bulletin board services on www.landlist.cn and Beijing Technology on www.fang.com. On November 11, 2005 and November 6, 2006, respectively, the Beijing Telecommunications Administration Bureau issued to Beijing China Index and Beijing Technology, respectively, an approval for operating electronic bulletin board services on www.landlist.cn and www.fang.com, respectively. Beijing JTX Technology and Beijing Advertising also obtained approval for operating electronic bulletin board services on www.jiatx.com on June 15, 2007. These approvals each have an original validity which is keyed to the corresponding ICP license and their continued validity is subject to the fulfillment of certain conditions and qualifications.

 

Regulations on the Real Estate Service Industry

 

The principal regulations governing the real estate service industry in China include the Law on the Administration of the Urban Real Estate, as amended in August 2007, the Real Estate Brokerage Administration Measures issued by the MOHURD, the NDRC, and the PRC Ministry of Human Resources and Social Security on January 20, 2011, which became effective on April 1, 2011,and was further amended on March 1, 2016 and became effective on April 1, 2016.

 

Real Estate Service Companies

 

In accordance with the Law on the Administration of the Urban Real Estate and the Real Estate Brokerage Administration Measures, real estate services refer to services of real estate consultation, appraisal and brokerage. A real estate service company is required to meet certain financial and personnel requirements and register with the SAIC or its local counterpart. To be qualified to engage in real estate services, a company is required to file with the relevant local branch of SAIC. Pursuant to the Real Estate Brokerage Administration Measures, a real estate brokerage company must have a certain number of real estate brokers and real estate broker assistants, and shall file with the local real estate regulatory authority within thirty days following the issuance of its business license. Local authorities have specific requirements on employing such brokers and the registration formalities.

 

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On May 11, 2011, the MOHURD and the NDRC jointly issued the Notice of Strengthening the Real Estate Brokerage Administration and Further Standardizing the Order of Real Estate Transactions. On June 13, 2013, the MOHURD and the SAIC jointly issued the Notice of Focusing on Special Administration on Market of Real Estate Agencies. According to these rules, a real estate brokerage company is forbidden to display any false or unverified information. The real estate brokerage company and its brokers shall not conceal transaction price and other transaction information from the transacting parties. Such entities are also prohibited from obtaining any gains by purchasing or renting a property at a lower price and then selling or leasing such property at a higher price. The real estate brokerage company is also required to establish a separate account for transaction settlement if the real estate brokerage company is responsible to collect and pay the transaction amount on behalf of the transaction parties.

 

Real Estate Service Brokers

 

In accordance with the Real Estate Brokerage Administration Measures, the PRC government implemented the occupational qualification system for real estate broker personnel.

 

Pursuant to the Interim Regulations on Professional Qualification for Real Estate Brokerage Professionals and the Implementation Rules on the Examinations of Real Estate Brokerage Professional Qualification issued by the PRC Ministry of Human Resources and Social Security and the MOHURD on December 18, 2001 and relevant circulars, to practice as a qualified real estate broker, an individual was required to pass an exam and obtain a qualification certificate for real estate brokers, However, the State Council issued the Decision of the State Council on Cancelling and Adjusting a Batch of Administrative Examination and Approval Items on July 22, 2014, which eliminated the qualification certificate requirement for real estate brokers. On June 25, 2015, the PRC Ministry of Human Resources and Social Security and the MOHURD further jointly issued Interim Provisions on the Occupational Qualification System of Professional Real Estate Brokers and the Implementing Measures for Occupational Qualification Exams of Professional Real Estate Brokers, which provide that real estate brokerage professional qualifications are divided into three levels, namely associate real estate broker, real estate broker and senior real estate broker. The associate real estate broker and real estate broker shall pass the examination as a method to evaluate their professional skills.

 

In accordance with the Brokers Administration Measures issued by the SAIC in August 2004, the local offices of the SAIC are the administrative bodies responsible for brokers, including their registration and supervision. Within twenty days after a brokerage company employs or dismisses an individual broker, it must file the individual broker’s information and the related employment contracts with the local offices of SAIC. In addition, no brokerage or broker can engage in any activities beyond the permitted business scope or against a client’s interests. In cases of non-compliance, the local offices of the SAIC can issue warnings or impose fines up to RMB30,000.

 

Real Estate Service Charges

 

According to the Circular on Real Estate Service Charges promulgated by the NDRC and the MOHURD on July 17, 1995, and the Notice on Release of Management of Real Estate Consultant and Brokerage Charges jointly issued by the NDRC and the MOHURD which became effective on July 1, 2014, a real estate service company must display its service charges, or commissions. The commissions for the real estate brokerage services are subject to the regulation of the local branch of the MOHURD and the competent pricing department of people’s government at the provincial level, the local authorities may decide to apply “government-guided” prices or "market-adjusted” prices according to the local situation. The commissions for the real estate consulting services shall be based on “market-adjusted” prices, and the real estate consulting service providers may negotiate and determine their commission rates with clients.

 

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Regulations on Microfinance Companies

 

According to the Guiding Opinions on the Pilot Operation of Microfinance Companies (the “Guiding Opinions”) jointly issued by the China Banking Regulatory Commission and the PBOC on May 4, 2008, microfinance companies are limited liability companies or joint stock companies established with the capital contribution from natural persons, legal persons and other organizations, which do not accept public deposits and engage in the microfinance business. To set up a microfinance company, an applicant shall submit a formal application to the competent administrative departments at the provincial level. Upon approval, the applicant shall apply to the local branch of the SAIC to obtain a business license for the microfinance company. In addition, the applicant shall complete certain filings with the local police department, the local office of the China Banking Regulatory Commission and the local branch of the PBOC. According to the Guiding Opinions, the aggregate balance of the loans granted to any single borrower may not exceed 5% of the net capital of the microfinance company. The PBOC is responsible for monitoring the interest rates and fund flows of microfinance companies and record the relevant information into the PBOC’s credit information system. Microfinance companies are required to provide information regarding their borrowers, loan amounts, guarantees for loans and loan repayment to the credit information system.

 

According to the Guiding Opinions, a provincial government may launch pilot programs for microfinance companies within prefectural regions of the province only after it designates a department (finance office or other relevant institutions) to be in charge of supervision and administration of microfinance companies and is willing to be responsible for risk management and disposals with respect to microfinance companies. Consequently, microfinance companies are primarily regulated locally by provincial governments under rules and regulations promulgated by the provincial governments.

 

Regulations on Entrusted Loans

 

The General Lending Code were promulgated by the PBOC on June 28, 1996 and came into effect on August 1, 1996. The General Lending Code define a “loan provider” as a PRC owned financial institution established in China that engages in the provision of interest bearing loans. One type of loan defined in and regulated in accordance with the General Lending Code is the entrusted loan. Entrusted loans are arrangements whereby the capital for a loan is supplied by a government department, an enterprise or a natural person (the “capital provider”) and entrusted to a financial institution as the loan provider. Entrusted loans are made by the loan provider to a specified borrower for a particular purpose and in an amount, for a term and at an interest rate determined by the capital provider. The term “specified borrower” describes the party specified by the capital provider as the person who will receive the amount of an entrusted loan (the “loan recipient”). While the loan provider exercises supervision over and receives repayment from the loan recipient, the loan provider does not assume any risk of default in repayment by the loan recipient. In accordance with the General Lending Code and the relevant judicial interpretation from the Supreme People’s Court of the PRC, in an entrusted loan arrangement, the relationship between the loan provider and the capital provider is that of trustee and trustor; and the relationship between the loan provider and the loan recipient is that of lender and borrower. No creditor/debtor relationship exists between the capital provider and the loan recipient. The General Lending Code requires that loan providers must be authorized by and have been granted a financial institution license or a financial institution operation license from the PBOC; and must have registered with the SAIC. The General Lending Code further stipulates that enterprises which are not authorized and registered as loan providers must not breach the laws of the PRC by engaging in intercompany loan transactions or the provision of loans through unauthorized means. An intercompany loan is a loan provided directly from one company to another where the loan provider is not authorized and registered as a loan provider.

 

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Regulations relating to Information Security and Confidentiality of User Identity and Information

 

Internet content in China is also regulated and restricted from a state security standpoint. Based on the Decision of the Standing Committee of the National People’s Congress on Internet Security Protection enacted by the Standing Committee of the National People’s Congress, any effort to undertake the following actions may be subject to criminal punishment in China:

 

·gain improper entry into a computer or system of national strategic importance;

 

·disseminate politically disruptive information;

 

·leak government secrets;

 

·spread false commercial information; or

 

·infringe intellectual property rights.

 

The Ministry of Public Security has also promulgated measures that prohibit the use of the Internet in ways that, among other things, result in the leakage of government secrets or the spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection powers in this regard, and we may be subject to the jurisdiction of the local security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its license and shut down its website.

 

The security and confidentiality of information on the identity of Internet users are also regulated in China. The Internet Information Service Administrative Measures promulgated by the PRC State Council in September 2000 require Internet content service providers to maintain an adequate system that protects the security of user information. In December 2005, the Ministry of Public Security promulgated the Regulations on Technical Measures of Internet Security Protection, requiring Internet service providers to utilize standard technical measures for Internet security protection. We have been advised by our PRC legal counsel that both requirements are for the protection of information on the identity of Internet users.

 

Regulations relating to Trademarks

 

Both the PRC Trademark Law and the Implementation Regulation of the PRC Trademark Law, as currently in effect, provide protection to the holders of registered trademarks and trade names. The PRC Trademark Office handles trademark registrations and grants a renewable term of rights of 10 years to registered trademarks. In addition, trademark license agreements must be filed with the Trademark Office.

 

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After receiving a trademark registration application, the PRC Trademark Office will make a public announcement with respect to the proposed trademark registration application if the relevant trademark passes the preliminary examination. Any person may, within three months after such public announcement, object to such trademark application. The PRC Trademark Office will then decide who is entitled to the trademark registration, and its decisions may be appealed to the PRC Trademark Review and Adjudication Board, whose decision may be further appealed through judicial proceedings. If no objection is filed within three months after the public announcement period or if the objection has been overruled, the PRC Trademark Office will approve the registration and issue a registration certificate, upon which the trademark is registered and will be effective for a renewable 10-year period, unless otherwise revoked.

 

Regulations relating to Employee Share Options

 

Under the Stock Option Rule promulgated by SAFE in February 2012, a PRC entity’s directors, supervisors, senior management officers, other staff or individuals who have an employment or labor relationship with a Chinese entity and are granted stock options by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures. We and our PRC resident employees who have been granted stock options are subject to these regulations. We have designated our PRC relevant subsidiaries to handle the registration and other procedures required by the Stock Option Rule. If we or our PRC option holders fail to comply with these regulations in the future, we or our PRC option holders may be subject to fines and legal sanctions.

 

Regulations relating to Employees

 

Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with workplace safety training. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative liabilities. Criminal liability may arise for serious violations.

 

In addition, employers in China are obliged to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.

 

Regulations relating to Foreign Investment in Value-Added Telecommunications Industry

 

According to the Administrative Rules on Foreign-invested Telecommunications Enterprises issued by the State Council effective in January 2002, as amended in September 2008 and February 2016, a foreign investor may hold no more than a 50% equity interest in a value-added telecommunications services provider in China and such foreign investor must have experience operating in such industry.

 

Regulations relating to the Establishment of Offshore Special Vehicle by PRC Residents

 

Pursuant to the Circular 37 promulgated by SAFE, which became effective on July 4, 2014, a PRC resident, including a PRC resident natural person or a PRC company, shall register with the local SAFE branch before it contributes assets or its equity interests into an overseas SPV established or controlled by the PRC resident for the purpose of investment and financing. When the overseas SPV that fulfilled the initial registration formalities undergoes certain major changes, including but not limited to, the change in the PRC-resident shareholder of the overseas SPV, name of the overseas SPV, term of operation, or any increase or reduction of the registered capital of the overseas SPV, share transfer or swap, and merger or division, the PRC resident shall timely register such change with the local SAFE branch.

 

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C. Organizational Structure

 

We conduct substantially all of our operations in China through our PRC subsidiaries and consolidated controlled entities. For more information regarding the contractual arrangements among our PRC subsidiaries and consolidated controlled entities, see “Item 7.B. Major Shareholders and Related Party Transactions—Related Party Transactions—Structure Contracts.”

