China Harmony Auto Holding Limited - Proxy Solicitation & Information Statement 2013

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Web Proof Information Pack of

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China Harmony Auto Holding Limited 中國和諧汽車控股有限公司

(Incorporated in the Cayman Islands with limited liability)

WARNING

This Web Proof Information Pack is being published as required by The Stock Exchange of Hong Kong Limited/the Securities and Futures Commission solely for the purpose of providing information to the public in Hong Kong.

This Web Proof Information Pack is in draft form. The information contained in it is incomplete and is subject to change which can be material. By viewing this document, you acknowledge, accept and agree with China Harmony Auto Holding Limited (the “ Company ”), any of its sponsors, advisers and/or members of the underwriting syndicate that:

(a) this Web Proof Information Pack is only for the purpose of facilitating equal dissemination of information to investors in Hong Kong and not for any other purpose. No investment decision should be based on the information contained in this Web Proof Information Pack;
(b) the posting of this Web Proof Information Pack or supplemental, revised or replacement pages on the Stock Exchange’s website does not give rise to any obligation of the Company, any of its sponsors, advisers and/or members of the underwriting syndicate to proceed with an offering in Hong Kong or any other jurisdiction. There is no assurance that the Company will proceed with the offering;
(c) the contents of this Web Proof Information Pack or supplemental, revised or replacement pages may or may not be replicated in full or in part in the actual document of the Company;
(d) this Web Proof Information Pack may be updated or revised by the Company from time to time and the updates and/or revisions could be material, but each of the Company and its affiliates, sponsors, advisers and/or members of the underwriting syndicate is under no obligation, legal or otherwise, to update any information contained in this Web Proof Information Pack;
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No offer or invitation to the public in Hong Kong will be made until after a document of the Company is registered with the Registrar of Companies in Hong Kong in accordance with the Companies Ordinance (Chapter 32 of the Laws of Hong Kong). If an offer or an invitation is made by the Company to the public in Hong Kong in due course, prospective investors are reminded to make their investment decisions solely based on a document of the Company registered with the Registrar of Companies in Hong Kong, copies of which will be distributed to the public during the offer period.

THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack.

This Web Proof Information Pack contains the following information relating to China Harmony Auto Holding Limited extracted from an amended version of the draft document:

Contents

Summary

Definitions

Risk Factors

Forward-looking Statements

Directors

Corporate Information

Industry Overview

Regulations

Our History and Reorganization

Our Business

Relationship with our Controlling Shareholders

Directors and Senior Management

Financial Information

Appendix I – Accountants’ Report Appendix III – Summary of the Constitution of Our Company and Cayman Companies Law Appendix IV – Statutory and General Information

YOU SHOULD READ THE SECTION HEADED “WARNING” ON THE COVER OF THIS WEB PROOF INFORMATION PACK.

SUMMARY

OVERVIEW

We are a leading dealership group that deals exclusively in luxury and ultra-luxury passenger vehicles in China in terms of number of outlets and brand coverage, according to the ACMR Report. As of the Latest Practicable Date, we operated 25 outlets nationwide and held minority equity interests in two other outlets, the second most among dealerships that specialize exclusively in luxury and ultra-luxury brands in China according to the ACMR Report. As of the Latest Practicable Date, our outlets in operation covered 10 luxury and ultra-luxury brands, namely, BMW, Lexus, Rolls-Royce, MINI, Land Rover, Jaguar, Aston Martin, Audi, Ferrari and Maserati, the most among dealerships that specialize exclusively in luxury and ultra-luxury brands in China according to the ACMR Report. In addition, we had authorizations, preliminary approvals or letters of intent to establish 20 outlets, among which 14 had entered into construction phase as of the Latest Practicable Date. In addition, our market share in the luxury and ultra-luxury market in Central China Region was 9.7% in terms of sales volume in 2012, the largest in the region according to the ACMR Report. In 2012, we were the second largest in terms of revenue among dealerships that specialize in luxury and ultra-luxury brands in China, according to the same report. Our specialization in luxury and ultra-luxury brands has enabled us to achieve significant revenue and profit growth during 2010, 2011 and 2012. Our profit was RMB112.7 million, RMB220.5 million and RMB350.7 million for the years ended December 31, 2010, 2011 and 2012, respectively, representing net profit margin of 6.3%, 7.3% and 6.2% for the same years.

Our services

Sales of new passenger vehicles . We sell new luxury and ultra-luxury passenger vehicles to our customers in our outlets. In addition, we provide customers services related to purchases of new passenger vehicles, such as financing and insurance consulting services and sales of pre-owned passenger vehicles customers traded in for new passenger vehicles.

After-sales services . We provide after-sales services to our customers in our 4S/5S stores and service centers. The after-sales services we provided include (i) repair and maintenance services, which include repair of parts, drive-train mechanism and post-collision body restoration; and (ii) sales of spare parts in connection with the repair services and other brand merchandises and accessories.

Sales network

We commenced business in 2005. Between 2005 and 2010, the number of outlets we operated grew to six, covering three brands. We have expanded rapidly since the beginning of 2012, and the number of outlets we operated grew to 25 as of the Latest Practicable Date. We are headquartered in Henan Province, China and all of our outlets were located in Henan Province until November 2011, when we opened a BMW 4S store in Beijing. As of the Latest Practicable Date, 17 of the 25 outlets we operated were located in Henan Province. In addition, we have obtained 20 authorizations, preliminary approvals or letters of intent to establish new outlets, among which 10 will be located outside of Henan Province.

– 1 –

SUMMARY

Our outlets include 4S/5S stores, service centers and exhibition galleries. 4S store is a form of passenger vehicle dealership store that provide customers sales, spare parts, after-sales and survey services. 5S store is a 4S store with sustainability and is equipped with certain eco-friendly capacity, among other things. A service center is dedicated to after-sales services while an exhibition gallery is dedicated to sales of new passenger vehicles. The following table sets forth the outlets we operated in China by brand as of the dates indicated:

	As	of December 31,	of December 31,	As of the Latest
	2010	2011	2012	Practicable Date

BMW. . . . . . . . . . . . . . . . . . . . . . .	4	7	13	14
Rolls-Royce . . . . . . . . . . . . . . . . . .	nil	nil	2	2
Lexus. . . . . . . . . . . . . . . . . . . . . . .	1	1	2	3
MINI . . . . . . . . . . . . . . . . . . . . . . .	1	1	1	2
Aston Martin . . . . . . . . . . . . . . . . .	nil	nil	2	2
Land Rover & Jaguar . . . . . . . . . . .	nil	nil	1	1
Maserati & Ferrari . . . . . . . . . . . . .	nil	nil	1	1

Total. . . . . . . . . . . . . . . . . . . . . . .	6	9	22	25

According to common market practice, automobile manufacturers normally approve the application for and the commencement of the construction of new outlets by dealerships in the form of authorizations, preliminary approvals or letters of intent. We are advised by our PRC legal adviser that such authorizations, preliminary approvals and letters of intent are not legally binding on either party. During 2010, 2011 and 2012 and up to the Latest Practicable Date, we had not experienced any difficulty in entering into dealership authorization agreements with automobile manufacturers for our new outlets which we constructed pursuant to such authorizations, preliminary approvals or letters of intent.

Our revenue

We generate our revenues from sales of new passenger vehicles and after-sales services during 2010, 2011 and 2012. The following table sets forth a breakdown of our revenues, percentages to total revenue and gross profit margins for the periods indicated:

	Year ended December 31, 2010 2011 2012 (RMB’000) (%) Gross profit margin (%) (RMB’000) (%) Gross profit margin (%) (RMB’000) (%) Gross profit margin (%)

– 2 –

SUMMARY

Sales of new passenger vehicles

A substantial majority of our revenues were generated from sales of new passenger vehicles. In particular, revenue generated from sales of BMW passenger vehicles accounted for 73.2%, 79.2% and 82.9% of our revenues generated from sales of new passenger vehicles for the years ended December 31, 2010, 2011 and 2012, respectively. Prior to 2012, all our revenues from sales of new passenger vehicles were generated from three luxury brands, namely, BMW, Lexus and MINI, and we had no track record of selling ultra-luxury brands until 2012. Revenues generated from sales of these three existing luxury brands and six new brands in 2012 accounted for 95.0% and 5.0% of the total revenues generated from sales of new passenger vehicles, respectively. The following table sets forth a breakdown of our sales of new passenger vehicles by brand for the periods indicated:

				Year ended December	Year ended December	31,

		2010			2011			2012

	Sales	Revenue		Sales	Revenue		Sales	Revenue
	volume	(RMB’000)	%	volume	(RMB’000)	%	volume	(RMB’000)	%

BMW. . . . . . . . . . .	2,199	1,183,857	73.2	3,985	2,180,202	79.2	9,340	4,343,837	82.9
Lexus. . . . . . . . . . .	768	418,622	25.9	873	506,484	18.4	1,120	547,297	10.4
MINI . . . . . . . . . . .	59	14,202	0.9	228	66,086	2.4	338	90,694	1.7
Rolls-Royce . . . . . . .	–	–	–	–	–	–	32	190,490	3.6
Aston Martin . . . . . .	–	–	–	–	–	–	10*	40,315	0.8
Land Rover & Jaguar .	–	–	–	–	–	–	28	20,459	0.4
Ferrari . . . . . . . . . .	–	–	–	–	–	–	2	5,367	0.1
Maserati . . . . . . . .	–	–	–	–	–	–	3	5,990	0.1

Total. . . . . . . . . . .	3,026	1,616,681	100.0	5,086	2,752,772	100.0	10,873	5,244,449	100.0

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The automobile manufacturer for such ultra-Luxury passenger vehicles sold certain numbers of passenger vehicles to us after we obtained authorization for a 4S store but before such store officially commenced operation. We sold certain of such passenger vehicles at motor shows and other promotional events as well as through direct contacts with potential customers.

The sales of new passenger vehicles are affected by a number of factors, including factors attributable to our business, such as our sales network operations and pricing, as well as factors beyond our control, such as market demand, regulatory change and macro-economic conditions. In particular, our Directors do not believe the implementation of anti-traffic congestion measures in certain cities in China, the Diaoyu Island dispute between China and Japan, or the deterioration of the passenger vehicle market in Europe will have any material adverse impact on our sales of new passenger vehicles in the near future. For more details, see “– Recent development” and “Our Business – Our Services – Sales of new passenger vehicles” on page 103 of this document.

We generally set the retail prices for new passenger vehicles by making reference to the suggested retail prices provided by the automobile manufacturers as well as taking into consideration a number of factors including market demand, competition and customers’ price sensitivities. For more details on our pricing, see “Financial Information – Factors Affecting Our Results of Operations – Pricing” on page 135 of this document.

Another factor that affects our revenue from sales of new passenger vehicles is incentive rebates. Automobile manufacturers often provide us incentive rebates if our annual performance satisfies certain criteria, such as sales volume, customer satisfaction and service quality standard. Excluding contribution from incentive rebates would have a significant negative impact on our gross profit margins, but it would not affect the overall trend during 2010, 2011 and 2012. For more details on incentive rebates, see “Financial Information – Factors Affecting Our Results of Operations – Cost of sales and services and incentive rebates from manufacturers” on page 136 of this document.

– 3 –

SUMMARY

Historically, from time to time, we engaged certain distributors in Henan Province to source customers for BMW passenger vehicles in areas where there is no existing BMW dealership outlet in order to serve local demand. According to the ACMR Report, such engagement of distributors is a common market practice among passenger vehicle dealerships in China. Based on unaudited financial information, the gross profit generated from such practices accounted for approximately 0.2%, 1.2% and 1.2% of the total gross profit for the years ended December 31, 2010, 2011 and 2012, respectively. During 2010, 2011 and 2012, BMW China is aware of our practice of engaging distributors to source customers as we regularly reported our business operations to the relevant BMW regional managers during their routine visits to our outlets. In March 2013, we reported to BMW China again formally in writing on such historical practices. In response, BMW China issued a letter which contained a warning with regard to such historical practice. Nevertheless, the letter indicated that such historical practice would not be used as a ground for termination of existing dealership authorization agreements and we would not be liable for any claims or penalties for such historical practice. BMW China further indicated such historical practice would not have any negative impact on any future grant of dealership authorizations by BMW China to us. We have implemented various internal control procedures to ensure that any such practice is pre-approved by the relevant automobile manufacturers and will be effectively and immediately terminated if requested by the automobile manufacturers in the future. For more details, see “Our Business – Our Services – Sales of new passenger vehicles – Engagement of distributors” on page 105 of this document.

After-sales services

The after-sales services we provide to customers include repair and maintenance, sales of spare parts and accessories, and other related services. The repair services we provide include repair of parts, driven-train mechanism and post-collision body restoration. The maintenance services are mainly routine inspections such as oil change, replacement of parts and tire rotation. The in-warranty repairs we provide to customers are generally limited to product defects. Fees for such in-warranty repairs are paid to us by automobile manufacturers and are usually higher than the cost of parts and labor we incurred. Our after-sales services provide steady and recurring revenues with higher gross profit margin compared with sales of new passenger vehicles. Gross profit generated from after-sales services accounted for 31.5%, 25.1% and 27.4% of the gross profit for the years ended December 31, 2010, 2011 and 2012, respectively.

Our Dealership Authorization Agreements

The operations of each of our outlets are primarily governed by a non-exclusive dealership authorization agreement we entered into with automobile manufacturers. The terms of such agreements are usually one to three years, and the automobile manufacturers have the right to terminate the agreements by written notice for a number of reasons. Pursuant to such agreements, we are required to, among other things:

follow the design and operational standard of a 4S store as set out by the manufacturer;
only keep the inventory of and sell passenger vehicles of the authorized brand and within the prescribed geographic area at a particular 4S store;
provide customers a list of other required services, including after-sales services and sales of spare parts if applicable;
follow price guidelines for sales of new passenger vehicles and after-sales services as set out by the manufacturer; and
refrain from selling passenger vehicles to customers who we know or should have known to have the intention to resell or export the passenger vehicles outside China.

– 4 –

SUMMARY

Our customers and sales contracts with customers

Our customers are mainly individuals, and we do not have a single customer that accounted for over 1% of our total revenue during 2010, 2011 and 2012 due to the retail nature of our business.

Our standard sales contract with a customer for the sale of a new passenger vehicle specifies terms and conditions for the sale, including price and delivery date. We typically require the purchaser to make a deposit of 10% of the full price on the date the sales contract is signed, and we deliver the passenger vehicle to the purchaser on the delivery date if the full purchase price is paid by the delivery date. If the passenger vehicle is not delivered due to non-payment by the purchaser or our inventory shortage, a 0.05% penalty fee is paid to the non-fault party for each day the transaction is not consummated, up to a certain amount.

Inventories

Our inventories include mainly new passenger vehicles procured for sales and after-sales products such as spare parts and accessories. Each of our outlets individually manages its orders for new passenger vehicles and after-sales products. An inventory manager makes monthly orders for the inventory of the respective outlet by taking into consideration the current inventory, estimated sales volume of the month and sales target of the year. A monthly inventory report is submitted by each outlet to our headquarters for review, and to facilitate inventory management at the group level. We pay for our inventory purchases mainly with a combination of cash and bank acceptance notes, which are generally secured by bank deposits and inventories.

The following table sets forth a breakdown of our inventories as of the dates indicated:

	As	of December	31,

	2010	2011	2012

		(RMB’000)

Passenger vehicles . . . . . . . . . . . . . . . . . . . . . . . . . .	145,817	309,027	655,809
Spare parts and accessories . . . . . . . . . . . . . . . . . . .	14,673	24,665	54,745
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	160,490	333,692	710,554

Our average inventory turnover days were 29 days, 34 days, and 38 days for the years ended December 31, 2010, 2011 and 2012, respectively. For more details and analysis on our inventories and relevant average inventory turnover days, see “Financial Information – Net Current Assets and Liabilities – Inventories” on page 154 of this document.

Recent development

The passenger vehicle market in China has recently been affected by global economic uncertainties as well as the recent territorial dispute between China and Japan over the Diaoyu Islands.

Global economic uncertainties

As a result of the global economic uncertainties resulting from the continuing European debt crisis, some major automobile manufacturers were reported to have started offsetting the effects of the deteriorating automobile market in Europe by channeling some of their unsold inventories to other markets including China. The Chinese market has taken on inventories for specific models which are produced outside China, but not for models which are produced in China. This has resulted in increased supplies, and therefore some downward pricing pressure, on those specific models (and their competing models in other brands). Our Directors believe that the situation with the passenger

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SUMMARY

vehicle market in Europe is not expected to have a material adverse effect on us as automobile manufacturers are expected to be planning sales targets for the China market in a way that seeks to meet the demands of the market with reasonable levels of supplies and that does not negatively affect their own profitability. Overall, while we may experience a reduction in our profit margins, we believe that more competitive pricing of European branded passenger vehicles (and the extension of the range of models offered by European automobile manufacturers to more mass market models) can be expected to lead to an increase in the overall market share of European branded passenger vehicles and help our competition position in increasing our sales volumes.

In addition, recently there were mixed media reports on expectations of BMW’s performance in Chinese market in 2013. For example, A representative of BMW AG was reported to anticipate a normalized growth rate in China in coming years, mainly because of the maturation of the passenger vehicle market and the anticipated slowdown in economic growth in China. Conversely, top management of BMW China was reported to set a target of maintaining a double-digit growth in China in 2013 by deepening its network penetration in mid- and small-size cities. Our Directors analyze the market condition on a regular basis and plan to maintain our growth in a potential slowdown in the foreseeable future by (i) leveraging our dominant market position in Henan Province, where our Directors expect the economic growth to benefit from the Twelfth Five-Year Plan which makes modernization of Henan Province as a core mission and (ii) emphasizing our expansion plan, both in terms of number of outlets and brand coverage, in the ultra-luxury passenger vehicle market which our Directors expect to be less saturated as compared with luxury brands.

Diaoyu Islands dispute

The territorial dispute between China and Japan over the Diaoyu Islands in and around September 2012 resulted in a temporary reduction in sales of Japanese branded passenger vehicles (including those produced in China). Although this impacted our sales in our Lexus outlets, our Directors believe that (i) the anticipated corresponding increase in sales of non-Japanese branded vehicles (at the expenses of Japanese branded passenger vehicle) in the China market and (ii) the increased competitive position of European automobile manufacturers through their introduction of more mass market models to compete directly with Japanese automobile manufacturers are likely to have an overall positive impact on us, given that we sell predominantly European branded vehicles. In addition, there are recent signs of recovery of sales of new Japanese branded passenger vehicles in China.

On this basis, our Directors are of the view that, in the absence of unforeseen circumstances and developments, the outlook for automobile sales in China for the remaining of 2013 and 2014 is not expected to be materially different from the current market environment. For more details, see “– Industry Overview – Luxury and Ultra-luxury Passenger Vehicle Market in China – Rapid growth of the luxury and ultra-luxury passenger vehicle market in China” on page 47 of this document.

Possible purchase tax on ultra-luxury passenger vehicles

It was recently reported by certain media sources that a 20% luxury tax might be levied by the relevant government authorities on the purchase of a passenger vehicle with a retail price over RMB1.7 million. The earliest possible effective date of such tax was reported to be June 1, 2013. Such purchase tax, if effectuated, might adversely affect our expansion plans in the ultra-luxury passenger vehicle market and sales of new ultra-luxury passenger vehicles. However, our Directors do not expect such purchase tax to have material adverse impact on our overall results of operations in the near future, as the purchase tax only affects sales of the higher-end ultra-luxury passenger vehicles, which accounted for less than 5.0% of our total revenues generated from the sales of new passenger vehicles in 2012 and is expect to remain at a low percentage of our total revenues in the near future.

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SUMMARY

In addition, the actual impact of the purchase tax on the sales of new ultra-luxury passenger vehicles remains unclear as purchasers of ultra-luxury passenger vehicles are typically less price sensitive compared with purchasers of lower-end brands.

Our Directors confirm that there has been no material adverse change in our financial or trading position or prospects and no event has occurred that would materially affect the information shown in the Accountants’ Report set out in Appendix I to this document.

CONSOLIDATED RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our consolidated results of operations.

	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,801,358	3,031,856	5,656,744
Cost of sales and services . . . . . . . . . . . . . . . . . . . .	(1,569,951) (2,614,356)		(4,993,298)

Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	231,407	417,500	663,446
Other income and gains, net (excluding interest
income from the Controlling Shareholders) . . . .	10,229	25,387	88,918
Interest income from the Controlling
Shareholders(1) . . . . . . . . . . . . . . . . . . . . . . . . .	13,405	53,516	147,740
Selling and distribution costs . . . . . . . . . . . . . . . .	(64,517) (106,737)		(237,030)
Administrative expenses . . . . . . . . . . . . . . . . . . . .	(18,716) (30,330)		(71,611)
Profit from operations . . . . . . . . . . . . . . . . . . . . .	171,808	359,336	591,463
Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(19,956) (61,872)		(116,403)
Share of profit of an associate . . . . . . . . . . . . . . .	–	–	222
Profit before tax. . . . . . . . . . . . . . . . . . . . . . . . . .	151,852	297,464	475,282
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(39,152) (77,014)		(124,563)

Profit for the year(2) . . . . . . . . . . . . . . . . . . . . . . .	112,700	220,450	350,719(3)

(1) Pursuant to a written agreement on January 1, 2009, we granted certain loans to the Controlling Shareholders with an annual interest rate of 15% during 2010, 2011 and 2012. Prior to the Reorganization, we were part of Hexie Industrial Group and the loans were granted to support the Controlling Shareholders’ other business activities as part of internal funds management. The loan interest was agreed upon between the Controlling Shareholders and us by referring to the then market interest rates for bank loans and other alternative financing channels. There had been no change in the interest rate during the term of the loans. The loans were repaid in full as of the Latest Practicable Date and we do not plan to grant similar loans to any related party going forward. The following table sets forth the relevant balances of the loans during 2010, 2011 and 2012:

the loans during 2010, 2011 and 2012:
	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Maximum balance . . . . . . . . . . . . . . . . . . . . . . . . .	305,633	990,077	1,648,198
Minimum balance . . . . . . . . . . . . . . . . . . . . . . . . .	31,029	232,552	980,577
Average balance of the year. . . . . . . . . . . . . . . . . . .	94,070	375,551	1,036,772

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SUMMARY

(2) The following table sets forth our adjusted profit excluding interest income from the Controlling Shareholders and the related tax impact for the periods indicated:

related tax impact for the periods indicated:
	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . .	112,700	220,450	350,719
Loan interests from the Controlling Shareholders . . . . . .	(13,405)	(53,516)	(147,740)
Related tax impact. . . . . . . . . . . . . . . . . . . . . . . . .	3,351	13,379	36,935

Adjusted net profit . . . . . . . . . . . . . . . . . . . . . . . .	102,646	180,313	239,914

Such adjusted net profit did not take into account the related interest expenses we incurred for bank loans that were used to grant loans to the Controlling Shareholders.

(3) We started to sell passenger vehicles of six new brands, namely, Rolls-Royce, Aston Martin, Land Rover, Jaguar, Ferrari and Maserati in 2012. Net profit generated from sales of such new brands was RMB27.3 million in 2012, representing 11.4% of our net profit excluding interest incomes from the Controlling Shareholders and the related tax impact of the year. Net profit excluding (i) interest income from the Controlling Shareholders and the related tax impact and (ii) net profit generated from sales of new passenger vehicles of the six new brands would be RMB212.6 million in 2012.

OUR SHAREHOLDING STRUCTURE

Mr. Feng indirectly owns approximately 85.84% interest in our issued share capital. As a result Mr. Feng, together with and through Eagle Seeker, is our Controlling Shareholders.

We secured funding from the Financial Investors in August 2011, when the Financial Investors entered into an investment agreement with, among others, Mr. Feng and Hexie Industrial Group, followed by a share exchange agreement in March 2012 and a shareholders’ agreement in September 2012. The Financial Investors initially invested in Success Intergrow, a holding company of our Group, by way of redeemable convertible preferred shares, representing approximately 14.16% of the enlarged issued share capital of Success Intergrow. The Financial Investors will convert their preferred shares into ordinary shares of Success Intergrow, and Eagle Seeker and the Financial Investors will exchange their ordinary shares in Success Intergrow into our Shares.

Pursuant to the shareholders’ agreement, the Financial Investors have a number of special rights in our Company, all of which will terminate. In addition, Mr. Feng granted certain performance adjustment rights based on our Group’s net profit for 2011 and 2012. If we fail to meet the agreed net profit amounts for 2011 or 2012, the Financial Investors will have the right to increase their shareholdings through an adjustment to the conversion ratio of their preferred shares. We did not meet the agreed net profit amount in 2011 and 2012, but the Financial Investors have agreed to waive their performance adjustment rights for 2011 and 2012. The terms of the preferred shares, the special rights and the performance adjustment right are further described in the section headed “Our History and Reorganization – Investment” on page 77 of this document.

We have implemented a RSU scheme in order to attract skilled and experienced personnel, to incentivize them to remain with the Group and to motivate them to strive for the future development and expansion of the Group by providing them with the opportunity to own equity interests in the Company. For more details, see sections headed “Restricted Share Unit Scheme” in Appendix IV to this document. As at the date of this document, RSU Awards in respect of an aggregate of 19,110,898 Shares had been granted to certain of our Directors, senior management and employees.

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SUMMARY

DIVIDEND POLICY

Our Board has absolute discretion in whether to declare any dividend for any year and, if it decides to declare a dividend, how much dividend to declare. In 2012, our Board declared a one-time dividend in the amount of RMB559.3 million, all of which was entitled to our Controlling shareholders and was settled with outstanding loan amount due to us from the Controlling shareholders. Our directors decided that all of our accumulated earnings prior to December 31, 2012 will be retained by our PRC subsidiaries. We currently intend to pay dividends of no more than 20% of our profits available for distribution of each accounting year beginning from the year ended December 31, 2013. Going forward, we will re-evaluate our dividend policy in light of our financial position and the prevailing economic climate. The determination to pay dividends will be based upon our earnings, cash flow, financial condition, capital requirements, statutory fund reserve requirements and any other conditions that our Directors deem relevant. The payment of dividends may also be limited by legal restrictions and by financing agreements that we may enter into in the future. The amounts of distribution that we have declared and made in the past should not be taken as indications of the dividends, if any, that we may pay in the future.

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DEFINITIONS

In this document, unless the context otherwise requires, the following terms shall have the meanings set out below.

“Ace Manufacturing”
“Ace Manufacturing” Ace Manufacturing Holding Limited, a company incorporated in Hong Kong on January 16, 2012 and our wholly-owned subsidiary
“Andebao” Anyang Andebao Automobile Sales & Services Co., Ltd. (安陽安德寶汽車銷售服務有限公司), a company established in the PRC on October 12, 2011 and our wholly-owned subsidiary
“Articles” or “Articles of the articles of association of our Company (as amended from Association” time to time), adopted on May 20, 2013, a summary of which is set out in Appendix III to this document
“Beijing Haojun” Beijing Haojunhang Automobile Sales & Services Co., Ltd. (北京豪駿行汽車銷售服務有限公司), a company established in the PRC on March 21, 2013 and our wholly-owned subsidiary
“Andebao”
“Biandebao” Kaifeng Biandebao Automobile Sales & Services Co., Ltd. (開封汴德寶汽車銷售服務有限公司), a company established in the PRC on March 26, 2012 and our wholly-owned subsidiary
“BMW China”
BMW Brilliance Automotive Ltd. (華晨寶馬汽車有限公司) and BMW China Automotive Trading Ltd. (寶馬 (中國) 汽車貿易有限公司), one of our major suppliers
“Board” or “Board of Directors”
the board of directors of our Company
“business day”

any day (other than a Saturday, Sunday or public holiday) on which banks in Hong Kong are generally open for business

“BVI”

the British Virgin Islands

“CAGR”

compound annual growth rate

“Cayman Companies Law” or “Companies Law”

the Companies Law, Cap.22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands

“Central China Region”

Henan Province, Hunan Province and Hubei Province

“China” or “the PRC”
the People’s Republic of China excluding, for the purpose of this document, Hong Kong, Macau and Taiwan
“Companies Ordinance”

the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), as amended or supplemented from time to time

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DEFINITIONS

“Company” or “our Company” China Harmony Auto Holding Limited, a company incorporated in the Cayman Islands with limited liability on September 24, 2012, and, except where the context otherwise requires, all of its subsidiaries, or where the context refers to the time before it became the holding company of its present subsidiaries, its present subsidiaries
“Controlling Shareholders”
Mr. Feng and Eagle Seeker
“Crystalline Prestige”
Crystalline Prestige Investments Limited, a company incorporated in the BVI on September 26, 2012 and our wholly-owned subsidiary
“CSRC” China Securities Regulatory Commission (中國證券業監督管理委員會)
“Daoable Future”
Daoable Future Limited, a company incorporated in Hong Kong on August 2, 2011 and our wholly-owned subsidiary
“Deed of Non-Competition” a deed of non-competition entered into by Mr. Feng and Eagle Seeker dated May 20, 2013 regarding non-competition undertakings given by Mr. Feng and Eagle Seeker in favor of our Company
“Director(s)” the director(s) of our Company
“Eagle Seeker”
Eagle Seeker Company Limited, a company incorporated in the BVI on December 16, 2011 and wholly-owned by Mr. Feng
“EIT” enterprise income tax
“EIT Law”
the PRC Enterprise Income Tax Law
“EIT Rules”
the Regulation on the Implementation of the PRC Enterprise Income Tax Law
“Encumbrance”
any mortgage, charge, pledge, lien, claim or other security interest or any option, restriction, right of first refusal, right of pre-emption or other third party claim, right, interest or preference or any other encumbrance of any kind
“Financial Investors” Grandsun, LC Fund V, LC Parallel Fund V, MCP Asia, MCPC II and Yushang
“GDP”
gross domestic product
“Grandsun”
Grandsun International Investments Limited, a company incorporated in the BVI on April 28, 2004, being one of our Financial Investors

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DEFINITIONS

“Group”, “our Group”, “we”, our Company and our subsidiaries or, where the context so “our” or “us” requires, in respect of the period before our Company became the holding company of our present subsidiaries (or before such associated companies of our Company), the business operated by such subsidiaries or their predecessors (as the case may be)
“Guangdebao” Guangzhou Guangdebao Automobile Sales & Services Co., Ltd. (廣州市廣德寶汽車銷售服務有限公司), a company established in the PRC on May 14, 2012 and our wholly-owned subsidiary
“Handebao” Wuhan Handebao Automobile Sales & Services Co., Ltd. (武漢漢德寶汽車銷售服務有限公司), a company established in the PRC on July 19, 2012 and our wholly-owned subsidiary
“Henan Hedebao” Henan Hedebao Automobile Services Co., Ltd. (河南和德寶汽車服務有限公司), a company established in the PRC on July 27, 2011 and our wholly-owned subsidiary
“Henan Yingzhiyi” Henan Yingzhiyi Automobile Sales & Services Co., Ltd. (河南英之翼汽車銷售有限公司), a company established in the PRC on May 21, 2012 and our wholly-owned subsidiary
“Hexie Auto” Henan Hexie Automobile Trading Co., Ltd. (河南和諧汽車貿易有限公司), a company established in the PRC on November 10, 2011 and our wholly-owned subsidiary
“Hexie Industrial Group” Henan Hexie Industrial Group Co., Ltd. (河南和諧實業集團有限公司) (formerly known as Henan Hexie Times Investment Co., Ltd.), a company established in the PRC on July 3, 2008 and beneficially wholly-owned by Mr. Feng
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“HKFRS”
Hong Kong Financial Reporting Standards issued by the HKICPA, which includes HKAS
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Huacheng Auto” Zhengzhou Huacheng Automobile Sales & Services Co., Ltd. (鄭州華誠汽車銷售服務有限公司), a company established in the PRC on September 30, 2011 and our wholly-owned subsidiary
“Huadebao” Beijing Huadebao Automobile Sales & Services Co., Ltd. (北京市華德寶汽車銷售服務有限公司), a company established in the PRC on July 19, 2010 and our wholly-owned subsidiary
“Latest Practicable Date” May 24, 2013, being the latest practicable date prior to the printing of this document for the purpose of ascertaining certain information contained in this document

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DEFINITIONS

“LC Fund V” LC Fund V, L.P., a limited partnership registered in the Cayman Islands on April 19, 2011 and having the same general partner as LC Parallel Fund V, being one of our Financial Investors
“LC Parallel Fund V” LC Parallel Fund V, L.P., a limited partnership registered in the Cayman Islands on May 23, 2011 and having the same general partner as LC Fund V, being one of our Financial Investors
“LC Gloricar” LC Gloricar Investment Limited, a company incorporated in the BVI on August 29, 2011 and our wholly-owned subsidiary
“Legend Capital” LC Fund V and LC Parallel Fund V
“Luohe Luodebao” Luohe Luodebao Automobile Sales & Services Co., Ltd. (漯河漯德寶汽車銷售服務有限公司), a company established in the PRC on April 17, 2013 and our wholly-owned subsidiary
“Luoyang Luhe” Luoyang Luhe Automobile Sales & Services Co., Ltd., a company established in the PRC on June 26, 2012 and our wholly-owned subsidiary
“Magic Frontier” Magic Frontier Limited, a company incorporated in the BVI on December 20, 2011
“MCP Asia” MCP Asia (Candlenut) Holdings Limited, a limited partnership registered in the state of Delaware of the United States of America on July 22, 2009 and one of the limited partners of LC Fund V, being one of our Financial Investors
“MCPC II” MCPC II (Candlenut) Holdings Limited, a limited partnership registered in the state of Delaware of the United States of America on July 29, 2010, being one of our Financial Investors
“MOFCOM” Ministry of Commerce of the PRC (中華人民共和國商務部) or its predecessor, the Ministry of Foreign Trade and Economic Cooperation of the PRC (中華人民共和國對外經濟貿易部)
“Morgan Creek Funds” MCP Asia and MCPC II
“Mr. Feng” Mr. Feng Changge, an executive Director and one of our Controlling Shareholders
“Ms. Ma” Ms. Ma Lintao, an executive Director and the wife of Mr. Feng
“PBOC” People’s Bank of China (中國人民銀行)
“PRC Government” or “State” the central government of the PRC, including all political subdivisions (including provincial, municipal and other regional or local government entities) and its organs or, as the context requires, any of them

– 13 –

DEFINITIONS
“Reorganization” the reorganization of the Group, details of which are set out in the section headed “Our History and Reorganization – Our Reorganization” in this document
“RMB” Renminbi, the lawful currency of the PRC “RSU Award” a restricted share unit award granted to a participant under the RSU Scheme
“RSU Scheme” the restricted share unit scheme conditionally adopted pursuant to a resolution of our shareholders dated May 20, 2013, the principal terms of which are summarized in the section headed “Statutory and General Information – Restricted Share Unit Scheme” in Appendix IV to this document
“SAFE” State Administration of Foreign Exchange of the PRC (中華人民共和國外匯管理局)
“SAIC” State Administration of Industry and Commerce of the PRC (中華人民共和國國家工商行政管理總局)
“SAT” State Administration of Taxation of the PRC (中華人民共和國國家稅務總局)
“Shangdebaojun” Shanghai Shangdebaojun Automobile Sales & Services Co., Ltd. (上海上德寶駿汽車銷售服務有限公司), a company established in the PRC on November 10, 2011 and our 90% owned subsidiary
“Shareholder(s)” holder(s) of Shares “Shares” ordinary shares in the capital of our Company with nominal value of HK$0.01 each
“Shenyang Shendebao” Shenyang Shendebao Automobile Sales & Services Co., Ltd. (瀋陽瀋德寶汽車銷售服務有限公司), a company established in the PRC on February 25, 2013 and our wholly-owned subsidiary
“Shenyang Shenzhiyi” Shenyang Shenzhiyi Automobile Sales & Services Co., Ltd. (瀋陽瀋之翼汽車銷售服務有限公司), a company established in the PRC on February 1, 2013 and our wholly-owned subsidiary
“State Council” the PRC State Council (中華人民共和國國務院)
“Success Intergrow” Success Intergrow Company Limited, a company incorporated in the Cayman Islands on December 19, 2011
“Suzhou Yijun” Suzhou Yijun Automobile Sales & Services Co., Ltd. (蘇州意駿汽車銷售服務有限公司), a company established in the PRC on October 24, 2012 and our wholly-owned subsidiary

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DEFINITIONS

“Wandebao” Nanyang Wandebao Automobile Sales & Services Co., Ltd. (南陽宛德寶汽車銷售服務有限公司), a company established in the PRC on December 8, 2010 and our wholly-owned subsidiary
“Wuhan Huazheng” Wuhan Huazheng Automobile Sales & Services Co., Ltd. (武漢華鄭汽車銷售服務有限公司), a company established in the PRC on July 9, 2012 and our wholly-owned subsidiary
“Xi’an Huadu” Xi’an Huadu Automobile Sales & Services Co., Ltd. (西安華都汽車銷售服務有限公司), a company established in the PRC on April 20, 2012 and our wholly-owned subsidiary
“Xiamen Lexus” Xiamen Yuanda Lexus Automobile Sales & Services Co., Ltd. (廈門遠達雷克薩斯汽車銷售服務有限公司), a company established in the PRC on December 22, 2011 and our wholly-owned subsidiary
“Xindebao” Xinxiang City Xindebao Automobile Services Co., Ltd. (新鄉市新德寶汽車服務有限公司), a company established in the PRC on April 24, 2009 and our wholly-owned subsidiary
“Xinxiang Dongxin” Xinxiang Dongxin Automobile Co., Ltd. (新鄉東新汽車有限責任公司), a company established in the PRC on December 13, 2010 in which we acquired 40% of the equity interests on September 29, 2012
“Xinxiang Hedebao” Xinxiang Hedebao Automobile Sales & Services Co., Ltd. (新鄉和德寶汽車銷售服務有限公司), a company established in the PRC on November 19, 2012 and our 51% owned subsidiary
“Yichang Lushun” Yichang Lushun Automobile Sales & Services Co., Ltd. (宜昌路順汽車銷售服務有限公司), a company established in the PRC on April 17, 2012 and our 65% owned subsidiary
“Yongda Hexie” Zhengzhou Yongda Hexie Automobile Sales & Services Co., Ltd. (鄭州永達和諧汽車銷售服務有限公司), a company established in the PRC on December 26, 2011 in which we own 30% of the equity interests
“Yuanda Investment” Henan Yuanda Investment Co., Ltd. (河南遠達投資有限公司), a company incorporated in the PRC on November 12, 2002 and 90% beneficially owned by Mr. Feng
“Yuanda Lexus” Zhengzhou Yuanda Lexus Automobile Sales & Services Co., Ltd. (鄭州遠達雷克蕯斯汽車銷售服務有限公司), a company incorporated in the PRC on October 19, 2006 and our wholly-owned subsidiary
“Yudebao” Luoyang Yudebao Automobile Sales & Services Co., Ltd. (洛陽豫德寶汽車銷售服務有限公司), a company established in the PRC on May 8, 2009 and our wholly-owned subsidiary

– 15 –

DEFINITIONS

“Yushang”	Yushang Limited, a company incorporated in the BVI on
	September 3, 2010, being one of our Financial Investors
“Zhengdebao”	Zhengzhou Zhengdebao Automobile Sales & Services Co., Ltd.
	(鄭州鄭德寶汽車銷售服務有限公司), a company established in
	the PRC on July 24, 2009 and our wholly-owned subsidiary
“Zhengzhou Huading”	Zhengzhou Huading Automobile Sales & Services Co., Ltd. (鄭州
	華鼎汽車銷售服務有限公司), a company established in the PRC
	on May 4, 2012 and our wholly-owned subsidiary
“Zhongdebao”	Henan Zhongdebao Automobile Sales Service Co., Ltd. (河南中
	德寶汽車銷售服務有限公司), a company established in the PRC
	on March 4, 2005 and our wholly-owned subsidiary

In this document, the terms “associate”, “connected person”, “connected transaction”, “controlling shareholder”, “subsidiary” and “substantial shareholder” shall have the meanings given to such terms in the Listing Rules, unless the context otherwise requires.

If there is any inconsistency between the Chinese names of the entities or enterprises established in the PRC mentioned in this document and their English translations, the Chinese names shall prevail. The English translations of the Chinese names of such PRC entities are provided for identification purposes only.

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RISK FACTORS

RISKS RELATING TO OUR BUSINESS

We rely on automobile manufacturers for authorizations to operate our existing dealership outlets. If one or more of these authorizations are terminated or not renewed, our business, results of operations and prospects could be adversely affected

Substantially all of our revenues during 2010, 2011 and 2012 were generated from the operations of our dealership outlets, and we rely on automobile manufacturers for authorizations to operate our existing dealership outlets and to open new outlets. We also rely on such automobile manufacturers for the supply of new passenger vehicles and spare parts.

Our rights to operate our dealership outlets and the supply of new passenger vehicles and spare parts are governed primarily by our dealership authorization agreements with automobile manufacturers. Our dealership authorization agreements are non-exclusive, and generally have terms of one to three years with the option of renewal at the discretion of the automobile manufacturers. The automobile manufacturers also have the right to terminate our dealership authorization agreements with written notice for specified reasons, including breach of agreements or failure to perform contractual obligations, unapproved business relationships with other automobile manufacturers, and unapproved changes to our ownership or management structure that would affect our ability to meet contractual obligations. We have obtained all consents/approvals regarding our Group’s investment and reorganization from all the relevant automobile manufacturers as required by relevant dealership authorization agreements except for Yuanda Lexus. As of the Latest Practicable Date, Yuanda Lexus was still undergoing the application process with the automobile manufacturer for the consent/approval required by the dealership authorization agreement. We cannot assure you that we will be able to renew our dealership authorization agreements on a timely basis, on commercially acceptable terms, or at all. Moreover, automobile manufacturers may decide to limit the number of new dealership outlets they allow us to open in the future for reasons unrelated to us, such as a change in their business strategies. If any of the foregoing events occur, our results of operations, financial condition and growth prospects may be materially and adversely affected.

Our business operations are subject to restrictions imposed by, and significant influence from, automobile manufacturers under our dealership authorization agreements

Pursuant to our dealership authorization agreements for individual outlets, an automobile manufacturer may impose various conditions or restrictions on our operations of the respective outlet. Such restrictions include, among other things:

geographical limitation on where an outlet can conduct its sales;
limitation on brand and model of passenger vehicles an outlet can display or sell;
payment conditions on new passenger vehicles or spare parts supplied to an outlet by the automobile manufacturer;
allocation of risks associated with the delivery of passenger vehicles by the automobile manufacturer;
limitation and specification on types of after-sales services and other services an outlet can provide to customers;
pricing guidelines for particular passenger vehicle, spare parts and other services an outlet provide to its customers; and
other conditions and internal policy the automobile manufacturer might require an outlet to comply with.

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RISK FACTORS

Many of such limitations have adverse effect on our revenue generating ability and violation of such limitations may result in the termination of such dealership authorization agreement or the deterioration of our business relationship with the automobile manufacturers.

In addition, automobile manufacturers have the power to exert influence on the operations and management of our outlets for their brands pursuant to other agreements or in ways not specifically provided in any agreements. For example, manufacturers may:

set various requirement and qualifications for our store-level managers, and demand us to replace store-level managers who do not qualify;
express preference in the construction and decoration of a particular outlet, especially an outlet that is heavily invested by us or located in a primary location; and
request certain outlets to participate in the manufacturers’ promotional events designed to increase consumer demand, which may include offering sales discounts and/or extended warranties on certain models of their passenger vehicles.

Such influences or requests might not always align with our business interests. As we depend on the cooperation and support of automobile manufacturers in various aspects of our operations, we will often opt to comply with such influences or requests even though we may not be contractually obligated to do so, in order to maintain solid long-term strategic relationships with automobile manufacturers.

We face uncertainties as a result of our recent rapid expansion

We have been implementing a strategy of rapid expansion since the beginning of 2012, as we increased the number of outlets we operated from 9 as of December 31, 2011 to 22 as of December 31, 2012 and 25 as of the Latest Practicable Date. Our rapid expansion brings uncertainties to our operation, including:

Operating outside Henan Province. Before we opened our 4S store in Beijing by the end of 2011, all of the outlets we operated were in Henan Province. Our ability to leverage our successful operational experience in Henan Province is limited by the differences existing between regional markets.

Intensive competition in tier-one cities. In order to increase our market recognition and complete our network deployment in China, and also as part of our plan to further develop our ultra-luxury passenger vehicle market and after-sales services, we recently expanded into tier-one cities such as Beijing, Shanghai and Guangzhou where the regional passenger vehicle markets are well-established and competition among dealerships is particularly intensive. For more details, see “Our Business – Our Strategies – Continue to expand our sales network and brand coverage for luxury brands in central and western China and for ultra-luxury brands in affluent cities” and “Our Business – Our Strategies – Further diversify our revenue sources.” We expect our gross profit margins for sales of new passenger vehicles in these regional markets to be less compared with that in Henan Province. We plan to solidify our competitiveness in these regional markets by leveraging the eminence and premier locations of our outlets, and focusing on after-sales services which generally provide higher gross profit margin than the sales of new passenger vehicles. We cannot assure you that we would be successful in implementing such strategy, or such strategy will generate desired results.

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RISK FACTORS

Majority of outlets without prior operating history. As of the Latest Practicable Date, we operated 25 outlets in China, among which 13 commenced operations in 2012 and three commenced operation in 2013. Results of operations of such newly opened outlets are difficult to project. In addition, we have authorizations, preliminary approvals and letters of intent to establish 20 new outlets, the majority of which are expected to commence operation in 2013. A significant portion of such newly opened outlets and outlets to be opened could perform worse than our expectation.