 

The following is a list of our principal subsidiaries and consolidated controlled entities as of the date of this annual report:

 

Name   Place of Formation   Relationship
         
Beijing Cun Fang Real Estate Broking Co., Ltd. (“Beijing Cun Fang”)   China   Wholly-owned subsidiary
         
Beihai Tian Xia Dai Microfinance Co., Ltd. (“Beihai Tian Xia Dai Microfinance”)   China   Wholly-owned subsidiary
         
Beijing Fang Tian Xia Decorative Engineering Co., Ltd. (“Beijing Fang Tian Xia Decorative Engineering”)   China   Wholly-owned subsidiary
         
Beijing Hong An Tu Sheng Network Technology Co., Ltd. (“Beijing Hong An Tu Sheng”)   China   Wholly-owned subsidiary
         
Beijing Li Man Wan Jia Network Technology Co., Ltd. (“Beijing Li Man Wan Jia”)   China   Wholly-owned subsidiary
         
Beijing SouFun Network Technology Co., Ltd. (“SouFun Network”)   China   Wholly-owned subsidiary
         
Beijing Tian Xia Dai Financial Information Service Co., Ltd. (“Beijing Tian Xia Dai Financial Information”)   China   Wholly-owned subsidiary
         
Beijing Tuo Shi Hong Tian Technology Development Co., Ltd. (“Beijing Tuo Shi Hong Tian”)   China   Majority-owned subsidiary
         
Beijing Tuo Shi Huan Yu Network Technology Co., Ltd. (“Beijing Tuo Shi Huan Yu”)   China   Wholly-owned subsidiary

 

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Beijing Zhong Zhi Shi Zheng Information Technology Co., Ltd. (“Beijing Zhong Zhi Shi Zheng”)   China   Wholly-owned subsidiary
         
Beijing Zhong Zhi Xun Bo Information Technology Co., Ltd. (“Beijing Zhong Zhi Xun Bo”)   China   Wholly-owned subsidiary
         
Best Work Holdings (New York) LLC   United States   Wholly-owned subsidiary
         
Chongqing Fang Tian Xia Real Estate Broking Co., Ltd. (“Chongqing Fang Tian Xia”)   China   Wholly-owned subsidiary
         
Chongqing Tian Xia Dai Microfinance Co., Ltd. (“Chongqing Tian Xia Dai Microfinance”)   China   Wholly-owned subsidiary
         
Hangzhou SouFun Network Technology Co., Ltd. (“Hangzhou SouFun Network”)   China   Wholly-owned subsidiary
         
Jia Tian Xia Network Technology Co., Ltd. (“Jia Tian Xia Network”)   China   Wholly-owned subsidiary
         
Nanjing Cun Fang Real Estate Broking Co., Ltd. (“Nanjing Cun Fang”)   China   Wholly-owned subsidiary
         
Tianjin Jia Tian Xia Commercial Factoring Co., Ltd. (“Tianjin Jia Tian Xia Commercial Factoring”)   China   Wholly-owned subsidiary
         
Shanghai BaoAn Enterprise Co., Ltd. (“Shanghai BaoAn Enterprise”)   China   Majority-owned subsidiary
         
Shanghai BaoAn Hotel Co., Ltd. (“Shanghai BaoAn Hotel”)   China   Majority-owned subsidiary
         
Shanghai Jia Tian Xia Financing Guarantee Co., Ltd. (“Shanghai Jia Tian Xia Financing Guarantee”)   China   Wholly-owned subsidiary
         
Shanghai Jing Rong Information Technology Co., Ltd. (“Shanghai Jing Rong”)   China   Majority-owned subsidiary

 

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Shanghai SouFun Microfinance Co., Ltd. (“Shanghai SouFun Microfinance”)   China   Majority-owned subsidiary
         
SouFun Media Technology (Beijing) Co., Ltd. (“SouFun Media”)   China   Wholly-owned subsidiary
         
Suzhou Cun Fang Real Estate Broking Co., Ltd. (“Suzhou Cun Fang”)   China   Wholly-owned subsidiary
         
Tianjin Fang Tian Xia Real Estate Broking Co., Ltd. (“Tianjin Fang Tian Xia”)   China   Wholly-owned subsidiary
         
Tianjin Jia Tian Xia Microfinance Co., Ltd. (“Tianjin Jia Tian Xia Microfinance”)   China   Wholly-owned subsidiary
         
Tianjin SouFun Network Technology Co., Ltd. (“Tianjin SouFun Network”)   China   Wholly-owned subsidiary
         
Beijing Century Jia Tian Xia Technology Development Co., Ltd. (“Beijing JTX Technology”)   China   Consolidated controlled entity
         
Beijing China Index Information Co., Ltd. (“Beijing China Index”)   China   Consolidated controlled entity
         
Beijing Fang Chao Real Estate Broking Co., Ltd. (“Beijing Fang Chao”)   China   Consolidated controlled entity
         
Beijing Hua Ju Tian Xia Network Technology Co., Ltd. (“Beijing Hua Ju Tian Xia”)   China   Consolidated controlled entity
         
Beijing Jia Tian Xia Advertising Co., Ltd. (“Beijing Advertising”)   China   Consolidated controlled entity
         
Beijing Li Tian Rong Ze Technology Development Co., Ltd. (“Beijing Li Tian Rong Ze”)   China   Consolidated controlled entity

 

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Beijing Li Tian Rong Ze Wan Jia Technology Development Co., Ltd. (“Beijing Li Tian Rong Ze Wan Jia”)   China   Consolidated controlled entity
         
Beijing SouFun Internet Information Service Co., Ltd. (“Beijing Internet”)   China   Consolidated controlled entity
         
Beijing SouFun Science and Technology Development Co., Ltd. (“Beijing Technology”)   China   Consolidated controlled entity
         
Beijing Yi Ran Ju Ke Technology Development Co., Ltd. (“Beijing Yi Ran Ju Ke”)   China   Consolidated controlled entity
         
Shanghai China Index Consultancy Co., Ltd. (“Shanghai China Index”)   China   Consolidated controlled entity
         
Shanghai Fang Chao Real Estate Broking Co., Ltd. (“Shanghai Fang Chao”)   China   Consolidated controlled entity
         
Shanghai Jia Biao Tang Real Estate Broking Co., Ltd. (“Shanghai JBT”)   China   Consolidated controlled entity
         
Shanghai SouFun Advertising Co., Ltd. (“Shanghai Advertising”)   China   Consolidated controlled entity
         
Shanghai SouFun Cun Fang Real Estate Broking Co., Ltd. (“Shanghai SouFun Cun Fang”)   China   Consolidated controlled entity
         
Shenzhen Fang Tian Xia Real Estate Broking Co., Ltd. (“Shenzhen Fang Tian Xia”)   China   Consolidated controlled entity
         
Tianjin Jia Tian Xia Advertising Co., Ltd. (“Tianjin JTX Advertising”)   China   Consolidated controlled entity
         
Wuhan SouFun Yi Ran Ju Ke Real Estate Broking Co., Ltd. (“Wuhan SouFun Yi Ran Ju Ke”)   China   Consolidated controlled entity

 

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The following diagram illustrates our corporate structure including our principal subsidiaries and consolidated controlled entities as of the date of this annual report:

 

 

 

*The diagram above omits the names of subsidiaries and consolidated affiliated entities that are insignificant individually and in the aggregate.
(1)Each of Shanghai BaoAn Enterprise and Shanghai BaoAn Hotel is owned as to 25.0% by Shanghai China Index, one of our consolidated controlled entities.
(2)Shanghai SouFun Microfinance is owned as to 20.0% by Beijing Technology and as to 10.0% by Beijing JTX Technology, both of which are our consolidated controlled entities.
(3)Each of Beijing Tuo Shi Hong Tian and Shanghai Jing Rong is owned as to 30.0% by Mr. Mo, our founder, executive chairman and chief executive officer.

(4)SouFun Network, SouFun Media, Beijing Li Man Wan Jia, Beijing Tuo Shi Huan Yu and Beijing Hong An Tu Sheng, collectively, are the Target Companies with respect to our anticipated transactions with Wanli. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Development—Proposed Acquisition of Controlling Stake in Wanli” of this annual report.

 

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D. Property, Plant and Equipment

 

See “Item 4.B. Information on the CompanyBusiness OverviewFacilities.”

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included elsewhere in this annual report. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. See “Forward-Looking Statements.” In evaluating our business, you should carefully consider the information provided under “Item 3.D. Key Information—Risk Factors.” We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

 

A. OPERATING RESULTS

 

Overview

 

We operate the leading real estate Internet portal in China in terms of the number of page views and visitors to our websites in 2015, according to Analysys, an independent market research institution commissioned by us. Our user-friendly websites and mobile apps support active online communities and networks of users seeking information on, and services for, the real estate and home-related sectors in China. Leveraging our Internet platform, we are developing our transaction and financing platforms by offering direct sales services for new homes, online real estate brokerage services and financial services to capture additional growth opportunities in the real estate market. Our service offerings include:

 

·E-commerce services: Our e-commerce services primarily include SouFun membership services, direct sales services for new homes, online real estate brokerage services, online home-decorating services and online sublease services. We provide both free and paid SouFun membership services to our registered members. Our free services include primarily regular updates regarding local property developments, tours to visit property developments and other services relating to property purchases. Our paid services primarily include offers to purchase properties at a discount from our partner developers and dedicated information and related services to facilitate property purchases. In August 2014, we launched our direct sales services, whereby we promote and sell properties primarily through our websites and mobile apps to home buyers for a predetermined percentage of fees charged to our developer clients. As part of our effort to develop our transaction platform, we began to offer online real estate brokerage services in January 2015, and online home-decorating services and online sublease services in the second quarter of 2015. In addition, we offer an online marketplace and related e-commerce services to home furnishing and improvement vendors in China through our www.jiatx.com website. E-commerce services were our largest source of revenues in 2015.

 

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·Marketing services: We offer marketing services on our websites and mobile apps, mainly through advertisements, to real estate developers in the marketing phase of new property developments, as well as to real estate agencies and suppliers of home furnishing and improvement and other home-related products and services who wish to promote their products and services. Marketing services were our second largest source of revenues in 2015.

 

·Listing services: We offer basic and special listing services on our websites and mobile apps. Our basic listing services are primarily offered to real estate agents, brokers, developers, property owners and managers and suppliers of home furnishing and improvement and other home-related products and services. Our basic listing services allow our customers to post information of their products and services on our websites. Our special listing services offer customized marketing programs involving both online listings and offline themed events. Listing services were our third largest source of revenues in 2015.

 

·Financial services: We provide financial services though our online financial platform, www.txdai.com, and offline micro loan subsidiaries. We provide secured loans in the form of entrusted loans, mortgage loans and unsecured loans, primarily to home buyers, real estate developers and other borrowers that meet our credit assessment requirements. We launched financial services in August 2014.

 

·Other value-added services: We offer subscription-based access to our information database and research reports and “total web solution” services.

 

We have built a large and active community of users who are attracted by the comprehensive real estate and home-related content available on our portal that forms the foundation of our service offerings. According to Google Analytics, in the fourth quarter of 2015, our website, www.fang.com, received a monthly average of approximately 100 million unique visitors and generated a monthly average of approximately 170 million website visits. We currently maintain approximately 100 offices to focus on local market needs.

 

Our revenues and net loss attributable to our shareholders in 2015 was US$883.5 million and US$15.1 million, respectively. E-commerce, marketing, listing, financial and other value-added services accounted for 53.7%, 28.3%, 12.2%, 3.4% and 2.4%, respectively, of our revenues in 2015.

 

Key Operating and Financial Performance Metrics

 

We monitor the key operating and financial performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies.

 

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   Year Ended December 31, 
Selected Metrics  2014   2015 
Average monthly unique visitors (million)*   78.1    100.9 
Average monthly mobile unique visitors (million)*   41.1    61.9 
Transactions under SouFun membership services and direct sales services   217,457    311,125 
GMV (U.S. dollars in millions)**   -    32,603 

 

*Source: Google Analytics
**We began to disclose GMV as a key operating and financial performance metric in 2015. GMV refers to the value of confirmed transactions generated or facilitated by our services, including (1) the total property price of new homes and secondary properties we sell or facilitate selling in connection with direct sales services and online real estate brokerage services, (2) the total rental fees we pay to landlords and collect from tenants in connection with online sublease services, and (3) the total contract value of home furnishing and improvement transactions in connection with online home-decorating services. We calculate GMV based on quarterly increments.

 

Certain of these measures, non-GAAP net income and adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) are not measures calculated in accordance with GAAP and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do.

 

   Year Ended December 31, 
   2013   2014   2015 
   (U.S. dollars in thousands) 
Non-GAAP net income/(loss)   318,298    284,823    (73,661)
Adjusted EBITDA   371,121    333,000    (9,563)

 

Non-GAAP net income measures GAAP net income, excluding the impact of stock-based compensation expense, realized (gain) loss on available-for-sale securities, other-than-temporary impairment on available-for-sale securities, gain on bargain purchase, withholding tax on dividends and one-off tax impact.

 

Adjusted EBITDA is defined as non-GAAP net income before income tax, excluding one-off tax impact and withholding tax related to dividend, interest expenses, interest income, and depreciation. Adjusted EBITDA, while generally a measure of profitability, excludes certain non-cash expenses, interest and other income, income taxes, and certain other items that management believes affect the comparability of operating results.

 

Non-GAAP net income and adjusted EBITDA are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends. In particular, we believe that the exclusion of the expenses eliminated in calculating non-GAAP net income and adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that non-GAAP net income and adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are:

 

·although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures;

 

·non-GAAP net income does not reflect the potentially dilutive impact of equity-based compensation;

 

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·adjusted EBITDA does not reflect tax payments that historically have represented a reduction in cash available to us or tax benefits that may arise as a result of generating net losses; and

 

·other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

 

Of these and other limitations, you should consider non-GAAP net income and adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, net income and our other GAAP financial results.

 

The following tables present reconciliations of net income to non-GAAP net income and net income to adjusted EBITDA from continuing operations for each of the periods indicated:

 

   Year Ended December 31, 
Reconciliation of net income and non-GAAP net income  2013   2014   2015 
   (U.S. dollars in thousands) 
GAAP net income / (loss)   298,662    253,217    (15,174)
Share-based compensation   7,028    4,682    4,008 
Other-than-temporary impairment on available-for-sale securities       8,417     
Realized (gain) loss on available-for-sale securities   (821)        
Gain on bargain purchase   (102)        
One-off tax impact(1)   13,531    18,507    (61,162)
Investment income           (1,333)
Non-GAAP net income / (loss)   318,298    284,823    (73,661)

 

(1)One-off tax impact recognized in 2015 represents the reversal of deferred tax liabilities in relation to the reversal of withholding tax.
One-off tax impact recognized in 2014 represents the adjustment on three of our PRC subsidiaries’ prior year tax positions upon obtaining the certificates of “Software Enterprise” with effect from January 1, 2013. Accordingly, the three subsidiaries are entitled to two-year enterprise income tax exemption for 2013 and 2014 and a reduced enterprise income tax rate of 12.5% for 2015, 2016 and 2017.
The one-off tax impact recognized in 2013 represented the adjustment on the applicable income tax rate used to measure the deferred tax liabilities in relation to the cumulative undistributed earnings of our two PRC subsidiaries that were not permanently reinvested. In September 2013, the subsidiaries obtained approvals from the tax authority for a reduced withholding tax rate of 5% on repatriation of dividends from 2013 to 2015 under the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation.