Sales of new passenger vehicles of new brands. Prior to 2012, all our revenues from sales of new passenger vehicles were generated from three luxury brands, namely, BMW, Lexus and MINI, and we had no track record of selling ultra-luxury brands until 2012. Revenues generated from sales of these three luxury brands in 2012 accounted for 95.0% of the total revenues generated from sales of new passenger vehicles. We started to sell passenger vehicles of six new brands, namely, Rolls-Royce, Aston Martin, Land Rover, Jaguar, Ferrari and Maserati in 2012, the majority of such new brands are ultra-luxury brands. We had no experience in selling passenger vehicles of such new brands prior to 2012 and in 2012 revenues generated from sales of such new brands accounted for only 5.0% of the total revenues generated from sales of new passenger vehicles. Customers who purchase ultra-luxury brand passenger vehicles typically have a higher expectation on customer service quality, and sales volume of ultra-luxury brand passenger vehicles on a per outlet basis is generally lower compared with luxury brands. As a result, our operating experience in sales of new passenger vehicles of luxury brands cannot be streamlined without adaptation in our operation of outlets for ultra-luxury brands.

Any or all of these uncertainties could have material adverse impacts on our results of operations, financial conditions and prospect.

We may not be able to successfully implement and sustain our growth strategies

We have grown rapidly since our inception in 2005, principally through our strategy of network expansion by organic growth. As of the Latest Practicable Date, we have obtained a total of 45 authorizations, preliminary approvals or letters of intent to operate or establish new outlets for nine brands since the inception of our business. In particular, 39 of our authorizations, preliminary approvals or letters of intent were obtained since the beginning of 2011. As of the Latest Practicable Date, we were constructing 14 new outlets in nine cities.

There are significant risks involved in our growth strategy, including circumstances unforeseeable or beyond our control that may render us, among other things, unable to: • manage our significant growth in number of outlets and brands, as well as geographical coverage;

secure adequate financing on acceptable commercial terms for the construction of our new outlets and purchase of new passenger vehicles from automobile manufacturers;
obtain necessary licenses, permits and approvals for the operations of our new outlets; and
hire, train and retain sufficient staff to keep pace with our expansion.

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RISK FACTORS

In particular, in our efforts to open new outlets in selected locations, there can be no assurance that we will be able to identify and secure suitable locations for such new outlets, or that we will be able to enter into new dealership authorization agreements with manufacturers on a timely basis or at all for such new outlets. The new outlets may result in additional indebtedness, costs and contingent liabilities and may fail to generate sufficient revenues for us to recover such debt, costs or liabilities. In addition to the opening of new outlets, we may also acquire existing dealerships from independent third parties. There can be no assurance that we will be able to identify and secure suitable acquisition opportunities, or that we will be able to improve the performance of such acquired dealerships in a commercially viable manner or on a timely basis.

Moreover, we may pursue opportunities of strategic acquisitions in the future. We may not be able to successfully identify suitable targets, obtain necessary financing or complete the complex acquisition procedures. Moreover, even if we successfully consummate an acquisition, there can be no assurance that we will be able to successfully integrate the acquired business into our existing operation.

If any of the above occurs, we may suffer loss of revenues and profits or delay in growth, which may materially adversely affect our results of operations and financial condition.

We generate a significant portion of our revenues from sales of new passenger vehicles of a few luxury and ultra-luxury brands

Our revenues generated from sales of the top three brands of passenger vehicles accounted for 89.7%, 90.8% and 89.8% of our total revenues for the years ended December 31, 2010, 2011 and 2012, respectively. In particular, revenues of sales of new BMW passenger vehicles represented 65.7%, 71.9% and 76.7% of our total revenue for the years ended December 31, 2010, 2011 and 2012, respectively. In particular, due to BMW passenger vehicles’ significant revenue contribution to our Group, gross profit margin for 2012 decreased compared to that of 2011 partially as a result of the increase in the supply of BMW passenger vehicles in the market, the reduction in retail prices and the introduction of lower-end models by BMW. As of the Latest Practicable Date, we operated 14 BMW outlets, out of 25 total outlets we operated. In addition, as of the Latest Practicable Date, we had received BMW’s authorizations, preliminary approvals or letters of intent to establish 10 new BMW outlets. Moreover, a majority of our outlets for ultra-luxury brands were still in the construction phase as of the Latest Practicable Date. We did not generate any revenue from sales of ultra-luxury passenger vehicles in the years ended December 31, 2010 and 2011. Revenues from sales of ultra-luxury passenger vehicles in 2012 were generated from four brands, namely, Rolls-Royce, Aston Martin, Ferrari and Maserati, which only accounted for an aggregate of 4.3% of our total revenues for the same period. There is no assurance that we will be able to continue to maintain our current relationship with our top manufacturers, and with BMW China in particular. If any of our top automobile manufacturers decide to terminate authorizations to us or decline to renew authorizations to us upon expiration, or if our relationships with BMW China or any other automobile manufacturers deteriorate for any reason, such as breach of contracts or failure to meet sales quota for any given periods, our results of operations, financial condition and growth prospects might be materially adversely affected.

Our operations are geographically concentrated in Henan Province

As of the Latest Practicable Date, we operated 25 outlets nationwide, among which 17 were located in Henan Province. Before November 2011 when we opened a BMW 4S store in Beijing, we operated seven outlets, all of which were located in Henan Province. We expect our operations in Henan Province to account for significant portion of our overall operations in the near future. As a result of the geographical concentration of our network in this area, any material negative event or development that affects Henan Province’s economy in general and the passenger vehicle market in particular, such as any severe economic downturn, natural disaster or outbreak of pandemics, may materially and adversely affect on our results of operations, financial condition and growth prospects.

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RISK FACTORS

We may not be able to sustain our historical growth rate or financial performance in the future

We have experienced significant growth during 2010, 2011 and 2012. Our revenues increased from RMB1.80 billion for the year ended December 31, 2010 to RMB5.66 billion for the year ended December 31, 2012, representing a CAGR of 77.3% during the period. We cannot assure you that we will achieve similar growth rates in future periods. Our historical growth rates and results of operations may not be an indication of our future performance. In particular, during 2010, 2011 and 2012 we granted to the Controlling Shareholders certain loans which bore interest at a rate of 15% per annum in support of the development and capital needs of the Controlling Shareholders’ other businesses. Our profit was RMB112.7 million, RMB220.5 million and RMB350.7 million for the years ended December 31, 2010, 2011 and 2012, respectively. In comparison, our profit excluding such interest incomes from the Controlling Shareholders and the related tax impact would be RMB102.6 million, RMB180.3 million and RMB239.9 million for the years ended December 31, 2010, 2011 and 2012, respectively. For more details, see “Financial Information – Net Current Assets and Liabilities – Related party transactions”. We do not plan to grant similar loans to any related party going forward and as a result would not generate any similar interest income.

Moreover, we have expanded quickly since the beginning of 2012. The number of outlets we operated increased from nine as of December 31, 2011 to 25 as of the Latest Practicable Date. As many of such newly opened outlets have no prior operating history or revenue contribution to our business, we cannot assure you we can operate such new outlets to generate profit margins comparable to our historical levels. If we are unable to maintain adequate growth, our results of operations and financial conditions may be materially and adversely affected. In addition, we cannot assure you that the passenger vehicle market in China in general or the sales of luxury and ultra-luxury passenger vehicles in particular, will sustain similar growth rates. See the section headed “Industry Overview” in this document for the forecasted growth for luxury and ultra-luxury passenger vehicles sales in China, and for our categorization of luxury and ultra-luxury passenger vehicles.

Changes in our revenue sources or composition may adversely affect our gross profit margin

During 2010, 2011 and 2012, we generated our revenues from the sales of new passenger vehicles and the after-sales services. After-sales services generally had a higher gross profit margin compared with that of sales of new passenger vehicles. Revenues from sales of new passenger vehicles accounted for 89.7%, 90.8% and 92.7% of our total revenues for the years ended December 31, 2010, 2011 and 2012, respectively, with gross profit margin of 9.8%, 11.4% and 9.2% for the same periods. In comparison, revenues from after-sales services accounted for 10.3%, 9.2% and 7.3% of our total revenues for the years ended December 31, 2010, 2011 and 2012, respectively, with gross profit margin of 39.6%, 37.6% and 44.0% for the same periods. Any change of suppliers for spare parts might adversely affect our gross profit margin of after-sales services. In addition, although it is one of our strategy to increase revenue contribution from our after-sales services, we may not be able to increase or maintain the level of revenues generated from after-sales services as a percentage of the total revenues, which will in turn have an adverse effect on our overall gross profit margin.

We may not be able to obtain necessary financing on commercially reasonable terms, or at all

Our business is capital intensive. We need funds to purchase new passenger vehicles, spare parts and other accessory products from manufacturers. In addition, construction of new outlets requires significant capital and we usually need to obtain financing from commercial banks to fund such construction. Our capital expenditure was RMB67.5 million, RMB201.0 million and RMB893.3 million for the years ended December 31, 2010, 2011 and 2012, respectively. As of December 31, 2010, 2011 and 2012, we had bank loans and other borrowings in the amount of RMB395.4 million,

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RMB859.5 million and RMB2.07 billion, respectively. Our interest expenses in connection with our bank loans and other borrowings were RMB20.0 million, RMB61.9 million and RMB116.4 million for the years ended December 31, 2010, 2011 and 2012, respectively. Our ability to obtain financing from commercial banks on commercially reasonable terms depends on our historical performances and financial condition, as well as a number of factors that are beyond our control, such as macro-economic conditions, availability of capital liquidity, the interest rate environment and relevant government rules and regulations. If we are unable to obtain necessary financing at commercially reasonable terms or at all, our expansion and/or operations may be disrupted which will in turn adversely affect our results of operations and financial condition.

If we are unable to obtain financing from commercial banks, we may need to issue additional equity or debt securities or obtain credit facilities through public offerings or private placements in the future to meet our requirements for capital. The sale of additional equity securities or securities convertible to our equity securities would dilute our Shareholders’ interests. The additional debt would also result in increased debt servicing obligations and may also result in covenants restricting our shareholding structure, business and/or operations.

Our business operation and financial performance could be materially and adversely affected by our indebtedness

During 2010, 2011 and 2012, we relied on bank loans, borrowings and other financing methods to support a substantial part of our capital expenditure, and we expect to continue to do so in the future. For the years ended December 31, 2010, 2011 and 2012, we had total debt (including bank loans and other borrowings, trade and bills payable and other payables and accruals) of approximately RMB945.3 million, RMB1,856.9 million and RMB3,512.8 million, respectively. Our gearing ratio (being net debt (total debt minus cash and cash equivalents) divided by the total equity attributable to owners of the parent plus net debt) for the same period was 68.9%, 66.3% and 84.3%, respectively. For more details, see section headed “Financial Information – Market Risk Disclosure – Capital Management” in this document.

Our high gearing ratio could adversely affect our business development and financial performance through, including but not limited to, the following means:

increase our vulnerability to adverse overall industry environment or increasing interest rate;
restrict our flexibility to manage our cash flow, because a substantial percentage of our cash will have to be allocated to the repayment of indebtedness;
increase our exposure to unpredictable adverse events, such as not having enough cash to cover potential damage liability from automobile defects/recalls or expenses for upgrading technologies or equipments required for our after sales service; and
decrease our sales volume or our expansion speed, since our marketing and sales budget will be limited as a result of the repayment of our indebtedness.

We were in a net current liabilities position as of December 31, 2012 and we cannot assure you that we will not experience net current liabilities position in the future

We had net current liabilities of RMB315.8 million as of December 31, 2012 as compared to net current asset of RMB498.2 million as of December 31, 2011, primarily due to (i) an increase of RMB918.2 million in bank loans and other borrowings to satisfy our increasing capital needs as we expand our business and (ii) a decrease of RMB313.7 million in amounts due from related parties. In the year ended December 31, 2012, the Controlling Shareholders settled part of the outstanding

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loans due to us by their dividend entitlement in the amount of RMB559 million. We do not plan to grant loans to any related parties going forward, however, we cannot assure you that we will not have net current liabilities in the future. If we fail to generate current assets to the extent that the aggregate amount of our current assets on any given day exceeds the aggregate current liabilities on the same day, we will continue to record net current liabilities. If we have significant net current liabilities for an extended period of time, our working capital for purposes of our operations may be subject to constraints, which may have a material adverse effect on our business, financial condition and results of operations.

There can be no assurance that we will continue to receive rebates from the automobile manufacturers

Our purchase arrangements with the automobile manufacturers often include volume-based rebates, which are decided with reference to the units of new passenger vehicle purchased, and are adjusted based on our satisfaction of certain targets set by the relevant automobile manufacturers, including sales targets, customer satisfaction indices, and dealership presentation standards. For the years ended December 31, 2010, 2011 and 2012, we recorded rebates received or receivable of approximately RMB92.2 million, RMB124.6 million and RMB317.7 million, respectively. If some or all of the manufacturers cease to offer such rebates in the future, or alter the conditions by which such rebates are granted, our results of operations and financial condition may be adversely affected.

Our results of operations and financial condition depend on our ability to effectively manage our inventory

Our ability to effectively manage our inventory for new passenger vehicles and spare parts is important to our business. We will not be able to meet demands from customers on a timely manner if our inventory is understock, which may in turn adversely affect our revenue and reputation. Conversely, we may incur additional financing and labor cost due to an overstock inventory. Our average inventory turnover days were 29 days, 34 days and 38 days for the years ended December 31, 2010, 2011 and 2012, respectively. If our average inventory turnover days increase significantly, our results of operations and financial condition may be adversely affected.

Product defects and passenger vehicle recalls may adversely affect our results of operations and financial condition

Automobile manufacturers may make recalls of certain model of their passenger vehicles due to product defects and other problems from time to time. During 2010, 2011 and 2012, we have assisted our manufacturers to effectuate recalls of their passenger vehicles. See “Our Business – Our services – Passenger vehicle recalls” in this document. We are generally not liable for costs associated with such recalls and are typically reimbursed by manufacturers for any costs we incurred in facilitating such recalls. Nevertheless, consumer confidence in the safety or quality of the recalled model or the brand in generally may be significantly impaired by such recalls which could result in cancellation of orders we receive and reduction in our sales. Any future automobile recall by our automobile manufacturer partners may have a negative impact on our sales, which may in turn adversely affect our results of operations and financial condition.

Any reduction by automobile manufacturers of their advertising, marketing and promotional activities could adversely affect our sales of new passenger vehicles

Our sales of certain models of passenger vehicles are strongly influenced by the advertising, promotional and marketing activities of the respective automobile manufacturers designed to foster consumer demand for such models, especially new models. We often assist automobile manufacturers in their advertising and promotional initiatives. In addition, for models that have been released for a certain period of time, automobile manufacturers sometimes offer discounts,

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complimentary products and services and/or extended warranties, often through our outlets. Nevertheless, we have no control over the content, timing and coverage of such advertising, promotional and market activities of a certain automobile manufacturers. In addition, the particular models or makes of passenger vehicles that an automobile manufacturer decides to promote might not be aligned with our needs from the inventory management perspective. As a result, changes in any of the promotional and marketing activities by automobile manufacturers may adversely affect the sales of automobiles at our dealership stores and adversely affect the results of our operations, financial position and growth prospects.

We rely on automobile manufacturers as our major suppliers

During 2010, 2011 and 2012, our operation and revenues were heavily relied on automobile manufacturers as our major suppliers, and we expect our reliance on those major suppliers to be continued going forward. For the years ended December 31, 2010, 2011 and 2012, purchases from our top five suppliers accounted for approximately 99.7%, 99.8% and 97.9% of our total purchases, respectively. Among the top five suppliers, BMW and Lexus were the two largest automobile brands in our portfolio based on purchase amount, which in combination accounted for 97.5%, 97.8% and 96.3% of our total purchase amount for the years ended December 31, 2010, 2011 and 2012, respectively. Specifically, purchases from BMW for the years ended December 31, 2010, 2011 and 2012 accounted for approximately 72.7%, 80.9% and 87.0% of our total purchases for the same periods, respectively, and purchase amount from Lexus accounted for approximately 24.8%, 16.9% and 9.3% of the total purchase amounts for the same periods, respectively. As a result, our business operation and financial performance would be adversely and materially affected if BMW or Lexus terminates or refuses to extend/renew the dealership agreements with us, or if BMW or Lexus experiences difficulties in producing or transporting passenger vehicles and spare parts.

We depend on third parties for supplies of spare parts and accessories

In addition to procuring spare parts and other accessories from automobile manufacturers, we also depend on independent local third-party suppliers for certain spare parts and accessories we sell. The success of our after-sales business is dependent on these suppliers’ abilities to anticipate changes in consumer tastes, preferences and requirements and deliver to us in sufficient quantities and on a timely basis the desirable, high-quality and price competitive mix of accessories. Our suppliers’ products may fail to meet our customers’ expectations due to changes of consumer preferences. We may be unable to maintain a sufficient stock. Our suppliers may increase their prices due to increasing demand for their products from other dealership stores. In addition, historically we were able to procure certain spare parts and accessories from certain independent local third-party suppliers at favorable prices, in part due to our bargaining powers in relation to such third-party suppliers, which are usually smaller in scale and operate locally. As a result, we have been able to generate higher profit margins from the sales of these spare parts and accessories. If we cannot or opt not to procure spare parts and accessories from such third-party suppliers, our profit margin for after-sales services might be adversely affected. Moreover, the spare parts supplied by our suppliers may fail to function properly and as a result, our customers may make claims against us, in which case we may be required to make repairment or pay damages. In the event of any of the above, our margins of these products may be affected, which in turn could adversely affect our results of operations and financial condition.

If we engage distributors to source customers for a brand in areas where there is no existing dealership outlet, it might be deemed not to be in compliance with the relevant requirement under the relevant dealership authorization agreement

During 2010, 2011 and 2012, from time to time, we engaged certain distributors in Henan Province to source customers for BMW passenger vehicles in areas where there are no existing BMW dealership outlet. In March 2013, BMW China issued a letter to us which contained a warning with

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regard to such historical practices. We have implemented various internal control procedures to ensure that such practices are pre-approved by the relevant automobile manufacturers and will be effectively and immediately terminated if requested by the automobile manufacturers in the future. For more details, see “Our Business – Our Services – Sales of new passenger vehicles – Engagement of distributors”. If our internal control procedures are not effective in ensuring pre-approvals are obtained from the relevant automobile manufacturers before we engage any distributors, or if we fail to effectively and immediately terminate such practices when requested, we might be deemed not be in compliance with the relevant dealership authorization agreements. As a result, the relevant automobile manufacturers might levy penalties or claim damages against us or terminate the relevant dealership authorization agreements, which will have an adverse impact on our results of operations, financial condition and growth prospects.

We depend on key individuals of our senior management and skilled employees to effectively conduct our business

The success of our business is to a significant extent attributable to the leadership of our senior management, in particular our founder and chairman, Mr. Feng and our chief executive officer, Mr. Yu Feng. If for any reason the services of any of these individuals were to become unavailable, and we were unable to find any suitable replacement on a timely basis, our business operations and growth prospects may be adversely affected.

In addition, the smooth daily operations of our outlets depend on our large number of skilled store-level managers, sales representatives and automotive engineers and technicians. Our ability to attract, train and retain our employment force is critical to the continued success of our business. Due to the strong growth in the PRC economy and the PRC automobile industry, competition for skilled personnel is increasingly intense, and we cannot assure you we can always attract and retain key personnel or highly skilled employees that we need. Our results of operations, financial condition and growth prospects may be materially and adversely affected if we suffer a shortage of personnel and necessary talents for our operations and growth.

Our insurance coverage may be inadequate to cover our potential losses

We carry insurance that covers loss, theft and damage to our inventories in most of our outlets. We do not carry liability insurance that extends coverage to all potential liabilities that may arise in the ordinary course of our business, neither do we maintain any insurance coverage for business interruption due to the limited coverage of any business interruption insurance in the PRC. To the extent claims are brought against us or we suffer damages or losses of our inventories or properties which are not covered in full or in part by our insurance, our results of operations and financial condition may be adversely affected.

We may not be able to use certain properties leased by us because of defects affecting our leasehold interests

We have leased certain properties in China to operate our outlets. As of December 31, 2012, we leased a total of 24 properties with an aggregate gross floor area, or GFA, of approximately 15,255 square meters for the building portion and an aggregate site area of approximately 114,261 square meters for the land portion, among which:

for three properties with an aggregate GFA of approximately 3,189 square meters, accounting for 20.9% of the aggregate GFA of our leased buildings and an aggregate site area of approximately 20,487 square meters, accounting for 17.9% of the aggregate site area of our leased land, the landlords had not obtained the relevant title certificates. One of these properties is located in Zhengzhou, Henan Province. The other two are located in Anyang, Henan Province and Wuhan, Hubei Province.

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in one property with an aggregate site area of approximately 8,671 square meters, which accounts for 7.6% of the aggregate site area of our leased land, we operated one 4S dealership store as of the Latest Practicable Date, the property was not in compliance with its designated usage. The property is located in Nanyang, Henan Province.
eight properties with an aggregate GFA of approximately 1,177 square meters, which accounts for 7.7% of the aggregate GFA of our leased buildings and an aggregate site area of approximately 67,457 square meters, which accounts for 59% of the aggregate site area of our leased land, are built in collectively-owned land and are not permitted to be leased to others for non-agricultural or commercial purposes under applicable PRC laws, rules and regulations. One of these properties are located in Guangzhou, Guangdong Province, one is located in Beijing and another six are located in Henan Province.

Our leasehold interests in 12 of these leased properties are subject to certain defects. For the years ended December 31, 2010, 2011 and 2012, revenue generated from our operations on these 12 leased properties with defects was RMB284.4 million, RMB1.14 billion and RMB3.08 billion respectively, which accounted for 15.8%, 37.6% and 54.5% of our total revenue, respectively. For more information, see section headed “Our Business – Properties”.

Any dispute or claim in relation to the rights to lease and use the properties occupied by us, including any litigation involving allegations of illegal or unauthorized use of these properties, may require us to relocate our business operations. If any of our leases were terminated as a result of any challenge by third parties or any failure of our lessors to renew the leases or obtain their legal title or the requisite government approval or consent to lease the relevant properties, we may need to seek alternative premises and incur additional costs for relocation. Based on currently available information, the estimated total costs and expenses for relocating our businesses located on properties with defective titles are approximately RMB174 million. Any such relocation could disrupt our operations and adversely affect our business, financial condition, results of operations and growth prospects. In addition, there can be no assurance that the PRC government will not amend or revise existing property laws or regulations to require additional approvals, licenses or permits, or impose stricter requirements to obtain or maintain the title certificates required for the properties occupied by us.

There can be no assurance that we will be able to enter into definitive dealership authorization agreements for outlets approved to be constructed by automobile manufacturers

According to common market practice, automobile manufacturers typically approve commencement of construction of new outlets in the form of authorization, preliminary approval or letter of intent and only enter into definitive dealership authorization agreement for such outlets upon completion of construction. For more details, see “Our Business – Sales Network – New outlets establishment.” We are advised by our PRC legal adviser that such authorizations, preliminary approvals and letters of intent to construction are not legally binding on either party. During 2010, 2011 and 2012 and up to the Latest Practicable Date, we had not experience any difficulty in entering into dealership authorization agreements with automobile manufacturers for our newly constructed outlets. As of the Latest Practicable Date, we had received authorizations, preliminary approvals and letters of intent to commence the construction of 20 new outlets, among which 14 were under construction and six were under preparation of construction. For more details, see “Our Business – Sales Network – New outlets establishment.” There is no assurance that we will be able to enter into definitive dealership authorization agreements for such 20 new outlets approved to be constructed. If an automobile manufacturer refuses to enter into the dealership authorization agreement with us upon the completion of the construction of a new outlets, our results of operations, financial conditions and prospect can be materially and adversely affected.

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Our business may be adversely affected by political and macro-economic events

Our business focuses on selling imported and domestically manufactured luxury and ultra-luxury passenger vehicles, including a Japanese luxury brand, Lexus. Lexus is the second largest brand we dealt in terms of purchase amount during 2010, 2011 and 2012, which accounted for 23.2%, 16.7% and 9.7% of our total revenues for the years ended December 31, 2010, 2011 and 2012, respectively. The territorial dispute between China and Japan in September 2012 led to boycotts of Japanese goods, including passenger vehicles, and a decrease in sales volume of Japanese vehicles. As a result, In October 2012 German brands overtook Japanese brands to account for the largest market share in China in terms of sale volume. Our sales volume of Lexus passenger vehicles was 67, 58, 75 and 79 for September, October, November and December 2012, respectively, and the average sales volume in the three months ended March 31, 2013 was 63 per month, as compared with 78 and 92 in July and August 2012, respectively, and the average of 115 per month in the six months ended June 30, 2012. Our sales of pre-owned passenger vehicles were not affected by such development as we had no trade-in for Lexus passenger vehicles during 2010, 2011 and 2012 and up to the Latest Practicable Date. Neither did we incur any liabilities in connection with any vehicles damaged during any protests relating to the Diaoyu Islands dispute in China. Nevertheless, the continuation of the territorial dispute could continue to adversely affect our Lexus sales volume.

In addition, as a result of the continuing European debt crisis, the automobile market in Europe has showed signs of deterioration. Major automobile manufacturers, including BMW Group and Volkswagen Group started to channel their unsold inventories to other auto markets with stronger purchasing power. The China market has received some of these inventories, but only for selected models that are not produced in China. Such measures have put downward pressure on retail prices of passenger vehicles in China, but at the same time resulted in an increase in sales volume. The long term effects of such measures remain unclear, but if downward pressure on retail prices continues for a sustained period of time, our results of operation, financial condition and prospect may be adversely affected.

Moreover, it was recently reported by certain media sources that a 20% luxury tax might be levied by the relevant government authorities on the purchase of a passenger vehicle with a retail price over RMB1.7 million. The earliest possible effective date of such tax was reported to be June 1, 2013. Such purchase tax, if effectuated, might adversely affect our expansion plans in the ultra-luxury passenger vehicle market and sales of new ultra-luxury passenger vehicles.

RISKS RELATING TO OUR INDUSTRY

We operate in an increasingly competitive passenger vehicle dealership market

Passenger vehicle dealership market in China is competitive, and intensified by the fact that manufacturers typically grant non-exclusive dealership rights in the same geographic region. As a result, in many of our regional markets we compete with dealerships that offer competing brands of passenger vehicles as well as dealerships that sell the same brands and models as we do. In addition, we compete with independent repair shops and auto parts retail centers in after-sales services and spare part sales. Our competitive strength depends on a number of factors, including our ability to:

maintain solid relationship with automobile manufacturers;
anticipate and cater to customer purchase sentiments and boost sales of new passenger vehicles;
provide high quality after-sales services to customers;
manage inventories of new passenger vehicles and spare parts to keep them at optimum levels; and

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train and retain employees and attract new talents.

We cannot assure we will maintain a high level of competitiveness in all these areas. We expect the number of luxury and ultra-luxury dealerships in China to continue to grow in the foreseeable future. We also compete with independent repair shops and auto parts retail centers in after-sales services. Increased competition could lead to decrease of our market shares and profits, and adversely affect our growth prospects.

Strict or stricter fuel economy standards and emission standards, high fuel prices and increased taxes on passenger vehicle consumption may restrict the supply of and/or reduce the demand for new passenger vehicles in China

The implementation and enforcement of strict or stricter fuel economy standards and emission standards for passenger vehicles are likely to raise costs of manufacturing, distribution and research and development for manufacturers. Consequently, manufacturers may raise their pricing guidelines for their passenger vehicles, and consumer demand for new passenger vehicles may decline.

The PRC government currently subsidizes the retail petrol price but may adjust the price due to factors such as change in global crude oil price. The PRC government has adjusted the retail petrol price several times in recent years. The fluctuation of petrol prices have led to noticeable changes in the level of demand for fuel in China and disparities in the cost and availability of petrol between different parts of China and made the petrol price in China less predictable. If the demand for fuel increases in China, fuel shortages or price increases may occur. Consumers may avoid increased or unpredictable costs or shortages and utilize alternative means of transport such as bicycles, public buses and subways, or purchase more fuel-efficient automobiles. These standards tend to have a greater impact on more expensive, luxury and ultra-luxury brand automobiles, which tend to be less fuel efficient.

There can be no assurance that the PRC government will not implement stricter fuel economy standards or emission standards, further increase fuel prices or automobile consumption tax rates, impose additional restrictions or taxes, or reduce or abort automobile consumption tax cuts on the Chinese automobile industry. We may face a decline in sales as a result of the above, and our results of operations, financial condition and growth prospects may be adversely affected.

Government policies on passenger vehicle purchases and ownership may materially affect our results of operations

Government policies on passenger vehicle purchase and ownership may materially affect our business, as it might significantly affect demand and customer behavior.

The PRC government adopted the current automobile consumption tax on April 1, 2006. The increase of applicable tax rates on automobiles with large cylinder capacities took effect on September 1, 2008 pursuant to the “Notice on Adjusting the Policy of the Consumption Tax on Passenger Vehicles” (關於調整乘用車消費稅政策的通知) as released by the PRC Ministry of Finance and the State Administration of Taxation. Certain of the automobiles we sell have large cylinder capacities and are subject to relatively higher automobile consumption tax rates. Any future implementation on higher automobile consumption tax rates for automobiles with larger engine displacement capacity may cause our sales to decline and adversely affect our revenues.

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Anti-traffic congestion measures and ordinances of certain Chinese cities may restrict local demand for automobiles

Passenger vehicle sales may be affected by quotas or other measures imposed by local governments to control the number of passenger vehicles as anti-traffic congestion measures in the cities where our networks are located. Changes in local economic conditions, the competitive environment and governmental policies could materially and adversely affect our business, financial condition, results of operations and growth prospects. For example, with a goal to curb traffic jams and pollution, Shanghai has been restricting the issuance of new license plates since 1994. Individuals and companies have to bid in an auction, which is generally held by the municipal government once a month, for a license plate in order to register a new vehicle and the total number of licence plates to be issued is notified to public each month immediately before the auction. Approximately 8,500 license plates were issued by auction per month in 2011. Similarly, effective on December 23, 2010, the Beijing municipal government issued a number of measures to limit the number of new license plates it issues each year, with a view to curbing traffic congestion in Beijing. The quota was 240,000 per year or 20,000 per month in 2011 and 2012 and is currently expected to remain the same in 2013. As a result, overall new passenger vehicle sales in the Beijing market have since decreased significantly. These and any future government policies to control the number of passenger vehicles in the markets where we operate may restrict the ability of potential customers to purchase passenger vehicles and hence reduce customer demand for passenger vehicles. For more details, see “Regulations – Regulations relating to the PRC Automobile Industry – Anti-Traffic Congestion Measures”. As of the Latest Practicable Date, there is no similar local rules or regulations to limit annual sales of new passenger vehicles in Henan Province. Any similar or other adverse events in areas in which we operate, and in particular in Henan Province, could materially and adversely affect our business, financial condition, results of operations and growth prospects.

Any failure to comply with applicable laws, rules and regulations governing the automobile dealership industry may adversely affect our business

We operate in a highly regulated industry. We are required to maintain various approvals, licenses and permits for our operations that are specific to the automobile dealership industry. There can be no assurance that the PRC government will not amend or revise existing laws, rules or regulations to require additional approvals, licenses or permits, or to impose stricter requirements to obtain or maintain the approvals, licenses or permits required for our business operations. Any loss of or failure to obtain or renew our approvals, licenses, or permits could disrupt our operations and any fines or other penalties imposed by the PRC government could materially and adversely affect our results of operations, financial position and reputation. Please see the section headed “Regulations” in this document for more details.

RISKS RELATING TO CONDUCTING BUSINESS IN CHINA

The business operation and future growth of our Group rely on the GDP and consumption growth in the Chinese market and may be adversely affected by changes in the economic, political and social conditions, globally and in China

All of our revenue during 2010, 2011 and 2012 was derived from our operations in China. We anticipate that China will remain our primary market in the foreseeable future. One of our strategies is to expand our operations in China. Accordingly, our business, financial condition, results of operations and prospects are, to a significant degree, subject to economic development in China. Should there be any adverse change in the GDP and/or consumer spending growth in China, our results of operations, financial condition and growth prospects may be materially and adversely affected.

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In the past twenty years, China has been one of the world’s fastest growing economies measured in terms of GDP. However, historically, the PRC government has taken measures to attempt to slow economic growth to a more manageable level, especially with respect to the rate of growth in industrial production, bank credit, fixed investment and monetary supply. Furthermore, a slowdown in the economies of the United States, the European Union and certain Asian countries may significantly and adversely affect economic growth in China.

Since early 2008, concerns over inflation or deflation, energy costs, geopolitical issues, the availability and cost of credit, have contributed to unprecedented levels of market volatility and diminished expectations for the global economy and the markets in the future. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and a possible prolonged recession on a global basis. These events have led the Chinese economy to experience a slowdown. We cannot predict the extent to which the changing global economic conditions will affect GDP and consumer spending in China. In addition, consumer spending can be affected by factors such as changes or developments in economic and financial condition, and social and political stability in China, and other factors which are beyond our control. Any changes in any of these conditions, or any changes in PRC laws, rules and regulations or other policies in reaction to the changing economic conditions could materially and adversely affect our Group.

Uncertainties with respect to the PRC legal system could have a material adverse effect on us

Our business and operations are primarily conducted in the PRC and governed by PRC laws, rules and regulations. The PRC legal system is a civil law system based on written statutes. Prior court decisions may be cited for reference, but have limited precedential value. Since the late 1970s, the PRC government has significantly enhanced PRC legislation and regulations to provide protections to various forms of foreign investments in the PRC. However, the PRC has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. As many of these laws, rules and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws, rules and regulations may involve uncertainties and may not be as consistent or predictable as in other more developed jurisdictions. Furthermore, the legal protections available to us under these laws, rules and regulations may be limited. Any litigation or regulatory enforcement action in China may be protracted and could result in substantial costs and diversion of resources and management attention.

In addition, there can be no assurance that the PRC government will not amend or revise existing laws, rules or regulations to require additional approvals, licenses or permits, or to impose stricter requirements or conditions for the approvals, licenses or permits required for our business and operations. Any loss of or failure to obtain or renew our approvals, licenses or permits could disrupt our operations, subject us to fines or penalties imposed by the PRC government. There can also be no assurance that the PRC Government will not amend or revise existing laws, rules or regulations, or promulgate new laws, rules or regulations, which have a material adverse effect on our business, operations, growth or prospects.

There are significant uncertainties under the EIT Law relating to our PRC enterprise income tax liabilities

Under the EIT Law, the profits of a foreign invested enterprise generated from January 1, 2008 and onwards, which are distributed to its immediate holding company outside the PRC, are subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate will be lowered to 5% if a Hong Kong resident enterprise owns over 25% of the PRC

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company. However, according to the Circular of State Administration of Taxation on Printing and Issuing the Administrative Measures for Non-residents to Enjoy the Treatment Under Taxation Treaties (關於印發非居民享受稅收協定待遇管理辦法(試行)的通知), which became effective on October 1, 2009, the 5% tax rate does not automatically apply. Approvals from competent local tax authorities are required before an enterprise can enjoy the relevant tax treatments relating to dividends under relevant taxation treaties. However, according to a tax circular issued by the State Administration of Taxation in February 2009, if the main purpose of an offshore arrangement is to obtain a preferential tax treatment, PRC tax authorities have the discretion to adjust the tax rate enjoyed by the relevant offshore entity. We cannot assure you that the PRC tax authorities will determine that the 5% tax rate applies to dividends received by our subsidiary in Hong Kong from our PRC subsidiaries, nor that the PRC tax authorities will not levy a higher withholding tax rate on such dividends in the future.

Under the EIT Law, we may be classified as a “resident enterprise” of the PRC. Such classification could result in unfavorable tax consequences to us and our non-PRC Shareholders

Under the EIT Law, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise”, meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementation rules of the EIT Law define “de facto management” as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. As no official interpretation or application of this new “resident enterprise” classification is currently available, the status and tax treatment of an enterprise registered outside the PRC in accordance with foreign laws and with a PRC individual as a controlling shareholder are unclear.

If the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. We may be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that any income sourced by us from outside the PRC would be subject to PRC enterprise income tax at a rate of 25%. By comparison, there is no taxation on such income in the Cayman Islands. In addition, if the Company is treated as PRC “resident enterprise” under PRC law, it may be required to withhold PRC income tax on capital gains realized from sales of our Shares and dividends paid to non-PRC residents under the EIT Law as such income may be regarded as income from “sources within the PRC”. In such case, our foreign corporate Shareholders may be subject to a 10% withholding income tax under the EIT Law, unless any such foreign corporate Shareholder is qualified for a preferential withholding rate under a tax treaty.

Our ability to pay dividends and utilize cash resources in our subsidiaries is dependent upon our subsidiaries’ earnings and distributions

We are a holding company incorporated in the Cayman Islands, and our business and operations are primarily conducted through our PRC subsidiaries. We rely on dividends and other distributions paid by our PRC subsidiaries for our future cash needs which cannot be provided by equity issuances or borrowings outside of the PRC, including the funds necessary to pay dividends to our Shareholders, to service any debt we may incur and to pay our operating expenses.

The ability of our subsidiaries to pay dividends or other distributions may be subject to their earnings, financial condition, cash requirements and availability, applicable laws, rules and regulations, and restrictions on making payments to our Company contained in financing or other agreements. If one or more of our subsidiaries incurs debt in its own name, the instruments governing the debt may restrict dividends or other distributions on its equity interest to us.

– 31 –

RISK FACTORS

As entities established in the PRC, our PRC subsidiaries are subject to limitations with respect to dividend payments. Regulations in the PRC currently permit payment of dividends by PRC subsidiaries only out of accumulated profits as determined in accordance with the PRC GAAP. According to applicable PRC laws and regulations, each of our PRC subsidiaries is required to maintain a general reserve fund of 10% of its after-tax profit based on PRC GAAP, up to a maximum of 50% of the registered capital of such PRC subsidiary. Our PRC subsidiaries, as foreign invested enterprises, may also be required to set aside individual funds for staff welfare, bonuses and development, at the discretion of such PRC subsidiaries and as stipulated in their articles of association. These reserves or funds are not distributable as dividends. Contributions to such reserves or funds are made from each of our PRC subsidiaries’ net profit after taxation. In addition, if one or more of our PRC subsidiaries incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. As a result, each of our PRC subsidiaries is restricted in its ability to transfer its net profit to us in the form of dividends.

If our PRC subsidiaries cannot pay dividends due to government policies or regulations, or because they cannot generate sufficient cash flow, we will not be able to pay dividends, service our debt or pay our expenses.

Failure by our Shareholders or beneficial owners who are PRC residents to make any required applications and filings pursuant to regulations relating to offshore investment activities by PRC residents may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under the PRC laws

The Circular Concerning Relevant Issues on the Foreign Exchange Administration of Raising Funds through Overseas Special Purpose Vehicles and Round-Trip Investment in the PRC by Domestic Residents (關於境內居民通過境外特殊目的公司融資及返程投資外匯管理有關問題的通知) (“ SAFE Circular ”) promulgated by SAFE on October 21, 2005, which became effective on November 1, 2005, requires PRC residents with direct or indirect offshore investments, including overseas special purpose vehicles, to file a Registration Form of Overseas Investments Contributed by Domestic Individual Residents and register with SAFE, and to update SAFE’s records within 30 days of any major changes in capital, including increases and decreases of capital, share transfers, share swaps, mergers or divisions. Failure to register may result in the prohibition of distributions or contributions from capital reductions, share transfers or liquidations, from PRC entities to the relevant offshore entity in which the PRC resident has a direct or indirect investment.

Due to the uncertainty concerning the reconciliation of the notices with other approval requirements, it remains unclear how the SAFE Circular and any future legislation concerning offshore or cross-border transactions will be interpreted, amended and implemented by the relevant PRC government authorities. We have been advised by Mr. Feng that he has completed and updated his registration with SAFE. Any failure by our PRC Shareholder to make the registrations or amendments with SAFE may result in the prohibition of distributions, share transfers, or liquidations of our PRC subsidiaries, and may affect our ownership structure, acquisition strategy, business operations, and ability to make dividend payments to our Shareholders.

Government control over currency conversion may affect the value of our Shares and limit our ability to utilize our cash effectively

Substantially all of our revenue is denominated in Renminbi. The PRC Government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, approval from the SAFE or its local branch is required

– 32 –

RISK FACTORS

where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC Government may also at its discretion restrict access in the future to foreign currencies for current account transactions.

Under our current corporate structure, our revenue is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency-denominated obligations. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our Shareholders. In addition, since a significant amount of our future cash flow from operations will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to purchase goods and services outside of the PRC or otherwise fund our business activities that are conducted in foreign currencies.

It may be difficult to effectuate service of process upon, or to enforce against, us or our Directors or members of our senior management who reside in the PRC, in connection with judgments obtained in non-PRC courts

Substantially all of the assets of the Company are located in the PRC. In addition, most of our Directors and senior management reside within the PRC, and the assets of our Directors and senior management may also be located within the PRC. As a result, it may not be possible to effect service of process outside the PRC upon most of our Directors and senior management, including matters arising under applicable securities laws. Moreover, a judgment of a court of another jurisdiction may be reciprocally recognized or enforced if the jurisdiction has a treaty with the PRC or if judgments of the PRC courts have been recognized before in that jurisdiction, subject to the satisfaction of other requirements. However, the PRC does not have treaties providing for the reciprocal enforcement of judgments of courts with Japan, the United Kingdom, the United States and many other countries. In addition, Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, recognition and enforcement in the PRC or Hong Kong of judgments of courts in some jurisdictions is uncertain.

– 33 –

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements and information relating to our Company and our subsidiaries that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. When used in this document, the words “aim”, “anticipate”, “believe”, “could”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “will”, “would” and the negative of these words and other similar expressions, as they relate to the Group or our management, are intended to identify forward-looking statements. Such statements reflect the current views of our management with respect to future events, operations, liquidity and capital resources, some of which may not materialize or may change. These statements are subject to certain risks, uncertainties and assumptions, including the other risk factors as described in this document. You are strongly cautioned that reliance on any forward-looking statements involves known and unknown risks and uncertainties. The risks and uncertainties facing our company which could affect the accuracy of forward-looking statements include, but are not limited to, the following:

our business prospects;
future developments, trends and conditions in the industry and markets in which we operate;
our business strategies and plans to achieve these strategies;
our ability to reduce costs;
our dividend policy;
the amount and nature of, and potential for, future development of our business;
the actions and developments of our competitors;
general economic, political and business conditions in the markets in which we operate;
changes to the regulatory environment and general outlook in the industry and markets in which we operate;
the effects of the global financial markets and economic crisis;
capital market developments; and
change or volatility in interest rates, foreign exchange rates, equity prices, volumes, operations, margins, risk management and overall market trends.

Subject to the requirements of applicable laws, rules and regulations, we do not have any and undertake no obligation to update or otherwise revise the forward-looking statements in this document, whether as a result of new information, future events or otherwise. As a result of these and other risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this document might not occur in the way we expect or at all. Accordingly, you should not place undue reliance on any forward-looking information. All forward-looking statements in this document are qualified by reference to the cautionary statements in this section.

In this document, statements of or references to our intentions or those of the Directors are made as of the date of this document. Any such information may change in light of future developments.

– 34 –

DIRECTORS

DIRECTORS
Name	Address	Nationality
*Executive Directors*
Feng Changge (馮長革)	No. 6, No. 1 Building, Yard 1	St. Kitts and
	Latitude Five Road No. 17	Nevis
	Jinshui District
	Zhengzhou, Henan Province
	PRC
Yu Feng (喻峰)	No. 23, No. 9 Building, Yard 91	Chinese
	Airport Road, Jinshui District
	Zhengzhou, Henan Province
	PRC
Fong Heung Sang, Addy	1/F, 35 Yin Hing Street	Chinese
(Dexter) (方香生)	Kowloon
	Hong Kong
Yang Lei (楊磊)	No. 1405, Unit 11	Chinese
	No. 7 Block, Jianxi District
	Luoyang, Henan Province
	PRC
Cui Ke (崔軻)	No. 14-5, Shangchengli	Chinese
	Guancheng Hui District
	Zhengzhou, Henan Province
	PRC
Liu Wei (劉蔚)	No. 47 Nanchang Road	Chinese
	Luwan District, Shanghai
	PRC
Ma Lintao (馬林濤)	No. 6, No. 1 Building, Yard 1	Chinese
	Latitude Five Road No. 17
	Jinshui District
	Zhengzhou, Henan Province
	PRC
*Non-Executive Director*
Wang Nengguang (王能光)	No. 27, Tou Tiao Xiao Chang	Chinese
	Xuanwu District
	Beijing
	PRC

– 35 –

DIRECTORS

Name	Address	Nationality
*Independent Non-Executive*
*Directors*
Xiao Changnian (肖長年)	No. 501, Unit 2, No. 11 Building	Chinese
	Yard 8 Bingjiaokou Hutong
	Xicheng District
	Beijing
	PRC
Liu Zhangmin (劉章民)	No. 2B, Hujingyuan	Chinese
	Dongfengyangguang Cheng
	Hanyang District
	Wuhan, Hubei Province
	PRC
Li Daomin (李道民)	No. 3, No. 3 Building	Chinese
	Yard 6 Wei Er Road
	Jinshui District
	Zhengzhou, Henan Province
	PRC
Xue Guoping (薛國平)	No. 1, 10/F, Unit 5, No. 1 Building	Chinese
	Yard 1 Donghouheyan
	Chongwen District
	Beijing
	PRC

– 36 –

	CORPORATE	INFORMATION

Principal Place of Business and		15A, Building A, Shangwuneihuan Road
Headquarter in the PRC		CBD Zhengdongxin District
		Zhengzhou, Henan Province
		PRC
Registered Office		Cricket Square, Hutchins Drive
		PO Box 2681
		Grand Cayman, KY1-1111
		Cayman Islands
Company’s Website		www.hexieauto.com
		(The information on the website does not form
		part of this document)
Place of business in Hong Kong registered		Level 28, Three Pacific Place
under Part XI of the Hong	Kong	1 Queen’s Road East
Companies Ordinance		Hong Kong
Company Secretary		Wong Wai Yee, Ella
Authorized Representatives		Fong Heung Sang, Addy (Dexter)
		1/F, 35 Yin Hing Street
		Kowloon
		Hong Kong
		Wong Wai Yee, Ella
		Level 28, Three Pacific Place
		1 Queen’s Road East
		Hong Kong
Audit Committee		Xiao Changnian (Chairman)
		Liu Zhangmin
		Xue Guoping
Remuneration Committee		Xue Guoping (Chairman)
		Liu Zhangmin
		Yang Lei
Nomination Committee		Feng Changge (Chairman)
		Li Daomin
		Xue Guoping
Cayman Islands Share Registrar		Codan Trust Company (Cayman) Limited
		Cricket Square, Hutchins Drive
		PO Box 2681
		Grand Cayman, KY1-1111
		Cayman Islands

– 37 –

CORPORATE INFORMATION

Hong Kong Share Registrar

Principal Banks

Tricor Investor Services Limited 26th Floor, Tesbury Centre 28 Queen’s Road East Wanchai Hong Kong China CITIC Bank, Zhengzhou Branch Shanghai Pudong Development Bank, Zhengzhou Branch China Merchants Bank, Zhengzhou Branch The Bank of East Asia, Zhengzhou Branch Bank of Communications, Zhengzhou Branch

– 38 –

INDUSTRY OVERVIEW

The information presented in this section is derived from various official government publications and other publications and from the market research report prepared by ACMR which was commissioned by us, unless otherwise indicated. We believe that the sources of such information are appropriate sources for such information and we have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading in any material respect or that any fact has been omitted that would render such information false or misleading in any material respect. The information has not been independently verified by our Company, any of our directors, officers or representatives and no representation is given as to its accuracy. The information and statistics may not be consistent with other information and statistics compiled within or outside of China.