 

   Year Ended December 31, 
Reconciliation of non-GAAP net income and adjusted EBITDA  2013   2014   2015 
   (U.S. dollars in thousands) 
Non-GAAP net income/(loss)   318,298    284,823    (77,923)
Add Back               
Interest expenses   14,675    17,308    16,518 
Income tax expenses excluding one-off tax impact and withholding tax related to dividends   56,250    63,214    59,519 
Depreciation expenses   9,701    11,624    14,544 
Subtract               
Interest income   (27,803)   (43,857)   (22,221)
Adjusted EBITDA   371,121    333,000    (9,563)

 

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Recent Developments

 

Completion of Private Placements

 

In September and November 2015, we completed the offering of our Class A ordinary shares and convertible notes in private placement transactions to, among others, the Carlyle Group and its affiliates, IDG Capital Partners and its affiliates, and certain members of our management team. As a result of the foregoing transactions, we issued 11,855,384 Class A ordinary shares and $300 million in principal amount of convertible notes for total gross proceeds of $646.77 million.

 

Proposed Acquisition of Controlling Stake in Wanli

 

In January 2016, the Fang Subsidiaries entered into a series of transaction documents in connection with our proposed acquisition of a controlling stake in Wanli. Under the proposed transaction structure, we agreed to subscribe for shares to be newly issued by Wanli in exchange for the transfer of the equity interests in five wholly-owned subsidiaries of the Fang Subsidiaries that operate as our service platforms for online advertising business. Wanli agreed that it would concurrently dispose of all of its existing non-cash assets and liabilities to a PRC entity that is not affiliated with us. The transaction price is to be determined based on the evaluation results on the entire equity interest of the Target Companies. As such evaluation is yet to be completed, pursuant to the estimated evaluation results and the subscription price, following the consummation of the foregoing transactions and the concurrent share placement, the Fang Subsidiaries will collectively hold approximately 70.0% of the share capital of Wanli, allowing us to consolidate Wanli’s financial results as Wanli will become a majority-owned indirect subsidiary of our company.

 

As required by the relevant PRC regulations and regulatory authorities, we also entered into a profit compensation agreement, under which we undertook to compensate Wanli if the Target Companies were unable to generate sufficient revenues to meet the predetermined profit targets in the Compensation Years or were to incur impairment loss upon the expiration of the Compensation Years, by transferring back the shares in Wanli, to the extent subscribed by Fang Subsidiaries, for nominal price.

 

The foregoing transactions remain subject to the requisite internal approvals of the relevant parties, including the approval by the shareholders’ meeting of Wanli, and regulatory clearance, including that by the CSRC and other applicable regulatory authorities. There is no assurance that these approvals or regulatory clearance will be obtained within an expected timeframe, or at all.

 

See “Item 3.D. Key Information—Risk Factors—Risks related to our business—Our anticipated acquisition of a controlling stake in Wanli, a company listed on the Shanghai Stock Exchange, may not be approved and consummated and may subject us to certain risks and challenges unique to the transaction structure and the PRC regulatory regime.”

 

Factors Affecting Our Results of Operations

 

Economic growth in China and in the PRC real estate market

 

We conduct substantially all of our business and operations in China. Accordingly, our results of operations have been, and are expected to continue to be, affected by the general performance of China’s economy. As a leading real estate Internet portal, our financial results have also been affected by the performance of the real estate and home furnishing and improvement sectors in China.

 

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Market acceptance of our e-commerce services

 

Real estate related e-commerce services are relatively new and evolving. We began offering SouFun membership services in 2011, our direct sales services for new homes in August 2014, online real estate brokerage services in January 2015, and online home-decorating services and online sublease services in the second quarter of 2015. Our revenues from e-commerce services have grown rapidly, totaling US$188.1 million, US$244.3 million and US$474.8 million in 2013, 2014 and 2015, respectively, representing 29.5%, 34.8% and 53.7% of our total revenues for the same periods. Our ability to maintain or increase the number of partner developers or property developments for e-commerce services are offered, grow our customer base and increase transaction volume to a significant extent depends on increased market acceptance of these services.

 

Growth in China’s Internet and online marketing sectors

 

We are an Internet portal company and a majority of our revenues are generated from our e-commerce, marketing and listing services. As such, our results of operations are heavily dependent on the successful and continued development of China’s Internet and online marketing sectors. The Internet has emerged as an increasingly attractive and cost-effective advertising channel in China, especially as the number of Internet users, disposable income of urban households and network infrastructure in China have increased.

 

Performance of certain geographic areas and urban centers in China

 

A substantial portion of our revenues are concentrated in China’s major urban centers including Beijing, Shanghai, Chengdu, Chongqing, Tianjin and Shenzhen. Although our percentage of revenues from these six urban centers has decreased as we expanded our operations elsewhere in China, we expect customers in these cities to continue to represent a significant portion of our revenues in the near term. We also plan to expand into new geographic areas and sectors. As of December 31, 2015, we had established real estate-related content, search services, marketing and listing coverage of more than 629 cities across China, and our SouFun membership services, which were launched in 2011, were offered in 81 cities. The financial performance of newly penetrated cities will have a substantial impact on our results of operations as we expand into new markets, as we may incur significant additional operating expenses, including hiring new sales and other personnel, in order to expand our operations.

 

Competition in China’s online real estate and home-related Internet services

 

We face competition from other companies in each of our primary business activities. In particular, the online real estate and home-related Internet service market in China has become increasingly competitive, and such competition may continue to intensify in future periods. As the barriers to entry for establishing Internet-based businesses are typically low, it is possible for new entrants to emerge and rapidly scale up their operations. We expect additional companies to enter the online real estate and home-related Internet service industry in China and a wider range of online services in this area to be introduced.

 

We expect to face additional competition as we develop and offer new services. For example, we began to offer direct sales services for new homes in August 2014, online real estate brokerage services in January 2015, and online home-decorating services and online sublease services in the second quarter of 2015. Some of our customers offer the same or similar services. Accordingly, we may face competition from these customers. In addition, such competition may adversely affect our relationships with these customers and our business.

 

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PRC regulations affecting the Internet, online marketing, real estate and financing industries

 

The Internet, online marketing, real estate and financing industries in China are heavily regulated. PRC laws, rules and regulations cover virtually every aspect of these industries, including entry into the industry, the scope of permissible business activities and foreign investment. The PRC government also exercises considerable direct and indirect influence over these industries by imposing industry policies and other economic measures. Many of these regulations have recently been implemented and are expected to be refined and adjusted over time. Moreover, the PRC government regulates interest rates, real estate transaction taxes and the acquisition and ownership of real estate. It also regulates Internet access and the distribution of news, information or other content, as well as products and services, through the Internet. The PRC government also levies business taxes, value-added taxes, surcharges and cultural construction fees on advertising-related sales in China, such as sales of our e-commerce, marketing, listing, financial and other value-added services. In addition, because certain of our PRC subsidiaries and consolidated controlled entities currently qualify as “high and new technology enterprises” or “Software Enterprise,” they enjoy tax holidays or lower rates from the relevant PRC tax authorities or under local governmental policies. If we were to lose such preferential tax treatment, we would be subject to a higher enterprise income tax rate, which would have a material adverse effect on our financial condition, results of operations and profitability. See “Item 4.B. Information on the Company—Business Overview—Regulation.” Political, economic and social factors may also lead to further policy refinement and adjustments. The imposition of new laws and regulations, or changes to current laws and regulations, could have a material impact on our business, financial condition and results of operations.

  

Our ability to grow financial services while maintaining effective risk management

 

We began to offer financial services in the third quarter of 2014. We offer secured entrusted loans, mortgage loans as well as unsecured loans to real estate developers, property buyers and other borrowers and charge interest, service fees and guarantee fees. As of December 31, 2015, we had loans receivable with a principal balance of US$322.3 million. The lending market has historically been dominated by commercial banks and other financial institutions. Compared with these market participants, we have significant less experience in managing the lending business. The growth of our financial services will depend on our ability to develop attractive loan products and services and manage related credit risk.

 

Demand for home furnishing and improvement information and products

 

As China’s real estate market has expanded and matured, the ancillary home furnishing and improvement industry has also been growing to meet rising consumer demand. Similarly, we have expanded our marketing and listing services to suppliers of home furnishing and improvement products and services. By adding this category of advertisers and clients, we have been able to expand our sources of marketing and listing service revenues and, accordingly, expect the rate of increase in our revenues to continue to benefit from the continued growth of China’s home furnishing and improvement sectors.

 

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Basis of Presentation

 

To comply with applicable PRC laws, rules and regulations restricting foreign ownership of companies that operate Internet content provision and online advertising services, we operate our websites and mobile apps and provide such services in China through contractual arrangements with our consolidated controlled entities. The equity interests of the consolidated controlled entities are held directly or indirectly by Mr. Mo, our founder, executive chairman and chief executive officer, and Mr. Dai, a director (until February 2016 when he resigned) and former chief executive officer, but the effective control of the consolidated controlled entities has been transferred to us through a series of Structure Contracts. We have funded these consolidated controlled entities’ paid-in capital by extending loans to Mr. Mo and Mr. Dai. Pursuant to the terms of the Structure Contracts, we are obligated to bear substantially all of the risk of losses from our consolidated controlled entities’ activities and are entitled to receive substantially all of their profits, if any. See “Item 7.B. Major Shareholders and Related Party Transactions—Related Party Transactions—Structure Contracts” and our consolidated financial statements included elsewhere in this annual report.

 

Based on these Structure Contracts, we believe that, notwithstanding our lack of equity ownership, the arrangements provide us with effective control over our consolidated controlled entities. Accordingly, the financial results of these entities are included in our consolidated financial statements.

 

We refer to our consolidated controlled entities as PRC entities we control through contractual arrangements together with their subsidiaries, or the PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries in our consolidated financial statements and related notes included elsewhere in this annual report.

 

Components of our Results of Operations

 

Revenues

 

We derive our revenues from e-commerce, marketing, listing, financial and other value-added services. In early 2015, we began a transformation from a pure Internet information platform to a transaction-oriented platform, and, as a result, our e-commerce services have grown rapidly and became the largest source of our revenues 2015.

 

E-commerce Services

 

Our e-commerce services, first launched in 2011, include SouFun membership services, direct sales services for new homes, online real estate brokerage services, online home-decorating services and online sublease services. Our SouFun membership services enable paid members to purchase specified properties from our partner real-estate developers at a discount significantly greater than the membership fees charged by us. We offer an online marketplace and related e-commerce services to home furnishing and improvement vendors in China through our website www.jiatx.com and charge commissions on transactions completed through the website. Beginning in August 2014, we introduced direct sales services for new homes developed by our property developer clients on our marketing platforms, i.e., website and mobile apps. After individuals interested in the properties register with us, we provide them with additional information about the properties and related services, such as tours to visit the property developments and other services to facilitate property purchases. We charge our developer clients a fee for each property they sell through our direct sales services. In January 2015, we launched online real estate brokerage services. We charge a commission for each completed transaction. We launched our online home-decorating services in the second quarter of 2015, charging our customers a fixed fee based on the square footage of the premises undergoing decoration. We also launched our online sublease services in the second quarter of 2015. We promote and market real properties leased from third parties on our websites and mobile apps, and sublease such properties to our customers for rental fees.

 

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Marketing Services

 

Our marketing service revenues consist of revenues derived from the advertising services provided by our new home, secondary and rental properties and home furnishing and improvement businesses. Our marketing services include the design and deployment on our websites and mobile apps of banners, links, logos and floating signs.

 

Listing Services

 

Our listing service revenues consist of revenues derived from both basic listing services and special listing services. Basic listing services are targeted at real estate agents, brokers, developers, property owners, property managers and others seeking to sell or rent new and secondary properties and allow visitors to our websites and mobile apps to search for product suppliers and service providers in China’s home furnishing and improvement sector. Revenues from basic listing services are predominantly derived from our secondary and rental business. Special listing services are tailor-made marketing campaigns provided primarily to developers marketing new property developments. We identify property developments with similar attributes and create a plan for collectively promoting such property developments in a “special listing,” typically in the form of an online listing supported or supplemented by offline events, such as a physical discussion forums or banquets, with the special listing as the theme.

 

Financial services

 

Our revenues from financial services consist of interest income and annual service fees from secured loans in the form of entrusted loans, mortgage loans and unsecured loans, primarily to home buyers, real estate developers and other borrowers that meet our credit assessment requirements.

 

Other value-added services

 

We also derive revenues from other value-added services, including subscriptions to our information database, research reports, and total web solution services.

 

Cost of Revenues

 

Our cost of revenues includes cost of services. Cost of services primarily consists of staff costs, business taxes, value-added taxes and surcharges, e-commerce cost, operating lease expenses, network costs, communication expenses, share-based compensation expenses and other costs directly related to the offering of our e-commerce, marketing, listing, financial and other value-added services. Staff costs include salary and benefits paid to members of our editorial staff, customer service personnel and personnel dedicated to servicing and designing websites and mobile apps for our customers. E-commerce cost refers to the portion of proceeds to be remitted to real estate brokers under our SouFun membership services. Operating lease expenses consist primarily of rent for our various office facilities as allocated on the basis of the space occupied by our editorial staff and customer service personnel. Network costs consist of server hosting fees, bandwidth fees and related charges. Communication costs consist of telephone expenses relating to our operations. Cost of revenues also includes share-based compensation expenses in connection with share options and other share-based compensation granted to our editorial and production staff, and business taxes, value-added taxes and surcharges relating to technical and consulting service fees charged by our wholly-owned PRC subsidiaries for services provided under our exclusive technical consultancy and services agreements with our consolidated controlled entities. In 2013, 2014 and 2015, our cost of revenues represented 16.1%, 20.7% and 62.9% of our revenues, respectively. Starting from January 1, 2012, the PRC Ministry of Finance and SAT launched a Business Tax to Value Added Tax (“VAT”) Transformation Pilot Program (the “Pilot Program”) for certain modern service industries. Effective August 1, 2013, the Pilot Program was expanded across China. With the adoption of the Pilot Program, our revenues are subject to VAT of 6% instead of business tax of 5%. We expect our cost of revenues to continue to increase and such expenses may increase faster than the growth of our revenues as we continue to invest in existing and new services and expand our market.

 

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Operating Expenses

 

Our operating expenses consist of selling expenses and general and administrative expenses.

 

Selling Expenses

 

Our selling expenses primarily consist of staff costs, such as salaries and benefits paid to personnel in our sales and distribution department, e-commerce cost relating to the portion of proceeds to be remitted to marketing agents for our SouFun membership services, operating lease expenses, which include rental expenses related to our selling and distribution department, traveling and communication expenses, office expenses and advertising and promotion expenses, including fees we pay to other Internet portals for the purpose of promoting and increasing traffic to our websites and mobile apps. Selling expenses also include other expenses incurred in relation to our selling and distribution activities and share-based compensation costs in connection with stock options and other share-based compensation granted to our sales and marketing personnel. We expect our selling expenses to increase and such expenses may increase faster than growth in our revenues as we continue to promote our websites and mobile apps and our brand name.

 

General and Administrative Expenses

 

General and administrative expenses primarily consist of staff costs, such as salaries and benefits paid to our management and general administrative, product and development personnel, bad debt expense relating to uncollectible accounts receivable, office expenses, communication expenses, professional service fees and other expenses for general and administrative purposes, as well as website development expenses related to the maintenance of our Internet portal browser and real estate database. Our general and administrative expenses also include share-based compensation costs in connection with share options and other share-based compensation granted to our general administrative, technical and research personnel. We expect our general and administrative expenses to increase in absolute amounts as our business continues to grow and remain relatively stable as a percentage of our revenues.

 

Taxation

 

We are subject to income tax on an entity basis on profits arising in or derived from the jurisdictions where we, our subsidiaries or our consolidated controlled entities are domiciled or have operations.

 

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Cayman Islands

 

Under the current laws of the Cayman Islands, the company and subsidiaries incorporated in the Cayman Islands are not subject to tax on income or capital gains. In addition, upon payments of dividends by us to our shareholders, no Cayman Islands withholding tax will be imposed.

 

British Virgin Islands (“BVI”)

 

Under the current laws of the BVI, subsidiaries incorporated in the BVI are not subject to tax on income or capital gains. In addition, upon payments of dividends by these companies to their shareholders, noBVI withholding tax will be imposed.

 

Hong Kong

 

Under the Hong Kong tax laws, subsidiaries incorporated in Hong Kong are subject to the Hong Kong profits tax rate at 16.5% and they are exempted from income tax on their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends. No provision for Hong Kong profits tax has been made in the financial statements as our Hong Kong-incorporated subsidiaries have no assessable profits for the three years ended December 31, 2015.

 

United States

 

Our United States-incorporated subsidiaries do not conduct any substantive operations of their own. No provision for the United States income tax has been made in the financial statements as these subsidiaries had no assessable income for the three years ended December 31, 2015. In addition, as these entities were in a loss position, no withholding tax on the undistributed earnings was recognized as of December 31, 2013, 2014 or 2015.

 

Singapore

 

Our Singapore-incorporated subsidiary does not conduct any substantive operations of its own. No provision for Singapore profits tax has been made in the financial statements as it had no assessable profits for 2015.

 

China

 

In March 2007, a new enterprise income tax law in China was enacted which became effective on January 1, 2008. The New EIT Law applies a unified 25% enterprise income tax (“EIT”) rate to both foreign invested enterprises and domestic enterprises, unless a preferential EIT rate is otherwise stipulated. On April 14, 2008, relevant governmental regulatory authorities released further qualification criteria, application procedures and assessment processes for meeting the High and New Technology Enterprise (“HNTE”) status under the New EIT Law which would entitle qualified and approved entities to a favorable EIT tax rate of 15%. In April 2009, the SAT issued Circular No. 203 stipulating that entities which qualified for the HNTE status should apply with in-charge tax authorities to enjoy the reduced EIT rate of 15% provided under the New EIT Law starting from the year when the new HNTE certificate becomes effective. The HNTE certificate is effective for a period of three years and can be renewed for another three years. Subsequently, an entity needs to re-apply for the HNTE status in order to enjoy the preferential tax rate of 15%.

 

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The HNTE certificates for SouFun Network, SouFun Media, Beijing Zhong Zhi Shi Zheng, and Beijing JTX Technology expired on May 27, 2012. The HNTE certificates for Beijing Technology expired on June 12, 2012. We applied for renewal of the HNTE certificates for these subsidiaries, which would enable them to continue qualifying for the preferential tax rates in 2012, 2013 and 2014. The approval for the renewal of the HNTE certificates for the five subsidiaries was published on the Beijing Municipal Science & Technology Commission’s website between April and October 2012 and we received the renewed HNTE certificates between May and November 2012. Therefore, SouFun Media, Beijing Zhong Zhi Shi Zheng, SouFun Network, Beijing Technology and Beijing JTX Technology were entitled to the preferential tax rate of 15% for 2012, 2013 and 2014. We applied for the renewal of the HNTE status for these five subsidiaries in 2015 and received the renewed HNTE certificates in November 2015, allowing them to enjoy the preferential tax rate of 15% in 2015, 2016 and 2017. In November 2015, we also received the HNTE certificate for Beijing Hong An Tu Sheng, which nevertheless enjoyed a reduced EIT rate of 12.5% for 2015 as a holder of the certificate of “Software Enterprise.” Beijing Hong An Tu Sheng will be entitled to the preferential tax rate of 15% in 2016 and 2017.

 

If any of these six subsidiaries fails to maintain the HNTE qualification under the New EIT Law and does not qualify for any other preferential tax treatment, they will no longer qualify for the preferential tax rate of 15%, which could have a material adverse effect on our results of operations and financial position provided that they do not qualify for any other preferential tax treatment. Historically, the abovementioned subsidiaries have successfully renewed their HNTE certificates after the previous certificates expired.

 

On March 26, 2012, Beijing Hong An Tu Sheng and Beijing Tuo Shi Huan Yu obtained the certificates of “Software Enterprise” with effect from January 1, 2011. Accordingly, the two subsidiaries were entitled to a reduced EIT rate of 12.5% for 2013, 2014 and 2015.

 

Subsequent to government approval in May 2014, Beijing Li Man Wan Jia, Beijing Zhong Zhi Xun Bo and Beijing Hua Ju Tian Xia obtained the certificates of “Software Enterprise” with effect from January 1, 2013. Accordingly, these three subsidiaries are entitled to a two-year EIT exemption for 2013 and 2014 and a reduced EIT rate of 12.5% for 2015, 2016 and 2017. As a result of the change in tax status of these three subsidiaries, current income tax expense of US$5.2 million was reversed in 2014, as a result of the cumulative effect of applying the statutory tax rate of 25% in 2013.

 

Dividends paid by our PRC subsidiaries out of the profits earned after December 31, 2007 to non-PRC tax resident investors are subject to PRC withholding tax. The withholding tax on dividends is 10%, unless a foreign investor’s tax jurisdiction has a tax treaty with the PRC that provides a lower withholding tax rate and the foreign investor is recognized as the beneficial owner of the income under the relevant tax rules.

 

Moreover, the New EIT Law treats enterprises established outside of China with “effective management and control” located in China as PRC resident enterprises for tax purposes. The term “effective management and control” is generally defined as exercising overall management and control over the business, personnel, accounting, properties, etc. of an enterprise. Our company, if considered a PRC resident enterprise for tax purposes, would be subject to the PRC EIT at the rate of 25% on our worldwide income for the period after January 1, 2008. As of December 31, 2015, we had not accrued for PRC tax on such basis. We will continue to monitor our tax status.

 

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Critical Accounting Policies

 

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities, disclosure of contingent assets and liabilities on the date of each set of financial statements and the reported amounts of revenues and expenses during each financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates and assumptions is an integral component of the financial reporting process, actual results could differ from those estimates and assumptions.

 

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically could materially impact the consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included elsewhere in this annual report.

 

Revenue Recognition

 

We recognize revenues only when (1) there is persuasive evidence of an arrangement, (2) the sales price is fixed or determinable, (3) delivery of services has occurred, and (4) collectability is reasonably assured. We derive revenues from the provision of e-commerce, marketing, listing, financial and other value-added services. To the extent that our revenues consist of multiple deliverables, we will recognize such revenues in accordance with applicable accounting policies.

 

E-commerce Services

 

We began to provide e-commerce services in 2011. Our e-commerce services primarily consist of SouFun membership services, our online marketplace services, beginning in August 2014, direct sales services for new homes, beginning in January 2015, online real estate brokerage services, and beginning in the second quarter of 2015, online home-decorating services and online sublease services.

 

Soufun Membership Services. We enter into arrangements with real estate developers, pursuant to which we charge our customers RMB5,000 to RMB20,000 in order for them to purchase specified properties from the real estate developers at a discount significantly greater than the fair value of the fees charged by us. The discount is either a fixed amount off or a fixed percentage of the price of the specified property. The fees paid by prospective home buyers are refundable before a purchase of the specified properties is made by the customers. We recognize revenues when cash consideration of the fee is received and the discount has been applied by the customers to pay for the purchase price of the specified properties. Cash received in advance of the purchase of specified properties is recorded as “customers’ refundable fees.”

 

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Commencing in 2013, we, real estate developers and advertising agencies entered into tri-party cooperation arrangements for certain SouFun membership services. When customers use our SouFun membership services to purchase specified properties in selected advertisements published by the marketing agents, a portion of the proceeds from the SouFun membership services is remitted to the marketing agents. We recognized revenues from this type of SouFun membership services on a net basis, representing the portion of proceeds received from customers that is ultimately retained by us as we are an agent in the arrangement. Commencing in 2014, we entered into cooperation arrangements directly with real estate developers for SouFun membership services. We either engage third-party real estate agents or places advertisements with marketing agents to promote the real estate projects. We recognized revenues from this type of SouFun membership services on a gross basis, representing the proceeds received from the real estate developers, as we are the primary obligor in the arrangement. Payments to third-party real estate agents are recorded as cost of sales, while payments to marketing agents are recorded as selling expenses. The portion to be remitted to third-party real estate agents and marketing agents is recorded as amounts payable to sales and marketing agents in “accrued expenses and other liabilities” on the consolidated balance sheets.

 

Online Marketplace Platform. We operate (1) an online marketplace platform which enables third-party merchants to sell home furnishing products to customers online and (2) an online payment platform which enable third-party merchants to transact with customers online. We earn a commission, which ranges from 5% to 15% of the sales transaction amount, from the third-party merchants when a transaction is completed. When a customer places his or her order for home furnishing products with a third-party merchant through our marketplace platform, the sales price and the shipping charge for the sale transaction are confirmed. Delivery of goods to a consumer will be processed by the third-party merchant after payment is made through our online payment platform. When the sales transaction is completed, we recognize the commission earned as e-commerce services revenues upon confirmation of receipt of the home furnishing products by the consumer and remittance of the net payment to the third-party merchant through our marketplace and online payment platforms.

 

Direct Sales Services. Commencing in 2014, we launched direct sales services for new homes. We promote property developments of our developer clients primarily through our websites and mobile apps. Potential buyers can register with our free of charge if they are interested in any real estate properties covered by our direct sales services. After the registration, we provide them with additional information about the properties and related services, such as tours to visit the property developments and other services to facilitate property purchases. By using the direct sales services, individual buyers can enjoy discounted prices for properties that we offer from our partner developers. We charge our developer clients a fee for each property they sold through our direct sales services at a predetermined percentage of the value of the individual transaction. Revenues are recognized by us when confirmation of the sale is received from the real-estate developers, as there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured, as prescribed by ASC 605, “Revenue Recognition.”

 

Online Home-decorating Services. We launched online home-decorating services in the second quarter of 2015. Based on the customer’s budget and plan for decoration, we engage third-party contractors to perform interior design, remodeling, renovation, furnishing and other home improvement services. We generally charge the customers a fixed fee based on the square footage of the premises undergoing decoration. We source customers primarily through our websites and mobile apps. Revenues derived from decoration services where we design and renovate the properties for our customers are recognized based on the percentage-of-completion method in accordance with ASC 605 “Revenue Recognition.”

 

Online Sublease Services. Commencing in 2015, we began providing a new sublease service through our rental services channel. We initially enter into contracts with the original lessors and receive the exclusive right to rent the property to the sublessees. We are responsible for collecting the rent from the sublessee and remitting the rent to the original lessor. We also bear the primary obligations under the original lease. The rent is recognized on a straight-line basis over the lease term.

 

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Marketing Services

 

We offer marketing services on our websites and mobile apps, primarily presented as banner advertisements, floating links, logos and other media insertions (“forms of services”). These services are offered primarily to real estate developers and providers of products and services for home decoration and improvement. Marketing services allow advertisers to place advertisements on specified areas of our websites and mobile apps, in various specified formats and over various periods of time. Written contracts, containing all significant terms, signed by us and our customers provide persuasive evidence of the arrangement. The contracts do not contain any specific performance, cancellation, termination or refund provisions.

 

We negotiate the service fee with the customer but once a price is agreed to and the written contract is signed by both parties, the price is fixed and not subject to change. Service fees are generally due and payable in installments over the service period. Historically, service fees have varied widely for marketing services and such variation in prices exists even when the same forms of services are provided in the same location of our websites and mobile apps and for the same duration. Marketing services typically last from several days to one year. Delivery of the services occurs upon displaying the agreed forms of service on our websites and mobile apps over the specified service period. We perform credit assessments on our customers prior to signing the written contract to ensure collectability is reasonably assured. We recognize revenues ratably over the contract period, when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured, as prescribed by ASC 605 “Revenue Recognition.”

 

For certain arrangements, we provide marketing services that contain multiple deliverables, that is, different forms of services to be delivered over different periods of time.