SOURCES OF THE INDUSTRY INFORMATION

We commissioned All China Marketing Research Co., Ltd. (“ ACMR ”), an independent market research consulting firm, to conduct a market analysis of, and produce a report (the “ ACMR Report ”) on the following:

macro-economy overview in China;
market analysis of passenger vehicle industry in China; and
competition pattern of passenger vehicle industry in Henan Province.

Established in 1992, ACMR mainly provides independent and objective services on data collection, industry research, market research and competition research. ACMR is the vice chairman member of the China Marketing Research Association, a member of the Society of Competitive Intelligence of China, and a member of the Association of European Society for Opinion and Marketing Research. ACMR has rich experience in industry research and has provided similar consulting services to various pre-listed companies.

The ACMR Report in May 2013 was produced by ACMR’s analysts with specific knowledge of the PRC automobile industry and the forecasts were based on ACMR’s analysis of historical data and trends. This information was obtained by ACMR from a variety of official industry sources, including relevant PRC government departments and established PRC industry organizations such as the National Bureau of Statistics, the China Association of Automobile Manufacturers and the China Automobile Dealers Association etc. ACMR has conducted interviews with market participants and industry experts in order to support, verify and cross check the consistency of the relevant date and estimates. In addition, ACMR has conducted a survey with 408 respondents on the consumer behavior of the PRC automobile industry.

We paid a fee of RMB320,000 to ACMR for the ACMR Report. Except for this report, we did not commission any other customized research report in connection with this document.

– 39 –

INDUSTRY OVERVIEW

SUSTAINED GROWTH OF CHINESE ECONOMY

Economic growth in China

Over the past three decades, China’s economy has grown significantly and sustainably due to the PRC Government’s economic reforms and the opening-up of China’s market. China has maintained strong economic growth in the past three decades and surpassed Japan as the world’s second largest economy in terms of nominal GDP in the second quarter of 2010. The nominal GDP of China grew from approximately RMB21.6 trillion in 2006 to approximately RMB51.9 trillion in 2012, representing a CAGR of 15.7%. During the same period, nominal GDP per capita grew from RMB16,500 in 2006 to RMB38,354 in 2012, representing a CAGR of 15.1%. The following diagram illustrates the growth of nominal GDP and nominal GDP per capita in China from 2006 to 2012:

==> picture [354 x 219] intentionally omitted <==

----- Start of picture text -----

RMB (Billions) RMB
60,000 38,354 40,000
35,083
50,000 29,992 51,932
47,156 30,000
25,608
40,000 23,708 40,120
20,169
34,090
30,000 16,500 31,405 20,000
26,581
20,000 2 1,631
10,000
10,000
0 0
2006 2007 2008 2009 2010 2011 2012
Nominal GDP Nominal GDP per Capita
----- End of picture text -----

Source: National Bureau of Statistics of China

Increase in urbanization and annual per capita disposable income

The sustained economic growth resulted in the increase in both the level of urbanization and per capita disposable income in China.

– 40 –

INDUSTRY OVERVIEW

The level of urbanization of a country is one of the general indications of the stage of its economic development. Urban population grew from 577 million in 2006 to 712 million in 2012, representing a CAGR of 3.6%. The percentage of urban population to the total population increased from approximately 44% in 2006 to approximately 53% in 2012. The diagram below illustrates the increase of the level of urbanization in China from 2006 to 2012:

==> picture [340 x 216] intentionally omitted <==

----- Start of picture text -----

Million People
1,600 54%
53%
1,400
51% 52%
1,200 712.9 674.2
737.4 727.5 721.4 50%
656.6 642.2
1,000 50%
47% 48%
800
46%
46%
45%
600
44%
44%
400 665.6 690.8 711.8
577.1 593.8 606.7 621.9
200 42%
0 40%
2006 2007 2008 2009 2010 2011 2012
Urban Population Rural Population Urbanization Rate
----- End of picture text -----

Source: National Bureau of Statistics of China

The economic growth also resulted in the increase of the annual per capita disposal income in China, especially for urban population. From 2006 to 2012, the annual per capita disposal income for urban population in China grew from RMB11,759 to RMB24,565, representing a CAGR of 13.0%. The diagram below illustrates the increase of annual per capita disposal income for urban population in China from 2006 to 2012:

==> picture [344 x 224] intentionally omitted <==

----- Start of picture text -----

RMB
25,000 17.2% 20%
14.5%
20,000 14.1%
15%
12.1% 12.6%
11.3%
15,000
24,565 10%
8.8% 21,810
10,000 19,109
15,781 17,175
13,786
11,759 5%
5,000
0 0%
2006 2007 2008 2009 2010 2011 2012
Per-capita Annual Disposable Income for Nominal Growth
Urban Population
----- End of picture text -----

Source: National Bureau of Statistics of China

– 41 –

INDUSTRY OVERVIEW

The combination of the increasing level of urbanization and the increasing per capita disposal income resulted in the growth of China’s middle and upper-middle classes, as well as the number of wealthy individuals. Such growth in turn engendered and sustained growth in demands for premium products, such as luxury and ultra-luxury passenger vehicles.

Increased investment in transportation network and other infrastructure

In recent years, the PRC government has been steadily increasing its investments in transportation network and other infrastructure as an important measure to sustain and further drive the economic growth, which resulted in significant growth in transportation network and improvement of infrastructure nationwide. From 2006 to 2011, the CAGR of investment in road construction, total road mileage and total highway mileage of China was 15.1%, 3.5% and 13.4%, according to the ACMR Report. The total highway mileage of China reached 85 thousand kilometers in 2011, the second longest in the world. The diagram below illustrates the road mileages in China from 2006 to 2011:

Million Kilometers

==> picture [332 x 203] intentionally omitted <==

----- Start of picture text -----

4.2 5.0%
4.1% 3.8%
4.0
3.7% 4.0%
3.5%
3.3%
3.8
2.4% 3.0%
3.6
4.01 4.11
2.0%
3.86
3.4 3.73
3.58
3.46 1.0%
3.2
3.0 0.0%
2006 2007 2008 2009 2010 2011
Road Mileages Growth
----- End of picture text -----

Source: Statistics of Development in Road and Waterway Transportation Industries

According to the ACMR Report, Henan Province has one of the highest road mileages among provinces in China.

– 42 –

INDUSTRY OVERVIEW

PASSENGER VEHICLE MARKET IN CHINA

Market segment

The segmentation of the passenger vehicle market in China is widely varied, with industry standards still in development. However, according to ACMR Report, passenger vehicle brands in China, based on, among other things, price range, functionality, customer sentiment and awareness of the brand, and market share, can be categorized into: (i) ultra luxury, (ii) luxury, (iii) middle range, and (iv) low end brands. According to market convention, the average price for an ultra-luxury brand passenger vehicle is typically RMB1 million or above; the average price for a luxury brand passenger vehicle is typically from RMB300,000 to RMB1 million. For middle- and low-end passenger vehicles, the average prices are from RMB80,000 to RMB300,000, and below RMB80,000, respectively. The following table sets forth the representative brands for the luxury and ultra-luxury segments:

Ultra-luxury		Luxury
Bentley		BMW
Bugatti		Audi
Ferrari		Mercedes Benz
Koenigsegg		MINI
Lamborghini		Volvo
Rolls-Royce		Lexus
Maserati		Infiniti
Maybach		Land Rover
Spyker		Cadillac
Wiesman		Jaguar
Aston Martin		Lincoln
Porsche

Source: ACMR Report

Significant growth in recent years

The passenger vehicle market in China has experienced exponential growth in recent years, driven by a number of factors, including:

the sustained economic growth over the past three decades;
the increase in urbanization and per capita disposal income;
the emergence and growth of middle and upper-middle class and wealthy individuals; and
the expansion of transportation network and improvement of infrastructure.

– 43 –

INDUSTRY OVERVIEW

The significant growth of passenger vehicle market in China manifests in both production volume and sales of passenger vehicles. According to ACMR Report, the number of passenger vehicles produced in China increased from 4.3 million in 2006 to 13.3 million in 2012, representing a CAGR of 20.6%. During the same period, the number of passenger vehicles sold in China increased from 4.5 million to 14.3 million, representing a CAGR of 21.5%. The diagram below illustrates the growth of passenger vehicle production and sales in China from 2006 to 2012:

Million Units

==> picture [339 x 198] intentionally omitted <==

----- Start of picture text -----

14.32
14 60%
13.23 13.26
12.15 12.25
12 11.27 50%
10
8.75 40%
8.38
8
30%
6 5.38 5.58 5.68 6.06
4.30 [4.45] 20%
4
2 10%
0 0%
2006 2007 2008 2009 2010 2011 2012
Output Sales Output Growth Sales Growth
----- End of picture text -----

Source: ACMR Report

In 2009, the PRC government issued favorable policies to boost automobile consumption, including reductions in the purchase tax, direct subsidies to rural households and subsidies to automobile owners replacing old automobiles with new ones. Such policies resulted in significant growth in both production and sales volume of passenger vehicles in China in the year. In 2010, additional favorable policies were issued which resulted in further growth in the production and sales volume of passenger vehicles. However, the additional favorable policies had a lesser impact on the market than the first round of favorable policies in 2009. As a result, following the strong growth in 2009, the growth in 2010 was of a lesser magnitude compared with 2009. In 2011, certain favorable policies expired. As a result, both production and sales volumes of passenger vehicles in China experienced much slower growth compared with previous years.

– 44 –

INDUSTRY OVERVIEW

Largest passenger vehicle market in the world

Due to its significant growth in the recent years, the passenger vehicle market in China has became the largest in the world in terms of sales volume in 2009, and it has remained the largest from 2010 to 2012. The size of China’s passenger vehicle market is approximately twice that of the U.S., the second largest in the world in term of sales volume. The table below sets forth the sales volume of passenger vehicle of the top five countries in the world:

			Sales	volume	(in million)

Country	2006	2007	2008	2009	2010	2011	2012	CAGR
China* . . . . . .	4.45	5.58	6.06	8.75	12.15	13.23	14.32	21.5%
America. . . . . .	7.78	7.6	6.81	5.46	5.64	6.19	7.24	–1.2%
Japan . . . . . . .	4.64	4.4	4.23	3.92	4.21	3.53	4.57	–0.3%
Brazil. . . . . . . .	1.56	1.98	2.19	2.48	2.65	3.25	3.63	15.1%
Germany . . . . .	3.46	3.15	3.09	3.81	2.92	3.17	3.08	–1.9%

Excluding sales volume of mini-buses.

Source: ACMR Report

Great growth potential in foreseeable future

According to ACMR Report, there is a great growth potential of the passenger vehicle market in China in the foreseeable future. The penetration rate of passenger vehicles, which is defined as the number of passenger vehicles owned per 100 residents, was 6.2% in 2012 in China, below the global average of 10.8% and significantly lower than those of the developed countries, such as 57.8% in Australia, 61.6% in the U.S., 47.9% in Japan and 30.2% in South Korea.

The growth of the passenger vehicle market is affected by various factors, including:

the macro-economic conditions in China;
per capita disposal income;
governmental policies with regard to passenger vehicles;
price fluctuation; and
further development of sales network.

– 45 –

INDUSTRY OVERVIEW

By taking into these various factors, ACMR Report estimates that demand of passenger vehicle in China will continue to grow at an average rate of approximately 9% from 2013 to 2016. The diagram below illustrates the estimated growth of passenger vehicle production and sales in China from 2013 to 2016:

==> picture [311 x 221] intentionally omitted <==

----- Start of picture text -----

Million Units
25
20.22
20 18.55 18.04
17.01 16.70
15.61 15.46
15 14.32
10
5
0
2013E 2014E 2015E 2016E
Output Sales
----- End of picture text -----

Source: ACMR Report

The 4S dealership

The chart below sets forth the number of brands sold, number of 4S dealership stores in China, and the average number of dealership stores per brand in 2012:

			Average
		Number of	number of
	Number of	outlets in	outlets per
	brands sold	China	brand

Ultra-luxury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13	197	15
Luxury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16	1,759	110

Dominant new passenger vehicle sales platform

The 4S dealership stores first emerged in mid 1990s and have become a dominant retail platform for passenger vehicles in China since the promulgation of the Measures for the Implementation of the Administration of Branded Automobile Sales (“汽車品牌銷售管理實施辦法”, the “ Measures ”) by MOFCOM in February 2005. The Measures stipulate, among other things, that all automobile dealers must obtain permission from an automobile manufacturer before retailing the brands of the automobile manufacturer, which in effect phased out most retail platforms other than 4S dealership stores. According to ACMR Report, all new passenger vehicles have been sold through 4S dealership stores since 2010. Due to intense competition, the average profit margin of sales of new passenger vehicle was 2~3% during 2010, 2011 and 2012.

– 46 –

INDUSTRY OVERVIEW

Rapid growth for after-sales services

Besides sales of new passenger vehicles, 4S dealership stores often also provide after-sales services such as maintenance and repair. According to ACMR Report, after-sales services tend to have the highest profit margin among various segments of automobile industry, and the current average profit margin for after-sales services in China is approximately 40~45%. After-sales services by 4S dealership stores have experienced significant growth in recent years, as a result of growing customer acceptance of 4S dealership services and the increasing number of passenger vehicles. The revenues of after-sales services by 4S dealership stores increased from RMB50 billion in 2006 to RMB295 billion in 2012, representing a CAGR of 30.4%, according to ACMR Report. Nevertheless, the revenues of after-sales services as percentages to total revenues for 4S dealership stores remained largely stable in recent years. The table below sets forth revenue breakdowns as percentages of 4S dealership stores in China from 2006 to 2012, as well as estimated revenue breakdowns from 2013 to 2016:

	2006	2007	2008	2009	2010	2011	2012	2013E	2014E	2015E	2016E

Sales of new passenger
vehicles . . . . . . . . . . . . .	91%	91%	89%	89%	89%	88%	86%	84%	81%	78%	74%
After-sales services. . . . . . . .	8%	7%	8%	9%	9%	10%	12%	14%	17%	20%	24%
Sales of pre-owned passenger
vehicles . . . . . . . . . . . . .	1%	2%	3%	2%	2%	2%	2%	2%	2%	2%	2%

Source: ACMR Report

LUXURY AND ULTRA-LUXURY PASSENGER VEHICLE MARKET IN CHINA

Rapid growth of the luxury and ultra-luxury passenger vehicle market in China

According to the ACMR Report, the market for luxury products in China has experienced exponential growth in recent years as a result of the economic growth and accumulation of individual wealth. The market size of luxury products, which include luxury and ultra-luxury vehicles, private airplanes, private yachts and luxury accessories, in Mainland China grew from RMB328.7 billion in 2009 to RMB903.1 billion in 2012, representing a CAGR of 40.1%. Among luxury products, luxury and ultra-luxury passenger vehicles accounted for the largest segment, which represented about 82% of total luxury product sales in 2012. From 2006 to 2012, the luxury and ultra-luxury passenger vehicle segment had experienced particularly rapid growth. According to ACMR Report, the sales volume of luxury and ultra-luxury passenger vehicles in China grew from 152,200 in 2006 to 1.43 million in 2012, representing a CAGR of 45.3%, more than twice of the CAGR of the sales volume of passenger vehicles in total in China. During the same period, the percentage of the sales volumes of luxury and ultra-luxury passenger vehicles as to the total sales volumes of passenger vehicles in China increased from 3.4% in 2006 to 10.0% in 2012. The table below sets forth the sales volumes and CAGR of luxury and ultra-luxury passenger vehicles, and their percentages as to total sales volumes from 2006 to 2012:

	2006		2007		2008		2009		2010		2011		2012		CAGR

	Volume		Volume		Volume		Volume		Volume		Volume		Volume
	(thousand)	(%)	(thousand)	(%)	(thousand)	(%)	(thousand)	(%)	(thousand)	(%)	(thousand)	(%)	(thousand)	(%)

Ultra-luxury . . . . .	3.1	0.07	5.0	0.09	10.9	0.18	9.6	0.11	15.8	0.13	31.8	0.24	40.0	0.28	53.0%
Luxury . . . . . . .	149.1	3.4	218.7	3.9	329.7	5.4	362.3	4.1	710.8	5.9	1,102.1	8.3	1,392.0	9.7	45.1%
Combined . . . . . .	152.2	3.4	223.7	4.0	340.6	5.6	371.9	4.3	726.6	6.0	1,133.9	8.6	1,432.0	10.0	45.3%
All passenger vehicles .	4,450	100.0	5,580	100.0	6,060	100.0	8,750	100.0	12,150	100.0	13,230	100.0	14,320	100	21.5%

Source: ACMR Report

– 47 –

INDUSTRY OVERVIEW

According to ACMR Report, the sales revenues of luxury and ultra-luxury passenger vehicles in China grew from RMB103.9 billion in 2006 to RMB741.8 billion in 2012, representing a CAGR of 38.8%, compared with the CAGR of 23.4% of the sale revenues of passenger vehicle in total in China. During the same period, the percentage of the sales revenues of luxury and ultra-luxury passenger vehicles as to the total sales revenues of passenger vehicles in China increased from 17.3% in 2006 to 35.0% in 2012. Due to their higher price ranges, luxury and ultra-luxury passenger vehicles accounted for higher revenue percentages as to total sales revenues of passenger vehicles in China, as compared to the percentages in terms of sales volumes. The table below sets forth the sales revenues in RMB and CAGR of luxury and ultra-luxury passenger vehicles, and their percentages as to total sales revenues from 2006 to 2012:

		2006		2007		2008		2009		2010		2011		2012		CAGR

		Revenue		Revenue		Revenue		Revenue		Revenue		Revenue		Revenue
		(billion)	(%)	(billion)	(%)	(billion)	(%)	(billion)	(%)	(billion)	(%)	(billion)	(%)	(billion)	(%)

Ultra-luxury . . . . .	. .	4.3	0.7	7.0	0.9	11.1	1.4	11.0	1.0	20.8	1.3	40.1	2.1	53.0	2.5	52.2%
Luxury. . . . . . . .	. .	99.6	16.6	142.2	18.5	183.0	22.7	217.4	20.0	400.9	24.6	586.3	30.6	688.8	32.5	38.0%
Combined . . . . . .	. .	103.9	17.3	149.2	19.4	194.1	24.1	228.3	21.0	421.7	25.9	626.4	32.7	741.8	35.0	38.8%
All passenger vehicles	. .	600.8 100.0		770.0	100.0	806.0	100.0	1,085.0	100.0	1,628.1	100.0	1,918.4	100.0	2,119.5	100	23.4%

Source: ACMR Report

The territorial dispute in and around September 2012 between China and Japan, or the Diaoyu Island dispute, led to temporary boycott of passenger vehicles of Japanese brand in China. Meanwhile, with the decreasing sales volume of Japanese brands, market shares of automobile manufacturers from other countries expanded significantly, especially for German brands such as BMW. In 2011, Japanese brands in aggregate accounted for the largest share in the China market among foreign brands of passenger vehicles, which was 19.4% by sales volume. However, by the end of 2012, market share of Japanese brands in aggregate decreased rapidly to 16.4%. Conversely, market share of German brands in aggregate increased from 16.5% in 2011 to 18.4% by the end of 2012, overtaking the Japanese brands in aggregate to become the largest in the China passenger vehicles market. Germany brands in aggregate are expected to account for the largest market share in the next few years. Nevertheless, the Diaoyu Island dispute is not expected to have significant long-term impact on the passenger vehicle market in China. According to a recent report by the China Association of Automobile Manufacturers, sales volume of Japanese branded passenger vehicles have started to recover since November 2012 and increased by approximately 72% compared with the previous month. The aggregate monthly market share of Japanese branded passenger vehicles in China has also increased to 11.7% in November 2012 and 14.9% in December 2012 from 7.6% in October 2012. The adverse impacts of the Diaoyu Island dispute are expected to continue to decrease gradually.

In addition, as a result of the deepening of the European debt crisis, automobile market in Europe showed signs of deterioration. Major automobile manufacturers, including BMW Group and Volkswagen Group started to channel their unsold inventories to other auto markets with stronger purchasing power, such as the China market. The increasing supply of imported vehicles has resulted in price competition among dealers, especially for luxury brands. However, the decreasing prices of luxury passenger vehicles have stimulated the sales volume significantly. For instance, in 2012, sales volume of BMW brand in the China market experienced strong growth, to 303,200 cars, representing a 40% increase from the same period of 2011. Moreover, despite its rapid increases, imported passenger vehicles still account for a relatively small market share in term of total sales volume in China. For example, in 2012, China imported 1.08 million units of passenger vehicles, representing less than 8% of the total sales volume of the same month. As a result, the deteriorating passenger vehicle market in Europe and the channeling of unsold passenger vehicles are not expected to have a significant adverse impact on the passenger vehicle market in China.

– 48 –

INDUSTRY OVERVIEW

Taking the above events into consideration, the ACMR Report estimates that the luxury and ultra-luxury passenger vehicle market in China will continue to grow rapidly from 2013 to 2016, and the sales volume could increase from 1.45 million in 2013 to 3.01 million in 2016, representing a CAGR of approximately 27.6%. In addition, ACMR further estimates that sales revenue from luxury and ultra-luxury passenger vehicles are expected to grow from RMB849 billion in 2013 to RMB1.5 trillion in 2016, representing a CAGR of 21.9%. Moreover, the ACMR Report estimated that the average retail price for luxury passenger vehicles in China to be RMB560,000, RMB547,000, RMB525,000 and RMB469,000 for 2013, 2014, 2015 and 2016, respectively; and the average retail price for ultra-luxury passenger vehicles to be RMB1.32 million, RMB1.36 million, RMB1.35 million and RMB1.29 million for 2013, 2014, 2015 and 2016, respectively.

The Group’s leading position in the luxury and ultra-luxury passenger vehicle market in China

According to ACMR Report, the Group is a leading dealership group that deals exclusively in luxury and ultra-luxury passenger vehicles in China in terms of brand coverage and number of outlets. As of the Latest Practicable Date, the Group wholly or jointly owned outlets that covered 10 luxury and ultra-luxury brands, the most among dealership groups which deal exclusively in luxury and ultra-luxury passenger vehicles. In addition, as of the Latest Practicable Date, the Group operated 25 outlets, the second most among dealership groups which deal exclusively in luxury and ultra-luxury passenger vehicles in China.

In terms of revenue, the Group is the second largest among dealership groups that specialize exclusively in the luxury and ultra-luxury brands in 2012. The major peers of the Group are Lei Shing Hong Limited and Sparkle Roll Group. Other dealerships specialized exclusively in luxury and ultra-luxury brands are small in scale and have less than five dealership stores. Lei Shing Hong Limited deals exclusively with Mercedes-Benz, and its revenue in 2012 was RMB40.46 billion. Sparkle Roll Group deals exclusively with ultra-luxury brands such as Bentley, Rolls-Royce and Lamborghini, and had a recognized revenue of RMB3.56 billion in 2012. In 2012, the Group’s market share in the luxury and ultra-luxury passenger vehicle market was approximately 0.7% in terms of revenue.

In terms of passenger vehicle dealerships in general, the Group’s major competitors include Lei Shing Hong Limited, China Yongda Automobiles Services Holdings Limited, China Zhengtong Auto Services Holding Limited, and Baoxin Auto Group Limited, whose market shares in terms of revenue in 2012 were 5.5%, 2.9%, 3.7%, and 2.3%, respectively. Except for Lei Shing Hong Limited, all such major competitors deal passenger vehicles of mid- and/or low-end brands in addition to luxury and ultra-luxury brands.

– 49 –

INDUSTRY OVERVIEW

Selected luxury and ultra-luxury brands

BMW

According to ACMR Report, in the first half of 2012 China overtook the U.S. to become BMW’s largest market in the world. In the Chinese luxury passenger vehicle market, BMW was the second largest brand in terms of sales volumes from 2006 to 2012. The diagram below illustrates the numbers of newly registered BMW passenger vehicles and the sales volumes of BMW passenger vehicles as percentages to the total sales volumes of luxury passenger vehicles in China from 2006 to 2012:

Thousand Units

==> picture [324 x 203] intentionally omitted <==

----- Start of picture text -----

300 23.2% 24.1% 25
21.2% 21.4% 282.10
250 19.8% 19.7% 19.9%
20
217.07
200
15
150 135.84
10
100 83.20
63.51
45.01 5
50 30.69
0 0
2006 2007 2008 2009 2010 2011 2012
Number of Newly Registered BMW Passenger Vehicles Market Share
----- End of picture text -----

Source: ACMR Report

In addition, according to ACMR Report, the CAGR of numbers of registered BMW passenger vehicles in Henan Province from 2006 to 2012 was 54.3%, higher than the national average of 44.7%.

– 50 –

INDUSTRY OVERVIEW

Lexus

The number of newly registered Lexus passenger vehicles in China increased from approximately 10,700 in 2006 to 59,700 in 2012, representing a CAGR of 33.1%. Lexus’ market share in China in 2012 was negatively impacted by the Diaoyu Island Dispute and decreased to 5.1%. The diagram below illustrates the numbers of newly registered Lexus passenger vehicles and the sales volumes of Lexus passenger vehicles as percentages to the total sales volumes of luxury passenger vehicles in China from 2006 to 2012:

Thousand Units

==> picture [319 x 207] intentionally omitted <==

----- Start of picture text -----

59.7
60 12
10.5% 52.6
10.0%
50 10
45.4
7.7%
40 8
6.9% 7.1%
33.6
30.0 5.6%
30 6
5.1%
22.9
20 4
10.7
10 2
0 0
2006 2007 2008 2009 2010 2011 2012
Number of Newly Registered Lexus Passenger Vehicles Market Share
----- End of picture text -----

Source: ACMR Report

In addition, according to ACMR Report, the CAGR of numbers of registered Lexus passenger vehicles in Henan Province from 2006 to 2012 was 54.4%, higher than the national average of 33.1%.

– 51 –

INDUSTRY OVERVIEW

Rolls-Royce

According to ACMR Report, in 2011 China overtook the U.S. to become the largest Rolls-Royce market in the world. The diagram below illustrates the numbers of newly registered Rolls-Royce passenger vehicles and the sales volumes of Rolls-Royce passenger vehicles as percentages to the total sales volumes of ultra-luxury passenger vehicles in China from 2006 to 2012:

==> picture [326 x 193] intentionally omitted <==

----- Start of picture text -----

Units
1,000 973 4
875
800 2.9%
3.3% 3
2.5%
600
2
400 366
1.3%
1.0%
0.8% 0.5% 1
200
65 84 51
32
0 0
2006 2007 2008 2009 2010 2011 2012
----- End of picture text -----

Number of Newly Registered Rolls-Royce Passenger Vehicles Market Share

Source: ACMR Report

– 52 –

INDUSTRY OVERVIEW

LUXURY AND ULTRA-LUXURY PASSENGER VEHICLE MARKET IN THE CENTRAL CHINA REGION

Rapid growth of the luxury and ultra-luxury passenger vehicle market in the Central China Region

According to ACMR Report, the nominal GDP of the Central China Region grew from RMB2.77 trillion in 2006 to RMB7.42 trillion in 2012, representing a CAGR of 17.9%, higher than the national average of 15.7%. In addition, the PRC central government made the development of the “Central China Economic Region” one of the core missions in the Twelfth Five-Year Plan, which will further stimulate economic growth in the future.

As a result of rapid economic growth, the passenger vehicle market in general and the luxury and ultra-luxury passenger vehicle market in particular in the Central China Region had experienced significant development. The number of newly registered passenger vehicles in the Central China Region grew from approximately 410,000 in 2006 to 1.2 million in 2012, representing a CAGR of 19.3%, the second highest among the seven regions in China, according to ACMR Report. Similarly, the number of newly registered luxury and ultra-luxury passenger vehicles in the Central China Region grew from 7,342 in 2006 to 70,871 in 2012, representing a CAGR of 45.9%, the highest among the seven regions in China. The table below sets forth the numbers and CAGR of newly registered luxury and ultra-luxury passenger vehicles in the Central China Region, and the percentages as to the total numbers of luxury and ultra-luxury passenger vehicles in China from 2006 to 2012:

to 2012:
	2006		2007		2008		2009		2010		2011		2012		CAGR

	Volume	(%)	Volume	(%)	Volume	(%)	Volume	(%)	Volume	(%)	Volume	(%)	Volume	(%)

Ultra-luxury . . . . . . .	78	2.4	121	2.3	328	3.1	457	4.4	570	4.0	1,610	6.0	1,812	5.4	68.9%
Luxury. . . . . . . . . .	7,264	4.7	10,291	4.5	15,756	4.9	19,524	5.0	34,789	5.5	59,282	6.3	69,059	5.9	45.5%
Combined . . . . . . . .	7,342	4.6	10,412	4.5	16,084	4.9	19,981	5.0	35,359	5.4	60,892	6.3	70,871	5.9	45.9%

Source: ACMR Report

The Group’s leading position in the luxury and ultra-luxury passenger vehicle market in the Central China Region

According to ACMR Report, the Group is the largest dealership group in luxury and ultra-luxury passenger vehicle market in the Central China Region in 2012, accounting for 9.7% of the total sales volume of luxury and ultra-luxury passenger vehicles in the region. Moreover, the Group was the largest dealership group in terms of sales volume for BMW and Lexus passenger vehicles in the Central China Region in 2012 according to ACMR Report. BMW and Lexus passenger vehicles sold by the Group in 2012 accounted for 38.1% and 29.8% of the total BMW and Lexus passenger vehicles sold in the Central China Region in 2012, respectively.

Major competitors of the Group in Central China Region include Hubei Hengxindelong Industrial Co., Ltd., Hunan Yongtong Auto Group, Hunan Huayang Century Auto Group, and Hunan Lantian Automobile Group, whose market shares in terms of sales volume in luxury and ultra-luxury passenger vehicle market in Central China region in 2012 were 5.2%, 3.8%, 2.1% and 1.7% respectively. In 2012, market share of the Group in luxury and ultra-luxury market in Central China Region was about 9.1% in terms of revenue. The market share of Hubei Hengxindelong Industrial Co., Ltd., Hunan Yongtong Auto Group, Hunan Huayang Century Auto Group, and Hunan Lantian Automobile Group was approximately 5.0%, 3.7%, 2.0% and 1.6%, respectively, in 2012.

– 53 –

INDUSTRY OVERVIEW

LUXURY AND ULTRA-LUXURY PASSENGER VEHICLE MARKET IN HENAN PROVINCE

Henan Province is the hub and the biggest province in the Central China Region in terms of population. According to the ACMR Report, the nominal GDP of Henan Province increased from RMB1.2 trillion in 2006 to RMB3.0 trillion in 2012, representing a CAGR of 15.8%. The nominal GDP per capita increased from RMB13,313 in 2006 to RMB31,753 in 2012, representing a CAGR of 15.6%. Disposable income of urban residents in Henan Province increased from RMB9,810 in 2006 to RMB20,442 in 2012, representing a CAGR of 13.0%. In 2010, the central government coined the term “Central China Economic Region” and made its development one of the primary strategies in the Twelfth Five-Year Plan. In September 2011, the State Council further substantiated this strategy by issuing The State Council’s Guidance on Supporting Henan Province to Accelerate the Development of the Central China Economic Region (“國務院關於支持河南省加快建設中原經濟區的指導意見”). The guidance designated the modernization of Henan Province as the “core mission” of the development of the Central China Economic Region and, among other things, mandated the strengthening of Zhengzhou’s position as the transportation and logistics hub of Central China.

The passenger vehicle market in Henan has experienced fast growth in recent years. The number of newly registered passenger vehicles in Henan Province increased from approximately 211,000 in 2006 to 542,000 in 2012, representing a CAGR of 17.1%. The number of newly registered luxury passenger vehicles in Henan Province increased from 2,965 in 2006 to 28,092 in 2012, representing a CAGR of 45.5%. The number of newly registered ultra-luxury passenger vehicles in Henan Province increased from 19 in 2006 to 671 in 2012, representing a CAGR of 81.1%. In 2012, market share of Henan Province in ultra-luxury and luxury passenger vehicles market in China was 2.4% in terms of sales volume, which has increased constantly from 1.9% in 2006. According to the ACMR Report, recent development of the Diaoyu Islands territorial dispute and the deepening of debt crisis in Europe are not expected to affect luxury and ultra-luxury passenger vehicle market in Henan Province in any way different that they affect the China market as a whole. For more details, see “– Luxury and Ultra-luxury Passenger Vehicle Market in China – Rapid growth of the luxury and ultra-luxury passenger vehicle market in China.”

The luxury and ultra-luxury passenger vehicle market in Henan Province has been dominated by the Group since its inception of business in 2005 in terms of number of outlets and sales volume, especially for brands such as BMW, Lexus and Rolls-Royce. Prior to 2011, the Group was the only dealership for BMW and Lexus in Henan Province. The Group was the only dealership for Rolls-Royces in Henan Province as of the Latest Practicable Date. As of the Latest Practicable Date, the Group operated 11 BMW outlets in Henan Province, accounting for 85.6% of the total number of BMW outlets in Henan Province. BMW passenger vehicles sold by the Group in Henan Province accounted for 100%, 91.9% and 85.6% of total numbers of BMW passenger vehicles in Henan Province in 2010, 2011 and 2012, respectively. Similarly, as of the Latest Practicable Date, the Group operated two Lexus outlets in Henan Province, accounting for 67% of the total number of Lexus outlets in Henan Province. Lexus passenger vehicles sold by the Group in Henan Province accounted for 100%, 80.9% and 70.3% of total numbers of Lexus passenger vehicles in Henan Province in 2010, 2011 and 2012, respectively. In addition, as of the Latest Practicable Date, the Group operated the only Rolls-Royce outlet in Henan Province.

– 54 –

REGULATIONS

OVERVIEW

This section summarizes the key current PRC laws, rules and regulations relevant to our business and operations carried out by our subsidiaries in the PRC.

REGULATIONS RELATING TO THE PRC AUTOMOBILE INDUSTRY

The PRC Automobile Industry

On March 20, 2009, the State Council issued the “Automobile Industry Restructuring and Revitalization Plan” (汽車產業調整和振興規劃) (“ Plan ”) for the period from 2009 to 2011, which clarified the areas of development of the automobile industry and set up policy measures across multiple aspects of the automobile industry. Our PRC legal adviser are of the view that the Plan is a general and marco regulatory guidance by the PRC government, and the Plan has instructive effect on automobile industry’s development after the planed 2009-2011 period. We believe that the Plan has no direct attribution to the material increase in the demand in our sales and its cessation will not have any direct adverse impact on the demand in our sales.

On May 21, 2004, the National Development and Reform Commission (“ NDRC ”) promulgated the Policy on Development of Automotive Industry (汽車產業發展政策) (“ Policy ”) which amended on August 15, 2009. The Policy contains provisions relating to, among other things, the PRC automobile industry’s technology policies, structural adjustments, market access administration, trade marks, product development, spare parts sales and other relevant sub-industries, distribution networks, investment administration, import administration, and automobile consumption. One of the Policy’s stated aims is to develop the PRC automobile industry into a strong pillar of the PRC national economy as well as the automobile industry before 2010.

New Automobile Sales

Our new automobile sales business is subject to the Measures for the Implementation of the Administration of Branded Automobile Sales (汽車品牌銷售管理實施辦法) (“ Measures ”) jointly promulgated by the MOFCOM, the NDRC and the SAIC on February 21, 2005 which became effective on April 1, 2005.

The Measures recognize two categories of automobile distributors – general automobile distributors and automobile dealers. General automobile distributors are defined under the Measures as enterprises engaged in providing automobiles and spare parts. Automobile dealers are defined under the Measures as enterprises authorized by automobile suppliers to engage in automobile sales and services. Our PRC legal adviser, Beijing Jing Rui Law Firm, has confirmed that under the Measures, our Group is classified as an automobile dealer.

An automobile dealer must be a legal person, authorized by an automobile supplier to sell its automobiles. An automobile dealer must comply with the supplier’s requirements relating to the intellectual property rights associated with the automobile brand, such as trademarks, labels and store names, and is also subject to regulation by local municipal and commercial development authorities.

Automobile dealers must obtain the operation permits and file registrations with the relevant local department of the MOFCOM. Further, according to a notice issued by the SAIC on November 10, 2005, automobile dealers must also file registrations with the SAIC prior to the commencement of business operations.

Automobile Maintenance and Repair Services

Our automobile maintenance and repair business is subject to the Regulations on the Administration of Automobile Maintenance and Repair (機動車維修管理規定) (“ Automobile Repair Regulation ”) promulgated by the Ministry of Transport on June 24, 2005 which became effective on August 1, 2005.

– 55 –

REGULATIONS

Under the Automobile Repair Regulations, an operator must have suitable facilities, equipment and technical personnel in order to operate an automobile maintenance and repair business. In addition, an operator must implement quality management systems and safety procedures, provide training to its technical personnel, maintain proper automobile repair and maintenance records and archives, and ensure that there are sufficient safeguards for environmental protection.

Road Transport Licenses

Under the Road Transportation Regulation (道路運輸條例) promulgated by the State Council on April 30, 2004, which became effective on July 1, 2004, prior to the commencement of an automobile maintenance and repair business, an operator must file an application with the local department of the Ministry of Transportation and obtain a Road Transportation License (道路運輸經營許可證) to provide automobile maintenance and repair services. Violation of the Road Transportation Regulation may result in fines and suspension of business operations, and criminal liability may be imposed on a person held directly responsible and/or fines of between two and ten times of the amount of the illegal gains. For successful renewal of Road Transportation License, the applicant shall: (a) have necessary site to repair passenger vehicles; (b) possess necessary equipment, facilities and employees; (c) have adopted sound administrative measures on automobile repair; and (d) have adopted necessary measures for environmental protection.

Foreign investment in automobile maintenance and repair business is also subject to the Regulations on the Administration of Foreign-Invested Road Transportation Services (外商投資道路運輸業管理規定) (the “ Foreign-Invested Road Transportation Services Regulations ”), which was promulgated by the Ministry of Transportation and the MOFCOM and became effective on November 20, 2001. According to Article 5, a foreign-invested road transportation services enterprise must comply with the policies on road transportation development and the requirements for enterprise qualification formulated by the department in charge of transportation under the State Council, and must meet the requirements for the development planning of road transportation services formulated by the local department in charge for transportation where the foreign-funded road transportation enterprise is to be established.

Under the Foreign-Invested Road Transportation Services Regulations, all the application documents of a foreign-invested enterprise received by the local transportation bureau should be forwarded to the Ministry of Transportation, which is the ultimate authority granting the project initiation approval (the “ Project Initiation Approval ”), and a Project Initiation Approval should be granted by the Ministry of Transportation prior to the issuance of a Road Transportation License by the relevant local transportation bureau. Under applicable PRC laws, rules and regulations, the establishment of a foreign-invested operator must be approved by the provincial branch of the MOFCOM, and such foreign-invested operator must submit its Certificate of Approval for ForeignInvested Enterprises and apply to the local department of the Ministry of Transportation for a Road Transportation License for its automobile maintenance and repair business, prior to commencing business.

Used Automobile Sales

Our used automobile sales business is subject to the Measures for the Administration of the Circulation of Used Automobiles (二手車流通管理辦法) (“ Used Automobiles Measures ”) jointly promulgated by the MOFCOM, the Ministry of Public Security, the SAIC and the State Administration of Taxation on August 29, 2005 which became effective on October 1, 2005.

Under the Used Automobiles Measures, a used automobile dealer must provide a customer with a written contract containing warranties relating to the quality of the used automobile, as well as offer arrangements of after-sales services. The Used Automobile Measures also provide for the establishment of a nationwide archival system to keep the records of used automobile dealers.

– 56 –

REGULATIONS

Used automobile dealers must obtain operation permits and file registrations with the relevant local department of the MOFCOM.

In addition, a foreign-invested used automobile dealer must obtain additional approvals from the MOFCOM and file registrations with the relevant local department of the MOFCOM.

Automobile Insurance

We earn commissions from insurance companies which provide their services to our customers on the premises of our 4S dealerships. As such, our business operations are subject to the Regulations on Administration of Concurrent-Business Insurance Agents (保險兼業代理管理暫行辦法) (“ Insurance Regulations ”) promulgated by the China Insurance Regulatory Commission (“ CIRC ”) on August 4, 2000 which became effective on August 4, 2000.

The Insurance Regulations require, among other things, a business which facilitates insurance coverage directly related to its main business, to apply for a license from the CIRC, and to obtain power of attorney, subject to CIRC’s supervision, from the insurance agencies. Under the Insurance Regulations, each business may work with only one insurance agency.

Automobile Loans

We obtain financing from banks and financial institutions for our operations, including for the purchase of new automobiles for sale. Our business operations are subject to the Measures for the Management of Automobile Loans (汽車貸款管理辦法) (“ Loans Measures ”), jointly promulgated by the PBOC and the China Banking Regulatory Commission (“ CBRC ”) on August 16, 2004 which became effective on October 1, 2004.

The Loans Measures provide that an automobile dealer may not obtain financing for a term exceeding one year, for the purchase of automobiles and/or spare parts. The automobile dealer’s balance sheet ratio, or the asset liability ratio, which equals to its indebtedness divided by total assets, must not exceed 80%, and it must have sufficient stable and lawful income or assets to repay both the principal and interest incurred on the loan. As of December 31, 2010, 2011 and 2012, our Group’s asset liability ratio calculated by dividing its total liabilities by total assets was 74.7%, 69.9% and 86.2%, respectively.

In addition, an automobile dealer handling a loan application on behalf of its customers must be a legal person with a business license, an annual review certificate issued by the relevant local branch of SAIC and an automobile selling agent certificate issued by the automaker of the relevant automobile.

Fuel-efficient Automobiles Subsidy

Pursuant to the Notice on the Launch of Energy-saving Product People-benefiting Project (關於開展”節能產品惠民工程”的通知) jointly promulgated by NDRC and the PRC Ministry of Finance on May 18, 2009 and the Implementation Provisions for the Promotion of the Fuel-efficient Automobiles (passenger vehicles of 1.6 liters and below) under the Energy-saving Product People-benefiting Project (“節能產品惠民工程”節能車(1.6升及以下乘用車)推廣實施細則) jointly promulgated by NDRC, MIIT and the PRC Ministry of Finance on May 26, 2010, the PRC Government provides a subsidy of RMB3,000 per automobile for purchases of certain fuel-efficient automobiles with 1.6-liter or smaller engines. NDRC, MIIT and the PRC Ministry of Finance announced a catalogue of the accredited fuel-efficient automobiles eligible for such subsidy (the “ Fuel-efficient Automobiles Catalogue ”) in June 2010 and have subsequently made amendments to the Fuel-efficient Automobiles Catalogue.

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On September 7, 2011, NDRC, MIIT and the PRC Ministry of Finance jointly promulgated the Notice on the Adjustment of Promotion and Subsidy Policy for Fuel-efficient Automobiles (關於調整節能汽車推廣補貼政策的通知). To implement this notice, NDRC, MIIT and the PRC Ministry of Finance further amended the Fuel-efficient Automobiles Catalogue, which reduced the types of accredited fuel efficient automobiles from about 400 to 37 as of October 1, 2011. The amount of subsidy remains RMB3,000 per automobile.

Automobile Recalls

The Regulation on Recall of Defective Automobile Products (缺陷汽車產品召回管理規定) promulgated by the State Administration of Quality Supervision, Inspection and Quarantine, the NDRC, MOFCOM and the General Administration of Customs on March 12, 2004, which became effective on October 1, 2004, requires all automobile dealerships to report defects in automobiles and automobile-related products to both the relevant automobile manufacturers and the relevant PRC government authorities, and to fully cooperate with automobile manufacturers in the conduct of automobile recall activities, and with the PRC government authorities in any relevant investigations.

Anti-Traffic Congestion Measures

In recent years, certain local or municipal governments implements various form of anti-traffic congestion measures with a goal to curb traffic jams and pollution. Such measures include:

Monthly draw for new registration plates in Beijing : On December 23, 2010, Beijing Municipal Government issued the Interim Provisions of Beijing Municipality on the Regulation and Control of the Amount of Passenger Vehicles, which was effective on the same day. According to such provisions, Beijing imposes an annual quota on the issuance of new registration plates of new passenger vehicles, which is 240,000 for 2012. Qualified applicants need to enter a monthly draw, and only the ones who have won a plate in the draw can apply to register their new vehicles with local vehicle administration in Beijing.

Bidding system for new registration plates in Shanghai : Shanghai has implemented an auction system for new registration plates of vehicles since 1994. Under this system, qualified applicant need to submit a blind bid for new registration plate. Only the successful bidder can apply to register their new vehicles with local vehicle administration in Shanghai.