 

We account for each deliverable in the arrangement as separate unit of accounting. Revenues are allocated to each unit of accounting on a relative fair value basis based on a selling price hierarchy and are recognized ratably over the duration of the service period. The selling price for a deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The total arrangement consideration is allocated to each unit of accounting based on its relative selling price, which is determined based on our BESP for that deliverable because neither VSOE nor TPE exist. In determining the BESP for each deliverable, we consider our overall pricing model and objectives, as well as market or competitive conditions that may impact the price at which we would transact if the deliverable were sold regularly on a standalone basis. We monitor the conditions that affect its determination of selling price for each deliverable and reassess such estimates periodically.

 

We updated the BESP for each deliverable during 2015. In accordance with ASC 250, “Accounting Changes and Error Corrections,” changes in the determination of the BESP are considered a change in accounting estimate and are accounted for on a prospective basis. The effect of changes in the BESP on the allocation of arrangement consideration was insignificant.

 

Listing Services

 

Listing service revenues consist of revenues derived from both basic listing and special listing services. We provide basic and special listing services to agents, brokers, property developers, property owners, property managers and others seeking to sell or rent new or secondary residential and commercial properties.

 

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Basic Listing Services. Basic listing services entitle customers to post information for properties, home furnishings and other related products and services in a specified area on our websites and mobile apps for a specified period of time, which typically range from one to 36 months, in exchange for a fixed fee. Written contracts, containing all significant terms, signed by us and our customers provide persuasive evidence of the arrangement. The amount of fee to be paid is not subject to change once the contract has been signed. The contracts do not contain any specific performance, cancellation, termination or refund provisions. Delivery of services occurs by making access to our websites and mobile apps available for posting by the customers over the specified listing period. We perform credit assessments of our customers prior to signing the written contract to ensure collectability is reasonably assured. In accordance with ASC 605, “Revenue Recognition,” revenues are recognized ratably over the duration of the service period as the basic listing services are being delivered.

 

Special Listing Services. Special listing services are arrangements comprising website listing services and other coordination of promotional themed events (“offline services”), such as physical forum discussions and banquet gatherings, each with the special listing as the theme, where our customers promote their products or services to a live audience. The offline services do not have standalone value and are always sold with special listing services. Written contracts, containing all significant terms, signed by us and our customers provide persuasive evidence of the arrangement. The amount of fee to be paid is not subject to change once the contract has been signed. The contracts do not contain any specific performance, cancellation, termination or refund provisions. Delivery of services occurs by making access to the websites available for posting by the customers over the specified listing period and upon completion of the offline services. We perform credit assessments of our customers prior to signing the written contract to ensure collectability is reasonably assured. As the offline services do not have standalone value, a combined unit of accounting is used pursuant to ASC 605 whereby we recognize revenues upon delivery of the final deliverable, which is recognized ratably over the duration of the special listing service period.

 

Financial Services

 

We provide financial services though our online financial platform, www.txdai.com, and offline micro loan subsidiaries. We provide secured loans in the form of entrusted loans, mortgage loans and unsecured loans, primarily to home buyers, real estate developers and other borrowers that meet our credit assessment requirements. Revenues derived from loan interest income and annual service fees are recognized in financial services using the effective interest rate method.

 

Other Value-added Services

 

We generate revenues from other value-added services, including primarily subscription services for access to our information database, and consulting services for customized and industry-related research reports and indices. Revenues derived from subscription services for access to our information database are recognized ratably over the subscription period. Revenues derived from consulting services for customized and industry-related research reports and indices are recognized when the relevant services are completed.

 

Our business is subject to business taxes, value-added taxes, surcharges or cultural construction fees levied on advertising-related sales in China. In accordance with ASC 605-45, “Revenue Recognition—Principal Agent Considerations”, all such business taxes, value-added taxes, surcharges and cultural construction fees are presented as cost of revenues in the consolidated statements of comprehensive income. Business taxes, value-added taxes and related surcharges and cultural construction fees for 2013, 2014 and 2015 were US$38,783, US$44,003 and US$48,253, respectively.

 

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All service fees received in advance of the provision of services are initially recorded as deferred revenues and subsequently recognized as revenues when we perform the related services.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

We consider many factors in assessing the collectability of its receivables, such as, the age of the amounts due, the customer’s payment history and credit-worthiness. An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable. Accounts receivable balances are written off after all collection efforts have been exhausted.

 

Funds Receivable

 

Funds receivable represents cash from SouFun membership services due from third-party payment service providers for clearing transactions. We carefully consider and monitor the credit worthiness of the third-party payment service providers used.

 

An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable. Receivable balances are written off after all collection efforts have been exhausted. No allowance for doubtful accounts was provided for the funds receivable, as of December 31, 2014 or 2015, respectively.

 

Loans Receivable

 

Loans receivable consists primarily of secured loans in forms of entrusted, mortgage and unsecured loans to borrowers that have passed our credit assessment. Such amounts are recorded at the principal amount less impairment as of the balance sheet date. The loan periods extended by us to the borrowers generally range from one to thirty-six months.

 

In accordance with ASC 310, “Receivables”, an allowance for doubtful accounts is recorded when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Each individual loan receivable is assessed for impairment on a quarterly basis.

 

Commencing in August 2014, we began to enter into arrangements with third-party investors under which we sell the economic benefits in certain mortgage loans receivable in exchange for cash. Sales of mortgage loans receivable to investors are accounted for in accordance with ASC 860 “Transfers and Servicing.” We derecognize the mortgage loans receivable if (1) the loans have been legally isolated from us, (2) there are no constraints on investors to pledge or exchange the mortgage loans, and (3) we do not maintain effective control over the mortgage loans.

 

Share-based Compensation

 

Our employees and directors participate in our share-based award incentive plan. We apply ASC 718, “Compensation-Stock Compensation,” to account for our employee share-based payments. There were no share-based payments made to non-employees for any of the years presented. In accordance with ASC 718, we determine whether a share option should be classified and accounted for as a liability award or an equity award. All grants of share-based awards to employees classified as equity awards are recognized in the financial statements based on their grant-date fair values, which are calculated using an option pricing model. All grants of share-based awards to employees and directors classified as liabilities are re-measured at the end of each reporting period with an adjustment for fair value recorded to the current period expense in order to properly reflect the cumulative expense based on the current fair value of the vested awards over the vesting periods. We have elected to recognize compensation expense using the straight-line method for all employee equity awards granted with graded vesting based on service conditions, which were not subject to performance vesting conditions.

 

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We use the accelerated attribution method for the equity awards with performance conditions on a tranche-by-tranche basis, based on the probable outcome of the performance conditions. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards is reversed. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest.

 

Income Taxes

 

We follow the liability method of accounting for income taxes, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards, if any. We reduce carrying amounts of deferred tax assets by a valuation allowance, if, based on the available evidence, it is “more-likely-than-not” that such assets will not be realized. Accordingly, we assess the need to establish valuation allowances for deferred tax assets at each reporting period based on a “more-likely-than-not” realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards, if any, not expiring.

 

We apply ASC 740, “Income Taxes” to account for uncertainties in income taxes. In accordance with the provisions of ASC 740, we recognize in our financial statements the impact of a tax position if a tax return position or future tax position is “more-likely-than-not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more-likely-than-not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement.

 

Our estimated liability for unrecognized tax benefits, which is included in “accrued expenses and other liabilities,” is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits and expiration of the statutes of limitation. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, the appeal or litigation process. The actual benefits ultimately realized may differ from our estimates. As each audit is concluded, adjustments, if any, are recorded in our financial statements. Additionally, in future periods, changes in facts, circumstances and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.

 

Interest and penalties arising from underpayment of income taxes are computed in accordance with the relevant PRC tax law. The amount of interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return. Interest and penalties recognized in accordance with ASC 740 are classified in our consolidated statements of comprehensive income as income tax expense.

 

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Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently evaluating the impact on our consolidated financial statements of adopting this standard.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement-Extraordinary and Unusual Items,” which eliminates the concept of extraordinary and unusual items from U.S. GAAP. The new guidance is effective prospectively for the Company for the year end ending December 31, 2017 and interim reporting periods during the year ending December 31, 2017. Early adoption is permitted. The Group is currently evaluating the impact of the adoption of ASU 2015-03 on the consolidated financial statements. We are currently evaluating the impact on our consolidated financial statements of adopting this standard.

 

In April 2015, the FASB issued ASU No. 2015-03 (“ASU 2015-03”), “Interest—Imputation of Interest.” ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact on our consolidated financial statements of adopting this standard.

 

In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17”), “Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact on our consolidated financial statements of adopting this standard.

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize the rights and obligations resulting from leases as assets and liabilities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact on our consolidated financial statements of adopting this standard.

 

In March 2016, the FASB issued ASU NO. 2016-09 (“ASU 2016-09”), “Accounting Standards Update No.2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 involves several aspects of the accounting for shared-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact on our consolidated financial statements of adopting this standard.

 

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Results of Operations

 

The following table sets forth selected financial data from our consolidated statements of comprehensive income for the periods indicated:

 

   Year Ended December 31, 
   2013   2014   2015 
   Amount   Percentage
of revenue
   Amount   Percentage
of revenue
   Amount   Percentage
of revenue
 
   (US$ in thousands, except percentage) 
Revenues                              
E-commerce services   188,107    29.5%   244,344    34.8%   474,810    53.7%
Marketing services   278,322    43.7%   294,484    41.9%   249,862    28.3%
Listing services   161,547    25.3%   145,654    20.7%   107,922    12.2%
Financial services           3,235    0.5%   29,582    3.4%
Other value-added services   9,403    1.5%   15,165    2.1%   21,373    2.4%
Total revenues   637,379    100.0%   702,882    100.0%   883,549    100.0%
Cost of revenues                              
Cost of services   (102,488)   (16.1)%   (145,739)   (20.7)%   (555,389)   (62.9)%
Total cost of revenues   (102,488)   (16.1)%   (145,739)   (20.7)%   (555,389)   (62.9)%
Gross profit   534,891    83.9%   557,143    79.3%   328,161    37.1%
Operating income (expenses)                              
Selling expenses   (101,935)   (16.0)%   (147,874)   (21.0)%   (236,603)   (26.8)%
General and administrative expenses   (83,384)   (13.1)%   (100,571)   (14.3)%   (125,405)   (14.2)%
Other income (loss)   786    0.1%   835    0.1%   (625)   (0.1)%
Operating income (loss)   350,358    55.0%   309,533    44.0%   (34,473)   (3.9)%
Foreign exchange gain (loss)   3    0%   (44)   0%   1,464    0.2%
Interest income   27,803    4.4%   43,857    6.2%   22,221    2.5%
Interest expenses   (14,675)   (2.3)%   (17,308)   (2.5)%   (16,519)   (1.9)%
Realized (loss) gain on available-for-sale securities (including accumulated other comprehensive income reclassifications for unrealized (loss) gain on available-for-sale securities of (US$721), nil, US$821, nil and nil for the year ended December 31, 2011, 2012, 2013, 2014 and 2015, respectively)   821    0.1%                
Government grants   4,031    0.6%   7,205    1.0%   4,936    0.6%
Investment income                   1,333    0.2%
Other-than-temporary impairment on available-for-sale securities           (8,417)   (1.2)%        
Gain on bargain purchase   102    0%                
Income (loss) before income taxes and noncontrolling interests   368,443    57.8%   334,826    47.6%   (21,038)   (2.4)%
Income tax (expenses) benefit   (69,781)   (10.9)%   (81,609)   (11.6)%   5,905    0.7%
Net income (loss)   298,662    46.9%   253,217    36.0%   (15,133)   (1.7)%
Net income (loss) attributable to noncontrolling interests   53    0%           (37)   0%
Net income (loss) attributable to SouFun Holdings Limited’s shareholders   298,609    46.9%   253,217    36.0%   (15,096)   (1.7)%
Other comprehensive income, before tax                              
Foreign currency translation adjustments   20,150    3.1%   (4,323)   (0.6)%   (55,930)   (6.3)%
Unrealized gain (loss) on available-for-sale securities   78    0%   10,508    1.5%   (4,002)   (0.5)%
Reclassification adjustment for loss (gain) included in net income   (821)   (0.1)%                
Other comprehensive income, before tax   19,407    3.0%   6,185    0.9%   (59,930)   (6.8)%

Income tax expense related to components of other comprehensive income

                        
Other comprehensive income, net of tax   19,407    3.0%   6,185    0.9%   (59,930)   (6.8)%
Comprehensive income (loss)   318,069    49.9%   259,402    36.9%   (75,063)   (8.5)%
Comprehensive income (loss) attributable to noncontrolling interests   53    0%           (37)   0%
Comprehensive income (loss) attributable to SouFun Holdings Limited’s shareholders   318,016    49.9%   259,402    36.9%   (75,026)   (8.5)%
Share-based compensation expenses included in:                              
Cost of revenues   1,143    0.2%   782    0.1%   471    0.1%
Selling expenses   1,621    0.3%   1,122    0.2%   446    0.1%
General and administrative expenses   4,264    0.7%   2,778    0.4%   3,485    0.4%

 

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Revenues

 

Our revenues increased 25.7% and 10.3% year-over-year in 2015 and 2014, respectively. The year-over-year increase in revenues in 2015 was primarily driven by the continued growth of our business and, in particular, the expansion of our e-commerce services. The year-over-year increase in revenues in 2014 was primarily driven by the growth in SouFun membership services and, to a lesser extent, marketing services.

 

E-commerce Services. Revenues from e-commerce services increased significantly year-over-year in 2015, primarily due to the expansion of e-commerce service offerings, including direct sales services for new homes, online real estate brokerage services, and online home-decorating services. Revenues from e-commerce services increased 29.9% year-over-year in 2014, primarily due to the expansion of our SouFun membership services in existing and new cities. Revenues from e-commerce services represented 29.5%, 34.8% and 53.7% of our revenues in 2013, 2014 and 2015, respectively. We expect revenues from e-commerce services to remain the most important source of our revenues for the foreseeable future.

 

The following table presents our e-commerce service revenues for each of our businesses by amount and percentage of total e-commerce service revenues for the periods indicated:

 

   Year Ended December 31, 
   2013   2014   2015 
   Amount   Percentage
of e-
commerce
service
revenues
   Amount   Percentage
of e-
commerce
service
revenues
   Amount   Percentage
of e-
commerce
service
revenues
 
   (US$ in thousands, except percentage) 
New home   188,102    100.0%   244,294    100.0%   318,612    67.1%
Other product groups   5    0.0%   50    0.0%   156,199    32.9%
Total e-commerce service revenues   188,107    100.0%   244,344    100.0%   474,811    100.0%

 

New home business accounted for substantially all of our e-commerce service revenues in each of 2013 and 2014, as well as a substantial portion of our e-commerce service revenue in 2015. Home furnishing and improvement business and secondary and rental business accounted for a portion of our e-commerce services revenue in 2015 as a result of the development of the online home-decorating services and online real estate brokerage services, respectively.

 

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Marketing Services. Our marketing service revenues consist of revenues derived from the advertising services provided by our new home, secondary and rental properties and home furnishing and improvement businesses. Our marketing services include the design and deployment on our websites and mobile apps of banners, links, logos and floating signs. Revenues from marketing services decreased 15.2% year-over-year in 2015, primarily due to the declines in the real estate market in China. Revenues from marketing services increased 5.8% year-over-year in 2014, primarily due to the contribution from the tier 2 cities. In 2013, 2014 and 2015, revenues generated from our marketing services represented 43.7%, 41.9% and 28.3% of our revenues, respectively.

 

The following table presents our marketing service revenues for each of our businesses by amount and percentage of total marketing service revenues for the periods indicated:

 

   Year Ended December 31, 
   2013   2014   2015 
   Amount   Percentage
of
marketing
service
revenues
   Amount   Percentage
of
marketing
service
revenues
   Amount   Percentage
of
marketing
service
revenues
 
   (US$ in thousands, except percentage) 
New home   258,479    92.9%   260,333    88.4%   219,057    87.7%
Home furnishing and improvement   18,924    6.8%   33,058    11.2%   28,307    11.3%
Secondary and rental   919    0.3%   1,093    0.4%   2,498    1.0%
Total marketing service revenues   278,322    100.0%   294,484    100.0%   249,862    100.0%

 

New home business accounted for 92.9%, 88.4% and 87.7% of our marketing service revenues in 2013, 2014 and 2015, respectively. New home business primarily consists of marketing services for newly developed properties for sale. Our new home customers are largely real estate developers and their sales agents who are in the process of promoting newly developed properties for sale.

 

Listing Services. Revenues from our listing services decreased 25.9% and 9.8% year-over-year in 2015 and 2014, respectively, which was due to decreases in the basic listing services. Such decreases were primarily due to discounts we have offered to real estate agency customers since the end of June 2014. In addition, certain real estate agency customers reduced or discontinued their purchase of our listing services as we continued to develop our own real estate brokerage and home sales services in competition with these customers. In 2013, 2014 and 2015, revenues from our listing services represented 25.3%, 20.7% and 12.2% of our revenues, respectively. We believe that listing service revenues will continue to remain a significant revenue source. However, regulatory efforts to require additional down payments and other actions to dampen the growing market for secondary homes have impacted and may continue to impact our revenues. In addition, our expansion into the online real estate brokerage services has adversely affected and may continue to adversely affect our relationship with customers of our listing services that are real estate brokers, which in turn has adversely affected and may continue to adversely affect our revenues from listing services.

 

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The following table sets forth our listing service revenues by amount and percentage of our listing service revenues for the periods indicated:

 

   Year Ended December 31, 
   2013   2014   2015 
   Amount   Percentage
of listing
service
revenues
   Amount   Percentage
of listing
service
revenues
   Amount   Percentage
of listing
service
revenues
 
   (US$ in thousands, except percentage) 
Basic listing   145,752    90.2%   124,807    85.7%   84,907    78.7%
Special listing   15,795    9.8%   20,847    14.3%   23,015    21.3%
Total listing service revenues   161,547    100.0%   145,654    100.0%   107,922    100.0%

 

The average revenue per paying subscriber was US$840, US$711 and US$410 for 2013, 2014 and 2015, respectively. The decrease in the average revenue per paying subscriber was primarily due to discounts we offered to real estate agency customers since the end of June 2014. In addition, certain real estate agency customers, including certain nationwide customers, reduced or discontinued their purchase of our listing services as we continued to develop our own real estate brokerage and home sales services in competition with these customers.

 

The following table presents our listing service revenues for each of our businesses by amount and percentage of total listing service revenues for the periods indicated:

 

   Year Ended December 31, 
   2013   2014   2015 
   Amount   Percentage
of listing
service
revenues
   Amount   Percentage
of listing
service
revenues
   Amount   Percentage
of listing
service
revenues
 
   (US$ in thousands, except percentage) 
Secondary and rental properties   144,963    89.7%   124,172    85.3%   83,972    77.8%
Research   14,178    8.8%   19,019    13.0%   21,540    20.0%
Other product group   2,406    1.5%   2,463    1.7%   2,410    2.2%
Total listing service revenues   161,547    100.0%   145,654    100.0%   107,922    100.0%

 

Secondary and rental properties business accounted for 89.7%, 85.3% and 77.8% of our listing service revenues in 2013, 2014 and 2015, respectively.

 

Financial Services. Revenues from financial services increased significantly in 2015 primarily due to the loans we made to real estate developers, property buyers and other borrowers since August 2014. In 2013, 2014 and 2015, revenues from financial services represented nil, 0.5% and 3.4% of our revenues, respectively.

 

Other Value-added Services. Revenues from other value-added services increased 61.3% and 40.9% year-over-year in 2015 and 2014, respectively, primarily due to a rising demand for our database and research services. In 2013, 2014 and 2015, revenues from other value-added services represented 1.5%, 2.1% and 2.4% of our revenues, respectively.

 

Cost of Revenues

 

Our cost of revenues consists primarily of staff costs, operating lease costs, decoration costs, sales taxes and commission fees. Our cost of revenues as a percentage of our revenues was 16.1%, 20.7% and 62.9% in 2013, 2014 and 2015, respectively.

 

 - 105 - 

 

 

Our cost of revenues increased significantly year-over-year in 2015, primarily due to (1) increased staff costs to US$312.1 million in 2015 from US$45.8 million in 2014, due to an increase in staff headcount and compensation bases, (2) increased materials and third-party contractor costs to US$52.2 million in 2015 from nil in 2014, due to the provision of decoration services, and (3) increased commission fees to US$70.5 million in 2015 from US$27.4 million in 2014, as a result of increasing commissions to marketing agents for purposes of promoting SouFun membership cards. We have implemented an aggressive recruitment policy since early 2015 to support our transformation from a pure Internet information platform to a transaction-oriented platform.

 

Our cost of revenues increased 42.2% year-over-year in 2014, primarily due to (1) an increase in staff costs to US$45.8 million in 2014 from US$37.6 million in 2013, due to our hiring of editorial staff and customer service personnel throughout 2014 to support our growth, (2) an increase in e-commerce costs of US$27.4 million, representing the portion of proceeds remitted to real estate brokers under SouFun membership services, (3) an increase in business taxes, value-added taxes, surcharges to US$44.0 million in 2014 from US$38.8 million in 2013 and (4) other expenses primarily due to our business growth.

 

Gross Profit and Gross Margin

 

As a result of the foregoing, our gross profit decreased 41.1% year-over-year in 2015, as compared to a year-over-year increase of 4.2% in 2014. Our gross margin was 83.9%, 79.3% and 37.1% in 2013, 2014 and 2015, respectively.

 

Operating Expenses

 

Our operating expenses increased 45.7% and 34.1% year-over-year in 2015 and 2014, respectively. The increase in our operating expenses was attributable to increases in both our selling expenses and general and administrative expenses. In 2013, 2014 and 2015, our operating expenses represented 29.1%, 35.3% and 41.0% of our revenues, respectively.

 

The following table sets forth our operating expenses by amount and percentage of our total operating expenses for the periods indicated:

 

   Year Ended December 31, 
   2013   2014   2015 
   Amount   Percentage
of
operating
expenses
   Amount   Percentage
of
operating
expenses
   Amount   Percentage
of
operating
expenses
 
   (US$ in thousands, except percentage) 
Selling expenses   101,935    55.0%   147,874    59.5%   236,603    65.4%
General and administrative expenses   83,384    45.0%   100,571    40.5%   125,405    34.6%
Total   185,319    100.0%   248,445    100.0%   362,008    100.0%

 

 - 106 - 

 

 

Selling Expenses. Our selling expenses increased 60.0% and 45.1% year-over-year in 2015 and 2014, respectively. The increase in 2015 was primarily due to enhanced promotional efforts for our SouFun membership card services, our website, new domain name and the SouFun mobile applications. In particular, our expenses paid to our marketing agents increased from US$21.0 million to US$77.0 million year-over-year in 2015, primarily due to our business expansion. Advertising and promotional expenses increased from US$46.6 million to US$122.4 million year-over-year in 2015, primarily due to the promotions for our SouFun membership card services, our website, new domain name and the SouFun mobile applications. Staff costs increased from US$61.4 million to US$80.2 million year-over-year in 2015, primarily due to the hiring of additional sales and marketing personnel to promote our online real estate brokerage service for secondary and rental properties. The increase in 2014 was primarily due to expenses paid to our marketing agents for our SouFun membership services, increased advertising and promotional expenses and staff cost. E-commerce cost relating to the portion of proceeds to be remitted to marketing media partners increased from nil to US$21.0 million year-over-year in 2014 due to increased revenue from our new model of SouFun membership services. Advertising and promotional expenses increased significantly from US$9.9 million to US$25.4 million year-over-year in 2014, mainly due to increased promotion of our SouFun membership services. Staff costs increased 12.4% from US$54.6 million to US$61.4 million year-over-year in 2014, mainly due to the hiring of additional sales and marketing personnel to support our business growth.

 

General and Administrative Expenses. Our general and administrative expenses increased 24.7% and 20.6% year-over-year in 2015 and 2014, respectively. The increases in general and administrative expenses were primarily due to increased staff costs as a result of an increase in staff headcounts and compensation bases. Staff costs increased 35.5% to US$72.1 million in 2015 from US$53.4 million in 2014, which increased 29.7% from US$41.4 million in 2013.

 

Other Income (Loss). Other loss in 2015 consisted of other revenue of US$0.7 million and other expenses of US$1.3 million of our subsidiaries that operate the hotel and office leasing businesses. Other income in 2014 consisted of other revenue of US$13.7 million and other expenses of US$12.9 million of the three subsidiaries we acquired in March 2013 that owned and managed the BoaAn Building.

 

Operating Income and Operating Margin

 

As a result of the foregoing, our operating income decreased significantly year-over-year in 2015 and decreased 11.7% year-over-year in 2014. Our operating margin was 55.0%, 44.0% and (3.9)% in 2013, 2014 and 2015, respectively.

 

Interest Income

 

Our interest income, consisting primarily of interest income from cash and restricted cash as well as short-term investments, decreased 49.3% year-over-year in 2015, primarily due to a decrease in our restricted cash and short-term investments. Our interest income increased 57.7% year-over-year in 2014, primarily due to our increased bank deposits.

 

Interest Expenses

 

Our interest expenses, consisting primarily of interest incurred as a result of our bank borrowings and convertible notes, decreased 4.6% year-over-year in 2015, primarily due to our repayment of existing borrowings and lower interest rates on our new borrowings. Our interest expenses increased 17.9% year-over-year in 2014, primarily due to the interest payable on our $400 million of notes.

 

Government Grants

 

Our government grants, which consisted of refunds on business taxes and VAT, totaled US$4.0 million, US$7.2 million and US$4.9 million in 2013, 2014 and 2015, respectively.

 

 - 107 - 

 

 

Investment Income

 

Our investment income, which consisted of dividends from the respective long-term investments in companies including Color Life, Hopefluent and Tospur, totaled nil, nil and US$1.3 million in 2013, 2014 and 2015, respectively.

 

Other-than-temporary Impairment on Available-for-sale Securities

 

We had nil, US$8.4 million and nil other-than-temporary impairments on available-for-sale securities in 2013, 2014 and 2015, respectively. The impairment resulted from a decrease in the trading price of Hopefluent, of which company we hold 17.26% outstanding shares.

 

Income Tax (Expenses) Benefit

 

We had US$5.9 million income tax benefit in 2015. Our income tax expenses increased 17.0% year-over-year in 2014. Our effective tax rate was 18.9% and 24.4% in 2013 and 2014, respectively. The increases in our tax expenses and effective tax rate in 2014 were both primarily due to reversal of US$15.1 million of previously accrued income taxes in 2013.

 

Net (Loss) Income Attributable to Our Noncontrolling Interests

 

We had US$0.04 million net loss attributable to our noncontrolling interests in 2015, as compared with nil and US$0.05 million net income in 2014 and in 2013, respectively.

 

B. Liquidity and Capital Resources

 

Historically, we have financed our liquidity requirements primarily through cash generated from operations, bank borrowings and equity financings. As of December 31, 2015, we had US$817.9 million in cash and cash equivalents, which primarily consisted of cash and bank deposits, US$103.2 million in restricted cash and US$62.6 million in short-term investments with maturity dates greater than three months but less than one year, compared to US$354.8 million, US$98.0 million and US$455.2 million as of December 31, 2014, respectively. Of our cash and cash equivalents as of December 31, 2015, US$388.9million was held inside the PRC and US$429.0million was held outside of the PRC. Of the US$388.9 million held inside the PRC, US$51.2 million was held by our consolidated controlled entities and US$337.7 million was held by our subsidiaries. See “Item 3.D. Key Information—Risk Factors—Risks related to doing business in China—We rely primarily on dividends and other distributions on equity paid by our subsidiaries, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business as well as our liquidity” and “—Government control of currency conversion may limit our ability to utilize our revenues effectively” for additional discussion. All of our investments with original stated maturities of 90 days or less are classified as cash and cash equivalents. All of our investments with original stated maturities of greater than 90 days and less than 365 days are classified as short-term investments. As of December 31, 2013, 2014 and 2015, we had short-term investments ofUS$10.1 million, US$455.2 million and US$62.6 million, respectively.