Combined methods for new registration plates in Guangzhou : On August 1, 2012, Guangzhou started to implement the Interim Provisions of Guangzhou Municipality on the Regulation and Control of the Amount of Passenger Vehicles. According to such provisions, Guangzhou imposes quota on the issuance of registration plates of new passenger vehicles, which is 120,000 during the period from August 1, 2012 to June 30, 2013. Qualified applicants can obtain registration plates by entering a monthly draw or submitting a bid, and the share of registration plate quota for each method is 60,000.

COMPANY LAW

The incorporation and operations of our subsidiaries in China is governed by the Company Law (公司法) which was promulgated by the Standing Committee of the National People’s Congress on December 29, 1993 and became effective on July 1, 1994. It was subsequently amended on December 25, 1999, August 28, 2004 and October 27, 2005.

The Company Law recognizes two general types of companies, limited liability companies and joint stock limited companies. Both types of companies have the status of legal persons, and the liability of a company to its debtors is limited to the value of the assets of the company. A shareholder’s liability is limited to the amount of registered capital contributed.

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The Company Law also applies to foreign-invested limited liability companies.

MERGERS AND ACQUISITIONS

The Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (關於外國投資者併購境內企業的規定) (“ M&A Rules ”) jointly promulgated by MOFCOM, CSRC, the State-owned Assets Supervision and Administration Commission of the State Council, State Administration of Taxation, SAIC and SAFE on August 8 2006 which became effective on September 8, 2006 and amended on June 22, 2009, govern, among other things, the purchase by foreign investors of equity interests in a domestic enterprise, the subscription by foreign investors of equity interests in a domestic enterprise, and the purchase and operation by foreign investors of the assets and business of a domestic enterprise.

In addition, the M&A Rules contain provisions which purport to require an offshore special purpose vehicle (“ SPV ”) formed and controlled directly or indirectly by PRC companies or individuals, to obtain CSRC approval prior to the listing and trading of the SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures specifying documents and materials to be submitted by SPVs seeking CSRC approval.

MOFCOM SECURITY REVIEW RULES

In August 25, 2011, the MOFCOM promulgated the Implementation Rules of MOFCOM on the Security Review Rules regarding Merger of Domestic Enterprises by Foreign Investors (商務部實施外國投資者併購境內企業安全審查制度的規定) (“ MOFCOM Security Review Rules ”) which became effective on September 1, 2011.

Under the MOFCOM Security Review Rules, a national security review is required for certain mergers and acquisitions by foreign investors raising concerns about national defense and security. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the national security review, the MOFCOM will assess the substance and actual impact of the transaction. The MOFCOM Security Review Rules further prohibit foreign investors from circumventing the national security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.

WHOLLY FOREIGN-OWNED ENTERPRISES

The Law on Wholly Foreign-Owned Enterprises (外資企業法) promulgated by the Standing Committee of the National People’s Congress on April 12, 1986 which became effective on April 12, 1986, and as amended on October 31, 2000, governs the establishment, operation and management of foreign-owned enterprises.

SINO-FOREIGN JOINT VENTURES

The Law on Sino-Foreign Equity Joint Ventures (中外合資經營企業法), promulgated by the National People’s Congress on July 8,1979 which became effective on July 8, 1979 and as amended on April 4, 1990 and March 15, 2001, governs the establishment procedures, verification and approval procedures, registered capital requirements, foreign exchange restrictions, accounting practices, taxation and labor matters of a Sino-foreign joint equity venture.

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REGULATIONS RELATING TO TAX

Consumption Tax

The PRC Government adopted an automobile consumption tax on January 1, 1994. Pursuant to the Notice on Adjusting the Policy of Consumption Tax on Passenger Vehicles (關於調整乘用車消費稅政策的通知) promulgated by the PRC Ministry of Finance and the State Administration of Taxation, which became effective on September 1, 2008, the personal automobile consumption tax rate for automobiles with engine displacement capacity of less than 1.0 liter has been reduced from 3% to 1%, whereas the tax rate for automobiles with larger engine displacements has been increased. In particular, the tax rate for automobiles with engine displacement of 3.0 to 4.0 liters increased from 15% to 25%, and the tax rate for automobiles with engine displacement of more than 4.0 liters increased from 20% to 40%.

PRC Enterprise Income Tax

According to the Enterprise Income Tax Law, or EIT Law 2008 (企業所得稅法) enacted on March 16, 2007 by the National People’s Congress and the Implementation Rules of Enterprise Income Tax Law (企業所得稅法實施條例) enacted on December 6, 2007 by the State Council, which both took effect on January 1, 2008, the enterprise income tax rate for both domestic and foreign-invested enterprises is 25%, and the high-technology enterprises receiving key support from the State enjoy a reduced enterprise income tax rate of 15%. For enterprises established before March 16, 2007 that are entitled to preferential income tax treatments under the related tax laws and administrative regulations, the EIT Law 2008 and its Implementation Rules provides for a five-year transitional period, during which the applicable tax rate shall be converted to the unified rate at 25% gradually.

Under the EIT Law 2008, enterprises are classified as either “resident enterprises” or “non-resident enterprises”. Pursuant to the EIT Law 2008 and its implementation rules, besides enterprises established within the PRC, enterprises established outside China whose “de facto management bodies” are located in China are considered “resident enterprises” and subject to the uniform 25% EIT rate for their global income. According to the implementation rules of the EIT Law 2008, “de facto management body” refers to a managing body that exercises, in substance, overall management and control over the manufacture and business, personnel, accounting and assets of an enterprise. In our circumstance, substantially our management is currently based in China and is expected to remain in China in the future. It is not clear whether we would be deemed as “resident enterprises” or not. In addition, although the EIT Law 2008 provides that dividend income between “qualified resident enterprises” is exempted income, and the implementing rules refer to “qualified resident enterprises” as enterprises with “direct equity interest”, it is not clear whether dividends we receive from our subsidiary are eligible for such exemption if we are deemed to be a PRC “resident enterprise”. If we are considered a PRC “resident enterprise” and thus required to withhold income tax for any dividends we pay to our non-PRC resident enterprise investors, the amount of dividends we can pay to our Shareholders could be materially reduced. In addition, any gain realized on the transfer of ordinary shares by our non-PRC resident investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC.

Furthermore, the EIT Law 2008 provides that a non-resident enterprise refers to an entity established under foreign law whose “de facto management bodies” are not within the PRC but which have an establishment or place of business in the PRC, or which do not have an establishment or place of business in the PRC but have income sourced within the PRC. The implementation rules of the EIT Law 2008 provide that after January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared to non-PRC resident investors which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. The income tax on the dividends may be reduced pursuant to a tax treaty between China and the jurisdictions in which our non-PRC Shareholders reside.

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REGULATIONS

Tax Collection for Share Transfer by Non-PRC Resident Enterprises

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (國家稅務總局關於加強非居民企業股權轉讓所得企業所得稅管理的通知) or SAT Circular 698, issued by the State Administration of Taxation on December 10, 2009 with retroactive effect from January 1, 2008, except for the purchase and sale of equity through a public securities market, where a foreign investor transfers its indirect equity interest in a PRC resident enterprise by disposing of its equity interests in an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the foreign investor shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer. If the tax authority, upon examining the nature of the Indirect Transfer, deems that the Indirect Transfer has no reasonable commercial purpose other than to avoid PRC tax, the tax authority may disregard the existence of the overseas holding company that is used for tax planning purposes and re-characterize the Indirect Transfer.

Value-Added Tax

All taxpayers engaged in the sale of goods, provision of processing, repairs and replacement services, and importation of goods within the territory of the PRC are required to pay VAT and the applicable tax rate is from 3% to 17%.

PRC Business Tax

Taxpayers providing taxable services in China are required to pay a business tax at a normal tax rate of 5% of their revenues, unless otherwise provided.

Dividend Withholding Tax

Pursuant to the EIT Law 2008 and the Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries are subject to a 10% withholding tax without any tax arrangement, provided that we are determined by the relevant PRC tax authorities to be a “non-resident enterprise” under the EIT Law 2008. However, as described above, we may be considered a PRC resident enterprise for EIT purposes, in which case dividends received by us from our PRC subsidiary would be exempt from the PRC withholding tax because such income is exempted under the EIT Law 2008 for a PRC resident enterprise recipient.

FOREIGN EXCHANGE CONTROLS

The Foreign Exchange Management Regulations (外匯管理條例) promulgated by the State Council on January 29, 1996 as amended and became effective on August 5, 2008, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment (結匯、售匯及付匯管理規定) promulgated by the People’s Bank of China on June 20, 1996 which became effective on July 1, 1996, govern foreign exchange transactions for foreign-invested enterprises. Foreigninvested enterprises are permitted to convert after-tax dividends into foreign exchange and to remit such foreign exchange from their bank accounts in the PRC. Foreign-invested enterprises may also effect payments for current account items without SAFE approval, with valid receipts and proof of the relevant transactions. However, prior approval from SAFE is required for foreign exchange conversions for capital account items, including direct investments and capital contributions.

The Implementation Rules of the Administrative Measures for Individual Foreign Exchange (個人外匯管理辦法實施細則) promulgated by SAFE on January 5, 2007 which became effective on February 1, 2007, requires PRC individuals who are granted shares or share options pursuant to an employee share option or share incentive plan by an overseas-listed company, to register with SAFE or its local counterparts.

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The Circular Concerning Relevant Issues on the Foreign Exchange Administration of Raising Funds through Overseas Special Purpose Vehicles and Investing Back in China by Domestic Residents (國家外匯管理局關於境內居民通過境外特殊目的公司融資及返程投資外匯管理有關問題的通知) (“ SAFE Circular ”) promulgated by SAFE on October 21, 2005 which became effective on November 1, 2005 requires PRC residents with direct or indirect offshore investments, including overseas special purpose vehicles, to file a Registration Form of Overseas Investments Contributed by Domestic Individual Residents and register with SAFE, and to update SAFE’s records within 30 days of any major change in capital, including increases and decreases of capital, share transfers, share swaps, mergers or divisions. Failure to register may result in the prohibition of distributions or contributions from capital reductions, share transfers or liquidations, from PRC entities to the relevant offshore entity in which the PRC resident has a direct or indirect investment.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas PubliclyListed Companies (國家外匯管理局關於境內個人參與境外上市公司股權激勵計劃外匯管理有關問題的通知(匯發[2012]7號)), or the Share Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Share Ownership Plans or Share Option Plans of Overseas Publicly-Listed Companies (境內個人參與境外上市公司員工持股計劃和認股期權計劃等外匯管理操作規程(匯綜發[2007]78號)) issued by SAFE in March 2007. Under these rules, PRC residents who participate in share incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures as required by the authorities. Participants of a share incentive plan who are PRC residents shall retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of share options, the purchase and sale of corresponding shares or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the share incentive plan if there is any material change to the share incentive plan, change in the PRC agent or the overseas entrusted institution or any other material changes.

FOREIGN EXCHANGE RATE

On July 21, 2005, the PBOC changed the fixed RMB-USD exchange system to a floating exchange system based on market supply and demand. The closing price of foreign currencies, including the USD, is announced by PBOC in the inter-bank foreign exchange market after the closing of the market on each working day and is the central parity for trading against RMB on the following working day. The daily trading price of the USD against the RMB in the inter-bank foreign exchange market has been allowed to float within a band of 0.5% around the central parity published by PBOC since May 21, 2007, whilst the trading prices of non-US dollar currencies against the RMB has been allowed to float within a band of 3.0%around the central parity published by PBOC since September 23, 2005.

SHAREHOLDER LOANS

Under existing PRC laws, rules and regulations, a foreign-invested enterprise may seek shareholder loans from offshore investors. In such event, a foreign-invested enterprise must apply to SAFE or local SAFE departments for foreign loan registration certificates and foreign exchange settlements. The aggregate amount of such foreign loans must not exceed the margin between the total investment and registered capital of such FIEs and shall be registered with the local SAFE bureau. The recipient of a foreign loan must submit the foreign loan registration certificate to open and maintain a special foreign exchange account with a SAFE-approved bank, and may then repay the foreign loan with its own foreign exchange funds or by purchasing foreign exchange with RMB upon receiving SAFE approval.

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REGULATIONS

DIVIDEND DISTRIBUTIONS

Under the Law on Wholly Foreign-Owned Enterprises (外資企業法),promulgated by the National People’s Congress on April 12, 1986 which became effective on April 12, 1986 and as amended on October 31, 2001, and the Law on Sino-foreign Equity Joint Ventures (中外合資經營企業法) promulgated by the Standing Committee of the National People’s Congress on July 8, 1979 which became effective on July 8, 1979 and as amended on April 4, 1990 and March 15, 2001, foreign-invested enterprises may not distribute after-tax profits unless they have contributed to employees’ funds as specified under PRC laws, rules and regulations, and have set off financial losses during previous accounting years. Undistributed profits from previous accounting years may be distributed together with profits available for distribution during the current accounting year. Foreign-invested enterprises may remit after-tax profits as dividends to overseas equity holders without seeking SAFE approval.

ENVIRONMENTAL PROTECTION

The Environmental Protection Law (環境保護法) promulgated on December 26, 1989 by the Standing Committee of the National People’s Congress which became effective on December 26, 1989, establishes the legal framework for environmental protection in the PRC. The environmental protection department of the State Council supervises environmental protection work in the PRC, and establishes national standards for the discharge of pollutants. Each of the local environmental protection bureaus is in turn responsible for the environmental protection work within their respective jurisdictions.

Air Pollution

The Air Pollution Prevention Law (大氣污染防治法) promulgated on September 5, 1987 by the Standing Committee of the National People’s Congress which amended on August 29, 1995 and April 29, 2000, establishes the legal framework for air pollution prevention in the PRC. The environmental protection department of the State Council formulates national air quality standards. Each of the local environmental protection bureaus is authorized to regulate air pollution within each of their respective jurisdictions by formulating more specific local standards, and may impose penalties for infringement.

Water Pollution

The Water Pollution Prevention Law (水污染防治法) promulgated on May 11, 1984 by the Standing Committee of the National People’s Congress which became effective on November 1, 1984 and amended on May 15, 1996 and February 28, 2008, establishes the legal framework for water pollution prevention in the PRC. The environmental protection department of the State Council formulates national waste discharge standards. Enterprises which discharge waste into water must pay a treatment fee. Each of the local environmental protection bureaus is authorized to regulate water pollution within each of their respective jurisdictions by formulating more specific local standards, and may impose penalties for infringement, including suspending operations.

Noise Pollution

The Noise Pollution Prevention Law (環境噪聲污染防治法) promulgated by the Standing Committee of the National People’s Congress on October 29, 1996 which became effective on March 1, 1997, establishes the framework for noise pollution prevention in the PRC. Under the Noise Pollution Prevention Law, any person undertaking a construction, renovation or expansion project which might cause environmental noise pollution must prepare and submit an environmental impact statement to the environmental protection department of the State Council for approval. Facilities for prevention and control of environmental noise pollution must be designed, approved by the environmental protection department of the State Council prior to commencement of the project,

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and built and commence operation simultaneously with the project works. Facilities for prevention and control of noise pollution may not be dismantled or left idle without the approval of the environmental protection department of the State Council.

Construction Projects

The Environmental Impact Appraisal Law (環境影響評價法) promulgated by the Standing Committee of the National People’s Congress on October 28, 2002 which became effective on September 1, 2003, the Administration Rules on Environmental Protection of Construction Projects (建設項目環境保護管理條例) promulgated by the State Council on November 29, 1998 which became effective on November 29, 1998, and the Measures for the Administration of Examination and Approval of Environmental Protection Facilities of Construction Projects (建設項目竣工環境保護驗收管理辦法) promulgated by the State Environmental Protection Administration of China on December 27, 2001 which became effective on February 1, 2002, require enterprises planning construction projects to engage qualified professionals to provide assessment reports on the environmental impact of such projects. The assessment report must be filed with, and approved by, the local environmental protection bureau, prior to commencement of any construction work.

PRODUCT QUALITY

The principal law governing product liability in the PRC is the Product Quality Law (產品質量法) promulgated by the Standing Committee of the National People’s Congress on February 22, 1993 and as amended on July 8, 2000.

Pursuant to the Product Quality Law, a seller is obliged to, among other things, adopt measures to keep products for sale in good quality, not to sell defective or damaged products, comply with regulations regarding the labeling of products, not to forge the origin of a product, not to forge or falsely use another manufacturer’s authentication marks, not to substitute a fake product for a genuine product or a defective product for a high-quality product.

Violation of the Product Quality Law may result in the imposition of fines, suspension of business operations, revocation of business licenses and criminal liability. Aggrieved consumers may seek compensation from both the manufacturer and the retailer. A retailer may seek reimbursement from the manufacturer in cases where the defect is due to the manufacturer.

CONSUMER PROTECTION

The Consumer Protection Law (消費者權益保護法) promulgated on October 31, 1993 by the Standing Committee of the National People’s Congress which became effective on January 1, 1994, prescribes standards of behavior for businesses in dealing with consumers.

Businesses must, among other things, observe the provisions of the Consumer Protection Law and other relevant laws and regulations regarding personal safety and protection of property, provide consumers with truthful information and advertising in relation to goods and services, truthful and clear answers to consumers’ questions in relation to goods and services, ensure that the actual quality of goods and services is consistent with the relevant advertisements, product descriptions or samples, not impose unreasonable or unfair terms on consumers or exclude civil liability unreasonably.

Article 35 of the Consumer Protection Law stipulates that consumers whose legitimate rights and interests are infringed upon during the purchase or use of a product may demand compensation from the relevant vendor. In the event the liability is attributable to another supplier or the manufacturer, the vendor may in turn demand recovery of any compensation paid to the consumer from the supplier or manufacturer, as the case may be. In addition, consumers who suffer personal injury or property damage due to product defects may demand compensation from either the vendor

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or the manufacturer. If the liability is attributable to the manufacturer, the vendor may demand recovery of any compensation which it paid to the consumer. If the default and liability are attributable to the vendor, the manufacturer may demand recovery of any compensation which it paid to the consumer.

In addition, Article 45 provides that businesses must be responsible for the repair, replacement or return of goods if such goods are guaranteed by PRC laws or pursuant to agreements between the businesses and consumers, and further, that businesses must bear the reasonable cost of transportation for large commodities in the event of repair, replacement or return. Article 45 also stipulates that should a product not work properly after being repaired twice within the term of guaranteed repair, the business shall be responsible for replacement or return.

Violation of the Consumer Protection Law may result in the imposition of fines, suspension of business operations, revocation of business licenses and criminal liability. Aggrieved consumers may seek compensation from both the manufacturer and the retailer. A retailer may seek reimbursement from the manufacturer in cases where the defect is due to the manufacturer.

LABOR PROTECTION

Employment Contracts

The Employment Contract Law (勞動合同法) was promulgated on June 29, 2007 and became effective on January 1, 2008 and the Implementing Regulations of the Employment Contracts Law (勞動合同法實施條例) promulgated and became effective on September 18, 2008. This law and its implementation govern the establishment of employment relationships between employers and employees, and the conclusion, performance, termination of, and the amendment to, employment contracts. To establish an employment relationship, a written employment contract shall be signed. In the event that no written employment contract was signed at the time of establishment of an employment relationship, a written employment contract shall be signed within one month after the date on which the employer first engages the employee.

Employee Funds

Under applicable PRC laws, rules and regulations, including the Social Insurance Law (社會保險法), promulgated by the Standing Committee of the National People’s Congress on October 28, 2010 which took effective on July 1, 2011,the Interim Regulations on the Collection and Payment of Social Security Funds (社會保險費徵繳暫行條例) promulgated by the State Council and became effective on January 22, 1999, Interim Measures concerning the Maternity Insurance (企業職工生育保險試行辦法) promulgated by the Ministry of Labor on December 14, 1994 which became effective on January 1, 1995, the Regulations on Occupational Injury Insurance (工傷保險條例) promulgated by the State Council on April 27, 2003 which became effective on January 1, 2004 and amended on December, 20, 2010, and the Regulations on the Administration of Housing Accumulation Funds (住房公積金管理條例) promulgated by the State Council and become effective on April 3, 1999 which was amended on March 24, 2002, employers are required to contribute, on behalf of their employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance, occupational injury insurance, maternity leave insurance, and to housing accumulation funds. These payments are made to local administrative authorities and any employer who fails to contribute may be fined and ordered to make good the deficit within a stipulated time limit.

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OUR HISTORY AND REORGANIZATION

OUR HISTORY

History of Our Business

Our Group was founded by Mr. Feng, who is also the controlling shareholder of Hexie Industrial Group, a privately owned group headquartered in Zhengzhou, Henan Province, China, with business interests focusing on branded and luxury lifestyle goods and services, including property development and golf courses.

After graduating from Central South Institute of Law (中南政法學院) (now known as Zhongnan University of Economics and Law (中南財經政法大學)) in 1992, Mr. Feng entered the judiciary in Henan Province, serving as assistant judge and judge of the Higher People’s Court of Henan Province (河南省高級人民法院). In 2002, Mr. Feng left the judicial system and established a law firm, while at the same time starting various business enterprises. He became involved in real estate investment through his vehicle, Yuanda Investment, and was also involved in the auction and valuation businesses. Yuanda Investment was established on November 12, 2002 and Mr. Feng beneficially owns 90% of its equity interests through nominee arrangements he set up with Ms. Ma and Li Lusheng (Mr. Feng’s nephew). Through these enterprises, Mr. Feng established useful business contacts and, in 2005, was introduced to an opportunity to establish the first BMW dealership in Henan Province.

Mr. Feng took up the opportunity of establishing the first BMW dealership in Henan Province and began our business when he established our principal operating subsidiary, Zhongdebao, in March 2005. At the time of Zhongdebao’s establishment, Mr. Feng, Yuanda Investment and Henan Weijia Automobile Trading Co., Ltd. (“ Henan Weijia ”) (an independent third party) owned 28.60%, 55.65% and 15.75% of Zhongdebao, respectively. The initial capital contributions in Zhongdebao were RMB11.13 million for Yuanda Investment, RMB5.72 million for Mr. Feng and RMB3.15 million for Henan Weijia. The initial capital contributions were followed by a capital increase in November 2005, when Yuanda Investment injected an additional RMB10 million into Zhongdebao, following which Yuanda Investment, Mr. Feng and Henan Weijia owned 70.43%, 19.07% and 10.50% of Zhongdebao, respectively. Following the establishment of Zhongdebao, our first BMW dealership outlet opened in Zhengzhou, the provincial capital of Henan Province in July 2005.

As of the Latest Practicable Date, we operated 25 outlets nationwide and held minority equity interests in two other outlets. The following is a summary of our Group’s key business development milestones:

Year	Event	Event
2005	•	We established Zhongdebao, the operating subsidiary of our first BMW 4S
		dealership outlet in Zhengzhou, Henan Province
2006	•	We established Yuanda Lexus, the operating subsidiary of our first Lexus 4S
		dealership outlet in Zhengzhou, Henan Province
2009	•	We established Xindebao, the operating subsidiary of our first BMW service
		only outlet in Xinxiang, Henan Province
	•	We began our used car agency business
2010	•	We opened our first MINI dealership outlet in Zhengzhou, Henan

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OUR HISTORY AND REORGANIZATION

Year Event

2011 • We established Henan Hedebao, the operating subsidiary of our first BMW repair and maintenance center in Zhengzhou, Henan
• We established Huadebao, the operating subsidiary of our first BMW 4S dealership outlet in Beijing
2012 • We established Zhengzhou Huading, the operating subsidiary of our first Aston Martin 4S dealership outlet in Zhengzhou, Henan
We established Guangdebao, the operating subsidiary of our first BMW 5S dealership outlet in Guangzhou
We established Huacheng Auto, the operating subsidiary of our first Rolls Royce 4S dealership outlet in Zhengzhou, Henan
We established Shangdebaojun, the operating subsidiary of our first BMW 5S dealership outlet in Shanghai
We established Yichang Lushun, the operating subsidiary of our first Jaguar/Land Rover 4S dealership outlet in Yichang, Hubei
We opened our first Maserati & Ferrari dealership outlet in Suzhou, Jiangsu
2013 • We opened our first Lexus dealership outlet in Xiamen, Fujian

Group Structure during Our Track Record Period up to the Reorganization

As at January 1, 2009, the start of our Track Record Period, we operated one BMW 4S dealership outlet and one Lexus 4S dealership outlet, which were held by our subsidiaries Zhongdebao and Yuanda Lexus, respectively.

We describe below the changes in the equity capital of Zhongdebao and Yuanda Lexus as well as our operating subsidiaries which were established, in each case during 2010, 2011 and 2012 and up to the start of our reorganization in August 2011.

(1) Zhongdebao:

Zhongdebao was established in March 2005. As at January 1, 2009, Mr. Feng and Zhao Lu (“ Ms. Zhao ”) owned 90% and 10% of Zhongdebao, respectively. Ms. Zhao is a relative of Ms. Ma’s and the mother of Liu Dan (“ Ms. Liu ”), our Treasury Manager, and held the 10% equity interest in Zhongdebao on behalf of Mr. Feng. Ms. Zhao confirmed in writing on October 7, 2012 that the equity interest was held for Mr. Feng as nominee. Mr. Feng put in place the nominee arrangement with Ms. Zhao, as well as the various nominee arrangements referred to below, principally because he wished to maintain a lower profile as his automobile dealership business expanded. As advised by our PRC legal adviser, a natural person can only establish one “one-man limited company” 100% owned by that natural person pursuant to the PRC Company Law. All nominee arrangements referred to below were valid, legal and enforceable under PRC law.

In November 2010, Mr. Feng transferred an 80% equity interest in Zhongdebao to Hexie Industrial Group for a consideration of RMB24 million (equal to 80% of the registered capital), following which Hexie Industrial Group, Mr. Feng and Ms. Zhao owned 80%, 10% and 10% of Zhongdebao, respectively.

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(2) Yuanda Lexus:

Yuanda Lexus was established in October 2006. As at January 1, 2009, Zheng Yan (“ Mr. Zheng ”), Liu Fenglei (“ Mr. Liu ”) and Fuda Fengtian Automobile Sales Services Co., Ltd. (“ Fuda Fengtian ”) owned 65%, 30% and 5% of Yuanda Lexus, respectively. Mr. Zheng is a friend of Mr. Feng’s and an independent third party and Mr. Liu is the general manager of Yuanda Lexus. Mr. Zheng and Mr. Liu held their equity interests in Yuanda Lexus on behalf of Mr. Feng. Mr. Zheng and Mr. Liu confirmed in writing on October 6, 2012 that the equity interests were held for Mr. Feng as nominees. Fuda Fengtian is an independent third party.

In August 2009, Mr. Zheng transferred the 65% equity interest in Yuanda Lexus to Yuanda Investment for a consideration of RMB0.80 million (nominal amount due to nominee arrangement) and Fuda Fengtian transferred its 5% equity interests in Yuanda Lexus to Yuanda Investment for a consideration of RMB1 million (equal to 5% of the registered capital). Following these transfers, Yuanda Investment and Mr. Liu owned 70% and 30% of Yuanda Lexus, respectively.

In November 2010, Yuanda Investment transferred its 70% equity interest in Yuanda Lexus to Hexie Industrial Group for a consideration of RMB14 million (equal to 70% of the registered capital), following which Hexie Industrial Group and Mr. Liu owned 70% and 30% of Yuanda Lexus, respectively. However, the application documents for dealership rights of Xiamen Lexus were filed by Yuanda Investment and Mr. Liu prior to such transfer. In order to avoid unnecessary delay in the application process, Hexie Industrial Group transferred its 70% equity interest in Yuanda Lexus back to Yuanda Investment for a consideration of RMB14 million (equal to 70% of the registered capital) in December 2010, following which Yuanda Investment and Mr. Liu owned 70% and 30% of Yuanda Lexus, respectively.

In March 2011, Yuanda Lexus underwent a capital increase, pursuant to which Mr. Liu injected RMB9 million in cash and Ms. Ma injected RMB21 million in cash into Yuanda Lexus. Following this capital increase, Ms. Ma, Mr. Liu and Yuanda Investment owned 42%, 30% and 28% of Yuanda Lexus, respectively. Ms. Ma is Mr. Feng’s wife and held the 42% equity interest in Yuanda Lexus on behalf of Mr. Feng. Ms. Ma confirmed in writing on October 7, 2012 that the equity interest was held for Mr. Feng as nominee.

In November 2011, Yuanda Investment transferred its 28% equity interest in Yuanda Lexus to Ms. Ma for a consideration of RMB14 million (equal to 28% of the registered capital), following which Ms. Ma and Mr. Liu owned 70% and 30% of Yuanda Lexus, respectively.

(3) Establishment of Operating Subsidiaries during 2010, 2011 and 2012 and before the Reorganization:

Xindebao

Xindebao is the operating subsidiary for our BMW repair and service center in Xinxiang, Henan Province. Xindebao was established in April 2009 by Mr. Feng (100%). In May 2011, Mr. Feng transferred 100% of Xindebao to Hexie Industrial Group for RMB1.5 million.

Yudebao

Yudebao is the operating subsidiary for our BMW 4S dealership outlet in Luoyang, Henan Province. Yudebao was established in May 2009 by Hexie Industrial Group (95%) and Zhongdebao (5%).

In June 2009, Hexie Industrial Group transferred a 90% equity interest in Yudebao to Zhongdebao for RMB9 million and a 5% equity interest in Yudebao to Mr. Feng for RMB0.50 million. In March 2010, Zhongdebao transferred an 85% equity interest in Yudebao to Mr. Feng for RMB8.5

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million and a 10% equity interest in Yudebao to Ms. Zhao for RMB1 million. Ms. Zhao is a relative of Ms. Ma’s and the mother of Ms. Liu, our Treasury Manager, and held the 10% equity interest in Yudebao on behalf of Mr. Feng. Ms. Zhao confirmed in writing on October 7, 2012 that the equity interest was held for Mr. Feng as nominee.

In October 2010, Yudebao underwent a capital increase, pursuant to which Yuanda Investment injected RMB20 million in cash into Yudebao, following which Yuanda Investment, Mr. Feng and Ms. Zhao owned 66.67%, 30% and 3.33% of Yudebao, respectively.

In November 2010, Yuanda Investment transferred its 66.67% equity interest in Yudebao to Hexie Industrial Group for RMB20 million (equal to 66.67% of the registered capital) and Ms. Zhao transferred her 3.33% equity interest in Yudebao to Hexie Industrial Group for RMB1 million (equal to 3.33% of the registered capital), following which Hexie Industrial Group and Mr. Feng owned 70% and 30% of Yudebao, respectively.

Zhengdebao

Zhengdebao is the operating subsidiary for our second BMW 4S dealership outlet in Zhengzhou, Henan Province. Zhengdebao was established in July 2009 by Zhang Youqu (“ YQ Zhang ”) (60%), Zhang Junsheng (“ JS Zhang ”) (20%) and Lan Haibo (“ Mr. Lan ”) (20%).

YQ Zhang, JS Zhang and Mr. Lan held their equity interests in Zhengdebao on behalf of Mr. Feng. YQ Zhang, JS Zhang and Mr. Lan confirmed in writing on October 6, 2012 that the equity interests were held for Mr. Feng as nominees. JS Zhang is Ms. Liu’s husband and YQ Zhang is JS Zhang’s brother. Mr. Lan is the general manager of Zhengdebao.

In March 2011, YQ Zhang transferred his 60% equity interest in Zhengdebao to Ms. Liu for RMB12 million and JS Zhang transferred his 20% equity interest in Zhengdebao to Mr. Lan for RMB4 million, following which Ms. Liu owned 60% and Mr. Lan owned 40% of Zhengdebao, respectively. Ms. Liu holds her equity interest in Zhengdebao on behalf of Mr. Feng pursuant to a nominee agreement entered into with Mr. Feng. Ms. Liu confirmed in writing on October 6, 2012 that the equity interest was held for Mr. Feng as nominee.

In May 2011, Zhengdebao underwent a capital increase, pursuant to which Ms. Liu and Mr. Lan injected RMB12 million and RMB8 million, respectively, in cash into Zhengdebao, following which Ms. Liu and Mr. Lan continued to own 60% and 40% of Zhengdebao, respectively.

Huadebao

Huadebao is the operating subsidiary for our BMW 4S dealership outlet in Beijing. Huadebao was established in July 2010 by Zhongdebao (95%) and Mr. Feng (5%).

In April 2011, Zhongdebao transferred a 90% equity interest in Huadebao to Hexie Industrial Group for RMB49.5 million and a 5% equity interest in Huadebao to Mr. Feng for RMB2.75 million, following which Hexie Industrial Group and Mr. Feng owned 90% and 10% of Huadebao, respectively.

Wandebao

Wandebao is the operating subsidiary for our BMW 4S dealership outlet in Nanyang, Henan Province. Wandebao was established in December 2010 by Hexie Industrial Group (90%) and Mr. Feng (10%).

Henan Hedebao

Henan Hedebao was established in July 2011 by Hexie Industrial Group (80%) and Zhongdebao (20%) to act as the operating subsidiary for our BMW repair and service center in Zhengzhou, Henan Province. As at the Latest Practicable Date, Henan Hedebao has not commenced business.

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OUR REORGANIZATION

The following chart sets forth our ownership structure immediately prior to the start of the Reorganization:

								Mr. Feng	Mr. Feng	Mr. Feng	Mr. Feng


Ms. Ma (for Mr. Feng)		Mr. Liu (for Mr. Feng)		90% Yuanda Investment			95%				5% 60% Ms. Liu (for Mr. Feng)					40% Mr. Lan (for Mr. Feng)
	42%		30%		28%			Hexie Industrial				Group			Zhengdebao
						Ms. Zhao (for Mr. Feng)
		Yuanda Lexus				10%			Zhongdebao				80%
						10%
							20%				Henan Hedebao			80%

						30%				Yudebao			70%
						10%							90%
										Wandebao
						10%				Huadebao			90%
										Xindebao			100%

Investment Agreement

Mr. Feng, Hexie Industrial Group, the Financial Investors, Zhondebao and a number of our operating subsidiaries entered into an investment agreement dated August 17, 2011 (the “ Investment Agreement ”), which set out the framework for a number of reorganization steps (the “ Reorganization ”) as well as the terms of the investment by the Financial Investors. The purpose of the Reorganization was to streamline our ownership structure, eliminate some of the legacy nominee ownership arrangements, as well as to create an offshore holding structure for the investment by the Financial Investors.

In summary, the parties agreed the following:

A. The Financial Investors agreed a total investment of RMB371.2 million, including RMB120.0 million of capital injection funds referred to in paragraph E below.
B. One of the Financial Investors agreed to provide an interest-free loan of RMB80 million to our Group as interim financing for the Reorganization. This loan was granted to our Group on August 22, 2011 and repaid in full by our Group on November 20, 2012.
C. We agreed to undertake a number of steps resulting in Hexie Industrial Group owning 100% of Zhongdebao (which would in turn own a number of our operating subsidiaries). See “Phase 1 of the Reorganization” below.
D. The Financial Investors and Mr. Feng agreed to each set up an offshore corporate structure in anticipation of the Investment (the “ Investors’ Offshore Holding Structure ” and “ Mr. Feng’s Offshore Holding Structure ”, respectively). See “Phase 2 of the Reorganization” below.
E. The Financial Investors agreed to provide initial funding in the amount of RMB120 million by way of capital injection into Zhongdebao through Daoable Future, a company wholly-owned by the Financial Investors. See “Phase 3 of the Reorganization” below.

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F. Mr. Feng agreed to transfer Hexie Industrial Group’s 80% equity interest in Hexie Auto to Mr. Feng’s Offshore Holding Structure. Hexie Auto would then purchase Hexie Industrial Group’s interests in Zhongdebao and Yuanda Lexus. See “Phase 3 of the Reorganization” below.
G. The Financial Investors agreed to purchase certain preferred shares issued by Success Intergrow in exchange for the transfer of their 100% ownership in the Investors’ Offshore Holding Structure (which held Zhongdebao following the above capital increase) and cash. See “Phase 4 of the Reorganization” and “Phase 5 of the Reorganization” below.

The Investment Agreement also set out a framework for the rights of the Financial Investors, in terms of corporate governance, information rights, downside protection and exit rights. These are described in further detail in the paragraph headed “Investment” below.

Phase 1 of the Reorganization

Phase 1 of the Reorganization commenced in August 2011 and involved the consolidation of a number of operating subsidiaries under the ownership of Zhongdebao, as well as the rationalization of the ownership structure of Zhongdebao itself so that it became wholly-owned by Hexie Industrial Group. Following these steps, the Financial Investors injected capital into our business through a capital increase of Zhongdebao.

The following took place during Phase 1 of the Reorganization:

Wandebao became wholly-owned by Zhongdebao: In August 2011, Hexie Industrial Group and Mr. Feng transferred all of their respective equity interests in Wandebao to Zhongdebao for a total consideration of RMB30 million, following which Zhongdebao owned 100% of Wandebao.
Yudebao became wholly-owned by Zhongdebao: In August 2011, Hexie Industrial Group transferred a 70% equity interest in Yudebao to Zhongdebao for RMB21 million and Mr. Feng transferred a 30% equity interest in Yudebao to Zhongdebao for RMB9 million. Following these transfers, Zhongdebao owned 100% of Yudebao.
Henan Hedebao became wholly-owned by Zhongdebao: In September 2011, Hexie Industrial Group transferred its 80% equity interest in Henan Hedebao to Zhongdebao for RMB16 million, following which Zhongdebao owned 100% of Henan Hedebao.
Zhongdebao became wholly-owned by Hexie Industrial Group: In September 2011, Mr. Feng and Zhao Lu each transferred a 10% equity interest in Zhongdebao to Hexie Industrial Group for a consideration of RMB3 million each, following which Hexie Industrial Group owned 100% of Zhongdebao.

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Phase 2 of the Reorganization

In Phase 2 of the Reorganization, the Financial Investors and Mr. Feng established the Investors’ Offshore Holding Structure and Mr. Feng’s Offshore Holding Structure, respectively, as follows:

Investors’ Offshore Holding Structure

LC Fund V		LC Parallel Fund V		Grandsun	MCP Asia		MCPC II		Yushang
56.24% 4.10% 28.45% 6.03% 100% 100% 2.59% 2.59% Daoable Future (HK) LC Gloricar (BVI)

Mr. Feng’s Offshore Holding Structure

Mr. Feng 100% Eagle Seeker (BVI) 100% Success Intergrow (Cayman Islands) 100% Magic Frontier (BVI) 100% Our Company (Cayman Islands) 100% Crystalline Prestige (BVI) 100% Ace Manufacturing (HK)

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Phase 3 of the Reorganization

In Phase 3 of the Reorganization, Daoable Future made a cash injection of a US dollar amount equivalent to RMB120 million to Zhongdebao, following which Hexie Industrial Group and Daoable Future owned 70% and 30% of Zhongdebao, respectively.

Hexie Auto was established in November 2011 by Hexie Industrial Group (80%) and Daoable Future (20%). The purpose of Hexie Auto was to eventually act as the onshore holding vehicle of our operating subsidiaries. On February 27, 2012, Hexie Industrial Group transferred its 80% equity interest in Hexie Auto to Ace Manufacturing for a consideration of RMB8 million, following which Ace Manufacturing and Daoable Future owned 80% and 20% of Hexie Auto, respectively. On March 14, 2012, Hexie Auto underwent a capital increase, pursuant to which Ace Manufacturing injected RMB160 million in cash into Hexie Auto. Following this capital increase, Ace Manufacturing and Daoable Future owned 98.8% and 1.2% of Hexie Auto, respectively. On November 26, 2012 Hexie Auto underwent a further capital increase, pursuant to which Ace Manufacturing injected RMB75 million in cash into Hexie Auto. Following this capital increase, Ace Manufacturing and Daoable Future owned 99.18% and 0.82% of Hexie Auto, respectively.

In the meantime, we continued with our business expansion by establishing four more operating subsidiaries, namely Huacheng Auto, Andebao, Shangdebaojun and Xiamen Lexus:

Andebao

Andebao is the operating subsidiary for our BMW 4S dealership outlet in Anyang, Henan Province. Andebao was established in October 2011 by Zhongdebao (100%).

Huacheng Auto

Huacheng Auto is the operating subsidiary for our Rolls Royce 4S dealership outlet in Zhengzhou, Henan Province. Huacheng Auto was established in September 2011 by Zhongdebao (100%).

Shangdebaojun

Shangdebaojun is the operating subsidiary for our BMW 5S dealership outlet in Shanghai. Shangdebaojun was established in November 2011 by Hexie Industrial Group (89%), Zhu Jiangming (10%) and Zhongdebao (1%). Zhu Jiangming is an independent third party.

Xiamen Lexus

Xiamen Lexus is the operating subsidiary for our Lexus 4S dealership outlet in Xiamen, Fujian Province. Xiamen Lexus was established in December 2011 by Ms. Ma (70%) and Yuanda Lexus (30%). Ms. Ma is Mr. Feng’s wife and held the 42% equity interest in Yuanda Lexus on behalf of Mr. Feng. Ms. Ma confirmed in writing on October 7, 2012 that the equity interest was held for Mr. Feng as nominee.

Phase 4 of the Reorganization

The principal purpose of Phase 4 of the Reorganization was to transfer the ownership of our operating subsidiaries to the offshore structure owned by Mr. Feng (and which owned 80% of Hexie Auto).

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The following took place during Phase 4 of the Reorganization:

Zhongdebao: On March 7, 2012, Hexie Industrial Group transferred a 70% equity interest in Zhongdebao to Hexie Auto for a consideration of RMB30 million, following which Hexie Auto and Daoable Future owned 70% and 30% of Zhongdebao, respectively.
Xindebao: On April 13, 2012, Hexie Industrial Group transferred 100% of Xindebao to Zhongdebao for RMB1.5 million, following which Zhongdebao owned 100% of Xindebao.
Shangdebaojun: On June 26, 2012, Hexie Industrial Group and Zhongdebao transferred all of their respective equity interests in Shangdebaojun to Hexie Auto for a total consideration of RMB45 million, following which Hexie Auto and Zhu Jiangming owned 90% and 10% of Shangdebaojun, respectively.
Zhengdebao: On June 11, 2012, Ms. Liu and Mr. Lan transferred all of their respective equity interests in Zhengdebao to Hexie Auto for a total consideration of RMB40 million, following which Hexie Auto owned 100% of Zhengdebao.
Huadebao: On August 29, 2012, Hexie Industrial Group and Mr. Feng transferred all of their respective equity interests in Huadebao to Hexie Auto for a total consideration of RMB55 million, following which Hexie Auto owned 100% of Huadebao.
Yuanda Lexus: On September 29, 2012, Ms. Ma and Mr. Liu transferred all of their respective equity interests in Yuanda Lexus to Hexie Auto for a total consideration of RMB50 million, following which Hexie Auto owned 100% of Yuanda Lexus.
Xiamen Lexus: On September 29, 2012, Ms. Ma transferred her 70% equity interest in Xiamen Lexus to Yuanda Lexus for a total consideration of RMB21 million, following which Yuanda Lexus owned 100% of Xiamen Lexus. On April 14, 2013, Yuanda Lexus transferred its 100% equity interest in Xiamen Lexus to Hexie Auto for RMB30 million.

Phase 5 of the Reorganization

In Phase 5 of the Reorganization, the Financial Investors transferred 100% of LC Gloricar to Success Intergrow and paid certain cash consideration in exchange for the issue by Success Intergrow of Preference Shares.

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Corporate structure immediately after the Reorganization

The following chart sets forth our corporate structure immediately after the Reorganization and the investment by the Financial Investors:

Mr. Feng Eagle Seeker (BVI) LC Fund V LC Parallel Fund V Grandsun MCP Asia MCPC II Yushang 100% 85.84% 7.96% 0.58% 4.03% 0.85% 0.37% 0.37% Success Intergrow (Cayman Islands) Magic Frontier (BVI) LC Gloricar (BVI) Ace Manufacturing (HK) Daoable Future (HK) 100% 100% 100% 100% 100% 100% Our Company (Cayman Islands) Crystalline Prestige (BVI)	MCP Asia	MCPC II	Yushang
Hexie Auto Shangdebaojun(3) Huadebao Zhengdebao Xinxiang Dongxin(1) Yongda Hexie(2) Xindebao Henan Hedebao Huacheng Auto Yuanda Lexus Zhongdebao 99.18% 0.82% 90% 100% 30% 40% 100% 100% 70% 30% 100% 100% Xiamen Lexus Yudebao Wandebao Andebao

Notes:

(1) Du Zhaohui and Du Gewei respectively hold 55% and 5% of Xinxiang Dongxin.
(2) Shanghai Yongda holds 70% of Yongda Hexie.
(3) Zhu Jiangming holds 10% of Shangdebaojun.