 

As of December 31, 2015, we had U.S. dollar-denominated short-term borrowings of US$100.0 million obtained from financial institutions in the United States. These bank borrowings are repayable on demand and bear interest at interest rates of LIBOR plus 2.6%. These bank borrowings are secured by bank deposits of approximately US$103.2 million, placed with financial institutions in China. The cash deposits pledged for these bank borrowings could be released after we repay the bank borrowings in full. These pledged deposits are classified as restricted cash on our consolidated balance sheets. Certain of these bank borrowings included cross default provisions.

 

 - 108 - 

 

 

As of December 31, 2015, we had no U.S. dollar-denominated long-term borrowings. We reclassified the US$180.8 million long-term borrowings as of December 31, 2014 into short-term borrowings as of December 31, 2015, as the maturity period of such borrowings was within one year. As of December 31, 2015, we already repaid US$80.8 million of such borrowings.

 

These bank borrowings, which initially totaled US$428.7 million, were incurred to satisfy the operating needs of our company and our offshore subsidiaries outside of the PRC, including property acquisitions, dividend payments, and other operational expenses.

 

Use of Proceeds  Amount 
   (US$ in thousands) 
Payment of dividends   354,272 
Acquisition of building   60,750 
Other (interest expenses and taxes)   13,722 
Total   428,744 

 

In December 2013 and January 2014, we sold an aggregate principal amount of US$350 million and US$50 million, respectively, of convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act and certain non-U.S. persons in compliance with Regulation S under the Securities Act. The 2018 Notes may be converted, under certain circumstances, based on the current conversion rate of 50.9709 ADSs per US$1,000 principal amount of 2018 Notes (after the five-for-one ADS ratio change effected in April 2014 and dividend distributions in August 2014 and March 2015, respectively), which is equivalent to a conversion price of approximately US$19.62 per ADS. The net proceeds to us from the issuance of the 2018 Notes were US$390.5 million. We are required to pay cash interest at an annual rate of 2.00% on the 2018 Notes. Interest is payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2014. We incurred debt issuance costs of US$9.5 million, which are being amortized to interest expense to the first put date of the 2018 Notes.

 

In September and November 2015, we sold an aggregate principal amount of U$100 million and US$200 million, respectively, of convertible notes due 2022 (the “2022 Notes”). The 2022 Notes were offered to certain non-U.S. persons in compliance with Regulation S under the Securities Act. The 2022 Notes may be converted, under certain circumstances, based on the current conversion rate of 27.9086 Class A ordinary shares per US$1,000 principal amount of the 2022 Notes, which is equivalent to a conversion price of approximately US$35.83 per Class A ordinary share or approximately US$7.166 per ADS. The net proceeds to us from the issuance of the 2022 Notes were US$300 million. We are required to pay cash interest at an annual rate of 1.5% on the 2022 Notes. Interest is payable semiannually in arrears on March 31 and September 30 of each year, beginning on March 31, 2016. We incurred debt issuance costs of US$1.1 million, which are being amortized to interest expense to the first put date of the 2022 Notes.

 

The notes are senior unsecured obligations and rank (1) senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the relevant notes, (2) equal in right of payment to any of our unsecured indebtedness that is not so subordinated, (3) effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and (4) structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries and consolidated controlled entities.

 

 - 109 - 

 

 

We believe that our working capital is sufficient for our present requirements. We may, however, seek additional cash resources due to changed business conditions or other future developments, including selling debt securities or additional equity securities or obtaining credit facilities to meet our cash needs. See “Item 3.D. Key Information—Risks Factors— Risks related to our ADSs, ordinary shares and notes—We may need additional capital, and the sale of additional ADSs, notes or other equity securities could result in additional dilution to our shareholders, while the incurrence of debt may impose restrictions on our operations.”

 

Cash Flows

 

The following table sets forth information regarding our cash flows for the periods indicated:

 

   Year Ended December 31, 
   2013   2014   2015 
   (US$ in thousands) 
Consolidated statements of cash flows data               
Net cash generated from (used in) operating activities   408,056    214,459    (161,183)
Net cash (used in)generated from investing activities   (39,770)   (631,131)   55,894 
Net cash generated from financing activities   87,149    192,065    587,471 
Net increase (decrease) in cash and cash equivalents   462,843    (226,250)   463,161 
Cash and cash equivalents at beginning of year   118,167    581,010    354,760 
Cash and cash equivalents at end of year   581,010    354,760    817,921 

 

Net Cash Generated from (Used in) Operating Activities

 

We had net cash used in operating activities of US$161.2 million in 2015, which was primarily attributable to (1) our net loss of US$15.1 million during this period, (2) an increase in loans of US$245.4 million provided to property buyers, real estate developers and other borrowers as we grew our financial services, (3) an increase in account receivables of US$118.8 million due to our business expansion, and (4) an increase in prepayments and other current assets of US$35.3 million. This was partially offset by (1) an increase in accrued expenses and other payables of US$106.4 million, (2) an increase in deferred revenue of US$3.1 million, and (3) an increase in customers’ refundable fees of US$19.2 million.

 

We had net cash generated from operating activities of US$214.5 million in 2014, which was primarily attributable to (1) our net income of US$253.2 million during this period, (2) an increase of US$50.2 million in accrued expenses and other liabilities primarily attributable to an increase in accrued unrecognized tax benefits and an increase in the portion of proceeds to be remitted to marketing agents under SouFun Membership services, and (3) an increase of US$8.8 million in prepayments and other current assets. This was partially offset by (1) an increase of US$81.8 million in loans provided to developers, home buyers and other borrowers as part of our financial services, (2) US$47.3 million in commitment deposits paid to real estate developers, (3) an increase of US$25.2 million in funds receivable, and (4) an increase of US$22.7 million in our accounts receivable due to the expansion of our business operations.

 

We had a net cash generated from operating activities of US$408.0 million in 2013, which was primarily attributable to (1) our net income of US$298.7 million during this period, (2) an increase in accrued expenses and other liabilities of US$41.4 million primarily attributable to an increase in the portion of proceeds to be remitted to marketing agents under SouFun Membership services, (3) an increase of US$46.4 million in deferred revenue due to increased advance from customers, and (4) US$33.5 million in customers’ refundable fees due to expansion of SouFun Membership services. This was partially offset by (1) an increase of US$25.5 million in our accounts receivable due to the expansion of our business operations, (2) an increase of US$29.3 million in funds receivable, and (3) an increase of US$12.3 million in prepayment and other current assets primarily attributable to increase in interest receivable.

 

 - 110 - 

 

 

Net Cash (Used in) Generated from Investing Activities

 

Our net cash generated from investing activities was US$55.9 million in 2015, primarily attributable to the proceeds from maturity of fixed-rate time deposits of US$507.0 million. These amounts were partially offset by (1) payment for the acquisition of property and equipment of US$137.6 million, (2) purchase of fixed-rate time deposits of US$129.8 million, and (3) long-term investments in companies including World Union, Yirendai and Sindeo of US$127.4 million in total.

 

Our net cash used in investing activities was US$631.1 million in 2014, primarily attributable to (1) short-term investments in the form of fixed-rate time deposits in China of US$1,268.7 million, (2) long-term investments in companies including Color Life, Hopefluent and Tospur of US$119.3 million in total, (3) deposits for non-current assets of US$48.2 million primarily attributable to a refundable deposit for the purchase of office space in Chengdu, partially offset by proceeds of US$822.8 million received from maturity of fixed-rate time deposits.

 

Our net cash used in investing activities was US$39.8 million in 2013, primarily attributable to (1) a US$37.7 million increase in deposit for non-current assets primarily attributable to a refundable deposit for the purchase of office building in Chengdu, (2) a US$12.8 million increase in payment for the BaoAn acquisition, (3) a US$10.0 million increase in short-term investments in the form of fixed-rate time deposits in China and (4) a US$6.7 million increase in property and equipment. These amounts were partially offset by an increase in cash proceeds received from the maturity of short-term investments of US$25.8 million relating to our fixed-rate time deposits in China and proceeds from sales of available-for-sale securities of US$1.5 million.

 

Net Cash Generated from Financing Activities

 

Our net cash generated from financing activities was US$587.5 million in 2015, primarily due to (1) an aggregate of US$646.8 million proceeds from issuance of Class A ordinary shares and convertible notes in the private placements completed in 2015, (2) increase in restricted cash of US$95.1 million, and (3) US$72.8 million proceeds from borrowing of short-term loans. These amounts were partially offset by US$153.5 million of repayment of short-term loans and US$82.8 million of dividend payments to our shareholders.

 

Our net cash generated from financing activities was US$192.1 million in 2014, primarily due to (1) a decrease in restricted cash pledged security for bank borrowings of US$303.8 million, (2) net proceeds from the issuance of convertible senior notes of US$48.9 in January 2014, and (3) proceeds of US$12.5 million from the exercise of share options. These amounts were partially offset by repayment of short-term bank borrowings of US$90.0 million and dividend payments to our shareholders of US$82.4 million.

 

Our net cash generated from financing activities was US$87.1 million in 2013, primarily due to (1) net proceeds from the issuance of convertible senior notes of US$341.6 in December 2013, (2) proceeds from long-term bank borrowings of US$100.0 million and (3) proceeds from the exercise of share options of US$26.0 million. These amounts were partially offset by (1) repayment of short-term bank borrowings of US$180.7 million, (2) dividend payments to our shareholders of US$81.0 million and (3) an increase in restricted cash pledged security for bank borrowings of US$108.2 million.

 

 - 111 - 

 

 

Capital Expenditures

 

Our capital expenditures were US$6.7 million, US$8.0 million and US$137.6 million in 2013, 2014 and 2015, respectively. We expect our capital expenditures to increase in the future as our business continues to develop and expand as we make further improvements to our websites and our services. As of December 31, 2015, we settled the total purchase price of an office building and the parking spaces in Chengdu and converted them into fixed assets on our consolidated balance sheets, and paid half of the total purchase price of US$119.9 million for the purchase of a new headquarters establishment in Beijing. See “Item 4.B. Information on the CompanyBusiness OverviewFacilities.”

 

Inflation

 

According to the National Bureau of Statistics of China, the change in the consumer price index in China was 2.6%, 2.0% and 1.4% in 2013, 2014 and 2015, respectively. Recent inflation has not had a material impact on our results of operations. However, we cannot assure you that we will not be adversely affected by inflation or deflation in China in the future.

 

C. Research and Development, Patents and Licenses, etc.

 

We have a team of experienced engineers who are primarily based at our headquarters in Beijing. We recruit most of our engineers locally and have established various recruiting and training programs with leading universities in China. We compete aggressively for engineering talent to help us address challenges such as Chinese language processing, information retrieval and high performance computing. In each of 2013, 2014 and 2015, our research and development expenditures, including share-based compensation expenses for research and development staff, were US$32.3 million, US$31.9 million and US$40.4 million, representing 5.1%, 4.5% and 4.6% of our total revenues for the same periods.

 

D. Trend Information

 

See “—A. Operating Results” of this Item 5 and “Item 3.D. Key Information—Risk Factors” of this annual report.

 

E. Off-Balance Sheet Arrangements

 

We do not currently have any outstanding off-balance sheet arrangements or commitments. We have no plans to enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet arrangements or commitments.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations as of December 31, 2015:

 

   Payment due by period 
   Total   Less than
one year
   One to
three years
   Three to
five years
   More
than
five years
 
   (US$ in thousands) 
Convertible senior notes with principal and interest   754,226    12,500    424,597    9,000    308,129 
Operating lease commitments   200,412    99,655    90,391    9,983    383 
Loan principal and interest expense obligation   100,843    100,843             

 

 - 112 - 

 

 

Our 2018 Notes will mature in December 2018, unless earlier repurchased or converted into our ADSs based on the current conversion rate of 50.9709 ADSs per US$1,000 principal amount of 2018 Notes (after the five-for-one ADS ratio change effected in April 2014 and dividend distributions in August 2014 and March 2015), which is equivalent to a conversion price of approximately US$19.62 per ADS. The conversion rate is subject to certain corporate events. The interest will be payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2014. Each holder of the 2018 Notes has the right to require us to repurchase for cash all or part of that holder’s 2018 Notes on December 15, 2016, at a repurchase price equal to 100.0% of the principal amount of the 2018 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date.

 

Our 2022 Notes will mature in September and November 2022, respectively, unless earlier repurchased or converted into our ADSs based on the current conversion rate of 27.9086 Class A ordinary shares per US$1,000 principal amount of the 2022 Notes, which is equivalent to a conversion price of approximately US$35.83 per Class A ordinary share or approximately US$7.166 per ADS. The conversion rate is subject to certain corporate events. The interest will be payable semiannually in arrears on March 31 and September 30 of each year, beginning on March 31, 2016.

 

Our payments under operating leases are expensed on a straight-line basis over the periods of the respective leases. Our lease arrangements have no renewal options, rent escalation clauses, restrictions or contingent rents and are all conducted with third parties, except for the building leased from a related party as disclosed in Note 20 to our consolidated financial statements included elsewhere in this annual report. For 2013, 2014 and 2015, total rental expenses for all operating leases were US$12.9 million, US$14.3 million and US$33.8 million, respectively.

 

Our sublease rental income for 2015 was US$18.2 million. Future minimum sublease receipts payments expected to be received under non-cancellable sublease agreements as of December 31, 2015 was US$37.1 million.

 

Our loan principal and interest expense obligations relate to our U.S.-dollar denominated bank borrowings of US$100.0 million obtained from financial institutions in the United States. These bank borrowings are secured by bank deposits of approximately US$103.2 million, placed with financial institutions in China. These pledged deposits are classified as restricted cash on our consolidated balance sheets. These bank borrowings are repayable on demand and bear interest at interest rates of LIBOR plus 2.6%.