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Recent Development

The following operating subsidiaries were established recently, and for which there have not been any changes in ownership prior to the onshore reorganization described below:

	Date of
Company Name	Establishment	Dealership Outlet	Ownership
Biandebao . . . . . . . . . . . .	March 2012	BMW / Kaifeng, Henan	Zhongdebao (100%)
		Province
Yichang Lushun . . . . . . . . .	April 2012	Land Rover & Jaguar /	Hexie Auto (80%)
		Yichang, Hubei Province	Yichang Xingshun Automobile
			Sales Co., Ltd. (“Yichang
			Xingshun”) (20%)(1)
Xi’an Huadu . . . . . . . . . . .	April 2012	Rolls Royce / Xi’an, Shaanxi	Hexie Auto (100%)
		Province
Zhengzhou Huading . . . . . .	May 2012	Aston Martin / Zhengzhou,	Hexie Auto (100%)
		Henan Province
Guangdebao. . . . . . . . . . .	May 2012	BMW / Guangzhou,	Hexie Auto (100%)
		Guangdong Province
Henan Yingzhiyi. . . . . . . . .	May 2012	MINI / Zhengzhou, Henan	Hexie Auto (100%)
		Province
Luoyang Luhe . . . . . . . . . .	June 2012	Land Rover & Jaguar /	Hexie Auto (100%)
		Luoyang, Henan Province
Wuhan Huazheng . . . . . . .	July 2012	Aston Martin / Wuhan,	Hexie Auto (100%)
		Hubei Province
Handebao . . . . . . . . . . . .	July 2012	BMW / Wuhan, Hubei	Hexie Auto (100%)
		Province
Suzhou Yijun . . . . . . . . . .	October 2012	Maserati & Ferrari / Suzhou,	Hexie Auto (100%)
		Jiangsu Province
Xinxiang Hedebao . . . . . . .	November 2012	BMW / Xinxiang, Henan	Hexie Auto (51%)
		Province	Du Gewei (49%)(2)
Shenyang Shenzhiyi . . . . . .	February 2013	MINI / Shenyang, Liaoning	Hexie Auto (100%)
		Province
Shenyang Shendebao . . . . .	February 2013	BMW / Shenyang, Liaoning	Hexie Auto (100%)
		Province
Beijing Haojun. . . . . . . . . .	March 2013	Maserati / Beijing	Hexie Auto (100%)
Luohe Luodebao . . . . . . . .	April 2013	BMW/Luohe, Henan Province	Hexie Auto (100%)

Notes:

(1) Yichang Xingshun is a car dealer who primarily based in Hubei province and deals with a mix range of passenger vehicles, Yichang Xingshun is an independent third party. On August 9, 2012, Hexie Auto and Yichang Xingshun entered into an entrustment agreement pursuant to which, Hexie Auto agreed to act as nominee of 15% of the equity interest in Yichang Lushun owned by Yichang Xingshun during the period from August 9, 2012 to December 31, 2012. The reason for such arrangement was that, in August 2012, Hexie Auto agreed to apply for a Lexus dealership authorization for a new outlet in Yichang jointly with Yichang Xingshun, as Yichang Xingshun owned the land use right of the site for the planned new outlet. Conversely, Yichang Xingshun agreed with Hexie Auto that in exchange for the opportunity of jointly applying for the dealership authorization, in addition to providing the usage of the land it owned, Yichang Xingshun would transfer 15% equity interest in Yichang Lushun to Hexie Auto, conditioned upon the success in the authorization application by December 31, 2012. As an act of good faith, the two parties entered into the entrustment agreement. We are currently in the process of reverting the 15% equity interest in Yichang Lushun to Yichang Xingshun as the application was not approved by Lexus, which was not informed of such entrustment arrangement. Upon completion of the reversion, Yichang Lushun will continue to be the operating entity of the Land Rover & Jaguar outlet with Hexie Auto and Yichang Xingshun holding 65% and 35% of the equity interest, respectively. As advised by our PRC legal adviser, the entrustment agreement between Hexie Auto and Yichang Xingshun was legal, valid and enforceable.
(2) Du Gewei is an independent third party.

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We have also established the following joint ventures with third party passenger vehicle dealerships:

dealerships:
	Date of
Company Name	Establishment	Dealership Outlet	Ownership
Yongda Hexie(1) . . . . . . . . .	December	Land Rover & Jaguar/	Hexie Auto (30%)
	2011	Zhengzhou, Henan	Shanghai Yongda
		Province	Automobile Group Co.
			Ltd. (“Shanghai
			Yongda”) (70%)(2)
Xinxiang Dongxin . . . . . . .	September	Audi/Zhengzhou,	Hexie Auto (40%)
	2012(3)	Henan Province	Du Zhaohui (55%)(4)
			Du Gewei (5%)(4)

Notes:

(1) Shanghai Yongda is responsible for the daily operations of Yongda Hexie.
(2) Shanghai Yongda is an independent third party car dealer who sells a mix range of passenger vehicles.
(3) Xinxiang Dongxin was established in the PRC on December 13, 2010 and we acquired 40% of its equity interests on September 29, 2012. Xinxiang Dongxin will continue to be operated by Du Zhaohui and Du Gewei.
(4) Du Zhaohui and Du Gewei are independent third party car dealers who sells a mix range of passenger vehicles.

The nature of the automobile dealership industry is that automobile manufacturers, having the power to grant dealerships, effectively control the overall planning of their dealership sales network in terms of geographical proximity and the scale and sales quota of each outlet. As such, competition within the same brand is “monitored and regulated” by automobile manufacturers. An automobile manufacturer would only grant additional dealerships in a regional market if it considers that market has sufficient demand so that new outlets would not create unnecessary competition with existing outlets. Prior to the establishment of Yongda Hexie and the acquisition of 40% of Xinxiang Dongxin’s equity interest, we did not have brand coverage of Land Rover and Jaguar in Zhengzhou or Audi in China, so the two joint ventures allowed us to expand our brand coverage, increase our market share and enter into and compete in market segments where we did not have any presence before, consequently we believe that they will not cause direct competition against us. Therefore, we do not foresee direct competition from the two joint ventures in the sense that they might divert business from our existing or future wholly-owned outlets.

INVESTMENT

The total investment of the Financial Investors was RMB371.2 million, represented by the issuance to the Financial Investors of five million redeemable convertible preferred shares (the “ Series A Preferred Shares ”) in Success Intergrow. The consideration for the Series A Preferred Shares comprised of (a) the sale of LC Gloricar, a company 100% owned by the Financial Investors and which held an indirect 1.2% interest in Hexie Auto through Daoable Future, by the Financial Investors to Success Intergrow and (b) a cash amount of RMB249.2 million, of which RMB169.2 million was paid on March 6, 2012 and the remaining RMB80 million was paid on December 3, 2012. On March 14, 2012, Ace Manufacturing injected RMB160 million of the first cash payment into Hexie Auto in the form of capital increase as part of Phase 3 of the Reorganization. The acquisition of LC Gloricar, which held an indirect 1.2% interest in Hexie Auto through Daoable Future after the capital increase, was consummated in September 2012 as part of the Investment. The cash payment were used primarily on the purchase of inventory and construction of new outlets, including Zhengzhou Huacheng Auto, Anyang Andebao, Kaifeng Biandebao and Xiamen Lexus. Completion of the investment took place on December 3, 2012.

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Subscription of Series A Preferred Shares

On March 5, 2012, Mr. Feng, Hexie Industrial Group, Eagle Seeker, Success Intergrow, Magic Frontier, ACE Manufacturing, Daoable Future, Hexie Auto, Zhongdebao, LC Gloricar, the Financial Investors entered into a share exchange agreement (the “ Share Exchange Agreement ”), pursuant to which the Financial Investors agreed to subscribe for an aggregate of five million Series A Preferred Shares in Success Intergrow, in consideration for the sale by the Financial Investors of 100% of LC Gloricar to Success Intergrow and a cash amount of RMB249.2 million. The Series A Preferred Shares represented 14.16% of the enlarged issued share capital of Success Intergrow.

Details of the Investment by each Financial Investor are set forth below:

		No. of Series
	% of LC	A Preferred	Total Cash Amount
Financial Investor	Gloricar	Shares	(US$)	Shareholding
LC Fund V . . . . . . . . . . . .	56.24%	2,812,185	19,112,974.17	7.96%
LC Parallel Fund V . . . . . .	4.10%	205,055	1,393,616.87	0.58%
Grandsun International. . .	28.45%	1,422,415	3,367,578.30 plus US$	4.03%
			equivalent of
			RMB80 million
MCP Asia . . . . . . . . . . . . .	6.03%	301,725	2,066,129.11	0.85%
MCPC II . . . . . . . . . . . . . .	2.59%	129,310	885,449.36	0.37%
Yushang. . . . . . . . . . . . . .	2.59%	129,310	13,410.89	0.37%
			US$ equivalent of
	100.00%	5,000,000	RMB249.2 million	14.16%

The parties to the Share Exchange Agreement and our Company agreed that the Financial Investors shall convert their Series A Preferred Shares in Success Intergrow into ordinary shares in Success Intergrow on a 1:1 basis, immediately following which Mr. Feng and the Financial Investors shall exchange their ordinary shares in Success Intergrow into our Shares (the “ Reorganization Agreement ”). As issuance and settlement of such Series A Preferred Shares were arranged among Success Intergrow, the holding company of the Group and the Financial Investors, the Series A Preferred Shares do not have any impact on the financial performance of the Group.

Key Terms of the Series A Preferred Shares

Set forth below are the key terms of the Series A Preferred Shares:

Number Issued: 5,000,000 Voting Rights: One vote per Series A Preferred Share Conversion Rights: The number of Shares into which a Series A Preferred Share shall be converted shall be the quotient of the “ Original Series A Issue Price ” (being RMB74.24 per share) divided by the then-effective Series A Conversion Price. The “ Series A Conversion Price ” shall initially equal to the Original Series A Issue Price and shall be adjusted from time to time as provided below. The initial conversion ratio for Series A Preferred Share to Shares shall be 1:1.

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Optional Conversion : At the option of the holder, a Series A Preferred Share may be converted in full-paid Shares based on the then-effective conversion price.

Automatic Conversion : The Series A Preferred Shares shall be converted into Shares upon the closing of a Qualified IPO.

Adjustments to Conversion Price:

“ Qualified IPO ” means a firm-commitment underwritten public offering of our Shares that is effected pursuant to, among other things, securities laws in a jurisdiction that is approved by our Shareholders, as a result of which our Shares become tradeable on one or more internationally recognized stock exchanges with aggregate offering gross proceeds to our Company of at least US$100 million and an implied valuation of our Company prior to such offering of at least HK$10 billion. The conversion price of the Series A Preferred Shares shall be adjusted as follows:

in the event of share splits and combinations, scrip dividends and distributions, other dividends, and reorganizations, mergers, consolidations, reclassifications, exchanges, and substitutions, and other dilutive events
in the event our Company issues securities without consideration or at below the conversion price
for performance based adjustment – see “Performance Adjustment” below

Performance Adjustment:

The parties agree that the “2011 Net Profit” shall be no less than RMB237.5 million, and the “2012 Net Profit” shall be no less than RMB360.0 million. Mr. Feng shall ensure that our Group will achieve such targets. The performance adjustment provisions shall continue to be in force.

“ 2011 Net Profit ” and “ 2012 Net Profit ” mean the consolidated net profit after tax of our Group for the year ended December 31, 2011 or 2012 (as the case may be) as reflected in the audited consolidated financial statements of our Group prepared in accordance with IFRS, excluding (a) any revenue contributed by entity or entities which have been acquired or merged into our Company after the closing date of the Share Exchange Agreement, and (b) any revenue which is extraordinary or non-recurring in nature.

In the event that the 2011 Net Profit or the 2012 Net Profit was less than RMB237.5 million or RMB360.0 million (as the case may be), then the then-effective Series A Conversion Price shall be adjusted as follows:

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Adjusted Series A (CP x A x B) = Conversion Price (C x D)

Where:

“ CP ” shall mean the applicable Series A Conversion Price in effect immediately prior to such adjustment of the Series A Conversion Price

“ A ” shall mean the number of Shares outstanding immediately prior to such adjustment of the Series A Conversion Price (including options)

“ B ” shall mean the 2011 Net Profit or 2012 Net Profit (as the case may be)

“ C ” shall mean RMB250 million (in the case of the 2011 Net Profit adjustment) and RMB400.0 million (in the case of the 2012 Net Profit adjustment)

“ D ” shall mean the number of Shares outstanding immediately after such adjustment of the Series A Conversion Price (including options)

The Financial Investors have waived the performance adjustment provision for the 2011 Net Profit and 2012 Net Profit, notwithstanding our 2011 Net Profit was less than RMB237.5 million and our 2012 Net Profit was less than RMB360.0 million.

Redemption Rights:

In the event (a) our Group fails to consummate a Qualified IPO before December 31, 2013, or (b) our Group fails to complete the restructuring before March 31, 2012 so as to be qualified to conduct an initial public offering on the Hong Kong Stock Exchange, Success Intergrow shall, upon written request of the holders of more than 50% of the outstanding Series A Preferred Shares, redeem the Original Series A shares at a redemption price of 100% of the Original Series A Issue Price, plus an annual compounded interest at the rate of 10% of the Original Series A Issue Price (as adjusted). Our group consummated the restructuring prior to March 31, 2012.

Special Rights of the Financial Investors

In conjunction with the Share Exchange Agreement, the same parties entered into a shareholders’ agreement dated March 5, 2012, as supplemented by the Reorganization Agreement (the “ Shareholders’ Agreement ”), pursuant to which the Financial Investors were granted a number of special rights in relation to our Company, including without limitation, right of first refusal, right of co-sale, pre-emptive rights, appointment of director, information rights, exit rights and lock-up. Set forth below is a summary of the principal special rights granted to the Financial Investors under the Shareholders’ Agreement:

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Right of Participation:

Each Financial Investor shall have a right of first refusal to purchase its pro rata share of an new issue of securities by our Company (excluding, among others, securities issued upon an initial public offering or a Qualified IPO). The participation rights shall terminate upon closing of a Qualified IPO.
Right of First Refusal: If any Shareholder proposes to transfer any of its Shares, the Financial Investors shall have a right of first refusal to purchase its pro rata share of such Shares. The right of first refusal shall terminate upon closing of a Qualified IPO.
Drag-Along Right: If a majority of the holders of the Series A Preferred Shares approve a transfer of all Shares held by them to a purchaser, or approve a proposed trade sale, then all other shareholders shall give their consent to the sale of all of the Shares held by them. The drag-along right shall terminate upon closing of a Qualified IPO.
Right of Co-Sale: Each Financial Investor which does not exercise its right of first refusal as mentioned above shall have the right, but not the obligation, to participate in the sale of Shares to the transferee upon substantially the same terms and conditions as offered by the selling Shareholder, in proportion to the total number of Shares held by the relevant Financial Investor. The right of co-sale shall terminate upon closing of a Qualified IPO.
Lock-Up Rights: Mr. Feng shall not, without the prior written consent of a majority of the holders of the Series A Preferred Shares, (a) sell, assign, exchange or transfer any Shares or securities of our Company or any other member of our Group held directly or indirectly by him or his holding vehicles, nor (b) pledge, mortgage or otherwise dispose of any Shares or securities of our Company, in each case prior to the closing of a Qualified IPO. The lock-up rights shall terminate upon closing of a Qualified IPO.
Board of Directors: The Board shall have seven Directors. So long as each of Legend Capital and Grandsun holds any Shares in our Company, each of them shall have the right to nominate, remove or replace one Director and one non-voting observer (each a “ Series A Director ”). The nomination rights shall terminate upon closing of a Qualified IPO.
Protective Rights:
Certain matters require (a) the approval of a majority of the holders of Series A Preferred Shares, or (b) the affirmative votes of at least two-thirds of the Board, including the affirmative votes of the Series A Directors, or (c) the affirmative votes of at least a majority of the Board, including the affirmative vote of at least one Series A Director. The protective rights shall terminate upon closing of a Qualified IPO.

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Information and Inspection The Financial Investors are entitled to receive from our Rights: Company periodic financial information. The Financial Investors also have the right to reasonably request for information about the operations, business affairs and financial condition of our Group. The information and inspection rights shall terminate upon closing of a Qualified IPO.

Registration Rights: The Financial Investors were granted customary “registration rights” in the event of an initial public offering of our Company in the United States, and shall be entitled to reasonably analogous or equivalent rights with respect to any other offering on a recognized stock exchange in any other jurisdiction.

Information regarding the Financial Investors

Legend Capital

LC Fund V is a limited partnership registered in the Cayman Islands on April 19, 2011. It is a US$480 million fund with investors from regions including the United States, United Kingdom, Germany, Japan and Hong Kong. LC Parallel Fund V is a limited partnership registered in the Cayman Islands on May 23, 2011. It is a US$35 million fund with investors from the Middle East. Both LC Fund V and LC Parallel Fund V focus on innovative and growing enterprises, in sectors including telecoms, media and technology (TMT), outsourcing and professional services, clean technology, healthcare, consumer products and services, and hi-tech manufacturing.

Legend Capital is an independent third party to the Group. As Legend Capital is not a connected person of our Company under the Listing Rules, the Shares held by Legend Capital will be counted towards the public float.

Grandsun

Grandsun was established in BVI on April 28, 2004. Grandsun is beneficially owned by Ms. Yip Chi Yu, an individual financial investor who is an independent third party and its principal business is investments in growing stage enterprises and industry integration opportunities.

As Grandsun is not a connected person of our Company under the Listing Rules, the Shares held by Grandsun will be counted towards the public float.

Morgan Creek Funds

MCP Asia and MCPC II are limited partnerships registered in the State of Delaware of the United States of America and established in 2009 and 2010 by Morgan Creek Capital Management, LLC. MCP Asia and MCPC II are focused on investing in emerging companies and private equity funds. Morgan Creek Capital Management, LLC is a SEC-registered investment adviser providing investment management services to institutions and wealthy families. MCP Asia is one of the limited partners of LC Fund V.

Morgan Creek Funds is an independent third party to the Group. As Morgan Creek Funds is not a connected person of our Company under the Listing Rules, the Shares held by Morgan Creek Funds will be counted towards the public float.

Yushang

Yushang is a company incorporated in the BVI on September 3, 2010. It is beneficially owned by Mr. Liu Lin and Ms. Yip Chi Yu, individual financial investors who are independent third parties and its principal business is investment holding.

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As Yushang is not a connected person of our Company under the Listing Rules, the Shares held by Yushang will be counted towards the public float.

Lock-up of the Financial Investors

Each of the Financial Investors has agreed to a lock-up period of six months.

FURTHER REORGANIZATION

We underwent a further reorganization pursuant to which our Company became the holding company of our Group. On [●], 2013, the parties to the Share Exchange Agreement and the Shareholders’ Agreement and our Company entered into the Reorganization Agreement, pursuant to which they have agreed that:

(1) Our Company’s sole shareholder, Magic Frontier, will declare a dividend, to be satisfied in specie, by the transfer of the entire share capital in our Company to Success Intergrow;
(2) Immediately thereafter, the Financial Investors will convert their Series A Preferred Shares in Success Intergrow into ordinary shares in Success Intergrow on a 1:1 basis;
(3) Immediately thereafter, our Company will allot and issue to Success Intergrow 799,999,999 Shares credited as fully paid; and
(4) Immediately thereafter, Success Intergrow will repurchase all the ordinary shares (except one Share registered under the name of Eagle Seeker) held by Eagle Seeker and the Financial Investors in return for Success Intergrow transferring all our issued Shares to Eagle Seeker and the Financial Investors.

As a result of the Reorganization Agreement, the respective number of Shares in our Company to be held by Mr. Feng (through Eagle Seeker) and the Financial Investors of Shares are as follows:

		Percentage
Name of Shareholder	No. of Shares	(%)

Eagle Seeker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	686,720,000	85.84
LC Fund V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	63,680,000	7.96
LC Parallel Fund V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4,640,000	0.58
Grandsun International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32,240,000	4.03
MCP Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6,800,000	0.85
MCPC II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,960,000	0.37
Yushang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,960,000	0.37
Total:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	800,000,000	100.00

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PRC REGULATORY REQUIREMENTS

Our PRC legal adviser has confirmed that all the share transfers and increases in registered capital in respect of the PRC companies in our Group as described above have obtained all relevant approvals and permits and the procedures involved are in accordance with PRC laws and regulations.

According to Article 11 of the “Provisions on the Acquisition of Domestic Enterprises by Foreign Investors” (關於外國投資者併購境內企業的規定) jointly issued by the Ministry of Commerce (商務部) (“ Ministry of Commerce ”), the State-Owned Assets Supervision and Administration Commission of the State Council (國務院國有資產監督管理委員會), the State Administration of Taxation (國家稅務總局), the China Securities Regulatory Commission (中國證券監督管理委員會) (“ CSRC ”), State Administration for Industry and Commence (國家工商行政管理總局) and the State Administration of Foreign Exchange (國家外匯管理局) on 8 August 2006 and effective as of 8 September 2006, where an offshore company established or controlled by a domestic natural person intends to acquire a domestic company related to the same domestic natural person, the acquisition (“ Related Acquisition ”) shall be subject to the examination and approval of the Ministry of Commerce; and where an offshore special purpose company established or controlled by the same domestic natural person holds an equity interest in the aforesaid domestic company after Related Acquisition, any transaction involving the overseas listing of that special purpose company shall be subject to approval by the CSRC.

As advised by our PRC legal adviser, since there was no Related Acquisition during the onshore reorganization, it is not necessary for us to obtain approval from the CSRC and the Ministry of Commerce. The issuance of shares does not require the approval from CSRC and MOFCOM. According to the M&A Rules, the reorganization should be approved by CSRC and MOFCOM only when related-party M&A transactions are involved in the process. There is no related-party M&A transaction in our case given that:

(i) The term “related-party M&A transactions” in the M&A Rules refers to merger or acquisition of a connected domestic company by a foreign company legally established or controlled by a domestic company, enterprise or natural person, where the term “merger and acquisition” refers to acquisition of equity of domestic enterprises or subscription of increased capital of domestic companies by foreign investors so that the domestic companies are converted to foreign-invested enterprises (hereafter, “ Equity Acquisition ”); or purchase of the assets of domestic enterprises through agreements and operation of these assets by a newly established foreign-invested enterprise by foreign investors, or purchase of the assets of domestic enterprises through agreements to establish foreign-invested enterprises for operation (hereafter, “ Asset Acquisition ”).

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(ii) In the process of our reorganization, the only M&A transaction is the subscription of increased capital of Zhongdebao by Daoable Future, which is an M&A transaction of domestic enterprise by foreign investors unconnected to Mr. Feng, and there is no connected relationship in all parties involved in the transaction. Therefore, this transaction is not a related-party M&A transaction. In addition, neither the establishment of Hexie Auto as a joint venture between the Chinese investor and the foreign investor nor the conversion of Hexie Auto from a joint venture into a wholly foreign-owned enterprise is a “related-party M&A transaction” as neither of them is a conversion of a domestic company into a foreign-invested enterprise. We are advised by our PRC legal adviser that, as Hexie Auto is an enterprise incorporated in China, the acquisition of equity of other domestic companies by Hexie Auto constitutes an acquisition transaction between domestic enterprises in China, which is not an M&A transaction defined in the M&A Rules. Therefore, no related-party M&A transaction is constituted in the equity transfer.

As further advised by our PRC legal adviser, Mr. Feng has completed the necessary foreign exchange registration with the local foreign exchange authority in accordance with the SAFE Circular No. 75.

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OVERVIEW

We are a leading dealership group that deals exclusively in luxury and ultra-luxury passenger vehicles in China in terms of number of outlets and brand coverage, according to the ACMR Report. As of the Latest Practicable Date, we operated 25 outlets nationwide and held minority equity interests in two other outlets, the second most among dealerships that specialize exclusively in luxury and ultra-luxury brands in China, according to the ACMR Report. As of the Latest Practicable Date, our outlets in operation covered 10 luxury and ultra-luxury brands, namely, BMW, Lexus, Rolls-Royce, MINI, Land Rover, Jaguar, Aston Martin, Audi, Ferrari and Maserati, the most among dealership groups specializing in luxury and ultra-luxury brands in China, according to the ACMR Report. In addition, we had authorizations, preliminary approvals or letters of intent to establish 20 new outlets, among which 14 had entered into construction phase. In addition, our market share in the luxury and ultra-luxury market in Central China Region was 9.7% in terms of sales volume in 2012, the largest in the region according to the ACMR Report. In 2012, we were the second largest in terms of revenue among dealerships that specialize exclusively in luxury and ultra-luxury brands in China, according to the same report. We focus exclusively on luxury and ultra-luxury brands in order to provide our customers the high-quality services and purchase experiences they expect. We believe such strategic focus has enabled us to benefit from the exponential growth of market demand for luxury products in China in recent years as a result of the economic growth and accumulation of individual wealth, and is consistent with the strategic expansion plan of the automobile manufacturers. Most of our dealership outlets are strategically located in populous and affluent cities in China with rapidlygrowing local economies.

Since the inception of our business in 2005, we have established a dominant presence in Henan Province, one of the largest provinces in China in terms of population and one of the fastest-growing regional markets for passenger vehicles, according to the ACMR Report. We opened the first BMW 4S store in Henan Province in 2005 and were the only BMW dealership in Henan Province until 2011. We have been the largest BMW dealership group in Henan Province in terms of sales volume since 2005 and, BMW passenger vehicles sold by us accounted for over 90% of BMW passenger vehicles sold in Henan Province during 2010, 2011 and 2012, according to the ACMR Report. Since 2010, we have been quickly expanding into other major cities in China. Our BMW 4S store in Beijing is one of the largest and most well equipped BMW 4S stores in China. The 5S BMW stores we operate in Shanghai and Guangzhou are of a new and enhanced form of 4S store and among the few 5S stores BMW China has authorized so far. In addition, we have obtained authorizations, preliminary approvals and letters of intent for 4S stores for a number of luxury and ultra-luxury brands in other selected provincial capitals and affluent cities in China.

By leveraging our leading position in Henan Province and our accumulated operational capabilities and expertise, we have established strong and long-term relationships with leading international luxury and ultra-luxury automobile manufacturers. In addition, specializing in luxury and ultra-luxury brands enables us to align our business interests and strategies with those of the automobile manufacturers, whose sales and marketing efforts are often tailored to high-end customers. As an endorsement of our performance, existing and new automobile manufacturers continue to grant us authorizations to open new outlets for their brands. We have won various awards from automobile manufacturers, including awards for excellent outlets operations from BMW and Lexus and awards for speedy 4S store construction from BMW.

We achieved significant revenue and profit growth during 2010, 2011 and 2012. Our revenues were RMB1.80 billion, RMB3.03 billion and RMB5.66 billion for the years ended December 31, 2010, 2011 and 2012, respectively, representing a CAGR of 77.3% from 2010 to 2012. Sales of new passenger vehicles are the main source of our revenues and accounted for 89.7%, 90.8% and 92.7% of the total revenues of the years ended December 31, 2010, 2011 and 2012, respectively. The gross profit margins for sales of new passenger vehicles were 9.8%, 11.4% and 9.2% for the years ended

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December 31, 2010, 2011 and 2012, respectively. Compared with sales of new passenger vehicles, after-sales services provide steady and recurring revenues with higher gross profit margin. The gross profit margins for after-sales services were 39.6%, 37.6% and 44.0% for the years ended December 31, 2010, 2011 and 2012, respectively. Gross profit generated from after-sales services accounted for 31.5%, 25.1% and 27.4% of the total gross profit of the years ended December 31, 2010, 2011 and 2012, respectively. Our net profit was RMB112.7 million, RMB220.5 million and RMB350.7 million for the years ended December 31, 2010, 2011 and 2012, respectively, representing a CAGR of 76.4% from 2010 to 2012.

OUR COMPETITIVE STRENGTHS

The following competitive strengths have contributed to our success and we believe will continue to help us to compete and expand in China’s fast growing luxury and ultra-luxury passenger vehicle market:

A leading dealership group specialized exclusively in luxury and ultra-luxury passenger vehicles in China

Since the inception of our business in 2005, we have been dedicating our efforts to building one of the largest dealership group in China that deals exclusively in luxury and ultra-luxury passenger vehicles. As of the Latest Practicable Date, we operated 25 dealership outlets and held minority equity interests in two other dealership outlets for 10 luxury and ultra-luxury brands, namely, BMW, Lexus, Rolls-Royce, MINI, Land Rover, Jaguar, Aston Martin, Maserati, Ferrari and Audi. Our portfolio of 10 luxury and ultra-luxury brands was the most extensive brand coverage among dealerships specializing in luxury and ultra-luxury brands in China, according to the ACMR Report. According to the same report, in recent years the luxury and ultra-luxury passenger vehicle market has sustained strong growth while the growth of mid- and lower-level passenger vehicle market has slowed down or experienced contraction. Our strategy to focus exclusively on luxury and ultra-luxury brands is consistent with such market trends and has contributed to our strong growth in recent years.

We have been focusing on brands that are well-known in China and have established ourselves as a market leader in a number of popular luxury and ultra-luxury brands in China. We are one of the largest BMW and Rolls-Royce dealership groups in China in terms of numbers of outlets, according to the ACMR Report. In addition, we have been actively seeking to introduce premier international luxury and ultra-luxury brands into new regional markets. For example, we are the first dealership group to introduce Aston Martin into regional Chinese markets outside the tier-one cities. As of the Latest Practicable Date, we operated two Aston Martin 4S stores.

Our business scale has provided us competitive advantages in various aspects of our operations, including:

Standardized operations: we have accumulated extensive experience from operating our outlets and translated such experience into standardized operational procedures across our sales network through periodic trainings;
Strategic relationships with automobile manufacturers: we have strengthened our strategic relationships with manufacturers through our strong sales performance and extensive sales network coverage;
Cost efficiency: we have achieved economies of scale and are continuing to improve our operational efficiency through central management of our sales network;
Human resources: our large sales network and multilayered management positions provide our employees with progressive career opportunities and development potential; and

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Source of financing: our business scale and track record of strong financial performance enhance our ability to obtain financing from local branches of commercial banks.

Extensive and strategically located sales network in China with a dominant presence in Henan Province

We have established an extensive sales network for luxury and ultra-luxury passenger vehicles in China, with a dominant presence in Henan Province as well as strong representation in tier-one cities. As of the Latest Practicable Date, we wholly or jointly owned, were constructing or planning to construct a total of 47 outlets, the most among dealerships specializing in luxury and ultra-luxury brands in China, according to the ACMR Report. Specifically, we operated 25 outlets in 14 cities, held minority equity interests in two other outlets in Henan, and had authorizations, preliminary approvals or letters of intent to establish 20 new outlets in 11 cities, among which five are cities where we do not yet have outlets. In addition, we are applying for authorizations from new luxury and ultra-luxury brands such as Porsche, Infiniti and Volvo.

Dominant presence in Henan Province resulting in enhanced pricing power

Since the inception of our business in 2005, we have quickly established and steadily maintained a dominant presence in Henan Province, by using Zhengzhou as a hub and expanding our sales network coverage into other major cities in the province, including Luoyang, Kaifeng, Xinxiang, Nanyang and Anyang. Our growth into the market leader in Henan Province was on pace with and contributed to the growth of the regional luxury and ultra-luxury passenger vehicle market, which is among the fastest growing regional markets in China. According to the ACMR Report, the number of registered new luxury and ultra-luxury passenger vehicles in Henan Province increased at a CAGR of 45.9% from 2006 to 2012, higher than the national average of 40.3%. As of the Latest Practicable Date, we had 11 out of 13 BMW outlets and two out of three Lexus outlets in Henan Province. As a result, during 2010, 2011 and 2012, the BMW sold by us accounted for over 90% and over 80% of the total numbers of BMW and Lexus passenger vehicles sold in Henan Province according to the ACMR Report. Moreover, we operate the only Rolls-Royce 4S store in Henan Province. We focused on Henan Province in the initial phase of our growth as it is one of the largest provinces in terms of population and one of the fastest growing provinces in China in terms of nominal GDP. Moreover, Henan Province is one of China’s focal points of economic development, as the PRC central government made the development of the “Central China Economic Region” one of the core missions in the Twelfth Five-Year Plan. We believe we are well-positioned to leverage our dominant position in the passenger vehicle market in Henan Province to fully benefit from this trend of further economic development in the region, and continue to grow in business scale and revenues as the market continues to grow.

Our dominant market position in Henan Province provided us enhanced pricing power in new passenger vehicle sales, especially for brands such as BMW, Rolls-Royce and Lexus. We make it our priority to set a high market standard in Henan Province and to satisfy our customers with excellent services, as our customers are in generally more sensitive to purchase experience as compared to competitive pricing. Our gross profit margin for sales of new passenger vehicles was 9.8%, 11.4% and 9.2% for the years ended December 31, 2010, 2011 and 2012, respectively.

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Prime outlet locations in tier-one cities with established passenger vehicle markets

Leveraging our operational experience and leading position in Henan Province, we have been quickly expanding into tier-one cities with established passenger vehicle markets since the end of 2011, as we believe presence in tier-one cities will increase our market recognition, complete our strategic deployment of sales network in China, and help our plan to improve our after-sales services. In tier-one cities such as Beijing, Shanghai and Guangzhou with numerous 4S stores that cover a wide variety of brands, we believe eminence and location are the two most critical factors of a 4S store’s competitiveness, as potential purchasers and existing owners of luxury and ultra-luxury passenger vehicles tend to frequent upper-scale 4S stores with ease of access for purchase and after-sales services. Our 4S and 5S stores in Beijing, Shanghai and Guangzhou are all situated in central business districts with easy access to arteries. With our prime outlet locations, we believe we are well-positioned to compete and increase our market share in such tier-one cities.

Our 4S store in Beijing, Huadebao, benefited from the eminence of its scale and the ease of access of its location, as it operates in an intensively competitive market. In its first year of operation, Huadebao has fulfilled or exceeded all sales quota for both sales of new passenger vehicles and after-sales services, as well as other operational and financial benchmarks as set by BMW China. BMW China grant various rewards to Huadebao to accommodate its first year of operation.

Strategic positioning in other provincial capitals and affluent cities

In addition, we have also selectively expanded our network into other strategic regional markets. We have obtained authorizations, preliminary approvals and letters of intent for 4S stores in other provincial capitals and affluent cities, including Shenyang and Wuhan. Such strategic positioning of our sales network provides us with, among other things, operational efficiency as we can more effectively coordinate our inventory management of passenger vehicles and spare parts among our outlets. Locations for our outlets in such cities were chosen by taking into consideration many factors, such as income level and consumption habit of local residents, governmental zoning and economic development plan of the location and nearby region, and availability of subsidy and support from local government.

Prudent capital expenditure in outlet construction with relatively low initial capital investment while ensuring long-term stability

Luxury and ultra-luxury passenger vehicle dealerships are capital-intensive, and capital expenditure and cost of financing have major impacts on profitability. A major capital expenditure for a passenger vehicle dealership is the acquisition of land use right for its outlets. Most of our outlets are located in primary locations in major cities where land use right tend to be expensive. Instead of acquiring land use rights, we generally secure long-term leases, typically for 10 years or more, of the land where our outlets are to be built. In choosing locations for our outlets, we also take into consideration zoning plans of local governments to make sure there are no significant zoning changes during the lease terms. Such measures significantly reduced our initial capital expenditure and the amount of financing needed for the opening of new outlets. Lower initial capital investment in outlets enables us to allocate more available capital to outlet development, such as purchase of new passenger vehicles and other working capital needs of such outlets.

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Strong relationships with luxury and ultra-luxury automobile manufacturers

Our significant growth in recent years is attributable in part to our ability to establish and maintain strong relationships with selected leading international luxury and ultra-luxury automobile manufacturers, which typically require strong management and high operational capability of their dealerships. During 2010, 2011 and 2012, we had consistently met and exceeded manufacturers’ annual sales quota and various other requirements, such as 4S store scale, service quality and management qualification.

As one of the biggest dealership groups that deals luxury and ultra-luxury passenger vehicles in China, we have proved ourselves as an important business partner to automobile manufacturers. In particular, our dominant market position in Henan Province contributed significantly to the growth of luxury and ultra-luxury brands such as BMW, Lexus and Rolls-Royce in the province. We have won various awards from manufacturers during 2010, 2011 and 2012. For example, Zhongdebao won the BMW Top Dealer Management Award in 2010, and Yudebao won the BMW Top Dealership Award in both 2011 and 2012. In 2012, Zhongdebao won the Top Sales Performance Award and Yuedebao won the Top Service Performance Award granted by BMW, respectively. In its first full-year operation, Beijing Huadebao won the BMW 2012 Excellent Public Relation Award and the BMW North Region 2012 Aftersales New Dealer Award. In their first years of operations, our exhibition galleries for Rolls-Royce in Zhengzhou and Xi’an won the Best Service Facility in China 2012 and the Best Performance New Dealer in China 2012, respectively. We also won Lexus National Excellent Dealership Awards in 2009 and 2010. In addition, BMW granted us a preliminary approval to establish a 4S store in Shenyang, Liaoning Province, where its largest production base in China is located.

In addition, we have accumulated and maintained a customer base consisting mainly of affluent individuals who we believe value service quality and purchasing experience over competitive pricing. We believe such customer base is valuable to automobile manufacturers who want to capture the growth of the luxury and ultra-luxury passenger vehicle market in recent years.

As a result, we have successfully obtained 43 authorizations, preliminary approvals or letters of intent to establish new outlets since 2009 and expanded our brand coverage from two as of January 1, 2009 to 10 as of the Latest Practicable Date. Such authorizations are crucial to our plans of strategic expansion in the near future as we believe most luxury and ultra-luxury brands are completing their sales network deployment in China and additional authorizations of outlets will be increasingly difficult to obtain going forward. In addition, in November 2012 BMW China granted preliminary approvals to three of our outlets, namely, Zhongdebao, Shangdebaojun, and Guangdebao, to distribute its new electric passenger vehicles, BMW i.

Experienced senior and mid-level management team with high employee retention rate

Our senior management team has a track record of successfully implementing our strategies and orchestrating the recent fast growth of our business. In particular, Mr. Feng, our founder and chairman, and Mr. Yu Feng, our chief executive officer, are both experienced in the passenger vehicle dealership business with over seven years of experience each and have been involved in our operations since the inception of our business. Other key managements such as our chief operating officer and vice president, Mr. Yang Lei, has also been working at our Company since the inception of our business.

We believe our employees are key assets to our business. We provide our employees ample career development opportunities by regularly offering a wide variety of training programs across seniority and job functions. We reward employees with promotion to various management roles as they improve and progress. We design a three-to-five-year career plan for each of our new employee,

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which gives the employee choices over a wide range of career trainings. Such training plans provide the employee multiple career paths. If the employee satisfies relevant qualifications at the end of the plan, we give the employee choice to further develop into a management or operational role. In addition, we provide our employees a harmonious and constructive working environment, as we believe our corporate culture, which can be characterized as “simplicity, transparency, generosity, harmony and congeniality”, is crucial to our human resource management.

We have achieved a stable employee workforce as we have retained all our management from store manager level and above during 2010, 2011 and 2012. Moreover, substantially all of our management at the store manager level and above was appointed through internal promotion as of the Latest Practicable Date. The stability of our senior and mid-level management team is an important asset of our business, which also helps us build a solid and long-term relationship with automobile manufacturers.

OUR STRATEGIES

Our goal is to strengthen our market position and to become the leading luxury and ultra-luxury dealership group in China and to further capture the opportunities in the large and fast-growing luxury and ultra-luxury passenger vehicle market by pursuing the following strategies:

Continue to expand our sales network and brand coverage for luxury brands in central and western China and for ultra-luxury brands in affluent cities

We plan to strengthen our leading position in the luxury and ultra-luxury passenger vehicle dealership market in China by continuing to implement our strategic expansion and extend our geographic and brand coverage for luxury brands in central and western China and for ultra-luxury brands in affluent cities. According to the ACMR Report, in recent years demand for luxury passenger vehicles in central and western China has experienced fast growth as economy in such regions grows. We plan to leverage our dominant market position in central China region to further expand into central and western China to capture the growth of the luxury passenger vehicle market. According to the same report, Beijing, Shanghai and Guangzhou, were among the top four cities in terms of number of newly registered ultra-luxury passenger vehicles in 2012. We had opened our first Maserati & Ferrari outlet in Suzhou, Jiangsu in December 2012. We plan to solidify our leading market position by expanding into such tier-one cities and selected cities in Jiangsu Province and other affluent regions. We expect to implement such strategic expansion mainly by organic growth in the near future, although we will also actively evaluate acquisition opportunities in a selective and prudent manner, especially in cities with established passenger vehicle markets.

In addition, we will continue to diversify our brand coverage to strengthen our leading position as an exclusive luxury and ultra-luxury brand dealership group. For example, we have obtained 4S store authorizations, preliminary approvals or letters of intent for a number of new ultra-luxury brands, such as Ferrari and Maserati since August 2012. Moreover, we are currently applying for authorizations for outlets from new brands including Porsche, Infiniti and Volvo.

Further diversify our revenue sources

We plan to continue to improve our revenue mix and profit margin by further diversifying our revenue sources. We plan to further strengthen our after-sales services to improve our profit margin. We are currently constructing two BMW service centers in Zhengzhou and we plan to apply for authorizations of large-scale full-service centers for other brands as well. Such service centers will significantly enhance the capacity and cost-efficiency of our after-sales services and serve as service hubs for the 4S stores we operate in the region, which will provide operational synergy. In addition, we plan to further emphasis after-sales service in our newly opened stores in tier-one cities, as we

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believe the eminence and ease of access of our stores in such cities will help attract after-sales service customers. In addition, according to ACMR Report, the volume of luxury and ultra-luxury passenger vehicles in tier-one cities is much larger than other cities in China, which we believe creates more market demand for after-sales services in tier-one cities as compared to cities in central and western China. The emphasis on after-sales services will help us compete and improve our overall gross profit margin in such established markets.

We plan to further develop our ability to generate revenues from sales of accessories, as well as insurance and finance consulting services in connection with sales of new passenger vehicles. We also plan to expand our BMW VIP Club coverage to other regional markets and offer similar membership services to customers of other brands.

In addition, our existing pre-owned passenger vehicle trading business is complementary to our new passenger vehicle sales. While this business is currently small in scale, we plan to leverage our know-how in sales and services and expand our pre-owned passenger vehicle trading business, both in volume and brand.

Further strengthen our strategic relationship with automobile manufacturers

We believe maintaining and improving relationship with automobile manufacturers is critical to our business, especially in the highly competitive luxury and ultra-luxury passenger vehicles dealership market. We plan to maintain our proven track record of meeting and exceeding manufacturer annual sales quota and other specifications by a number of measures, including continuing to expand our operational scale, intensifying our sales and marketing initiatives, further aligning our various operational procedures with manufacturers’ standards, and improving our informational technology system and internal control.

In addition, we are seeking other innovative initiatives to strengthen our relationship with manufacturers. For example, we obtained approval from BMW China to sponsor a program titled “BMW Class” at Henan Institute of Transportation. Such program will feature a number of courses related to BMW passenger vehicles, and top graduates of the program will be offered employment opportunities at our various BMW outlets. We are looking into similar and other forms of cooperation with other brands we serve.

Continue to focus on employee recruitment, training and retention

Employee training is an on-going process and we need to retain and expand our work force as we continue to expand our sales network. In addition, we expect employee retention to become increasingly important as competition intensifies. To meet the needs of our expansion plan, we plan to continue to refine our career plans for new employees by providing them with hands-on trainings and meaningful career choices, which need to be constantly adjusted as the market changes. We will also offer competitive compensation packages to selected domesticand foreign-educated candidates to join our management. It is also important to maintain a high ratio of employees who passed various qualifications as set by automobile manufacturers. We will keep active communications with automobile manufacturers in terms of employee trainings, giving them regular updates and obtaining feedbacks. Moreover, we will continue our tradition of internal promotion for management positions while actively attracting local management talents with competitive incentives as we expand into new regional markets.

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OUR DEALERSHIP BUSINESS

Overview

We are a leading dealership group in China that specializes exclusively in the sales and after-sales services of luxury and ultra-luxury passenger vehicles. The services we provide our customers include:

sales of new passenger vehicles of luxury and ultra-luxury brands;
after-sales services such as repair and maintenance, sales of spare parts and accessories and detailing services;
financing and insurance consulting services in connection with the sales of new passenger vehicles; and
sales of pre-owned passenger vehicles which is complementary to our sales of new passenger vehicles business.

We conduct our business through our sales network of manufacturer-authorized dealership outlets, which include 4S and 5S stores, exhibition galleries and services centers. As of the Latest Practicable Date, we operated 25 outlets in 14 cities in China. The following table sets forth our outlets in operation in China by brand as of the indicated dates:

	As	of December 31,	of December 31,	As of the Latest
	2010	2011	2012	Practicable Date

BMW. . . . . . . . . . . . . . . . . . . . . . .	4	7	13	14
Rolls-Royce . . . . . . . . . . . . . . . . . .	nil	nil	2	2
Lexus. . . . . . . . . . . . . . . . . . . . . . .	1	1	2	3
MINI . . . . . . . . . . . . . . . . . . . . . . .	1	1	1	2
Aston Martin . . . . . . . . . . . . . . . . .	nil	nil	2	2
Land Rover & Jaguar . . . . . . . . . . .	nil	nil	1	1
Maserati & Ferrari . . . . . . . . . . . . .	nil	nil	1	1

Total. . . . . . . . . . . . . . . . . . . . . . .	6	9	22	25

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The vast majority of our outlets are located in populous and affluent cities in China with a strategic focus on Henan Province and tier-one cities. The following map illustrates the geographic coverage of our sales network in China, including outlets in operation, under construction and under preparation of construction, as of the Latest Practicable Date:

==> picture [349 x 268] intentionally omitted <==

----- Start of picture text -----

Liaoning (2)
BMW (1) Mini Cooper (1)
Beijing (5)
BMW (1/2) Maserati (1)
Ferrari (1)
Hebei (1)
Beijing Liaoning Lexus (1)
Hebei
Shaanxi (1)
Rolls-Royce (1)
Henan (28)
BWM (11/4/1) Mini Cooper (2/1)
Shaanxi Jiangsu Lexus (2/2*) Rolls-Royce (1)
Henan Land Rover/Jaguar (1/1)
Shanghai Aston Martin (1) Audi (1)
Hubei Jiangsu (2)
Maserati/Ferrari (1/1)
Shanghai (3)
Fujian BMW (1/1) Rolls-Royce (1)
Hubei (3)
Guangdong Aston Martin (1) BMW (1)
Land Rover/Jaguar (1)
Fujian (1)
Lexus (1)
Headquarters
Under construction Guangdong (1)
Under preparation for construction
Minority interests BMW (1)
----- End of picture text -----*

4S/5S dealership stores

The majority of our outlets are 4S dealership stores. As of the Latest Practicable Date, we operated 16 4S and 5S stores in 12 cities, held minority equity interests in two other 4S stores in Zhengzhou, and had authorizations, preliminary approvals or letters of intent to establish 14 new 4S stores in 11 cities, five of which we did not yet have outlets. Each 4S store is authorized by an automobile manufacturer, and exclusively deals and services passenger vehicles of that brand. A 4S store provides comprehensive and integrated passenger vehicle related services, as the 4 “S” stands for:

Sales , referring to sales of new passenger vehicles of the authorized brand;
Spare parts , referring to sales of spare parts of the authorized brand;
Service , referring to various services provided to passenger vehicles of the authorized brand, including maintenance, repair and detailing services; and
Survey , referring to the gathering of customer information and feedback for manufacturers’ market research purposes.