 

Our capital commitments relate primarily to the purchase of an office building in Beijing, which is to be used as our new headquarters establishment. The total capital commitments contracted but not yet reflected in our consolidated financial statements amounted to US$126.9 million as of December 31, 2015. The purchase is expected to be completed in 2016, and payments will be made in accordance with the relevant commercial properties purchase agreement.

 

 - 113 - 

 

 

G. Ratio of Earnings to Fixed Charges

 

The following table sets forth our ratio of earnings to fixed charges for each of the periods indicated:

 

   Year Ended December 31, 
   2011   2012   2013   2014   2015 
Ratio of earnings to fixed charges(1)(2)   19.3    13.9    20.4    16.2     

 

 

(1)For the purpose of calculating such ratios, “earnings” consist of income from continuing operations before income taxes and noncontrolling interests plus fixed charges and “fixed charges” consist of interest expense (net of capitalized portion), capitalized interest, amortization of debt discount and one-third of our rental expenses relating to operating leases, which we deem representative of an interest factor.
(2)In 2015, we incurred losses from operation, and as a result, our earnings were insufficient to cover our fixed charges.

 

H. Safe Harbor

 

See “Forward-Looking Statements.”

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Executive Officers

 

The following table sets forth certain information relating to our directors and executive officers as of the date of this annual report. The business address of each of our directors and executive officers is F9M, Building 5, Zone 4, Hanwei International Plaza, No. 186 South 4th Ring Road, Fengtai District, Beijing 100160, the People’s Republic of China.

 

Name   Age   Position
Vincent Tianquan Mo   51   Executive chairman of the board of directors, chief executive officer
Quan Zhou   58   Director
Shan Li   52   Independent director
Qian Zhao   47   Independent director
Sam Hanhui Sun   43   Independent director
Sol Trujillo   64   Independent director
Zhizhi Gong   36   Director
Kent Cangsang Huang   37   Chief financial officer
Jian Liu   40   Chief operations officer

 

Vincent Tianquan Mo is our founder and has served as our executive chairman of our board of directors since 1999 and as our chief executive officer since August 2014. Prior to founding our company, Mr. Mo served as an executive vice president at Asia Development and Finance Corporation from 1996 to 1998 and a general manager for Asia at Teleres, a venture of Dow Jones & Co. and AEGON USA to provide online commercial real estate information services, from 1994 to 1996. He currently serves as a director on the board of directors of Shun Cheong Holdings Limited, a Hong Kong-listed company, and is the secretary general of the China Real Estate Index System, a real estate research publication operated by us. Mr. Mo is also a director of Taoshi PE Fund Management Co. Mr. Mo holds a bachelor’s degree in engineering from South China University of Technology, a master of science degree in business administration from Tsinghua University and a master of arts degree in economics from Indiana University. Mr. Mo is the uncle of Mr. Dai, who is a director of our company (until February 2016 when he resigned) and our former president and chief executive officer.

 

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Quan Zhou has served as a director of our company since 2000. Mr. Zhou has been a managing member of the general partner of IDG Technology Venture Investments, L.P. and its successor funds for over 15 years. Mr. Zhou is also serving as a director of the general partner of each of IDG-Accel China Growth Fund I, IDG-Accel China Capital Fund I and their respective successor funds. He is also currently acting as a director of the general partner of IDG China Venture Capital IV L.P. and IDG China Capital Fund III L.P. He currently serves on the boards of a number of private companies, including Superdata Technology (Asia) Limited, OriGene Technologies Inc., COFCO Womai Limited, Shanghai Hua Mei Medical Investment Management Limited, Circle Internet Financial Limited, Yirendai Ltd., a New York Stock Exchange-listed company, CosmoChina International Inc., Xunlei Limited, Yesky.com Inc., CreditEase Holdings (Cayman) Limited and MEMSIC Inc. He was the president of IDG Technology Venture Investment, Inc. from mid 1990s until 2012. Mr. Zhou holds a bachelor’s degree in chemistry from the China Science and Technology University, a master’s degree in chemical physics from the Chinese Academy of Sciences, and a Ph.D degree in fiber optics from Rutgers University.

 

Shan Li has served as a director of our company since 1999 and is an independent director of our company and chair of our compensation committee. Mr. Li is a founding partner and director of San Shan (HK) Limited, a private equity firm focused on the China market. He is currently the chairman and chief executive officer of Chinastone Capital Management Limited. He also currently serves as the chairman and chief executive officer of Silk Road Finance Corporation Limited, and the chief international business adviser to China Development Bank. Previously, Mr. Li was a senior advisor and vice chairman of UBS Investment Bank in Asia from 2010 to 2011. He was the chief executive officer of BOC International Holdings Limited, a position he held from 2001 to 2005. Mr. Li served as a managing director at Lehman Brothers Asia (Hong Kong) from 1999 to 2001 and served as the deputy head of the Investment Banking Preparation Committee at China Development Bank from 1998 to 1999. Mr. Li received a bachelor’s degree in management information systems from Tsinghua University, a master’s degree in economics from the University of California at Davis and a Ph.D degree in economics from the Massachusetts Institute of Technology.

 

Qian Zhao has served as an independent director of our company and chair of our nominating and corporate governance committee since September 2010. Mr. Zhao is a founding partner of CXC China Sustainable Growth Fund, a private equity fund that makes investments in China-based companies. Mr. Zhao was a lawyer by training and is admitted to practice law in both China and New York. Mr. Zhao co-founded Haiwen & Partners in 1992, a preeminent China corporate finance law firm in Beijing. He worked in Sullivan & Cromwell’s New York office from 1998 to 2000 and Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates’ Beijing office from 2000 to 2003. Mr. Zhao is currently an independent director of Trina Solar Limited, a New York Stock Exchange-listed company. Mr. Zhao was a managing director of CXC Capital, Inc., which was the management company of CXC China Sustainable Growth Fund form 2008 to 2011, and president of Camelot Information Systems Inc., a company listed on NASDAQ, from 2011 to 2013. Mr. Zhao was the general counsel and chief investment officer of BGI Shenzhen from 2014 to 2015. Mr. Zhao received a J.D. degree from the New York University School of Law in 1998 and an LL.B degree from University of International Business & Economics, Beijing, in 1990.

 

Sam Hanhui Sun has served as an independent director of our company and chairman of our audit committee since September 2010. Mr. Sun currently serves as an independent director and audit committee chair of Yirendai Ltd., a New York Stock Exchange-listed company, and an independent director and audit committee chair of CAR Inc., a Hong Kong Stock Exchange-listed company. From January 2010 to September 2015, Mr. Sun assumed a couple of positions at Qunar Cayman Islands Limited, a company listed on NASDAQ, including serving as Qunar’s president from May 2015 to September 2015 and its chief financial officer from January 2010 to April 2015. He was chief financial officer of Beijing Ruifeng Co. Ltd. from May 2009 to September 2009 and KongZhong Corporation, a Nasdaq-listed company, from February 2007 to April 2009. Mr. Sun was also an independent director and audit committee member of KongZhong Corporation from July 2005 through January 2007. From 2004 to 2007, Mr. Sun took various financial controller roles at Microsoft China R&D Group, Maersk China Co. Ltd. and our company. From 1995 to 2004, Mr. Sun worked in KPMG’s auditing practice, including eight years at KPMG in Beijing where he was an audit senior manager, and two years at KPMG in Los Angeles, California. Mr. Sun earned a bachelor’s degree in business administration from the Beijing Institute of Technology in 1993. He is a Certified Public Accountant in China.

 

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Sol Trujillo has served as an independent director of our company since August 2014. Mr. Trujillo is an international business executive with three decades’ experience as the chief executive officer of large market cap global companies in the United States, the European Union and Asia Pacific, including US West (now CenturyLink), Orange (now France Telecom) and Telstra, the Australian communications company. He is currently the principal of Trujillo Group LLC. He previously served as the chairman, president and chief executive officer of Graviton, Inc. from 2001 to 2003. A digital pioneer operating in the telecommunications, technology, and media space, he has been a long-time champion of high-speed broadband and a pioneer and innovator of smartphone and the mobile internet to stimulate productivity and innovation across all sectors of the economy. He has managed operations in more than 25 countries – including developed and emerging markets from the European Union and North America to China, South Asia, Africa and the Middle East. He currently sits on corporate boards in the United States, European Union and China – including Western Union and ProAmerica Bank in the US and in Asia, Silk Road Technologies in China, where he is Board chairman. In the public sector, Mr. Trujillo served as trade policy advisor to the Clinton and Bush administrations and remains active on public policy issues related to immigration, trade, productivity and fiscal affairs. Mr. Trujillo earned his B.S. in Business and an MBA in Finance from the University of Wyoming.

 

Zhizhi Gong has served as a director of our company since May 2016. Ms. Gong is a director of the Carlyle Group where she focuses on Asia private equity investment and buyout opportunities. She joined the Carlyle Group in 2010 and is based in Beijing. Ms. Gong also serves as chairwoman of the supervisory board of Focus Media Information Technology Co., Ltd., a company listed on the Shenzhen Stock Exchange. In 2015, Ms. Gong was also a member of the board of directors of Natural Beauty BioTechnology Limited, a company listed on the Hong Kong Stock Exchange. Prior to joining the Carlyle Group, Ms. Gong was a principal at Apax Partners, where she was a founding member of the Greater China team. Prior to that, Ms. Gong worked at the investment banking department at China International Capital Corporate Limited. Ms. Gong received her M.B.A. from Harvard Business School and B.A. in economics from Peking University.

 

Kent Cangsang Huang joined us in October 2015 as deputy chief financial officer and was in charge of financial reporting, investor relations and internal auditing functions. Mr. Huang has been our chief financial officer since January 2016. Mr. Huang had served as managing partner with Oriental Cornerstone Capital and as chief financial officer with China Housing and Land Inc. and had accumulated multiple years of banking experience with Cantor Fitzgerald and Collins Steward LLC. Mr. Huang holds a bachelor’s degree from Shanghai Maritime University and a master’s degree from Columbia University.

 

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Jian Liu joined us in April 2000 and is our chief operations officer. Mr. Liu is in charge of overseeing the operations and management of our business operations. Mr. Liu was also our first chief information officer. Prior to joining us, Mr. Liu worked at the information center of Ningbo Economic Committee in Zhejiang Province. Mr. Liu holds a bachelor’s degree in computer science from Ningbo University.

 

B. Compensation

 

Compensation of Directors and Executive Officers

 

Our executive directors and executive officers receive compensation in the form of salaries, annual bonuses and share options. Our independent directors receive annual compensation in connection with the performance of their duties. All directors receive reimbursements from us for expenses necessarily and reasonably incurred by them for providing services to us or in the performance of their duties. We have entered into service contracts with our executive officers. None of these service contracts provide benefits to our directors and executive officers upon termination.

 

In 2015, we paid aggregate cash compensation of approximately US$737,395 to our directors and executive officers as a group. We do not pay or set aside any amounts for pension, retirement or other similar benefits for our officers and directors.

 

Share Options

 

1999 Stock Incentive Plan

 

At a meeting held on September 1, 1999, our board of directors reserved a total of 12.0% of our fully diluted share capital for issuance upon the exercise of options to be granted to our executive directors, officers and employees or their affiliated entities from time to time. On September 1, 1999, our shareholders approved the stock-related award incentive plan (the “1999 Stock Incentive Plan”). The number of options awarded to a person was based on the person’s potential ability to contribute to our success, the person’s position with us and other factors deemed relevant and necessary by our board of directors. Under the 1999 Stock Incentive Plan, we awarded to several of our employees and directors options to purchase 9,874,672 ordinary shares of our company. As of December 31, 2015, options to purchase 3,050,135 ordinary shares remained outstanding. Options generally do not vest unless the grantee remains under our employment or in service with us on the given vesting date. However, the 1999 Stock Incentive Plan provides that in circumstances where there is a change in the control of our company, if no substitution or assumption is provided by the successor corporation, the outstanding options will automatically vest and become exercisable for a period of 30 days, after which such options will terminate. The termination date for the options granted is 10 years after the date of grant.

 

a. Standard Stock Options

 

From September 1, 1999 to September 30, 2006, we awarded standard stock options exercisable to acquire Class A or Class B ordinary shares of our company. All standard stock options were granted to employees and directors and vested over the requisite service periods of three to four years using a graded vesting. The maturity life of the standard stock options was 10 years originally. On April 20, 2010, our board of directors resolved to extend the maturity life of the standard stock option 10 years to 15 years.

 

From 2001 to 2003, we awarded 1,739,500 standard stock options, classified as liability awards, with exercise prices ranging from HK$1.00 to HK$5.00. In April 2010, we agreed with the grantees to modify the Hong Kong dollar exercise currency to U.S. dollars. The modified exercise prices of these options range from US$0.13 to US$0.64.

 

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b. Special Stock Options

 

We have awarded 15,711,200 special stock options to our employees and directors, with exercise prices ranging from US$2.50 to US$5.31, since December 31, 2006. Terms for special stock options are the same as standard stock options, except that two special stock options are exercisable into one Class A ordinary share. These special stock options vest 10.0% after the first year of service, 20% after the second year of service, 40.0% after the third year of service and 30.0% after the fourth year of service, except for special stock options granted in September 2010, which vest 20.0% after the first year of service, 20.0% after the second year of service, 30.0% after the third year of service and 30.0% after the fourth year of service. The maturity life of the special stock options is 10 years.

 

Our board of directors may amend, alter, suspend or terminate the 1999 Stock Incentive Plan at any time, provided, however, that our board of directors must first seek the approval of our shareholders and, if such amendment, alteration, suspension or termination would adversely affect the rights of an optionee under any option granted prior to that date, the approval of such optionee. Without further action by our board of directors, our 1999 Stock Incentive Plan has no specified termination date.

 

2010 Stock Incentive Plan