As of the Latest Practicable Date, we operated a 5S store in Shanghai and a 5S store in Guangzhou. A 5S store is a 4S store with “sustainability”, and is equipped with certain recycling capacities and operated according to eco-friendly procedures set by the authorizing manufacturer.

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Other outlets

In addition to 4S and 5S stores, we operated eight exhibition galleries and had obtained authorizations, preliminary approvals or letters of intent to establish three new exhibition galleries as of the Latest Practicable Date. Unlike a 4S or 5S store which also offers after-sales and other related services, an exhibition gallery is authorized by a manufacturer to showcase such manufacturer’s passenger vehicles, usually the latest or most popular models, to attract potential customers and facilitate sales of new passenger vehicles. Four of our operating exhibition galleries are authorized by BMW, two are authorized by Rolls-Royce, and the other two are authorized by MINI and Lexus. In addition, we also operated a service center in Xinxiang, Henan Province and had authorizations, preliminary approvals or letters of intent for another two service centers in Henan Province as of the Latest Practicable Date. We also had a preliminary approval to establish our first BMW brand store in Beijing in collaboration with BMW as of the Latest Practicable Date. A brand store is a flagship outlet to showcase the newest passenger vehicle models of an automobile manufacturer.

Brand Coverage

As of the Latest Practicable Date, we had the most extensive brand coverage among dealership groups that specialize exclusively in luxury and ultra-luxury passenger vehicles in China, according to the ACMR Report. As of the Latest Practicable Date, we wholly or jointly owned outlets that cover 10 luxury and ultra-luxury brands, namely, BMW, Lexus, Rolls-Royce, Aston Martin, Land Rover, Jaguar, MINI, Maserati, Ferrari and Audi. In addition, we are currently applying for authorizations for outlets from new brands including Porsche, Infiniti and Volvo.

Sales Network

Henan Province

Since we opened our first 4S store in July 2005, we have built a dominant presence in major cities in Henan Province including Zhengzhou, Luoyang, Kaifeng, Nanyang, Xinxiang and Anyang. Henan Province is one of the fastest growing provinces in China in terms of nominal GDP and one of China’s focal points of economic development as set forth in the Twelfth Five-Year Plan. As of the Latest Practicable Date, we operated 17 outlets in Henan Province with 11 outlets in Zhengzhou, as of the Latest Practicable Date. During 2010, 2011 and 2012, we accounted for over 90%, 80% and 100% of the total numbers of BMW, Lexus and Rolls-Royce passenger vehicles sold in Henan Province, respectively. We plan to continue to expand our sales network and brand coverage in Henan Province and other major cities in the Central China region. We have built a long-term relationship with local commercial banks and 4S store construction contractors, which facilitates the financing and construction of our newly authorized outlets in Henan Province. We believe we are wellpositioned to maintain our dominant presence in Henan Province in the near future.

Network expansion

Starting from 2010, we have been selectively expanding our sales network outside of Henan Province. According to the ACMR Report, the luxury and ultra-luxury passenger vehicle market in China has been in development for approximately 10 years, and many manufacturers are in the process of completing the deployment of their sales network nationwide. As such, we believe it is essential to our long-term growth to establish our presence in major regional passenger vehicle markets in China in the near future. In July 2011, we started construction of a BMW 4S store in Beijing, which opened for business in November 2011. This was our first 4S store outside of Henan Province. Since then, we have been executing an expansion plan that focuses on tier-one cities with established regional passenger vehicle markets, such as Beijing, Shanghai and Guangzhou, as well as selected provincial capitals and affluent cities, including Wuhan, Shenyang, Xi’an, Xiamen and Yichang.

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We perform feasibility study in respect of each new outlet to ascertain, among other things, the expected amount of capital expenditure for the new outlet, whether there will be sufficient financial and human resources to support the opening of such new outlet and the local market demand and existing dealership outlets for the relevant brand. Such feasibility study is typically submitted to the automobile manufacturer as part of the application for a new outlet. One of the approval criteria of automobile manufacturers when reviewing a new outlet application is to assess, among other things, the financial state, relevant operational experience and the management personnel of the applicant. The fact that we have been continuously successful in obtaining authorizations, preliminary approvals or letters of intent for new outlets from a number of automobile manufacturers shows that the automobile manufacturers are satisfied with our financial resources available to the establishment of new outlets.

We had demonstrated the ability, financial or otherwise, to open and operate new outlets during 2010, 2011 and 2012. Our Directors are confident that our expansion plan for the foreseeable future is both reasonable and achievable, for the following reasons:

Feasibility study: we perform detailed feasibility assessment on each new outlets before we submit the application to an automobile manufacturer. An automobile manufacturer’s approval of the application is also an indication that our planned new outlet is consistent with their strategic expansion in China.

Financial resource: our strategy and ability to lease land at primary locations for our new outlets instead of acquiring land use rights enable us to incur relatively low initial capital expenditure for the opening of new outlets. Historically we use a combination of internal operating cash and bank borrowings to fund the opening of new outlets. For the 20 newly authorized outlets, we have already obtained sufficient capital for their construction and initial operations.

Human resource: for each of the new outlets, we follow a general practice of selecting an outlet manager from our existing management team and hiring operational staff locally. Substantially all of our management at the store manager level and above was appointed through internal promotion as of the Latest Practicable Date. Since the inception of our business in 2005, we have been building a solid and stable team of mid-level management mainly through systemic training and internal promotion. The Directors believe we have enough potential managers to lead new outlets in the foreseeable future.

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Existing outlets

The following table sets forth details of the 25 outlets that we operated as of the Latest Practicable Date:

Practicable Date:
				Dealership
			Date of	Authorization
			commencement of	Agreement
Outlet Name	Type	Location	operation	Expiration Date
BMW
Henan Zhongdebao. . . . . .	4S store	Zhengzhou, Henan	July 15, 2005	December 31, 2013
Xinxiang Xindebao . . . . . .	Service center	Xinxiang, Henan	July 27, 2009	December 31, 2013
Luoyang Yudebao . . . . . . .	4S store	Luoyang, Henan	October 21, 2009	December 31, 2013
Zhengzhou Zhengdebao . . .	4S store	Zhengzhou, Henan	October 29, 2010	December 31, 2013
Nanyang Wandebao . . . . .	4S store	Nanyang, Henan	September 14, 2011	December 31, 2014
Beijing Huadebao . . . . . . .	4S store	Beijing	November 14, 2011	December 31, 2014
Zhengzhou Yuedebao . . . .	Exhibition gallery	Zhengzhou, Henan	December 27, 2011	December 31, 2013
Zhengzhou Chengdebao. . .	Exhibition gallery	Zhengzhou, Henan	February 27, 2012	December 31, 2013
Anyang Andebao . . . . . . .	4S store	Anyang, Henan	June 21, 2012	December 31, 2015
Kaifeng Biandebao . . . . . .	4S store	Kaifeng, Henan	July 25, 2012	December 31, 2015
Luoyang Luodebao . . . . . .	Exhibition gallery	Luoyang, Henan	July 27, 2012	December 31, 2013
Zhengzhou Hengdebao . . .	Exhibition gallery	Zhengzhou, Henan	September 20, 2012	December 31, 2013
Shanghai Shangdebaojun . .	5S store	Shanghai	September 22, 2012	(1)
Guangzhou Guangdebao . .	5S store	Guangzhou,	March 26, 2013	December 31, 2016
		Guangdong
Land Rover & Jaguar
Yichang Lushun . . . . . . . .	4S store	Yichang, Hubei	September 27, 2012	(1)
Lexus
Zhengzhou Yuanda Lexus . .	4S store	Zhengzhou, Henan	January 16, 2007	December 31, 2013
Zhengzhou Yuanda Lexus . .	Exhibition gallery	Zhengzhou, Henan	February 28, 2012	December 31, 2013
Xiamen Yuanda Lexus . . . .	4S store	Xiamen, Fujian	March 28, 2013	(1)
Rolls-Royce
Zhengzhou Huacheng Auto .	Exhibition gallery	Zhengzhou, Henan	February 7, 2012	(1)
Xi’an Huadu . . . . . . . . . .	Exhibition gallery	Xi’an, Shaanxi	May 9, 2012	No expiration date(2)
Aston Martin
Zhengzhou Huading . . . . .	4S store	Zhengzhou, Henan	July 13, 2012	(1)
Wuhan Huazheng. . . . . . .	4S store	Wuhan, Hubei	July 13, 2012	(1)
MINI
Henan Zhongdebao. . . . . .	Exhibition gallery	Zhengzhou, Henan	September 29, 2010	December 31, 2013
Henan Yingzhiyi . . . . . . . .	4S store	Zhengzhou, Henan	April 9, 2013	(1)
Maserati & Ferrari
Suzhou Maserati/Ferrari . . .	4S store	Suzhou, Jiangsu	December 17, 2012	No expiration date(3)

(1) Official commencement of operation authorized by automobile manufacturers. In the process of finalizing dealership authorization agreement.

(2) Effective until terminated for cause by the automobile manufacturer or by 24-month notice by either party.
(3) Effective until breach of certain provisions or by notice no less than 180 days by either party.

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In addition, the following table sets forth details of the two dealership outlets in which we held minority equity interests as of the Latest Practicable Date:

			Ownership	Date of acquisition
Outlet Name	Type	Location	percentage	of equity interests
Audi
Xinxiang Dongxin . . . . . .	4S store	Xinxiang,	40%	September 29, 2012
		Henan
Land Rover & Jaguar
Zhengzhou Yongda Hexie . .
	4S store	Zhengzhou, Henan	30%	December 26, 2011

In choosing the cities we expand into, factors we consider include:

regional passenger vehicle market condition;
expansion plan of the authorizing manufacturer;
logistics and transportation of the city;
purchase habits of the residents;
existing 4S store dealerships and their operational scales and competitiveness; and
economic scale, planning and growth potential of the city or region.

In addition, an important aspect of our network expansion strategy is to achieve sales efficiency, by opening outlets within geographical proximity, as operating a cluster of stores can achieve efficiencies through targeted local marketing and better coordination of inventory management among stores.

New outlets establishment

Typical steps of new outlet establishment

For each new store we plan to open, we first submit to the automobile manufacturer an application which include, among other things, a feasibility study and the planned location. The automobile manufacturer will review the application and send us an approval of the new outlet construction in a form of authorization, preliminary approval or letter of intent depending on the particular automobile manufacturer’s practice. An authorization, preliminary approval or letter of intent usually sets out minimal share capital amounts of a new outlet and certain milestone dates for the construction, such as date to commence or complete construction, date to set up legal entity or date to acquire land use right or enter into lease agreement. We are advised by our PRC legal adviser that such authorizations, preliminary approvals and letters of intent to construction are not legally binding on either party. Nevertheless, during 2010, 2011 and 2012 and up to the Latest Practicable Date, we had not experienced any difficulty in entering into a definitive dealership authorization agreement with the relevant automobile manufacturer for each authorization, preliminary approval or letter of intent we received after the respective outlet was constructed. The automobile manufacturer makes decisions on the fundamental aspects of a new outlet, such as total area and number of mechanical stations, and will typically provide us with a preliminary blueprint of the new outlet a few months after it sent us the authorization, preliminary approval or letter of intent. We can suggest revisions of the preliminary blueprint or request a total redesign of such blueprints. Once we reach an agreement on the preliminary blueprint with the automobile manufacturer, we will then use

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the preliminary blueprint to design a detailed blueprint, which will, among other things, set out the floor layout and decoration of the new outlet. We will send the detailed blueprint to the automobile manufacturer for approval, and once such approval is obtained, we can commence construction. During the construction, we provide regular status updates to the automobile manufacturer. Upon completion of the construction of the new outlet, the automobile manufacturer will inspect the outlet and enter into a definite dealership authorization agreement with us if the result of the inspection is satisfactory. There is no bidding process involved in such applications and approvals and we do not need to pay any fee to automobile manufacturers in connection with the applications.

The following chart illustrates the typical establishment process of a new outlet:

==> picture [286 x 248] intentionally omitted <==

----- Start of picture text -----

preparation and submission of
the application for a new outlet
Upon approval of application for the new outlet in the form of
authorization, preliminary approval or letter of intent and receipt
of the preliminary blueprint from the automobile manufacturer
review and negotiation of
the preliminary blueprint
design and submission of
the detailed blueprint
Upon approval of the detailed blueprint
by the automobile manufacturer
outlet construction and setup of
operating legal entity
Upon approval to commence operation after inspection
of the new outlet by the automobile manufacturer
commencement of operation
----- End of picture text -----

Status of our authorized new outlets

The requirements for establishing new outlets vary depending on the automobile manufacturers. As of the Latest Practicable Date, we had satisfied all relevant requirements except for the requirements to set up the legal operating entities for Zhengzhou Huadebao as it is still under construction. We notified BMW China on the status of Zhengzhou Huadebao and were notified by BMW China regarding the extension to set up the operating entity. In addition, we were still awaiting approvals by BMW China on the new proposed sites for the Beijing and Shanghai exhibition galleries. We provide regular updates on the preparation or construction of the 20 new outlets to the relevant automobile manufacturers, and do not expect any significant impediments or additional requirements from the automobile manufacturers in connection with the establishment of such outlets.

All the capital expenditure required for the 20 new outlets will be financed through a combination of internal operating cash and bank borrowings. Typically, capital expenditure for 4S stores are much higher than that of the exhibition galleries due to the requirements to construct mechanical stations within 4S stores, which are facilities for after sales services. The capital expenditure of a particular 4S store also depends on the number of mechanical stations of such store, which is usually determined by the relevant automobile manufacturer. For example, each of Guangzhou Guangdebao and Wuhan Handebao will have 14,119 square meters total construction areas with 50 mechanical stations, the most among all BMW 4S stores in China. As a result, the

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estimated capital expenditure for both stores are over RMB120 million. In comparison, Zhengzhou Hengdebao and Zhengzhou Yuedebao, our largest and second largest exhibition galleries current in operation, has approximately 1,200 and 650 square meters total construction area and capital expenditure of RMB3.1 million and 1.3 million, respectively. We estimate that the total expected capital expenditure for the 20 new outlets to be approximately RMB609 million, of which we had incurred approximately RMB118 million as of the Latest Practicable Date, primarily on 14 outlets whose construction had commenced. We expect to commence construction for the other six outlets, in the second or third quarter of 2013. As of April 30, 2013, we had undrawn credit lines of approximately RMB3.5 billion and over RMB1.3 billion can be drawn on demand to finance the opening of new outlets. In addition, we had a total cash balance of approximately RMB342.7 million as of December 31, 2012. Our Directors believe that our available resources would be sufficient to fund the total capital expenditure required to open the 20 new outlets without materially affecting our liquidity position.

The following table sets forth details of the 20 authorized new outlets as of the Latest Practicable Date:

Practicable Date:
				Capital
				expenditure
				incurred as
				of the	Estimated
			Expected time	Latest	total
			of completion	Practicable	capital
Outlet Name	Type	Location	of construction	*Date ()**	expenditure
				(RMB’000)	(RMB’000)

BMW
Shenyang
Shendebao(1)(3) . . . .	4S store	Shenyang, Liaoning	October, 2013	5,000	45,500
Wuhan Handebao(1)(5) .	4S store	Wuhan, Hubei	August, 2013	49,430	122,900
Zhengzhou
Huadebao(1)(4)(5). . . .	4S store	Zhengzhou, Henan	August, 2013	nil	40,000
Henan Hedebao(1)(5). . .	Service center	Zhengzhou, Henan	July, 2013	1,520	40,000
Zhengzhou
Zhengdebao(1)(5) . . .	Service center	Zhengzhou, Henan	July, 2013	2,000	5,000
Beijing Exhibition	Exhibition
Gallery(1)(4)(5). . . . . .	gallery	Beijing	September, 2013	nil	10,000
Beijing BMW Brand
Store(1)(4)(5). . . . . . .	Brand store	Beijing	October, 2013	nil	60,000
Shanghai Exhibition	Exhibition
Gallery(1)(4)(5). . . . . .	gallery	Shanghai	September, 2013	nil	10,000
Luohe Luodebao(1)(4)(5) .	4S store	Luohe, Henan	August, 2013	2,470	24,000
Xinxiang Hedebao(1)(5) .	4S store	Xinxiang, Henan	August, 2013	2,900	24,000

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				Capital
				expenditure
				incurred as
				of the	Estimated
			Expected time	Latest	total
			of completion	Practicable	capital
Outlet Name	Type	Location	of construction	*Date ()**	expenditure
				(RMB’000)	(RMB’000)

MINI
Shenyang
Shenzhiyi(1)(3) . . . . .	4S store	Shenyang, Liaoning	October, 2013	5,000	22,400
	Exhibition
Luoyang Yudebao(1)(5) .	gallery	Luoyang, Henan	August, 2013	1,300	3,100
Lexus
Jiaozuo Yuanda
Lexus(2)(5). . . . . . . .	4S store	Jiaozuo, Henan	May, 2013	1,700	5,000
Luoyang Yuanda
Lexus(2)(5). . . . . . . .	4S store	Luoyang, Henan	October, 2013	1,000	40,000
Handan Yuanda
Lexus(2)(5). . . . . . . .	4S store	Handan, Hebei	October, 2013	1,000	40,000
Land Rover & Jaguar
Luoyang Luhe(2)(5) . . . .	4S store	Luoyang, Henan	October, 2013	30,800	55,640(6)
Maserati & Ferrari
Wuxi
Maserati/Ferrari(1)(4)(5).	4S store	Wuxi, Jiangsu	August, 2013	5,000	15,400
Beijing Maserati(2)(5). . .	4S store	Beijing	August, 2013	6,500	15,400
Beijing Ferrari(1)(5) . . . .	4S store	Beijing	August, 2013	2,500	15,400
Rolls-Royce
Shanghai(1)(4)(5). . . . . .	4S store	Shanghai	August, 2013	nil	15,000
Total. . . . . . . . . . . . .				118,120	608,740

Notes:

(*) Capital expenditure of nil incurred as of the Latest Practicable Date reflects the fact that the outlet was still in design phase and construction had not started.
(1) We had received the written preliminary approval for this outlet.
(2) We had entered into a formal letter of intent with automobile manufacturer for this outlet.
(3) We have executed a framework agreement with the competent governmental authority, and is in the process of obtaining the land use right certificate.
(4) We have not commenced construction for this outlet.
(5) We had entered into a lease agreement and made prepayment of the rent for the premises of this outlet.
(6) Our working capital should not be less than RMB90,000,000.

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The successful experiences we have accumulated in 4S and 5S stores construction and operations are crucial to our expansion plans, which we apply to every aspect of the establishment of new stores, including site selection, financing and construction.

Site selection

We believe location is crucial to an outlet’s success. In choosing the site of a store, the factors we consider include:

local government’s zoning and urban planning of the neighborhood;
ease of access and proximity to main arteries;
distribution of existing outlets in the area;
income level and purchase habit of nearby residents; and
leasing price for business properties of the location.

Our BMW 4S and 5S stores in Beijing, Shanghai and Guangzhou are all situated at primary central business districts with easy access to main arteries.

Financing for outlets constructions

Capital expenditure associated with establishment of a new outlet is primarily related to acquiring or leasing land use right, construction costs and purchase of equipment. We finance the establishment of our 4S stores primarily through bank loans and our operating cash flow. We have built relationship with a number of nation-wide commercial banks, including China CITIC Bank, China Minsheng Bank, and Bank of East Asia, and we typically apply for financing for construction of a store from a local branch of such banks. For more details, see “Financial Information – capital expenditure.”

Store Construction

We are generally required to complete construction of a new outlet within an agreed-upon period of time after receiving the automobile manufacturer’s acceptance of new outlet proposal. For new outlet construction, we adopted a standard which we call “Harmony Experience, Harmony Speed.” “Harmony Experience” refers to the fact that we have standardized and streamlined our new store construction process, which enables us to shorten the time span between the authorization and the commencement of operation of a store. We require our new 4S stores construction to finish within five months, which we call “Harmony Speed” and is typically shorter than the timeline prescribed by the authorization, preliminary approval or letters of intent of the new 4S stores. As a result, we consistently complete construction of our outlets earlier than the dates prescribed by the authorizing automobile manufacturers. Our standardized construction process also helps us ensure consistent quality of the construction work.

We have a team of 27 employees at the headquarters that is dedicated to new store constructions, and each employee is responsible for a specific aspect during the construction process. Also, it is our policy that a store manager needs to be appointed during the construction phase of the store and participate in the construction process. We set deadlines for different phases of the construction to monitor the construction progress.

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Our Services

Sales of new passenger vehicles

During 2010, 2011 and 2012, we derived the substantial majority of our revenues from sales of new passenger vehicles. For the years ended December 31, 2010, 2011 and 2012, revenues generated from sales of new passenger vehicles were RMB1.62 billion, RMB2.75 billion and RMB5.24 billion, respectively, representing 89.7%, 90.8% and 92.7% of the total revenues of the same years.

The following table sets forth a breakdown of our sales of new passenger vehicles and total revenue contribution by brand for the years indicated:

				Year ended December	Year ended December	31,

		2010			2011			2012

	Sales	Revenue		Sales	Revenue		Sales	Revenue
	volume	(RMB’000)	%	volume	(RMB’000)	%	volume	(RMB’000)	%

BMW. . . . . . . . . . .	2,199	1,183,857	65.7	3,985	2,180,202	71.9	9,340	4,343,837	76.7
Lexus. . . . . . . . . . .	768	418,622	23.2	873	506,484	16.7	1,120	547,297	9.7
MINI . . . . . . . . . . .	59	14,202	0.8	228	66,086	2.2	338	90,694	1.6
Rolls-Royce . . . . . . .	–	–	–	–	–	–	32	190,490	3.4
Aston Martin . . . . . .	–	–	–	–	–	–	10*	40,315	0.7
Land Rover & Jaguar .	–	–	–	–	–	–	28	20,459	0.4
Ferrari . . . . . . . . . .	–	–	–	–	–	–	2	5,367	0.1
Maserati . . . . . . . .	–	–	–	–	–	–	3	5,990	0.1

Total. . . . . . . . . . .	3,026	1,616,681	89.7	5,086	2,752,772	90.8	10,873	5,244,449	92.7

==> picture [459 x 32] intentionally omitted <==

The automobile manufacturer for such ultra-Luxury passenger vehicles sold certain numbers of passenger vehicles to us after we obtained authorization for a 4S store but before such store officially commenced operation. We sold certain of such passenger vehicles at motor shows and other promotional events as well as through direct contacts with potential customers.

Our sales of new passenger vehicles are affected by a number of factors, including factors with regard to our business such as our sales network and pricing, as well as factors beyond our control, such as market demand, regulatory change and macro-economic conditions. For more details, see “Financial Information – Factor Affecting Our Results of Operations.” Our Directors expect our sales volume and revenue of sales of new passenger vehicles to continue to grow in the foreseeable future as we expand our business. In particular, our Directors do not expect the implementation of anti-traffic congestion measures in certain tier-one cities to have significant adverse impact on our sales of new passenger vehicles. In the first year of its operation in Beijing, Huadebao has fulfilled or exceeded all sales quota for sales of new BMW passenger vehicles as set by BMW China, partially due to its scale and primary location. The Directors expect our 5S stores in Shanghai and Guangzhou to possess similar competitiveness. In addition, in 4S/5S stores in tier-one cities, we will emphasize after-sales services to improve overall profitability. In the event of a potential slowdown in the Chinese passenger vehicle market in the foreseeable future, Our Directors plan to maintain our growth by (i) leveraging our dominant market position in Henan Province, where our Directors expect the economic growth to benefit from the Twelfth Five-Year Plan and (ii) emphasizing our expansion plan, both in terms of number of outlets and brand coverage, in the ultra-luxury passenger vehicle market which our Directors expect to be less saturated as compared to luxury brands. Moreover, the Directors do not expect the recent Diaoyu Island dispute between Japan and China or the deterioration of passenger vehicle market in Europe and the channeling of unsold passenger vehicles to China to have a significant adverse impact on our sales of new passenger vehicles. For more details, see “Industry Overview – Luxury and Ultra-Luxury Passenger Vehicle Market in China – Rapid growth of the luxury and ultra-luxury passenger vehicle market in China.”

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Prior to 2012, all our revenues from sales of new passenger vehicles were generated from three luxury brands, namely, BMW, Lexus and MINI, and we had no track record of selling ultra-luxury brands until 2012. Revenues generated from the six new brands in 2012, the majority of which are ultra-luxury brands, accounted for 5.0% of the total revenues generated from sales of new passenger vehicles. It was recently reported by certain media sources that a 20% luxury tax might be levied by the relevant government authorities on the purchase of a passenger vehicle with a retail price over RMB1.7 million. The levy of such purchase tax might adversely affect our expansion plans in the ultra-luxury passenger vehicle market and sales of new ultra-luxury passenger vehicles. However, our Directors do not expect such purchase tax to have material adverse impact on our overall results of operations in the near future.

We sell both imported and domestically manufactured passenger vehicles at our outlets. The place of manufacture of a passenger vehicle sold by us depends on the specific vehicle model. Each of the manufacturers we deal with has its own policies of whether locally manufactured or imported products should be supplied for a specific model in China. For example, some manufacturers, such as BMW, sell imported products for certain of their models and domestically manufactured ones for the others. Other manufacturers like Lexus, Rolls-Royce, Land Rover, Jaguar, Aston Martin, Ferrari and Maserati sell 100% imported products in China as of the Latest Practicable Date. For all the passenger vehicle brands that we have been authorized to distribute, there is generally no overlapping between locally manufactured and imported products for the same model, as a result we typically procure a variety of models for such brands to satisfy different customer needs. The price of locally manufactured passenger vehicles is usually lower than those imported, and the automobile manufacturers typically do not differentiate between imported and domestically manufactured passenger vehicles in terms of warranty. All of the passenger vehicles that we sell are purchased in the PRC, regardless of whether they are imported or manufactured locally, therefore the procurement process of imported and domestically manufactured passenger vehicles are essentially the same. See “– Suppliers and Procurement.”

Sales transaction

We enter into a sales contract with the customer for each passenger vehicle we sold. The sales contract specifies, among other things, sales price and delivery date. We typically require the purchaser to make a deposit of 10% of the full sales price upon the signing of the sales contract, and we deliver the passenger vehicle to the purchaser upon full cash payment of the sales price on the delivery date. If the purchaser fails to make the full payment on the delivery date, we are entitled to a penalty fee of 0.05% of the sales price per day for the maximum amount that equals to the deposit. Conversely, if we are not able to deliver the passenger vehicle on the delivery date pursuant to the sales contract, we will pay the purchaser a penalty fee of 0.05% of the sales price per day for the maximum of 90 days from the delivery date.

We also provide financing and insurance services in connection with the sales of new passenger vehicles. We arrange car purchase loans for the purchasers with the financing arms of manufacturers or third-party commercial banks and charge the purchasers service fees. Similarly, we charge a purchaser a service fee for arranging car insurance on the new passenger vehicle if requested by the purchaser.

Manufacturer rebate

As a common market practice, manufacturers often provide us incentive rebates if our annual performance satisfies certain criteria, such as sales volume, customer satisfaction and service quality standard. Such criteria are set by manufacturers based on their internal policies or sales strategies over which we do not have control. In addition, manufacturers sometimes provide special incentive rebate to us in connection with their promotional events or quarterly sales quota. In the years ended

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December 31, 2010, 2011 and 2012, we deducted cost of goods sold of RMB92.2 million, RMB124.6 million and RMB317.7 million, respectively. Incentive rebates were usually paid to us in the form of cash payments or deduction of purchase price payable by us to the manufacturers.

Sales personnel

Each of our 4S stores for luxury brands is typically staffed with 15 to 20 employees in the sales department, including

a sales manager, who oversees sales transaction and performance;
sales agents, who conduct sales;
an inventory manager, who manages inventory and oversees delivery of new passenger vehicles;
an internal trainer, who conducts regular internal trainings and liaison with manufacturers to coordinate their trainings and qualification of our sales staff; and
an administrative clerk.

In comparison, our outlets for ultra-luxury brands is typically staffed with three to five specialized sales representatives who each maintains personal contact with his or her existing or potential customers.

Engagement of distributors

Historically, from time to time, we engaged certain distributors in Henan Province to source customers for BMW passenger vehicles in areas where there is no existing BMW dealership outlet. The distributors would source customers for us in such areas to serve local demand, and we would pay the distributors certain referral fees. According to the ACMR Report, such engagement of distributors is common market practice among automobile dealerships in China. We sold BMW passenger vehicles directly to such customers identified by such distributors, issued the invoices for the sales transactions directly to such customers and were responsible for any in-warranty maintenance or repair for such passenger vehicles. The fees for such in-warranty repairs were paid to us by BMW China, same as other BMW passenger vehicles we sold to customers. The distributors are required to pay a performance deposit at the beginning of their cooperation with us. Consistent with the restrictions under the dealership authorization agreement between BMW China and us, we require the distributors to comply with certain restrictions in their practices. For example, the distributors are required to limit their customer referral within the geographic area that is prescribed by BMW China to be covered by our sales network. If the distributor fails to comply with these restrictions, we can discontinue the cooperation without refunding the performance deposit. Historically, we had not discovered any instance of violation by distributors we engaged of the geographic area restriction we prescribed.

Based on unaudited financial information, revenues generated from such practices accounted for approximately 2.0%, 2.2% and 2.1% of our revenues for the years 2010, 2011 and 2012, respectively, and the gross profit generated from such practices accounted for approximately 0.2%, 1.2% and 1.2% of the total gross profit for the same years, respectively.

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During 2010, 2011 and 2012, BMW China is aware of our practice of engaging distributors to source customers as we regularly reported our business operations verbally to the relevant BMW regional managers usually during their routine visits to our outlets. In March 2013, we reported to BMW China again formally in writing on such historical practice. In response, BMW China issued a letter to us which contained a warning with regard to such practice during 2010, 2011 and 2012 and as of March 26, 2013. BMW China further indicated in the letter that notwithstanding such warning, BMW China does not deem such historical practice (i) as a ground for cancelation, annulation or termination of our existing dealership authorization agreements; (ii) as grounds for any claim for damage or penalty against us; and (iii) to have negative impact on any future grant of dealership authorizations by BMW China to us.

As stipulated in our internal written policy, our Directors shall not engage in any similar practices of engaging distributors to source customers without the respective automobile manufactures’ prior consent in the future. We have also implemented internal control procedures as of March 1, 2013 with regard to the engagement of distributors, which include:

requiring each outlet manager to report in writing and obtain a written approval by the Chief Operating Officer of its plan to engage distributors;
requiring the Chief Operating Officer to obtain pre-approvals in writing by the relevant automobile manufacturers its plan to engage distributors before the Chief Operating Officer can approve the outlet managers in writing to initiate such engagement;
Stipulating in our contract with each distributor that the effectiveness of such contract is conditioned upon our receipt of the approval of the engagement by the relevant automobile manufacturer and no customer referral would be accepted by us prior to the receipt of such approval;
requiring each outlet to report sales volume generated from such practice on a quarterly basis to the Chief Operating Officer, who will in turn aggregate and report to the relevant automobile manufacturers in writing;
requiring the internal operational auditing personnel to conduct quarterly inspection on the compliance with the relevant requirements in connection with such practices and report its findings to the Audit Committee and Board of Directors;
assigning a senior finance manager to monitor through the ERP system all sales activities and report to the Chief Financial Officer any sales to non-individuals;
requiring the finance department to pay close attention to inventory outflows and conduct physical inventory counts from time to time; and
requiring the Audit Committee and Board of Directors to conduct on a semi-annual basis evaluation of the practice of engaging distributors and the effectiveness of the relevant internal policies including the reporting and internal approval mechanism, and to get regular updates on the market trends of such practices, as well as the relevant automobile manufacturers’ regional expansion and distribution plans.

Through such internal control measures, we will maintain enhanced oversight on such practices to ensure that such practices are pre-approved by the relevant automobile manufacturers and will be effectively and immediately terminated if requested by the automobile manufacturers. As of the Latest Practicable Date, we have obtained prior consents from relevant automobile manufacturers for all of our existing engagement of distributors. The Joint Sponsors are of the view that adhering to the

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above internal control measures would be effective in ensuring that the Company receives the necessary pre-approvals by the relevant automobile manufacturers for engaging distributors to source customers. For more details, see “Risk Factors – Risk Relating to Our Business – If we engage distributors to source customers for a brand in areas where there is no existing dealership outlet, it might be deemed not to be in compliance with the relevant requirement under the relevant dealership authorization agreement.”

After-sales services

After-sales services are important sources of our revenues. The after-sales services we provide include repair and maintenance, sales of spare parts and accessories, detailing services and other related services. Revenues generated from after-sales services include labor cost charged by hours and sales of spare parts and accessories. For the years ended December 31, 2010, 2011 and 2012, revenues generated from after-sales services were RMB184.7 million, RMB279.1 million and RMB412.3 million, respectively, representing 10.3%, 9.2% and 7.3% of our total revenue of the same periods. Customers to our after-sales services include customers who previously purchased their passenger vehicles at our 4S stores, as well as owners who did not purchase their branded passenger vehicles from us. As after-sales services generate recurring and steady revenues from returning customers, we are dedicated to providing high-quality and speedy after-sales services to attract new customers and increase customer loyalty. In addition, we believe the ease of access of most of our 4S stores in major cities will help bring us new customers for after-sales services.

Repair and maintenance services

Our 4S stores provide a full range of repair and maintenance services. Our maintenance services include primarily oil change, replacement of spark plugs, air filters or brake pads, tire rotation and other routine inspections. We provide regularly scheduled maintenance services for passenger vehicles. Most manufacturers recommend owners of their passenger vehicles to schedule a maintenance check for every 5,000 to 10,000 kilometers or three to six months. We keep a database of our maintenance service customers, and send them reminders when it is time for their scheduled maintenance checkups.

The repair services we provide include repair of parts, drive-train mechanism and post-collision body restoration. Our maintenance and repair services are generally charged based on the prices of the spare parts and accessories used, if any, and the hourly rates of our technicians. We provide in-warranty repair as well as repair for drive-in passenger vehicles. The product warranties for new passenger vehicles typically have terms of two years and are generally limited to product defects. We are paid by automobile manufacturers for parts and labor for in-warranty repair services we provide to customers. Such fees are usually higher than the cost we incurred, as a result, we generate gross profit from the differences. As the cost associated with in-warranty repair is generally stable, the gross profit margin largely depends on the fees the automobile manufacturers decide to pay us. For out-of-warranty repair we generate gross profit from the differences between the fee we charge to customers and the cost incurred.

Under applicable PRC laws and regulations, we are required to provide a service warranty for the repair service we provide. During 2010, 2011 and 2012, warranty claims in connection with our after-sales services were of immaterial amount and accordingly, no provision has been made with respect to such warranty claims.

Sales of spare parts and accessories

Our 4S stores sell spare parts and passenger vehicle accessories, such as motor lubricants and oil additives, in connection with the maintenance and repair services. In addition, we also sell certain related brand merchandises, such as bicycles, clothing and accessories, for manufacturers in the 4S stores.

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After-sales services personnel

Our 4S stores are typically staffed with the following front-line after-sales personnel:

an after-sales service manager, who oversees after-sales services and performance;
after-sales consultants, who are direct contacts with customers for after-sales services;
inventory manager who manages inventory of spare parts and accessories; and
courtesy maintenance staff, who handle customer claims.

Each of our 4S stores is staffed with two types of engineer teams which are specialized in mechanical repair and paint spread, respectively. The mechanical repair team typically consists of a team leader, a chief engineer, an assistant engineer and two interns. The paint spread team typically consists of four engineers. The number of such teams in a 4S store depends on the number of mechanical stations of the 4S store.

Sales of pre-owned passenger vehicles

Our sales of pre-owned passenger vehicles are complementary to our sales of new passenger vehicle business, as we take pre-owned passenger vehicles that customers trade in to purchase new passenger vehicles. Sales of pre-owned passenger vehicles are conducted in the similar manner as sales of new passenger vehicles, as we enter into written contracts for our sales of pre-owned passenger vehicles upon which our customers are typically required to pay a deposit or an advance.

Passenger vehicle recalls

Our 4S stores may be required to assist manufacturers to coordinate recalls of their passenger vehicles. We are not liable under PRC laws and regulations for any cost associated with vehicle recalls and are compensated by the manufacturers for providing assistance during the process, usually within two or three months. Each manufacturer has its own recall procedure, and will typically notify us with detailed procedural instructions prior to the public announcement of a recall. We will contact affected passenger vehicle owners and arrange for their vehicles to be inspected and repaired in our 4S stores according to the manufacturer’s instruction. During 2010, 2011 and 2012, we have not received any customer complaints in connection with vehicle recalls that would have a material adverse effect on our business and operation, and we were not subject to any legal, regulatory or administrative proceedings as a result of any vehicle recalls.

The following table sets forth the major recalls of passenger vehicles we sold during 2010, 2011 and 2012:

Brand								Model	Recall Date	Affected Component
BMW.	.	.	.	.	.	.	.	F20 F30 F35	December 2012	Reconstructing of the front
										seat
BMW.	.	.	.	.	.	.	.	F02 N54 E84 F20 F30 F35	November 2012	DME (cold boost), LEW,
										FEM, NBT/HU-NBT-HU
										variant CIC software
BMW.	.	.	.	.	.	.	.	F35	October 2012	Changing PSC Module
BMW	.	.	.	.	.	.	.	E70 E71	September 2012	Steering box, widen the seat
										in the 3rd row

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Brand								Model	Recall Date	Affected Component
BMW	.	.	.	.	.	.	.	E70 E71 E9x F07 F10 F18	August 2012	Screw nuts on VANOS unit,
								N55 E84 F18 E84 (China)		Rear window, change of the
										tag of the engine number,
										adding vehicle orders
BMW	.	.	.	.	.	.	.	E8x E9x	July 2012	EPS Steering box
BMW.	.	.	.	.	.	.	.	E88	April 2012	Adding “EMOA”
BMW	.	.	.	.	.	.	.	E60 E61 E63 E64 F20 E84	March 2012	Plastic protective cover of
								F18		the battery wires, right front
										window glass elevator, IHKA
										programming, changing
										engine tags
BMW	.	.	.	.	.	.	.	E84 E89 F10 F11 F25 F30	February 2012	Seal ring of the chain
								N20		tensioning
BMW	.	.	.	.	.	.	.	F12 F13 F02 F07 F10 F11	December 2011	Screw nut, DVD player
BMW	.	.	.	.	.	.	.	E7x F0x F1x E70 E71 N55	November 2011	Exhaust driven supercharger,
								F02 F04		Clapboard of the engine
										compartment, change of the
										tag of the engine number,
										adding vehicle orders, rear
										window, point of contact at
										the back panel
BMW	.	.	.	.	.	.	.	E84	October 2011	Seat fabric
BMW	.	.	.	.	.	.	.	E83 N52K 2.5L (China)	September 2011	DME programming
BMW	.	.	.	.	.	.	.	F04	August 2011	DME programming, service
										function
BMW	.	.	.	.	.	.	.	F10 (China)	July 2011	Changing vehicle orders,
										exhaust gas catalytic
										converter
BMW	.	.	.	.	.	.	.	E60 E71 E82 E88 E9x F0x	May 2011	Fuel spray nozzle, EME
								N54 F04		programming
BMW	.	.	.	.	.	.	.	E60 E71 E82 E88 E89 E9x	March 2011	Oil high pressure pump
								F0x N54
BMW.	.	.	.	.	.	.	.	E70 E71 F2x	February 2011	Changing two horns
BMW	.	.	.	.	.	.	.	E71 E8x E9x F0x N54	January 2011	DME programming
BMW	.	.	.	.	.	.	.	E72 F04 E70 N52K (China)	November 2010	High voltage battery, fuel
										pump in the fuel tank
BMW	.	.	.	.	.	.	.	E6x E65 E66 E67 N62 N62T	October 2010	Vacuum pump, two signal
								N73 (China) F01 F02 F03		lamps
								F04
BMW.	.	.	.	.	.	.	.	F07 E71 E89 E90 F02 N54	July 2010	Fuel tank sensor, program
								E8x E9x E6x		control units, DME
										programming, oil high
										pressure pump
BMW.	.	.	.	.	.	.	.	F07 N55 E6x E7x E8x E9x	June 2010	DME programming, PDM
								Fxx N53 N54
BMW	.	.	.	.	.	.	.	F02 F07	February 2010	DME programming
BMW	.	.	.	.	.	.	.	F02	July 2009	Oil tank
BMW	.	.	.	.	.	.	.	E70 N52K	June 2009	Cooling fluid tube sealing
										plug

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Brand	Model	Recall Date	Affected Component
BMW. . . . . . . .	E70 N62T	March 2013	Vacuum tube
MINI . . . . . . . .	R5x R60	March 2012	Radio player
MINI . . . . . . . .	R55 R56 R57 R60 N14 N18	January 2012	Electronic pump
MINI . . . . . . . .	R5x R60	July 2011	Changing vehicle tasks
Lexus . . . . . . .	RX300	December 2011	Crankshaft pulley
Lexus . . . . . . .	GS300/RX300	November 2010	Brake pump seal
Lexus . . . . . . .	LX470	August 2010	Inter shaft assy
Lexus . . . . . . .	LS460/460L/600HL	July 2010	Valve spring
Lexus . . . . . . .	LS460/600HL	June 2010	Timing Intake (VVT-i) System
			VGRS ECU
Lexus . . . . . . .	ES350/RX350	April 2010	Engine oil tube of Variable
			Valve
Lexus . . . . . . .	RX300/350	March 2011	Carpet of the driver’s side

Surveys

Customer survey provides valuable information and guidance to both manufacturers and us. We conduct customer survey to collect feedback on our customer service and market information. Manufacturers also provide us questionnaires form for customers to fill out from time to time. Customer feedback on our services helps us improve our service quality, and customer feedback on certain models or makes of passenger vehicles helps the manufacturers gauge market sentiment towards their brand and products. Survey results are reviewed by store management and when appropriate, forwarded to other departments for further handling. Results of surveys prescribed by manufacturers are stored in databases to which the manufacturers have access.

KEY TERMS OF DEALERSHIP AUTHORIZATION AGREEMENTS

The operations of our outlets are primarily governed by the dealership authorization agreements we entered into with automobile manufacturers. The dealership authorization agreements are non-exclusive and typically for the term of one to three year, subject to renewal by the automobile manufacturer. Pursuant to such agreements, we are obligated to, among other things:

follow the design and operational standard of a 4S store as set out by the manufacturer;
only keep the inventory of and sell passenger vehicles of the authorized brand and within the prescribed geographic area at a particular 4S store;
provide a list of other required services to customers, including after-sales services and sales of spare parts if applicable;
follow price guidelines for sales of new passenger vehicles and after-sales services as set out by the manufacturer;
refrain from selling passenger vehicles to customers who we know or should have known to have intention to resell or export the passenger vehicles outside China;
procure our employees to participate relevant trainings and qualifications held by manufacturers;
make a 4S store available for site visit and annual retail standard inspection by the manufacturer, the failure of which will result in the reduction of incentive rebate granted to the particular outlet; and

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provide period reports to manufacturers, including financial, sales, market research and customer data.

The dealership authorization agreements do not contain a price range for a model or any minimum purchases or sales requirement for an outlet. However, each year automobile manufacturers typically set minimal inventory and sales volume target for each outlet, the failure of which will result in reduction of incentive rebate. For more details on our pricing policy, see “Financial Information – Factor Affecting Our Results of Operations – Pricing.” For each new outlet, automobile manufacturers typically enter into definitive authorization dealership agreement after they inspected and approved the new respective outlets. For more details on new outlet application and approval process, see “– Sales network – Network expansion.”

Automobile manufacturers have the right to terminate a dealership authorization agreement by written notice for a number of reasons, including, among other things, breach of contract, unapproved business relationship with other manufacturers, and failure to meet operational standard at the 4S store. We did not experience any termination of any of our 4S stores, or any difficulties in renewing our dealership authorization agreements upon expiration since the inception of our business and there had not been any change to the salient terms of the renewed dealership authorization agreements. In addition, since the inception of our business and as of the Latest Practicable Date, we had not received any claim of breach of dealership authorization agreements from any automobile manufacturers. As a result, we expect to continue to secure renewals of dealership authorization agreements of our outlets.

SUPPLIERS AND PROCUREMENT

We procure spare parts, automobile accessories and other automobile-related products from automobile manufacturers and other independent suppliers. Our main suppliers are automobile manufacturers, who provide us new passenger vehicles, spare parts, accessories, and other merchandises of their brands. For the years ended December 31, 2010, 2011 and 2012, purchases from our top five suppliers accounted for approximately 99.7%, 99.8% and 97.9% of our total purchases, respectively. As of the Latest Practicable Date, none of our Directors, or their respective associates, or any shareholders of our Company who, to the best of the knowledge of our Directors, owned 5% or more of our issued Shares had any interest in any of our five largest suppliers. Purchases amount from our largest supplier accounted for 72.7%, 80.9% and 87.0% of our total purchases for the years ended December 31, 2010, 2011 and 2012, respectively.

We typically pay our automobile manufacturers full purchase prices before delivery. Pursuant to our dealership authorization agreements, automobile manufacturers bear the cost of transportation of new passenger vehicles, whether imported or manufactured domestically, until such passenger vehicles are delivered to us. The automobile manufacturers also bear the risks of damages and losses during the transportation to the logistic companies, but such risks are transferred to us upon delivery to such logistic companies. Automobile manufacturers typically purchase insurance for transportation and bear the cost of such insurance. We are entitled to return passenger vehicles and spare parts with manufacturing defects to the suppliers. All of our passenger vehicles and spare parts are purchased in China, whether they are manufactured domestically or abroad. As a result, we do not need to pay any import or custom duties or tariffs for such purchases.

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As we rely heavily on automobile manufacturers as our major suppliers, factors that adversely affect automobile manufacturers typically have adverse effect on our business and financial condition as well. Such factors include weak economic growth, decrease in individual disposal income, intense competition, or governmental rules or regulations that curtail purchases of new passenger vehicles. In particular, as sales of BMW and Lexus passenger vehicles accounted for the substantial majority of our sales of new passenger vehicles during 2010, 2011 and 2012, the following events that affect BMW or Lexus could have material impact on us as well:

BMW: unexpected events such as strikes, fires and other accidents will force BMW to stop production and result in decreases in passenger vehicle output, which in turn will reduce the supply of BMW vehicles. In addition, BMW factories in China still need to import key parts and accessories, due to the relatively low homebred change rate of domestically manufactured BMW vehicles, which is about 60% in September 2012. As a result, unexpected events in factories abroad that manufacture such key parts and accessories will affect the supply of the BMW passenger vehicles as well. Inadequate production capacity of BMW in China would be expected to reduce its market share. Although BMW has completed the scale expansion with the opening of the second factory in China in May 2012, BMW still face inadequate production capacity in China in the short-term, compared with its major competitor, Audi. This may result in decrease in its market share in the rapidly increasing luxury market in China.

Lexus: one of the most important factors affecting Lexus is the China-Japan relationship. For instance, due to the Diaoyu Islands dispute in or around September 2012, consumers started boycotts of Japanese passenger vehicles, including Lexus. Sales of Lexus experienced temporary decreases in the following months. Our sales volume of Lexus passenger vehicles was 67, 58, 75 and 79 for September, October, November and December 2012, respectively, and the average sales volume in the three months ended March 31, 2013 was 63 per month, as compared with 78 and 92 in July and August 2012 and the average of 111 per month in the six months ended June 30, 2012. Unexpected events will also have an adverse impact on Lexus. The earthquake in the Great East Japan region in March 2011 had resulted in output declines of Lexus passenger vehicles, which in turn reduced supply to China market. In addition, as the parent company of Lexus, Toyota’s frequent vehicle recalls would potentially have negative impact on the brand image of Lexus as well. The frequent vehicle recalls have raised concerns about the quality and safety of Toyota vehicles and Lexus vehicles. From 2009 to 2011, Toyota made recalls of over 10 million vehicles worldwide. In October 2012, Toyota had announced another recall of 7.43 million vehicles worldwide.

INVENTORY MANAGEMENT

We actively monitor our inventory at each outlet as well as at the headquarters, and strive to maintain optimal inventory levels of new passenger vehicles and spare parts. Our average inventory turnover days were 29 days, 34 days, and 38 days for the years ended December 31, 2010, 2011 and 2012, respectively.

Each outlet has its own garage for inventory storage and staff that are dedicated to inventory management of new passenger vehicles and spare parts, respectively. Inventory managers typically make orders once a month. We provide an inventory manager a standard inventory management spreadsheet to monitor the inventories in the respective outlet. Parameters contained in such spreadsheet include current inventory, store manager’s estimated sales volume of the month, and the annual sales target set by manufacturers. Each outlet provides a monthly report to the headquarters which contains, among other things, information on monthly sales volume and inventory level. Management at the headquarters reviews such reports and coordinate inventories at different outlets when necessary, as manufacturers typically allow us to shift new passenger vehicles among outlets in the same regional market. Outlets in the same region also contact each other to coordinate inventory needs.

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OUR BUSINESS

We pay automobile manufacturers the purchase prices of new passenger vehicles and spare parts mainly with a combination of cash and bank acceptance notes, which are generally secured by bank deposits and inventories. We repay the bank acceptance notes with cash received from customers for their purchases of new passenger vehicles and spare parts, upon which the relevant pledged deposits are released.

PRICING

Automobile manufacturers generally provide us the minimal retail price of a particular model of their passenger vehicles. We retain some flexibility in determining the actual retail prices of the new passenger vehicles we sold, which are influenced by a number of factors, including brand and model, market demand, inventory supply and presence of competing dealerships, and we adjust our pricing strategy periodically according to the market environment. For more details on factors affecting pricing, see “Financial Information – Factor Affecting Our Results of Operations – Pricing.”

We have implemented a pricing policy in order to periodically monitor the retail prices in our outlets. Pursuant to the policy, the manager of an outlet will submit the suggested retail price range for each model of passenger vehicles in the respective outlet to the headquarters for review on a quarterly basis. A vice president at the headquarters will approve or adjust such suggested retail price ranges based on the above mentioned factors, as well as the performance in previous quarters and the annual sales quota assigned to the particular outlet, and the overall sales performance of the Group. The outlet managers can then decide the retail price of a particular sale within the approved range at the time of the sale.

SALES AND MARKETING

Our marketing is store-oriented and localized in nature, in order to broaden the customer reach of our stores in the area they cover. We maintain databases of potential customers and offer existing customers referral bonus if they introduce new customers to our stores. We advertise on magazines and local radio for our stores. We also participate in manufacturers’ marketing and promotional events such as new model launches. Certain manufacturers prescribe the amount of sales and marketing expenses we need to spend on certain new models, usually as a small percentage of the sale price per vehicle. For the years ended December 31, 2010, 2011 and 2012, we incurred advertisement and marketing expenses of RMB15.5 million, RMB24.0 million and RMB52.0 million, respectively.

CUSTOMERS

As we are a dealership group that specializes exclusively in luxury and ultra-luxury brand passenger vehicles, our customers are mainly affluent individuals. Due to the retail nature of our business, we do not have a single major customer that accounted for over 1% of our total revenues and our top five customers in aggregate accounted for less than 1% of our total revenues during 2010, 2011 and 2012.

Customer satisfaction is a priority in our business operations as we believe our customers have especially high expectation on service quality. We hold periodic trainings for our management and sales representatives on customer service related topics, and we use customer feedback as an important indicator in our performance reviews. We assign an individual sales agent to maintain relationship with each purchaser and potential purchaser of ultra-luxury brand passenger vehicles. We offer our customers of BMW passenger vehicles in Henan Province a fee-based annual membership to the BMW VIP Club. Services we offer to members of the club include priority in scheduling repair and maintenance, special resting area in our 4S stores reserved for members, and free airport pick-up services. We are in the process of extending such membership to our customers who purchased passenger vehicles of other brands.

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OUR BUSINESS

EMPLOYEES

As of the Latest Practicable Date, we had a total of 1,982 full-time employees. The following table sets forth our employees by function as of the Latest Practicable Date:

table sets forth our employees by function as of the Latest Practicable Date:
Function	Number of employees
After-sales Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finance and Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	852 754 222 121 33 1,982

table sets forth our employees by function as of the Latest Practicable Date:

Function

Number of
employees

After-sales Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance and Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

852
754
222
121
33
1,982

We believe that maintaining a stable and experienced employee force is critical to the operation of our business. Due to the scale of our business, we are able to provide our employees ample career choices and opportunities of promotion. For each new employee, we have implemented a three-to-five-year career plan, which gives the employee choices over a wide variety of career trainings. Through such programs, an employee can choose his or her career path. We provide employees various incentives to participate and complete such training programs, in the form of career certification and qualification for internal promotion. At the end of such plan, an employee is provided a choice to further develop into a management or operational role if such employee satisfied certain qualifications. We also provide various incentives to employees in our sales and after-sales service teams based on their performance, including sales targets and quality of services judged by internal inspection and customer feedbacks.

We are required by PRC laws and regulations to contribute towards various governmentsponsored employee benefit plans, including housing, pension, work-related injury benefits, maternity insurance, medical and unemployment benefit plans, in amounts equal to predetermined percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government where we operate our businesses from time to time. We did not make such contributions in full and underpaid RMB3.8 million, RMB6.0 million and RMB12.5 million for the years ended December 31, 2010, 2011 and 2012, respectively. The underpayment was resulted from the fact that, due to the different levels of development in employee benefits in different parts of the PRC, the local policies in some jurisdictions where we operate are less stringent than the requirements under the PRC laws and regulations governing the PRC employee benefit. We are advised by our PRC legal adviser that the PRC laws and regulations governing the PRC employee benefit is applicable to us and we could be deemed as not be in full compliance with such PRC laws and regulations due to the underpayment. As a result, we requested and obtained confirmation letters from the relevant government authorities which stated that we have complied with relevant laws and regulations regarding employee benefit contributions or has no outstanding payments for employee benefit contributions. Our PRC legal adviser has checked the status of the requisite registration with government authorities for our employee benefit contribution and has assisted us in obtaining a written compliance confirmation from relevant local government authorities. In such written confirmation, the relevant government authorities confirmed that we have paid the employee benefit contribution as required by such local government authorities.

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We are advised by our PRC legal adviser that the local government authorities that issued the compliance confirmation are competent supervisors on our activities in terms of the matters referenced in the compliance confirmation and such local government authorities are competent to issue such compliance confirmation, which confirmed that there would be no legal penalty for under-payment or requirement to pay outstanding contribution. Based on the above, we believe that the chance of us being penalized by relevant government authorities for the under-payment of the employee benefit contribution is slim.

We have made the provision for the under-payments in selling and distribution costs and administrative expenses. In addition, the Controlling Shareholders have committed to indemnify us against any costs, expenses and losses arising from such under-payment of the employee benefit contributions. Meanwhile, we have implemented internal procedures which set forth, among other things, the rules and regulations to be complied with and the percentage amounts of various employee benefits to be contributed by us in a tabular form, to ensure strict compliance with the requirements in relation to employment benefit contribution. We assigned an internal audit manager, Ms. Song Yingfang, to monitor compliance with the relevant laws and regulations on the employment benefit contribution. Ms. Song has 15 years of experience in audit and financial reporting. Ms. Song graduated with a bachelor degree in accounting from Henan University of Economics and Law in 1999. Ms. Song joined our Group in February 2012 as a manager in our audit department.

During 2010, 2011 and 2012, we have retained all our management from store manager level and above. During 2010, 2011 and 2012 and as of the Latest Practicable Date, we were not involved in any material labor dispute.

COMPETITION

The passenger vehicle dealership market in China is highly competitive. We compete primarily with other passenger vehicle dealership groups in China who focus or specialize in luxury and ultra-luxury brands. We compete with such dealership groups for manufacturer authorization, location for outlets, source of customers, financing channels and employees. According to the ACMR Report, competition among dealerships of luxury and ultra-luxury brands is generally less intense as compared to that of middle market brands due to high entry barriers of the luxury and ultra-luxury brand market. Our competitiveness depends on our ability to, among other things:

maintain solid relationship with manufacturers;
anticipate and cater to customer purchase sentiments and boost sales of new passenger vehicles;
provide high quality after-sales services to customers;
manage inventories of new passenger vehicles and spare parts to keep them at optimum levels; and
train and retain existing employees and attract new talents.

In addition, our business is also affected by factors that are beyond our control, such as the passenger vehicle market and economic growth in China, competitiveness of our major competitors and business plans and condition of manufacturers.

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OUR BUSINESS

We have a dominant presence in Henan Province in terms of number of outlets and brand coverage. As of the Latest Practicable Date, there were 13 BMW dealership outlets in Henan Province, 11 of which were operated by us. Similarly, we operated two out of the three of Lexus dealership outlets, and the only Rolls-Royce dealership outlet in Henan Province. We plan to compete with dealerships in Henan Province by strengthening our dominant market share, through opening new outlets in selected cities, especially for luxury brands, and further improving our after-sales services to existing and new customers. For more details, see “– Our Strategies.”

We face competition from dealers which deal competitive brands. As of December 31, 2012, there were 54 dealership outlets that covered 16 luxury and ultra-luxury brands in Henan Province. We operated or held minority interest in 19 of the above 54 outlets which covered seven luxury and ultra-luxury brands. Our major competitors in Henan Province include Best Character Auto Group, which operates 6 dealership outlets, Henan Wei Jia Automobile Group, which operates six dealership outlets, and Lei Shing Hong Limited, which operates 3 dealership outlets in Henan Province.

Our major competitors outside of Henan Province include Lei Shing Hong Limited, China Yongda Automobiles Services Holdings Limited, China Zhengtong Auto Services Holding Limited, Baoxin Auto Group Limited. We plan to compete with dealerships outside of Henan Province by emphasizing ultra-luxury brands and after-sales services, as substantially all of our new outlets outside of Henan Province are located in tier-one and affluent cities where customers generally value service quality over competitive pricing. For more details, see “– Our Strategies.”

We do not compete with any parallel importer of passenger vehicles in Henan Province or in China in general. There is no large dealership group specializing in parallel imports of passenger vehicles in China. Existing parallel importers are generally small-scale, and can only import a very limited number of passenger vehicles each time, as they are not authorized dealers and have limited channels of vehicle procurement. According to the ACMR Report, the market share of parallel importers in China was less than 1% in aggregate in terms of sales volume in 2011 and 2012. As a result, the level of competition from parallel importers is relatively low in Henan Province and in China in general.

PROPERTIES

We occupy certain properties in China in connection with our business operations. These properties are used for non-property activities as defined under Rule 5.01(2) of the Listing Rules. They mainly include premises for our offices, stores and warehouses. As of December 31, 2012, we owned 2 properties and leased 24 properties in the PRC.

According to section 6(2) of the Companies Ordinance (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice, this document is exempted from compliance with the requirements of section 342(1)(b) of the Companies Ordinance in relation to paragraph 34(2) of the Third Schedule to the Companies Ordinance which require a valuation report with respect to all our Group’s interests in land or buildings, for the reason that, as of June 30, 2012, none of the properties held or leased by us had a carrying amount of 15% or more of our consolidated total assets.

Owned Properties

As of the Latest Practicable Date, we owned two properties with a GFA of approximately 13,163.91 square meters. We have legal and valid ownership interests in both of these properties. As confirmed by our PRC legal adviser, we legally own all of our buildings.

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The following table sets out a summary of the properties owned by us.

					Duration
Address and			GFA		of land
description of		Use of	(square		use
location	Owner	property	meters)	Restrictions on use	rights
No. 3, Shangdu	Zhongdebao	Business	3,936.01	Pledged to Shanghai	40 years
Road, Zhengdong		and		Pudong
New District,		Service		Development Bank,
Zhengzhou,		Use		Zhengzhou Branch
Henan				from April 6, 2010
(河南鄭州市鄭東				to April 6, 2013.
新區商都路3號)
No. 3, Shangdu	Yuanda Lexus	Business	9,227.90	Pledged to Shanghai	40 years
Road, Zhengdong		and		Pudong
New District,		Service		Development Bank,
Zhengzhou,		Use		Zhengzhou Branch
Henan				from December 31,
(河南鄭州市鄭東				2009 to December
新區商都路3號)				31, 2012.

Leased Properties

We have leased certain properties in China to operate our outlets. As of December 31, 2012, we leased a total of 24 properties with an aggregate GFA of approximately 15,255 square meters for the building portion and an aggregate site area of approximately 114,261 square meters for the land portion, among which:

for three properties with an aggregate GFA of approximately 3,189 square meters, accounting for 20.9% of the aggregate GFA of our leased buildings and an aggregate site area of approximately 20,487 square meters, accounting for 17.9% of the aggregate site area of our leased land, the landlords had not obtained the relevant title certificates. One of these properties is located in Zhengzhou, Henan province. The other two are located in Anyang, Henan province and Wuhan, Hubei Province.
in one property with an aggregate site area of approximately 8,671 square meters, which accounts for 7.6% of the aggregate site area of our leased land, we operated one 4S dealership store as of the Latest Practicable Date, the property was not in compliance with its designated usage. The property is located in Nanyang, Henan province.
eight properties with an aggregate GFA of approximately 1,177 square meters, which accounts for 7.7% of the aggregate GFA of our leased buildings and an aggregate site area of approximately 67,457 square meters, which accounts for 59.0% of the aggregate site area of our leased land, are built in collectively-owned land and are not permitted to be leased to others for no agricultural or commercial purposes under applicable PRC laws, rules and regulations. One of these properties is located in Guangzhou, Guangdong Province, one is located in Beijing and another six are located in Henan Province.

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OUR BUSINESS

As of December 31, 2012, our leasehold interests in 12 of these leased properties were subject to certain defects. For the years ended December 31, 2010, 2011 and 2012, revenue generated from our operations on these 12 leased properties with defects was RMB284.4 million, RMB1.14 billion and RMB3.08 billion respectively, which accounted for 15.8%, 37.6% and 54.5% of our total revenue, respectively.

As of the Latest Practicable Date, we had not been subject to any material claim arising from or in connection with any defect in our leasehold interest in any of our leased properties. In addition, our Company did not close any dealership outlet during 2010, 2011 and 2012.

Our Directors are of the view that these defects in our leased properties would not have any material and adverse impact on our business and operations because (i) we can find comparable properties to relocate the relevant outlets, if necessary; (ii) we do not anticipate any material practical difficulties in relocating the relevant outlets; and (iii) based on the current available information, the estimated total costs and expenses for relocating our businesses located on properties with defective titles are not expected to exceed RMB55 million. In addition, because we are required to submit to an automobile manufacturer documents relating to our ownership or lease of the premises for our outlet prior to the execution of any dealership agreement, including the related title documents, automobile manufacturers were aware of title defects of these 12 leased properties before they entered into dealership agreements with us. As such, we believe, and our PRC legal adviser, Beijing JingRui Law Firm, has advised, that the existing title defects of these 12 leased properties would not constitute a material breach of the relevant dealership agreements or trigger any termination by the relevant automobile manufacturers.

Each of Mr. Feng and Eagle Seeker has jointly and severally agreed to indemnify us against any costs, expenses and losses which we may suffer as a result of any dispute as to our rights to lease and use any of these properties for our business operations. For more details of the deed of indemnity, see “Appendix IV – Statutory and General Information – E. Other information – Estate duty and deed of indemnity”. We have implemented internal control measures pursuant to which our legal advisers will review our lease agreements and advise us of the relevant risks with respect to our leased properties and to ensure that we have adequate rights to claim against the relevant landlords in the event of any defects arising from our leased properties.

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OUR BUSINESS

The following table sets out a summary of the properties leased by us which are considered material as they are used as our stores and warehouses.

Address and	Use of	Area (square	Restrictions	Duration of lease	Expiration
description of location	property	meters)	on use	or land use rights	Date
Shaoyuan Village,	Construction	15,507.75	None	30 years	September 1,
Liulin Town,					2040
Jinshui District,
Zhengzhou,
Henan Province
(河南鄭州市金水區柳林鎮
杓袁村)
鄭德寶
No. 1018, Xinfei South	Industrial	1,006	None	Two years	March 31,
Street, Xinxiang,					2014
Henan Province
(河南新鄉市新飛大道南段
1018號)
新德寶
Zhao Village, The west	Construction	1,020	None	15 years	March 31,
side of Longmen Street,					2024
Luoyang, Henan Province
(河南洛陽市龍門大道西側
趙村)
豫德寶
The North side of Yingbin	Comprehensive	8,671	None	20 years	May 1, 2031
Street, Nanyang,
Henan Province
(河南南陽市迎賓大道北側)
宛德寶
Balizhuang Village,	Collectively	9,267	None	50 years	October 31,
Gaobeidian Town,	owned land				2059
Chaoyang District, Beijing
(北京市朝陽區高碑店鄉八
裡莊村)
華德寶

Properties Currently under Construction

As of the Latest Practicable Date, we had 14 properties under construction. The projected total cost of construction of our 20 new outlets was approximately RMB609 million, of which approximately RMB118 million had already been utilized. We financed the construction primarily through, cash flow from operations and loans from local commercial banks.

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OUR BUSINESS

INSURANCE

We carry insurance covering risks including loss and theft of and damage to property such as our fixed assets and inventories in our dealership outlets, losses due to fire, flood and other natural disasters. We do not carry liability insurance that extends coverage to all potential liabilities that may arise in the ordinary course of business, neither do we maintain any insurance coverage for business interruption due to the limited coverage of any business interruption insurance in China. We consider our insurance coverage to be adequate and in line with industry practices in China. However, significant uninsured damage to any of our properties, inventory or other assets, whether as a result of fire or other causes, could have a material and adverse effect on our results of operations. See the section headed “Risk Factors – Our insurance coverage may be inadequate to cover our potential losses” in this document.

LEGAL COMPLIANCE AND PROCEEDINGS

During 2010, 2011 and 2012 and as of the Latest Practicable Date, we had not been and was not a party to any legal, arbitral or administrative proceedings, and we were not aware of any pending or threatened legal, arbitral or administrative proceedings against us or any of our Directors which could have a material adverse effect on our operations or financial condition. However, we may from time to time become a party to various legal, arbitral or administrative proceedings arising in the ordinary course of our business.

In the opinion of our PRC Legal Counsel, Beijing Jing Rui Law Firm, during 2010, 2011 and 2012 and as of the Latest Practicable Date, we have complied with relevant PRC laws, rules and regulations in all material respects including without limitation in this document environmental and work safety laws and regulations. Except as disclosed in the sections entitled “Risk Factors – We may not be able to use certain properties leased by us because of defects affecting our leasehold interests” in this document, we and all of our subsidiaries have obtained all the licenses, approvals and permits from appropriate regulatory authorities that are material to our business operations in China.

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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS

Background

Apart from his interest in our Group, Mr. Feng is also the controlling shareholder of Hexie Industrial Group, which is a privately owned group headquartered in Zhengzhou, Henan Province, China, with business interests focusing on branded and luxury lifestyle goods and services, including, among others, property development and golf courses. Our Controlling Shareholders’ interests in sales of passenger vehicles is now carried out solely through our Group. From November 2008 to April 2012, our Controlling Shareholders helped potential customers who were unable to purchase particular models of passenger vehicles from our outlets by sourcing passenger vehicles from sellers who import them from outside China. We were unable to sell the particular models to the customers because our outlets were out of stock and the automobile manufacturers in China could not supply such models on a timely basis or at all due to high demand, and customers did not want to wait for vehicles to become available. The purpose of this was to help ensure that potential customers do not buy other brands. In order to facilitate such purchases, a number of our operating subsidiaries acted as counterparties to the contracts with certain potential customers as agent and on behalf of our Controlling Shareholders. The number of passenger vehicle purchases referred by the Controlling Shareholders for the years ended December 31, 2010, 2011 and 2012 were 463, 925 and 118, respectively. Such referral practice was not part of our business and as such we do not possess relevant financial information of the transactions amount. The Controlling Shareholders did not engage in direct sales of the imported passenger vehicles as the sellers of such imported passenger vehicles issued invoices of the sales directly to the customers. There may be instances of claims or damages arising out of those contracts or the performance or functionality of the passenger vehicles procured by our Controlling Shareholders, and some of these claims or damages may not be fully covered by insurance. Our Controlling Shareholders are ultimately responsible for the contracts as principal. In any event, we have obtained an indemnity from our Controlling Shareholders for any losses to us arising out of the contracts we entered into as agent and on their behalf. As supply levels normalized, our Controlling Shareholder has discontinued such practice since April 2012 and will not engage in similar practice going forward under the terms of the Deed of Non-Competition (see below for further details). In addition, we have also set up various internal policies and measures to ensure that no company resources are utilized by related parties for purposes unrelated to or in conflict with our business. Such policies and measures include:

an internal policy on related party transactions, which sets forth, among other things, (i) general principles including scope and pricing; (ii) internal authorization entity and process and (iii) disclosure requirements of related party transactions;
an internal policy on non-competition, which sets forth, among other things, details of the scope of prohibition on competition with the Company’s business, and procedures to follow when an employee encounters an undertaking that would potentially violate the noncompetition policy; and
a requirement for all Directors and principal management to sign a non-competition agreement.

Our Controlling Shareholders and Directors confirm that they do not have any interest in a business, apart from the business of our Group, which competes or is likely to compete, directly or indirectly, with our business, which would require disclosure under Rule 8.10 of the Listing Rules.

INDEPENDENCE FROM OUR CONTROLLING SHAREHOLDERS

Having considered the following factors, our Directors are satisfied that we are capable of carrying out our business independently from the Controlling Shareholders and their respective associates.

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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS

Management Independence

The Board comprises 7 executive Directors, 1 non-executive Director and 4 independent non-executive Directors. For more information, please see “Directors and Senior Management” section of this document. Mr. Feng is also one of the Controlling Shareholders of the Company. Each of our Directors is aware of his/her fiduciary duties as a director which require, among others, that he/she must act for the benefit of and in the best interests of our Company and not allow any conflict between his/her duties as a Director and his/her personal interests. The Directors shall not vote in any Board resolution approving any contract or arrangement or any other proposal in which he/she or any of his/her associates has a material interest and shall not be counted in the quorum present at the particular Board meeting.

Based on the above, our Directors are satisfied that our Board as a whole together with our senior management team are able to perform the managerial role in our Group independently.

Operational Independence

Our organizational structure is made up of individual departments, each with specific areas of responsibilities. We have established a set of internal controls to facilitate the effective operation of our business. Our INEDs will also review the effectiveness and compliance of the internal control systems of the Company on a quarterly basis.

Based on the above, our Directors are satisfied that we have been operating independently from our Controlling Shareholders during 2010, 2011 and 2012 and will continue to operate independently.

Financial Independence

Our Group has its own financial management system and the ability to operate independently of the Controlling Shareholders from a financial perspective. During 2010, 2011 and 2012, the Group had certain outstanding balances due from Mr. Feng, details of which are set forth in Note 35(b) to the Accountants’ Report as Appendix I to this document. Our Controlling Shareholders confirmed that the outstanding balances due from him will be settled prior to [●] by cash. Our Directors confirmed that, as of December 31, 2012 and except for the guarantees or pledges set forth in Note 35(a) to the Accountants’ Report as Appendix I to this document and the pledges referred to in the next paragraph, (i) none of our Controlling Shareholders or their respective associates had provided any guarantees or pledges to our Group; and (ii) our Group did not provide any guarantees or pledges to our Controlling Shareholders or their respective associates. The Directors further confirmed that such guarantees and pledges will be released prior to [●] and will be substituted by guarantees provided by members within our Group and pledges over our Group’s properties and assets as appropriate.

In addition, as a private company, we were part of Mr. Feng’s Hexie Industrial Group. As part of Hexie Industrial Group’s financing activities, Hexie Industrial Group used the equity interests in four of our operating subsidiaries, namely Wandebao, Huadebao, Andebao and Henan Hedebao (“ Pledged Subsidiaries ”), as security for a debt financing plan it entered into with Hua Ao International Trust Co., Ltd. (also known as Sino-Australian International Trust Co., Ltd.) (“ HAT ”). In September 2011, Hexie Industrial Group, Mr. Feng and Zhongdebao entered into a debt financing plan with HAT, pursuant to which HAT raised RMB180 million by issuing trust fund units to purchasers. The proceeds of the sale of the trust fund units were passed onto Hexie Industrial Group through the purchase by HAT of the entitlements to the income stream of the Pledged Subsidiaries. As security, the equity interests of the Pledged Subsidiaries have been pledged to HAT. In addition, our operating subsidiaries, Zhongdebao and Yuanda Lexus, acted as the guarantors for Mr. Feng’s obligations under the debt financing arrangement. Mr. Feng and Hexie Industrial Group have

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RELATIONSHIP WITH OUR CONTROLLING SHAREHOLDERS

obtained the agreement of HAT to release the pledges over the equity interests of the Pledged Subsidiaries as well as the guarantees by Zhongdebao and Yuanda Lexus.

Based on the above, our Directors believe that we are able to maintain financial independence from the Controlling Shareholders.

NON-COMPETITION UNDERTAKING

Each of Mr. Feng and Eagle Seeker (the “ Covenantors ”) has entered into a Deed of Non-Competition in favor of our Company on May 20, 2013 pursuant to which the Covenantors have unconditionally, irrevocably and severally undertaken with our Group that they shall not, and shall procure that all their respective associates, shall not (except through our Group), directly or indirectly (including through nominees), carry on, participate, acquire or hold any right or interest or otherwise be interested, involved or engaged in or connected with, any business which is in any respect in competition with or similar to or is likely to be in competition with the business of our Group described in this document (the “ Restricted Business ”).

The Covenantors have also undertaken to us that:

any business investment or other commercial opportunity relating to any Restricted Business (the “ New Opportunity ”) identified by or offered to our Controlling Shareholders or any of their associates (“ Offeror ”) be first referred to us, and we shall be given written notice of any New Opportunity containing all information reasonably necessary, including but not limited to the financial and operating information and a description of the business involved, for us to consider whether (a) such New Opportunity would constitute competition with any Restricted Business; and (b) it is in the interest of our Group and our Shareholders as a whole to pursue such New Opportunity (“ Offer Notice ”). Upon receipt of the Offer Notice, we will seek determinations from a committee of our Board consisting exclusively of independent non executive Directors who do not have a material interest in the matter;
the Offeror will be entitled to pursue the New Opportunity only if the Offeror has received a notice from us declining the New Opportunity (failure by us to provide the Offeror with a written notice within 25 Business Days from receipt of the Offer Notice constitutes a decline of the New Opportunity). If there is a material change in the terms and conditions of the New Opportunity pursued by the Offeror, the Offeror will refer the New Opportunity, as so revised, to us in the manner set out above;
in the event that, during the validity period of the Deed of Non-Competition, our Controlling Shareholders or any of their associates (except any members of our Group) intend to dispose of any business acquired pursuant to any New Opportunity, or any interest therein, the seller shall first offer to us the right to acquire such business or interest and none of the Controlling Shareholders or any of their associates (except any members of our Group) may proceed with such disposal to any third party, unless the terms of disposal are not more favourable than those offered to us, following the written rejection of such offer by us; and
our Group will be entitled to an option to acquire any business acquired by the Controlling Shareholders or any of their associates pursuant to any New Opportunity, or any interest therein, on and in accordance with commercial terms which shall have been opined upon by a committee of our Board consisting exclusively of independent non-executive Directors, after taking into account the advice from independent experts as being, inter alia, normal commercial terms, in line with the ordinary commercial practice of our Group, fair and reasonable and in the interests of our Group as a whole.

During the non-competition period each of the Controlling Shareholders also jointly and severally undertake to:

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procure that all relevant corporate and financial information in his possession relating to any Restricted Business be provided to us from time to time;
to the extent not inconsistent with any confidentiality agreements, allow the authorized persons or internal auditors of our Group to access the material financial or corporate information in relation to any third-party transaction, so as to determine whether the terms of the Deed of Non-Competition were complied with by the Controlling Shareholders and their associates; and
within 10 days from receipt of our written request, provide us with a written confirmation in respect of its/his compliance with the Deed of Non-Competition, and consent to the inclusion of such confirmation in our annual report.

Such non-competition undertaking does not apply where:

the Controlling Shareholders and their associates hold, directly or indirectly, equity interests in any company listed on a recognized stock exchange not engaged in any Restricted Business; and
the Controlling Shareholders and their associates have interests in the shares of a company other than our Group provided that:
a) any Restricted Business conducted or engaged in by such company (and assets relating thereto) accounts for less than 10% of that company’s consolidated sales or consolidated assets, whichever is less, as shown in that company’s latest audited accounts; and
b) the total number of the shares held by the Controlling Shareholders and their associates in aggregate does not exceed 10% of the issued shares of that class of the company in question and the Controlling Shareholders and their associates are not entitled to appoint a majority of the directors of that company.

The Covenantors have acknowledged that we may be required by the relevant laws, regulations, rules of the stock exchange(s) on which we may be listed and the regulatory bodies, to disclose, from time to time, information on the New Opportunity in respect of the Restricted Business, including but not limited to disclosure in public announcements, our annual and/or interim reports of decisions made by us to decline such New Opportunity and have agreed to such disclosure to the extent necessary to comply with any such requirement.

CORPORATE GOVERNANCE MEASURES

Our Directors believe that there are adequate corporate governance measures in place to manage the conflict of interests arising from the competing business and to safeguard the interests of our shareholders, including:

the independent non-executive Directors will review, on an annual basis, the compliance with the non-competition undertaking by the Controlling Shareholders under the Deed of NonCompetition;
the Controlling Shareholders to provide all information requested by our Company which is necessary for the annual review by the independent non-executive Directors and the enforcement of the Deed of Non-Competition;
our Company will disclose decisions and related basis on matters reviewed by the independent non-executive Directors relating to compliance and enforcement of the non-competition undertaking by the Controlling Shareholders under the Deed of Non-Competition in the annual reports of the Company; and

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the Controlling Shareholders to make annual statement on compliance with the Deed of Non-Competition in our annual report, which is consistent with the principles of making disclosure in the corporate governance report of the annual report.

LEASE ARRANGEMENT WITH A CONNECTED PERSON

We entered into a lease agreement dated May 26, 2013, with Ms. Ma, our connected person, in respect of the use of our corporate offices in Zhengzhou, Henan Province. The lease agreement is for a period of one year. The annual rent under this lease agreement is RMB780,000. As the lease agreement was entered into on normal commercial terms (or better) and the applicable percentage ratio in respect of the aggregate annual rental payable under the lease agreement is less than 0.1%, it is exempt from the relevant reporting, annual review, announcement and independent shareholders’ approval requirements under the Listing Rules.

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DIRECTORS

The Board currently consists of 12 Directors, comprising 7 executive Directors, 1 non-executive Director and 4 independent non-executive Directors. The functions and duties of the Board include convening shareholders’ meetings, reporting on the Board’s work at these meetings, implementing the resolutions passed on these meetings, determining business and investment plans, formulating our annual budget and final accounts, and formulating our proposals for profit distributions and for the increase or reduction of registered capital. In addition, the Board is responsible for exercising other powers, functions and duties in accordance with the Articles of Association.

The following table contains certain information about each of our directors.

Directors

Directors
Name	Age	Position and role	Appointment Date
Feng Changge (馮長革)	42	Executive Director and Chairman	September 24, 2012
Yu Feng (喻峰)	45	Executive Director and CEO	September 24, 2012
Fong Heung Sang, Addy	54	Executive Director and CFO	November 6, 2012
(Dexter) (方香生)
Yang Lei (楊磊)	37	Executive Director, COO and	September 24, 2012
		vice-president
Cui Ke (崔軻)	33	Executive Director and	September 24, 2012
		vice-president
Liu Wei (劉蔚)	36	Executive Director and	September 24, 2012
		vice-president
Ma Lintao (馬林濤)	45	Executive Director	January 31, 2013
Wang Nengguang (王能光)	55	Non-executive Director	September 24, 2012
Xiao Changnian (肖長年)	64	Independent Non-executive Director	March 18, 2013
Liu Zhangmin (劉章民)	63	Independent Non-executive Director	March 18, 2013
Li Daomin (李道民)	70	Independent Non-executive Director	March 18, 2013
Xue Guoping (薛國平)	62	Independent Non-executive Director	March 18, 2013

Executive Directors

Feng Changge (馮長革) , aged 42, is an Executive Director and the Chairman of our Board of Directors. Mr. Feng was appointed as an executive Director of our Company on September 24, 2012 and is responsible for the overall strategic and business direction of our Group. He is the founder of our Group, and has been in the automobile industry since 2005 when he founded Zhongdebao, our wholly-owned subsidiary and the first BMW dealership outlet in Henan Province. Mr. Feng graduated with a bachelor’s degree in economic law from Central South Institute of Law (中南政法學院) (now known as Zhongnan University of Economics and Law (中南財經政法大學)) in 1992 and received a master’s degree in law from the same institution in 2001. After graduation in 1992, Mr. Feng entered

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the judiciary in Henan Province, serving as assistant judge and judge of the Higher People’s Court of Henan Province (河南省高級人民法院). In 2002, Mr. Feng left the judicial system and established a law firm, while at the same time starting various business enterprises. He became involved in real estate investment through his vehicle, Yuanda Investment, and was also involved in the auction and valuation businesses. He is also the controlling shareholder of Hexie Industrial Group, a privately owned group headquartered in Zhengzhou Henan Province, China, with business interests focusing on branded and luxury lifestyle goods and services, including property development, golf courses and automobile sales. Over the past three years, Mr. Feng has not been a director of any listed companies.

Yu Feng (喻峰) , aged 45, is the chief executive officer of our Group and was appointed an executive Director of our Company on September 24, 2012. He oversees the day-to-day business and management of our Group. Mr. Yu graduated from Central South Institute of Law (中南政法學院) (now known as Zhongnan University of Economics and Law (中南財經政法大學)) with a bachelor’s degree in law in 1992 and completed a postgraduate course in criminal law from China University of Political Science and Law (中國政法大學) in 2000. From 1992 to 2001, Mr. Yu worked in the courts in Luoshan county of Henan province (河南羅山縣法院). He then joined Yuanda Investment from June 2003 to July 2005. In July 2005, Mr. Yu joined Henan Zhongdebao Automobile Sales & Service Co., Ltd (河南中德寶汽車銷售服務有限公司), our wholly owned subsidiary, where he was involved in obtaining the dealership rights to automobile brands such as, Land Rover, Lexus, Rolls-Royce and Aston Martin. Mr. Yu was appointed as a director of Henan Jinshahu Golf Club Co., Ltd (河南金沙湖高爾夫俱樂部有限公司), a company which operates golf courses in Henan in September 2009. Over the past three years, Mr. Yu has not been a director of any listed companies.

Fong Heung Sang, Addy (Dexter) (方香生) , aged 55, is the chief financial officer of our Group and was appointed an executive Director of our Company on November 6, 2012. Mr. Fong joined our Group in October 2012 and is responsible for the Group’s audit, financial reporting and overall financial planning and budgeting. He obtained a Master of Business Administration from the University of Nevada, Reno in December 1989 and a master of accounting from the University of Illinois, Champaign in June 1993. He is a member of the American Institute of Certified Public Accountants and the State Board of Accountancy of Washington State. Mr. Fong has more than 20 years of audit/financial/capital market experience. Prior to joining our Group, he held various positions in a wide variety of companies in Hong Kong, US and China, including top accounting firms. Mr. Fong previously served as the following positions in the respective listed companies:

the chief financial officer and a director of Apollo Solar Energy Inc. (OTCBB: ASOE), from February 2009 to March 2010, where he was in charge of the company’s overall financial strategy;
the chief financial officer and a director of China Electric Motor, Inc., a company listed on OTC (OTC: CELM), from June 2010 to May 2011 and January 2010 to May 2011 respectively, where he was closely involved in the company’s initial public offering;
the independent director and chairman of the audit committee of Diguang International Development Co., Ltd. (OTC: DGNG), from August 2007; and
the independent director and chairman of the audit committee of Kandi Technologies Corp, a company listed on Nasdaq (stock code: KNDI), from July 2006 to June 2011.

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Besides serving as the chief financial officer of a start-up private pharmaceutical company, Mr. Fong is also the independent director of the following companies:

Universal Technologies Holdings Ltd., a company listed on the Hong Kong Stock Exchange (stock code: 1026.HK); and
China Housing and Land Development Inc., a company listed on Nasdaq (stock code: CHLN).

A shareholder derivative action was filed in June 27, 2011 in Delaware, United States, against China Electric Motor, Inc. and its directors and senior management, for, among other allegations, potential breaches of fiduciary duties. A securities class action was also filed in September 2, 2011 in California, United States against the same parties for breaches of the U.S. Securities Act. Both actions relate to the alleged production of bank statements by the chairman of the company, which could not be verified by its accountants, and both actions have not yet been settled. Mr. Fong has been named as one of the respondents of these actions by virtue of being a director of China Electric Motor, Inc. at the relevant time, and the relevant filings did not indicate any form of wrongdoing on the part of Mr. Fong. According to Mr. Fong and his legal advisers, none of the allegations were directed at Mr. Fong and it is unlikely that Mr. Fong would have personal liabilities or penalties as a result of these claims.

Yang Lei (楊磊) , aged 37, is the chief operating officer and a vice-president of our Group and was appointed an executive Director of our Company on September 24, 2012. Mr. Yang is responsible for overseeing and managing the Group’s automobile business. Mr. Yang graduated in 2002 from Henan University, College of Foreign Languages (河南大學外語學院) majoring in English. Mr. Yang joined our Group in April 2005 in the sales department of our BMW business, during which he gained extensive sales and marketing experience in the automobile industry. Over the past three years, Mr. Yang has not been a director of any listed companies.

Cui Ke (崔軻) , aged 33, is a vice-president of our Group and general manager of our wholly owned subsidiary, Huadebao. He was appointed as an executive Director of our Company on September 24, 2012. Mr. Cui is responsible for overseeing the network development and operation supervision of BMW and Land Rover brands. Mr. Cui graduated in economics and business management from the Henan Institute of Finance and Economics (河南財經學院) (now known as Henan University of Economics and Law (河南財經政法大學)) in 2008. Mr. Cui joined our Group in July 2009 as the general manager of Yudebao. He was promoted to vice president of our Company in February 2011. He was appointed as the general manager of Huadebao in February 2011. Over the past three years, Mr. Cui has not been a director of any listed companies.

Liu Wei (劉蔚) , aged 36, is a vice-president of our Group being responsible for establishing and managing the ultra-luxury segment of our automobile business. She was appointed an executive Director of our Company on September 24, 2012. Ms. Liu graduated from the University of Hertfordshire, United Kingdom in 2001 with a master’s degree in Law (with commendation). Ms. Liu joined ThyssenKrupp Transrapid GmbH as an executive assistant to the general manager and board of directors in May 2002, and subsequently served as a contract manager. From April 2007, Ms. Liu worked as the director of the legal department of the German Centre for Industry and Trade Co., Ltd. where she was responsible for formulating and overseeing legal matters and general internal control and compliance. Ms. Liu joined Shangdebaojun in June 2011 as an executive director where she was responsible for establishing and operating Shangdebaojun and the ultra-luxury segment of our automobile business. Over the past three years, Ms. Liu has not been a director of any listed companies.

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Ma Lintao (馬林濤) , aged 45, is our executive director where she is responsible for the Group’s overall administrative matters and public relationships. Ms. Ma graduated from Henan Institute of Finance and Economics (河南財經學院) (now known as Henan University of Economics and Law (河南財經政法大學) with a bachelor’s degree in national economic planning and statistics in June 1992. From July 1992 to December 2003, Ms. Ma worked in China Construction Bank Henan branch (中國建設銀行河南分行) in various positions such as director of the credit approval committee of the Zhengzhou branch office and vice-president of the Zhengzhou futures branch office, where she was responsible for matters such as credit assessment and approval and public and retail sales. Ms. Ma joined our Group in September 2006 as the chairman of Yuanda Lexus, our wholly owned subsidiary. Over the past three years, Ms. Ma has not been a director of any listed companies. Ms. Ma is Mr Feng’s wife.

Non-Executive Director

Wang Nengguang (王能光) , aged 55, was appointed as our our non-executive director on September 24, 2012. Mr. Wang graduated from Beijing Agricultural and Industrial Cooperative Company Workers University (北京市農工商聯合總公司職工大學) in 1987 and from Party School of the Central Committee of C.P.C. (中共中央黨校) in 2001. He is also qualified as a certified public accountant in June 2004. Mr. Wang has more than 30 years of experience in management and corporate finance. In 1992, Mr. Wang joined the Lenovo Group Limited (聯想集團) (stock code: 00992.HK), a company listed on the Hong Kong Stock Exchange. From 1994 to 2001, Mr. Wang served as the general manager of the finance department. Mr. Wang was involved in the 1997 merger of Lenovo Group Limited and Lenovo China. In 2001, Mr. Wang was also involved in a restructuring exercise in Lenovo Group Limited. In 2001, Mr. Wang left Lenovo Group Limited and co-founded Legend Capital Co., Ltd (君聯資本 , previously known as 聯想投資有限公司), an investment company, where he is responsible for financing, exit strategies and the long term investments. Mr. Wang has been the director of Anhui USTC iFlytek Co., Ltd (安徽科大訊飛資訊科技股份有限公司) (stock code: 002230.SZ), a company listed on the Shenzhen Stock Exchange, since April 2007. He had also been the director of SinoCom Software Group Limited (中訊軟件集團股份有限公司) (stock code: 0299.HK), a company listed on the Hong Kong Stock Exchange, from April 2004 to May 2012 and Shanghai Luxin Evotech Packing Materials Science & Technology Co., Ltd (上海綠新包裝材料科技股份有限公司) (stock code: 002565.SZ), a company listed on the Shenzhen Stock Exchange, from August 2009 to August 2012.

Independent Non-Executive Directors

Xiao Changnian (肖長年) , aged 64, was appointed as our independent non-executive director on March 18, 2013. Mr. Xiao graduated with a bachelor’s degree in industrial accounting from Hubei Institute of Finance and Economics (湖北財經學院) (now known as Zhongnan University of Economics and Law (中南財經政法大學)) in 1982. Mr. Xiao has more than 30 years of experience in the accounting and auditing profession. After graduation, Mr. Xiao worked for the National Audit Office of the PRC in the department of public transport (審計署工交局) from August 1982 to July 1994 and served as the deputy bureau chief of the Audit Office of the National Sports Commission of the PRC (國家體委審計局) from July 1994 to September 1998. He went on to serve as the deputy bureau chief in various departments of the National Audit Office of the PRC, such as the Customs Audit Office (海關審計局), the Transportation Audit Office (交通運輸審計局) and the Second Economics Audit Office (經濟審計二局) from September 1998 to December 2003. Thereafter, Mr Xiao was appointed as auditing official (deputy bureau chief grade) of the Economics and Trade Office of National Audit Office of the PRC (審計署經貿司), where he served till December 2008. Mr. Xiao was the chairman of the board of supervisors of the Quantum Hi-Tech (China) Biological Co., Ltd (量子高科 (中國) 生物股份有限公司) (stock code: 300149.SZ), a company listed on the Shenzhen Stock Exchange from November 2010 to August 2011, and the independent director of Zhejiang Qianjiang Motorcycle Co., Ltd (浙江錢江摩托股份有限公司), (stock code: 000913.SZ), a company also listed on the Shenzhen Stock Exchange, since April 2012.

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Liu Zhangmin (劉章民) , aged 63, was appointed as our independent non-executive director on March 18, 2013. Mr. Liu graduated with a college degree in industrial accounting from the Beijing Institute of Machinery Management (北京機械工業管理學院) (now known as the Beijing Information Science and Technology University (北京信息科技大學)) in 1986. He also qualified as a senior auditor in 1996, and as a senior accountant in 2006. Mr. Liu has over 40 years of experience in the automobile industry since he joined the Dongfeng Motor Corporation (東風汽車公司) in 1970. Mr. Liu started as a deputy head of factory in Dongfeng Motor Corporation in July 1982, and worked in procurement, finance and other departments in different positions of responsibility. Mr. Liu was appointed as vice president of Dongfeng Motor Corporation in July 1995 and chief accounting officer in April 2005. He was appointed as chairman of the board of directors of Dongfeng Motor Finance Co., Ltd. (東風汽車財務有限公司) in November 1997, Dongfeng Checheng Logistics Co., Ltd (東風車城物流股份有限公司) in February 2004 and Dongfeng Nissan Auto Finance Co., Ltd (東風日產汽車金融有限公司) in July 2007.

Mr. Liu served as the president and executive director of Dongfeng Motor Group Company Limited (stock code: 0489.HK), a company listed on the Hong Kong Stock Exchange, from December 2004 to June 2010.

Besides serving as a director of the China Shipping (Group) Company (中國海運(集團)總公司), Mr. Liu also holds the following positions in the respective listed companies:

the independent director of China First Heavy Industries Co., Ltd (中國第一重型機械股份公司) (stock code: 601106.SS), a company listed on the Shanghai Stock Exchange;
the independent director of China Communications Construction Co., Ltd (中國交通建設股份有限公司) (stock code: 1800.HK, 601800.SS), a company listed on the Hong Kong Stock Exchange and Shanghai Stock Exchange; and
the independent director of China Yangtze Power Co., Ltd (中國長江電力股份有限公司) (stock code: 600900.SS), a company listed on the Shanghai Stock Exchange.

Li Daomin (李道民) , aged 70, was appointed as our independent non-executive director on March 18, 2013. Mr. Li graduated from Hubei University (湖北大學) (now known as Zhongnan University of Economics and Law (中南財經政法大學)) with an undergraduate degree in law majoring Politics & Law. He has more than 25 years of experience in civil and administrative law. From August 1987 to August 1993, Mr. Li served as a standing committee member and the deputy head of the Higher People’s Court of Henan Province (河南省高級人民法院), and from August 1993 to February 1996, he served as deputy party secretary of the standing committee and executive deputy head of the Higher People’s Court of Henan Province. He was then promoted to party secretary of the standing committee and head of the Higher People’s Court of Henan Province where he served till January 2008. From December 2009 to date, Mr. Li has served as the chairman of the Henan Private Economy Research Association (河南省民營經濟研究會) and member of Advisory Committee of the Supreme People’s Court (最高人民法院諮詢委員會). Over the past three years, Mr. Li has not been a director of any listed companies.

Xue Guoping (薛國平) , aged 62, was appointed as our independent non-executive director on March 18, 2013. Mr. Xue graduated from Beijing University of Foreign Trade (北京對外貿易大學) (now known as University of International Business and Economics (對外經濟貿易大學)) in 1976. Mr. Xue began his career in the COFCO Group (中糧集團) and was appointed as deputy chief executive officer in 1994. He also served as the deputy general manager and general manager of COFCO Hong Kong (previously known as Top Glory International Holdings Limited (鵬利國際集團有限公司)) between 1994 and 2004. Mr. Xue continued to serve as the deputy chief executive officer of the COFCO Group

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until he retired in 2010. Mr. Xue was an executive director and later the chairman of the board of directors of China Foods Limited (中國食品有限公司) (stock code: 0506.HK), a company listed on the Hong Kong Stock Exchange and a division of the COFCO Group, from 1995 to 2007, and chairman of the board of directors of CPMC Holdings Limited (中糧包裝控股有限公司) (stock code: 0906.HK), a company listed on the Hong Kong Stock Exchange and a division of the COFCO Group, from 2008 to 2011.

SENIOR MANAGEMENT

The senior management team of our Group, in addition to the executive Directors listed above, is as follows.

Feng Guo (馮果) , aged 30, is the financial controller of our Group and is responsible for the audit, and financial related matters at our subsidiary level. Ms. Feng graduated with a bachelor’s degree in law from Zhengzhou University (鄭州大學) in 2007 and obtained a masters degree in business management from Zhongnan University of Economics and Law (中南財經政法大學) in 2009. She joined our Group in March 2005 as a deputy general manager responsible for finance matters. She was involved in establishing our partnership with BMW China in Henan Province and setting up Zhongdebao. Ms. Feng was also tasked with the development of automobile brands such as BMW, Land Rover and Rolls-Royce. Over the past three years, Ms. Feng has not been a director of any listed companies. Ms. Feng is Mr. Feng’s niece.

Yang Shengjun (楊勝軍) , aged 48, is the chief officer of human resources of our Group. Mr. Yang joined our Group in October 2012. Mr. Yang graduated from the Beijing Institute of Technology (北京理工大學) in July 1986 with a bachelor’s degree in machinery manufacturing, and in March 1989 with a master’s degree in machinery manufacturing. He also graduated as a research student from the Institute of Psychology, Chinese Academy of Sciences (中國科學院心理研究所) with a master’s degree in applied psychology in July 2002. Mr. Yang has more than 10 years of experience in human resource planning and management. He joined Legends Holding (聯想控股集團) in March 1999 and served in various positions in his ten years with Legend Holdings and its affiliates, including as deputy general manager and subsidiary director of human resources. He then worked at Tianya Shequ Network Technology Co., Ltd (天涯社區網絡科技股份有限公司) from June 2010 to October 2012 as director of human resource and deputy general manager of the Beijing branch office. Over the past three years, Mr. Yang has not been a director of any listed companies.

COMPANY SECRETARY

Wong Wai Yee, Ella (黄慧兒) , aged 37, was appointed as our company secretary on April 19, 2013. She is currently a senior manager of the corporate services division of Tricor Services Limited (“ Tricor ”). Prior to joining Tricor in 2004, Ms. Wong worked for Ernst & Young and Tengis Limited in Hong Kong as the supervisor of corporate secretarial services. She has over 10 years of experience in corporate secretarial practice, providing company secretarial services to many private companies and a number of public companies (including H share companies) listed on the Hong Kong Stock Exchange. Ms. Wong is currently the company secretary of Vedan International (Holdings) Limited (stock code: 2317.HK), a company listed on the Hong Kong Stock Exchange. Ms. Wong is a chartered secretary and an associate member of both The Institute of Chartered Secretaries and Administrators and The Hong Kong Institute of Chartered Secretaries. Ms. Wong received a Bachelor of Economics from the University of Hong Kong in 1997 and has also completed a Postgraduate Diploma in Corporate Administration at the City University of Hong Kong in 2000.

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AUDIT COMMITTEE

Our Company established an audit committee with written terms of reference in compliance with Rules 3.21 and 3.23 of the Listing Rules and the Corporate Governance Code and Corporate Governance Report as set out in Appendix 14 to the Listing Rules. The audit committee consists of three members, namely Xiao Changnian, Liu Zhangmin and Xue Guoping, our independent non-executive Directors. Xiao Changnian has been appointed as the chairman of the audit committee, and is our independent non-executive Director possessing the appropriate professional qualifications. The primary duties of the audit committee are to review and supervise the financial reporting process and internal control system of the Group, oversee the audit process and perform other duties and responsibilities as assigned by our Board.

REMUNERATION COMMITTEE

Our Company established a remuneration committee with written terms of reference in compliance with the Corporate Governance Code and Corporate Governance Report as set out in Appendix 14 to the Listing Rules. The remuneration committee consists of three members, namely Xue Guoping and Liu Zhangmin, our independent non-executive Directors, and Yang Lei, our executive Director. Xue Guoping has been appointed as the chairman of the remuneration committee. The primary duties of the remuneration committee are to establish and review the policy and structure of the remuneration for the Directors and senior management and make recommendations on employee benefit arrangement.

NOMINATION COMMITTEE

Our Company established a nomination committee with written terms of reference in compliance with the Corporate Governance Code and Corporate Governance Report as set out in Appendix 14 to the Listing Rules. The nomination committee consists of two independent non-executive Directors, being Li Daomin and Xue Guoping, and one executive Director, being Feng Changge. Feng Changge, the Chairman of our board, is the chairman of the nomination committee. The primary duties of the nomination committee are to make recommendations to our Board on the appointment and removal of Directors of our Company.

COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT

The aggregate amount of remuneration our Directors and senior management have received (including fees, salaries, contributions to pension schemes, discretionary bonuses, housing and other allowances and other benefits in kind) for the years ended December 31, 2010, 2011 and 2012 was approximately RMB2.2 million, RMB2.9 million and RMB3.9 million, respectively.

The aggregate amount of fees, salaries, contributions to pension schemes, discretionary bonuses, housing and other allowances and other benefits in kind paid to our five highest paid individuals of our Company, including Directors, during each of the years ended December 31, 2010, 2011 and 2012, was approximately RMB1.9 million, RMB2.4 million and RMB3.1 million, respectively.

Under the arrangements currently in force, the aggregate amount of remuneration, excluding discretionary bonuses, payable to our Directors for the year ending December 31, 2013 is estimated to be approximately RMB3.9 million.

No remuneration was paid by us to our Directors or the five highest paid individuals as an inducement to join or upon joining us or as a compensation for loss of office in respect of the years ended December 31, 2010, 2011 and 2012. Further, none of our Directors had waived any remuneration during the same period.

Save as disclosed above, no other payments have been made or are payable in respect of each of the three years ended December 31, 2010, 2011 and 2012 by the Group to the Directors.

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DIRECTORS AND SENIOR MANAGEMENT

Our Board will review and determine the remuneration and compensation packages of our Directors and senior management which will receive recommendation from the Remuneration Committee which will take into account salaries paid by comparable companies, time commitment and responsibilities of the Directors and performance of our Group.

RESTRICTED SHARE UNIT SCHEME

Directors (excluding independent non-executive Directors) are also eligible to participate in the RSU Scheme. For details, see the section headed “Statutory and General Information – D. Restricted Share Unit Scheme” in Appendix IV to this document.

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FINANCIAL INFORMATION

You should read the following discussion and analysis with our audited consolidated financial information, including the notes thereto as of and for the years ended December 31, 2010, 2011 and 2012 included in the Accountants’ Report set out in Appendix I to this document. The Accountants’ Report has been prepared in accordance with HKFRS. The following discussion and analysis and other parts of this document contain forward-looking statements that reflect our current views with respect to future events and financial performance that involve risks and uncertainties. These statements are based on assumptions and analysis made by us in light of our experience and perception of historical events, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. In evaluating our business, you should carefully consider the information provided in the section headed “Risk Factors” in this document.

OVERVIEW

Our specialization in luxury and ultra-luxury brands has enabled us to achieve significant revenue and profit growth during 2010, 2011 and 2012. Our revenue was RMB1.80 billion, RMB3.03 billion and RMB5.66 billion for the years ended December 31, 2010, 2011 and 2012, respectively, representing a CAGR of 77.3% from 2010 to 2012. Sales of new passenger vehicles were the main revenue sources and accounted for 89.7%, 90.8% and 92.7% of the total revenues of the years ended December 31, 2010, 2011 and 2012, respectively. The gross profit margin for sales of new passenger vehicles was 9.8%, 11.4% and 9.2% for the years ended December 31, 2010, 2011 and 2012, respectively. We also generate revenue from after-sales services. Compared with sales of new passenger vehicles, after-sales services provide steady and recurring revenue with higher gross profit margin. The gross profit margin for after-sales services was 39.6%, 37.6% and 44.0% for the years ended December 31, 2010, 2011 and 2012, respectively. Gross profit generated from after-sales services accounted for 31.5%, 25.1% and 27.4% of the total gross profit of the years ended December 31, 2010, 2011 and 2012, respectively. Our net profit was RMB112.7 million, RMB220.5 million and RMB350.7 million for the years ended December 31, 2010, 2011 and 2012, respectively, representing a CAGR of 76.4% from 2010 to 2012.

FACTORS AFFECTING OUR RESULTS OF OPERATIONS

Demand for luxury and ultra-luxury passenger vehicles in China

We generate the substantial majority of our revenues from the sales of new luxury and ultra-luxury passenger vehicles and the market demand for such passenger vehicles in China directly affects our revenues. Demand for luxury and ultra-luxury passenger vehicles is affected by a variety of factors, including:

the macro-economic conditions in China, level of urbanization and household income;
continued increase in the number of wealthy individuals and consumer sentiment toward luxury products;
continued improvement of road networks and infrastructure; and
relevant governmental laws and regulations with regard to passenger vehicle consumptions.

Moreover, demand and supply of luxury and ultra-luxury passenger vehicles is also affected by a number of factors outside the passenger vehicle market in China. For example, the recent territorial dispute with Japan and the deepening debt crisis in Europe had negative or mixed impact on the

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FINANCIAL INFORMATION

passenger vehicle market in China. For more details, see “Industry Overview – Luxury and Ultra-luxury Passenger Vehicle Market in China – Rapid growth of the luxury and ultra-luxury passenger vehicle market in China” and “Risk Factors – Our business may be adversely affected by political and macro-economic events.”

Overall, according to the ACMR Report, Chinese luxury and ultra-luxury passenger vehicle market has experienced significant growth in recent years. The sales volume of luxury and ultra-luxury passenger vehicles in China grew from approximately 152,000 in 2006 to 1.43 million in 2012, representing a CAGR of 45.3%, more than twice of the CAGR of the sale volume of passenger vehicle in total in China. The ACMR Report estimates that the recent European debt crisis and the Diaoyu Island dispute between China and Japan will not have a significant adverse impact on the passenger vehicle market in China, and the luxury and ultra-luxury passenger vehicle market in China will continue to grow rapidly from 2013 to 2016, and the sales volume is expected to increase from 1.45 million in 2013 to 3.0 million in 2016, representing a CAGR of approximately 27.4%. Based on the foregoing, our Directors are of the view that, in the absence of unforeseen circumstances and developments, the outlook for automobile sales in China for the remaining of 2013 is not expected to be materially different from the current market environment.

Our sales network

Our sales of new passenger vehicles are directly affected by the number, locations, and business performances of our outlets. We have rapidly expanded our sales network of outlets in first-tier cities, provincial capitals and other affluent cities in China during 2010, 2011 and 2012. As of December 31, 2010, 2011 and 2012, we operated six, nine and 22 outlets, respectively. The maintenance and continued expansion of our sales network depend on our ability to continue to renew existing and enter into new dealership authorization agreements with manufacturers. We believe our strong relationship with manufacturers and track record of strong performance will help us maintain and expand our sales network in the foreseeable future.

Pricing

Market demand. Market demand for luxury and ultra-luxury passenger vehicles in China in general has been increasing steadily during 2010, 2011 and 2012 and is expected to continue to grow in the near future, according to the ACMR Report. The retail price of a new passenger vehicle is affected by the demand and supply of the particular model at the time of the sale. In addition, the average retail price of a certain brand is affected by the demand and competitive landscape of a particular regional market. In general, competition of luxury and ultra-luxury passenger vehicle markets in tier-one cities and affluent regions is more intense than that in other areas in China. Certain tier-one cities such as Beijing and Shanghai also implemented a number of measures to limit the number of new license plates they issue each year, which resulted in intensified competition in sales of new passenger vehicles in such cities. In particular, according to the ACMR Report, Henan Province is one of the fast growing regional markets for luxury and ultra-luxury passenger vehicles, which, combined with our dominant market position in Henan Province, enabled us to continuously increase our sales volumes and average retail price during 2010, 2011 and 2012.

Competition in the same region. Intense competition in a regional market often results in price reduction and lower profit margin for dealerships. During 2010, 2011 and 2012, our dominant market position in Henan Province enhanced our pricing power in the region, which enabled us to sell a passenger vehicle at a premium compared with the prevailing price of the same brand and model

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FINANCIAL INFORMATION

in other more competitive regional markets. Such dominant position in Henan Province contributed significantly to our gross profit margin of 12.8%, 13.8%, and 11.7% for the years ended December 31, 2010, 2011 and 2012, respectively. Conversely, in other regions such as tier-one cities where there are developed passenger vehicle markets and intense competition, the profit margin of our sales of new passenger vehicles tend to be lower compared with that of passenger vehicles we sold in Henan Province. We expect to continue to maintain our dominant position in Henan Province in the near future, while we actively increase our presence and competitiveness in other regional markets.

Price sensitivity of customers. Consumers of luxury and ultra-luxury passenger vehicles are in general less price sensitive compared with purchasers of mid- to high-end passenger vehicles. The majority of our customers are affluent individuals, who generally value service quality and purchase experiences over price bargains, which gives us more flexibility in adjusting retail prices depending on market demand and our inventory. In addition, for models that are high in demand, many of our customers were willing to pay a premium to obtain the particular models they desired sooner than they would be able to if they were put on a wait list.

Sales and services mix

Our principal business consists of sales of new passenger vehicles and after-sales services. Our after-sales services have a higher gross profit margin compared with that of sales of new passenger vehicles. During 2010, 2011 and 2012, we generated the substantial majority of our revenues from sales of new passenger vehicles, which accounted for 89.7%, 90.8%, and 92.7% of the total revenues for the years ended December 31, 2010, 2011 and 2012, respectively. For the years ended December 31, 2010, 2011 and 2012, the gross profit margin of our after-sales services was 39.6%, 37.6% and 44.0%, respectively, and gross profit generated from after-sales services accounted for 31.5%, 25.1% and 27.4% of the total gross profit for the same periods. In comparison, gross profit margin of sales of new passenger vehicles was 9.8%, 11.4% and 9.2% for the years ended December 31, 2010, 2011 and 2012, respectively. Our after-sales services are indirectly affected by our historical new passenger vehicles sales, as customers who purchased passenger vehicles from our 4S stores tend to return to the same stores for after-sales services. In addition, it typically takes approximately one to two years for the demand for after-sales services in newly established 4S stores to ramp up, and as a result, our revenues from after-sales services are also affected by the number and maturity of our 4S stores.

Gross profit margins for sales of new passenger vehicles of luxury and ultra-luxury brands are typically higher than those of mid- to high-end brands. Since we deal exclusively luxury and ultra-luxury passenger vehicles, our gross profit margins for sales of new passenger vehicles are generally higher and less affected by brand mix compared with dealerships that have a mixed portfolio.

Cost of sales and services and incentive rebates from manufacturers

The significant part of our cost of sales is cost of procurement of passenger vehicles and spare parts from automobile manufacturers offset by the incentive rebates they offer.

For the years ended December 31, 2010, 2011 and 2012, our cost of sales and services accounted for 87.2%, 86.2% and 88.3% of our revenues, respectively. The wholesale prices that we pay for new passenger vehicles and spare parts are determined by automobile manufacturers and we do not exercise any control or influence over the pricing.

Automobile manufacturers typically offer incentive rebates that are generally determined with reference to the units of new passenger vehicles we purchase or sell during a fiscal year, and are further adjusted based on our performance relative to certain targets set by such automobile

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FINANCIAL INFORMATION

manufacturers, including customer satisfaction ratings and dealership operating standards. As a market practice, automobile manufacturers will determine their own rebate policies and practices and inform us in advance. Such policies and practices are not subject to negotiation or set forth in the dealership authorization agreements. From time to time, automobile manufacturers also offer special incentive rebates for particular models of their passenger vehicles. Rebate amounts are settled from time to time, and the timing of settlement varies with the different business practices of different automobile manufacturers. Our incentive rebates were typically settled within a period varying from three months to 12 months as determined by the automobile manufacturers. There was no fixed settlement period agreed upon between the Group and the automakers. For the years ended December 31, 2010, 2011 and 2012, we recorded incentive rebates of approximately RMB92.2 million, RMB124.6 million and RMB317.7 million. Excluding contribution from incentive rebates would have a significant negative impact on our gross profit margins, but it would not affect the overall trend during 2010, 2011 and 2012. Our gross profit margin excluding the incentive rebates would be 7.7%, 9.7% and 6.1% for the years ended December 31, 2010, 2011 and 2012, respectively, as compared to our gross profit margin of 12.8%, 13.8% and 11.7% for the same periods. For more information, see “– Description of Selected Income Statement Line Items – Cost of sales and services.”

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

We have identified certain accounting policies that are significant to the preparation of our financial statements. Our significant accounting policies, which are important for an understanding of our financial condition and results of operations, are set forth in detail in Note 3 to the Accountants’ Report included in Appendix I to this document. Some of our accounting policies involve subjective assumptions and estimates, as well as complex judgments relating to accounting items. In each case, the determination of these items requires management judgments based on information and financial data that may change in future periods. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies; (ii) the judgment and other uncertainties affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. We set forth below those accounting policies that we believe involve the most significant estimates and judgments used in the preparation of our financial statements.

Basis of Combination

This document includes our consolidated financial information for 2010, 2011 and 2012. The acquisition of subsidiaries under common control has been accounted for using merger accounting principles. The merger method of accounting involves incorporating the financial statement items of the combining entities or businesses in which the common control combination occurs as if they had been consolidated from the date when the combining entities or businesses first came under the control of the controlling party.

No amount is recognized in respect of goodwill or the excess of the acquirers’ interest in the net fair value of acquirees’ identifiable assets, liabilities and contingent liabilities over the cost of investment at the time of common control combination.

The consolidated income statements include the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under common control, where this is a shorter period, regardless of the date of the common control combination.

The financial statements of our subsidiaries are prepared for the same reporting period as our company, using consistent accounting policies.

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FINANCIAL INFORMATION

All significant intra-group balances, transactions, unrealized gains and losses resulting from intra-group transactions and dividends are eliminated on combination in full.

Non-controlling interests represent the interests of outside shareholders not held by our Group in the results and net assets of the companies now comprising our Group.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

Judgments and Estimates

The preparation of our consolidated financial information requires our management to make judgments, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.

Judgments

In the process of applying our accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the financial information:

Deferred tax assets

Deferred tax assets are recognized for all deductible temporary differences and unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. The carrying values of deferred tax assets were RMB2.8 million, RMB6.7 million and RMB10.1 million as of December 31, 2010, 2011 and 2012, respectively. No deferred tax was provided for the accumulated earnings as of December 31, 2012, as the Directors decided that all of our accumulated earnings prior to December 31, 2012 will be retained by our PRC subsidiaries. All of our accumulated earnings as of June 30, 2012 were distributed to the Controlling Shareholders as part of the plan to offset the outstanding loan amount due to us. For more details, see “– Net Current Assets and Liabilities – Related party transactions.”

Estimation Uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of our assets and liabilities within the next financial year, are discussed below.

Impairment of non-financial assets (other than goodwill)

We assess whether there are any indicators of impairment for all non-financial assets at each reporting date. Indefinite life intangible assets are tested for impairment annually and at other times when such an indicator exists. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The calculation of the fair value less costs to sell is based on available data

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FINANCIAL INFORMATION

from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.

CONSOLIDATED RESULTS OF OPERATIONS

The following table sets forth our consolidated results of operations for the periods indicated:

	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,801,358	3,031,856	5,656,744
Cost of sales and services . . . . . . . . . . . . . . . . . . . .	(1,569,951) (2,614,356)		(4,993,298)

Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	231,407	417,500	663,446
Other income and gains, net (excluding interest
income from the Controlling Shareholders) . . .	10,229	25,387	88,918
Interest income from the Controlling
Shareholders(1) . . . . . . . . . . . . . . . . . . . . . . . . .	13,405	53,516	147,740
Selling and distribution costs . . . . . . . . . . . . . . . .	(64,517) (106,737)		(237,030)
Administrative expenses . . . . . . . . . . . . . . . . . . . .	(18,716) (30,330)		(71,611)
Profit from operations . . . . . . . . . . . . . . . . . . . . .	171,808	359,336	591,463
Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(19,956) (61,872)		(116,403)
Share of profit of an associate . . . . . . . . . . . . . . .	–	–	222
Profit before tax. . . . . . . . . . . . . . . . . . . . . . . . . .	151,852	297,464	475,282
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(39,152) (77,014)		(124,563)

Profit for the year(2) . . . . . . . . . . . . . . . . . . . . . . .	112,700	220,450	350,719(3)

the loans during 2010, 2011 and 2012:
	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Maximum balance . . . . . . . . . . . . . . . . . . . . . . . . .	305,633	990,077	1,648,198
Minimum balance . . . . . . . . . . . . . . . . . . . . . . . . .	31,029	232,552	980,577
Average balance of the year. . . . . . . . . . . . . . . . . . .	94,070	375,551	1,036,772

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FINANCIAL INFORMATION

(2) The following table sets forth our adjusted net profit excluding interest incomes from the Controlling Shareholders and the related tax impact for the periods indicated:

the related tax impact for the periods indicated:
	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . .	112,700	220,450	350,719
Loan interests from the Controlling Shareholders . . . . . .	(13,405)	(53,516)	(147,740)
Related tax impact. . . . . . . . . . . . . . . . . . . . . . . . .	3,351	13,379	36,935

Adjusted net profit . . . . . . . . . . . . . . . . . . . . . . . .	102,646	180,313	239,914

Such adjusted net profit did not take into account the related interest expenses we incurred for bank loans that were used to grant loans to the Controlling Shareholders.

(3) We started to sell passenger vehicles of six new brands, namely, Rolls-Royce, Aston Martin, Land Rover, Jaguar, Ferrari and Maserati in 2012. Net profit generated from sales of such new brands was RMB27.3 million in 2012, representing 11.4% of our net profit excluding interest incomes from the Controlling Shareholders and the related tax impact of the year. Net profit excluding (i) interest incomes from the Controlling Shareholders and the related tax impact and (ii) net profit generated from sales of new passenger vehicles of the six new brands would be RMB212.6 million in 2012.

DESCRIPTION OF SELECTED INCOME STATEMENT LINE ITEMS

Revenue

We generate our revenue from sales of new passenger vehicles and after-sales services during 2010, 2011 and 2012. The following table sets forth a breakdown of our revenues and percentages to total revenues for the periods indicated:

				Year ended December 31,	Year ended December 31,	Year ended December 31,

	2010			2011			2012

			Gross			Gross			Gross
			profit			profit			profit
		margin			margin			margin
	(RMB’000)	(%)	(%)	(RMB’000)	(%)	(%)	(RMB’000)	(%)	(%)

Sales of new passenger vehicles . . .	1,616,681	89.7	9.8	2,752,772	90.8	11.4	5,244,449	92.7	9.2
After-sales services . . . . . . . . . . .	184,677	10.3	39.6	279,084	9.2	37.6	412,295	7.3	44.0

Total revenues. . . . . . . . . . . . .	1,801,358	100	12.8	3,031,856	100	13.8	5,656,744	100	11.7

We generated the substantial majority of our revenue from sales of new passenger vehicles, which accounted for 89.7%, 90.8% and 92.7% of the total revenues for the years ended December 31, 2010, 2011 and 2012, respectively. Our sales of new passenger vehicles in 2010, 2011 and 2012 benefited from the continued increase in demand for luxury and ultra-luxury passenger vehicles as a result of the development of the market segment in China. The increase in revenues from sales of new passenger vehicles in a fiscal year was primarily due to the increase in sales in both our existing outlets and the newly opened outlets during that year.

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FINANCIAL INFORMATION

The following table sets forth a breakdown of our sales volume and revenue contribution of new passenger vehicles for the periods indicated:

				Year ended December	Year ended December	31,

		2010			2011			2012

	Sales	Revenue		Sales	Revenue		Sales	Revenue
	volume	(RMB’000)	%	volume	(RMB’000)	%	volume	(RMB’000)	%

BMW. . . . . . . . . . .	2,199	1,183,857	73.2	3,985	2,180,202	79.2	9,340	4,343,837	82.9
Lexus. . . . . . . . . . .	768	418,622	25.9	873	506,484	18.4	1,120	547,297	10.4
MINI . . . . . . . . . . .	59	14,202	0.9	228	66,086	2.4	338	90,694	1.7
Rolls-Royce . . . . . . .	–	–	–	–	–	–	32	190,490	3.6
Aston Martin . . . . . .	–	–	–	–	–	–	10*	40,315	0.8
Land Rover & Jaguar .	–	–	–	–	–	–	28	20,459	0.4
Ferrari . . . . . . . . . .	–	–	–	–	–	–	2	5,367	0.1
Maserati . . . . . . . .	–	–	–	–	–	–	3	5,990	0.1

Total. . . . . . . . . . .	3,026	1,616,681	100.0	5,086	2,752,772	100.0	10,873	5,244,449	100.0

The automobile manufacturer for such ultra-luxury passages vehicles sold certain numbers of passenger vehicles to us after we obtained authorization for a 4S store but before such store officially commenced operation. We sold certain of such passenger vehicles at motor shows and other promotional events as well as through direct contacts with potential customers.

During 2010, 2011 and 2012, the majority of our revenues from sales of new passenger vehicles were generated from sales of BMW passenger vehicles, which accounted for 73.2% 79.2% and 82.9% of the revenues from sales of new passenger vehicles for the years ended December 31, 2010, 2011 and 2012, respectively. The increase in percentages was due to the fact that the majority of outlets we opened in 2010, 2011 and 2012 were BMW outlets. Going forward, we expect BMW passenger vehicles to continue to be our major revenue contributor. At the same time, as we expand our business and broaden our brand coverage, we expect revenue contributions from other luxury and ultra-luxury brands to increase in percentage. The average retail price of a BMW passenger vehicle we sold was approximately RMB538,000, RMB547,000 and RMB465,000 for the years ended December 31, 2010, 2011 and 2012, respectively. The decreases in the average retail price were primarily due to an increase in the supply of BMW passenger vehicles in the market and the introduction of several lower-end models, especially since the beginning of 2012, due to BMW China’s strategy to increase its market share in China by catering to customers’ demands for less expensive luxury passenger vehicles.

Our second largest brand in terms of sales volume and revenue contribution is Lexus, which accounted for 25.9%, 18.4% and 10.4% of the revenues from sales at new passenger vehicles for the years ended December 31, 2010, 2011 and 2012, respectively. The decrease in percentage was primarily due to our expansion with mainly BMW outlets, as well as opening of outlets for ultra-luxury brands. Average retail price and sales volume of Lexus are also affected by Chinese customers’ sentiment to passenger vehicles of Japanese brand. In particular, sales of Lexus passenger vehicles were adversely affected in recent months by the Diaoyu Island territorial dispute. For more details, see “Risk Factors – Our business may be adversely affected by political and macro-economic events.”

The average retail prices for ultra-luxury brands we sold, including Rolls-Royce and Aston Martin were significantly higher than those of luxury brands, which was consistent with market trend.

Revenues from after-sales services consist primarily of income generated from repair and maintenance services, sales of spare parts and accessories and other miscellaneous passenger vehicle related services. Revenues from after-sales services were RMB184.7 million, RMB279.1 million and RMB412.3 million for the years ended December 31, 2010, 2011 and 2012, respectively. The increase in revenues from after-sales services during 2010, 2011 and 2012 was primarily due to the increase

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in the numbers of our 4S stores and the number of our customers who purchased new passenger vehicles at our outlets and subsequently used our 4S stores for after-sales services. Revenues from after-sales services accounted for 10.3%, 9.2% and 7.3% of the total revenues for the years ended December 31, 2010, 2011 and 2012, respectively. The decreases in percentage of revenue contribution from after-sales services were primarily attributable to the revenue contribution from the new outlets, as there is typically a ramp-up period for after-sales services to pick up in a newly opened 4S store.

Cost of sales and services

Our cost of sales consists of cost of sales of new passenger vehicles and cost associated with after-sales services. The following table sets forth a breakdown of our cost of sales for the periods indicated:

indicated:
		Year ended December			31,

	2010		2011		2012

	(RMB’000)	(%)	(RMB’000)	(%)	(RMB’000)	(%)

Sales of new passenger vehicles .	1,458,326	92.9	2,440,304	93.3	4,762,592	95.4
After-sales services . . . . . . . . . . .	111,625	7.1	174,052	6.7	230,706	4.6

Total cost of sales . . . . . . . . . .	1,569,951	100	2,614,356	100	4,993,298	100

Cost of sales of new passenger vehicles

Our cost of sales for new passenger vehicles during 2010, 2011 and 2012 was for the procurement of the passenger vehicles, which accounted for 92.9%, 93.3% and 95.4% of the total cost of sales for the years ended December 31, 2010, 2011 and 2012, respectively. The increases in our cost of sales for new passenger vehicles during 2010, 2011 and 2012 were consistent with the increases in revenues of sales of passenger vehicles.

In particular, the cost of procurement of new passenger vehicles is affected by the rebates granted to us by automobile manufacturers. Our dealership authorization agreements with automobile manufacturers often provide for volume-based rebates, which are decided with reference to the units of new automobiles purchased, and adjusted based on our satisfaction of certain targets set by the relevant automobile manufacturers, including sales targets, customer satisfaction indices and dealership presentation standards. The automobile manufacturers settle the rebates with us from time to time taking into account the above factors by deducting the price payable by us in the subsequent purchases placed by us. Incentive rebates are accrued at each financial reporting date based on the actual purchasing amounts, corresponding rebate rates as agreed with automobile manufacturers and our management’s estimate on relevant factors, including without limitation, meeting certain sales and service targets set by the relevant automakers. Incentive Rebates related to passenger vehicles already sold are deducted from cost of sales. Conversely, incentive rebates attributable to passenger vehicles already procured from automobile manufacturers but still held in our inventories on the reporting date are deducted from the carrying value of these inventory items, so that the cost of inventories is recorded net of applicable rebates.

Cost of after-sales services

Our cost associated with after-sales services include cost of labor and spare parts. The increases in our cost associated with after-sales services during 2010, 2011 and 2012 were in line with the increases in revenues of after-sales services. Cost of after-sales services accounted 7.1%, 6.7% and 4.6% of the total cost of sales for the years ended December 31, 2010, 2011 and 2012, respectively. The decrease in the year ended December 31, 2012 was in line with the decrease in revenue contribution from after-sales services during the same period.

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FINANCIAL INFORMATION

Gross Profit Margin

Our overall gross profit margin was 12.8%, 13.8% and 11.7% for the years ended December 31, 2010, 2011 and 2012, respectively. The trend of our overall gross profit margin during 2010, 2011 and 2012 was largely in line with the trend of gross profit margin of our sales of new passenger vehicles. Sales of luxury and ultra-luxury passenger vehicles usually have higher gross profit margins compared with sales of middle- or low-end passenger vehicles. As a result, our gross profit margin benefit from our specialization in the sales of luxury and ultra-luxury passenger vehicles only.

Our gross profit margin for sales of new passenger vehicles was 9.8%, 11.4% and 9.2% for the years ended December 31, 2010, 2011 and 2012, respectively. The increase of our gross profit margin for sales of new passenger vehicles from 2010 to 2011 was primarily due to our ability to charge increasing premiums on retail prices, which was in turn a result of (i) the increase in demand for luxury and ultra-luxury passenger vehicles during the period and (ii) the increase in our market share and competitiveness in Henan Province as our existing outlets matured and new outlets were opened. The decrease of gross profit margin for sales of new passenger vehicles in 2012 was primarily due to the increase in the supply of BMW passenger vehicles in the market which resulted in a reduction of retail prices for various BMW models and the introduction of various lower-end BMW models in that period.

Our gross profit margin for after-sales services was 39.6%, 37.6% and 44.0% for the years ended December 31, 2010, 2011 and 2012, respectively. The decreases of our gross profit margin for after-sales services from 2010 to 2011 were primarily due to the continued increases in costs of labor and spare parts. In 2012, we increased the rates of after-sales services for out-of-warranty services, resulting in an increase in gross profit margin. Gross profit generated from after-sales services accounted for 31.5%, 25.1% and 27.4% of the total gross profit for the years ended December 31, 2010, 2011 and 2012, respectively. The decrease in percentages from 2010 to 2011 was primarily due to (i) the opening of exhibition galleries which do not provide after-sales services and (ii) the opening of new 4S stores as there is typical a ramp-up period for after-sales services to pick up in newly opened 4S stores. The increase in percentage from 2011 to 2012 was primarily due to the increase in the gross profit margin of after-sales services.

Other net income and gain (excluding interest income from the Controlling Shareholders)

The following table sets forth our other net income and gains for the periods indicated:

	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Commission income. . . . . . . . . . . . . . . . . . . . . . . . .	4,563	13,211	61,141
Advertisement support received from motor vehicle
manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,474	3,843	5,326
Bank interest income . . . . . . . . . . . . . . . . . . . . . . . .	1,514	2,818	8,429
Net gain on disposal of items of property, plant
and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . .	–	497		–
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,678	5,018	14,022

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10,229	25,387	88,918

Our other net income and gain consists primarily of commission income.

Commission income consists primarily of service fees we generate from (i) consulting services for insurance and financing in connection with purchases of new passenger vehicles and (ii) referral services for traded-in pre-owned passenger vehicles. Referral service fees for trade-in pre-owned

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FINANCIAL INFORMATION

passenger vehicles were recognized as commission income as such services are provided to our customers to facilitate their purchases of new passenger vehicles and similar in nature with the insurance and financing services we provided in connection with the purchase of new passenger vehicles. The commission income is normally calculated as certain percentage of the sales price of the pre-owned passenger vehicles. We only provided the referral service to our customers who want to sell their trade-in passenger vehicles. Once the buyers were identified, we then arranged the transaction directly between our customers and the buyers. We do not purchase the trade-in pre-owned passenger vehicles from our customers and we do not take title of such passenger vehicles in the entire process. Accordingly the sales of trade-in pre-owned passenger vehicles were not recorded as revenues. Our commission income was RMB4.6 million, RMB13.2 million and RMB61.1 million for the years ended December 31, 2010, 2011 and 2012, respectively. The increases in commission income, especially in 2012, were primarily due to the increase in the numbers of customers who used insurance services we referred and financing services for purchases of new passenger vehicles provided by the financing companies affiliated with automobile manufacturers, which were in turn attributable to (i) the increase in sales volume of new passenger vehicles; (ii) favorable interest rates on such financing services provided by the financing companies as incentive for the purchases of new passenger vehicles; and (iii) our efforts to promote such insurance services and financing services to our customers who purchase new passenger vehicles.

Interest income from the Controlling Shareholders

Interest income from the Controlling Shareholders was generated from loans we granted to the Controlling Shareholders which bore an annual interest rate of 15% during 2010, 2011 and 2012. The Controlling Shareholders plan to settle all the outstanding loan amount prior to the [●] and we do not plan to grant any additional loans to the Controlling Shareholders going forward. For more details, see “– Related party transactions”.

Operating expenses

Our operating expenses consist of (i) selling and distribution expenses and (ii) general and administrative expenses. The following table sets forth a breakdown of our operating expenses and percentages to our revenue for the periods indicated:

		Year ended December	Year ended December	Year ended December	31,

	2010		2011		2012

	(RMB’000)	(%)	(RMB’000)	(%)	(RMB’000)	(%)

Selling and distribution
expenses . . . . . . . . . . . . . . . . .	64,517	3.6	106,737	3.5	237,030	4.2
General and administrative
expenses . . . . . . . . . . . . . . . . .	18,716	1.0	30,330	1.0	71,611	1.3
Total operating expenses . . . .	83,233	4.6	137,067	4.5	308,641	5.5

The total operating expenses accounted for 4.6%, 4.5% and 5.5% of the revenues for the years ended December 31, 2010, 2011 and 2012, respectively. The decreases in percentage from 2010 to 2011 was primarily due to increases of our operational efficiency and the synergy among our outlets as we grew our business scale. The increase in operating expenses as a percentage to revenue in 2012 was primarily due to the significant expansion of our business as we opened five new outlets in the first half of 2012 and an increase in our advertising spending.

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FINANCIAL INFORMATION

Selling and distribution expenses

The following table sets forth a breakdown of our selling and distribution expenses for the periods indicated:

periods indicated:
	Year	ended December 31,

	2010		2011	2012

			(RMB’000)

Salary and welfare. . . . . . . . . . . . . . . . . . . . . . . . . .	20,576		35,720	71,094
Rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,202		6,814	18,649
Utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,774		2,069	6,413
Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3,215		8,548	23,961
Office supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,966		3,345	4,683
Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,699		1,661	3,239
Travelling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,538		1,895	3,861
Advertising and promotion expenses . . . . . . . . . . . .	15,489		24,005	51,989
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7,913		14,093	33,631
Automobile related expenses . . . . . . . . . . . . . . . . . .	3,991		5,424	15,103
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3,154		3,163	4,407

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	64,517		106,737	237,030

Our selling and distribution expenses consist primarily of the following:

Salary and welfare. Our expenses associated with salary and welfare for sales employees were RMB20.6 million, RMB35.7 million, and RMB71.1 million for the years ended December 31, 2010, 2011 and 2012, respectively, representing 1.1%, 1.2%, and 1.3% of the revenue of the same periods. The increases in salary and welfare expenses were primarily a result of the increase of our sales representatives as we increased the number of our outlets.

Advertising and promotion expense. Our advertising and promotion expense were RMB15.5 million, RMB24.0 million and RMB52.0 million for the years ended December 31, 2010, 2011 and 2012, respectively, representing 0.9%, 0.8%, and 0.9% of the revenue of the same periods. The increase in advertising and promotion expense due to our increased advertising and promotion activities which was largely in line with the further expansion of our business and increased automobile manufacturers sales and marketing initiatives in which we participated.

Depreciation. Our expenses associated with the depreciation of our assets for the administration purposes were RMB7.9 million, RMB14.1 million, and RMB33.6 million for the years ended December 31, 2010, 2011 and 2012, respectively, representing 0.4%, 0.5%, and 0.6% of the revenues of the same periods. The increase in depreciation expenses was consistent with the expansion of our business and the increase of our number of outlets.

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FINANCIAL INFORMATION

Administrative expenses

The following table sets forth a breakdown of our administrative expenses for the periods indicated:

indicated:
	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Salary and welfare. . . . . . . . . . . . . . . . . . . . . . . . . .	2,287	3,969	11,417
Office supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,307	4,023	6,332
Entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3,591	4,064	5,648
Travelling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,225	3,762	3,317
Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	800	1,026	3,808
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	228	298	833
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . .	671	1,561	13,724
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	879	1,566	3,737
Amortisation of land use right. . . . . . . . . . . . . . . . .	400	400	400
Amortisation of intangible assets. . . . . . . . . . . . . . .	234	205	334
Telecommunication . . . . . . . . . . . . . . . . . . . . . . . . .	449	616	990
Guard and cleaning . . . . . . . . . . . . . . . . . . . . . . . . .	245	370	1,884
Net loss of disposal of Property, Plant and
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	–	–	1,630
Bank charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,734	3,487	9,285
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,666	4,983	8,272

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18,716	30,330	71,611

We incur administrative expenses for the administration and daily operation of our business, including salary and welfare for our administrative personnel, entertainment and travelling expenses in connection with our business operation and promotion, bank changes and other miscellaneous expenses. Our administrative expenses were RMB18.7 million, RMB30.3 million and RMB71.6 million for the years ended December 31, 2010, 2011 and 2012, respectively, representing 1.0%, 1.0%, and 1.3% of the revenues of the same periods.

Finance expenses

The following table sets forth a breakdown of our finance expenses for the periods indicated:

	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Interest expense on bank borrowings wholly
repayable within five years . . . . . . . . . . . . . . . . . .	19,654	60,327	131,275
Interest expense on other borrowings . . . . . . . . . . .	302	1,545	4,844
Less: Interest capitalized . . . . . . . . . . . . . . . . . . . . .	–	–	(19,716)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19,956	61,872	116,403

Substantially all of our financial expenses were interest expenses incurred in connection with bank borrowings that are repayable in full within five years. For more details on our bank borrowings, see “– Indebtedness”.

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FINANCIAL INFORMATION

Tax

Pursuant to the EIT Law, our PRC subsidiaries have been subject to the statutory income tax rate of 25%. Our effective tax rate was 25.8%, 25.9% and 26.2% for the years ended December 31, 2010, 2011 and 2012, respectively, and relatively stable during 2010, 2011 and 2012. We had RMB255.4 million taxes payable as of December 31, 2012, representing income taxes from previous years to be paid.

Net Profit and Net Profit Margin

Our net profit was RMB112.7 million, RMB220.5 million and RMB350.7 million for the years ended December 31, 2010, 2011 and 2012, respectively, representing net profit margin of 6.3%, 7.3% and 6.2% for the same years. Our adjusted net profit excluding interest incomes from the Controlling Shareholders, after taking into account the related tax impact of RMB3.4 million, RMB13.4 million and RMB36.9 million, respectively, would be RMB102.6 million, RMB180.3 million and RMB239.9 million in the years ended December 31, 2010, 2011 and 2012, respectively. Such adjusted net profit did not take into account the related interest expenses we incurred for bank loans that were used to grant loans to the Controlling Shareholders. The adjusted net profit margin would be 5.7%, 5.9% and 4.2% in the years ended December 31, 2010, 2011 and 2012, respectively.

RESULTS OF OPERATIONS

The year ended December 31, 2012 compared with the year ended December 31, 2011

Revenue

Our total revenues increased by 86.8% from RMB3.03 billion in the year ended December 31, 2011 to RMB5.66 billion in the year ended December 31, 2012, due to the increase in revenues from both sales of new passenger vehicles and after-sales services.

Revenues from sales of new passenger vehicles increased by 90.5% from RMB2.75 billion in the year ended December 31, 2011 to RMB5.24 billion in the year ended December 31, 2012. The increase in revenues from sales of new passenger vehicles was primarily due to the increase in sales volume. The number of new passenger vehicles we sold increased from 5,086 in the year ended December 31, 2011 to 10,873 in the year ended December 31, 2012, primarily attributable to (i) the continued growth in demand for luxury and ultra-luxury passenger vehicles in China, especially in Henan Province; (ii) the increase in sales made by our existing outlets, especially outlets opened in 2011 which past their ramp-up phase; and (iii) sales made by 13 newly-opened outlets and in particular, Beijing Huadebao and Nanyang Wandebao, which were opened in November and September 2011, respectively, and had their first full year of operations in 2012.

Revenues from after-sales services increased by 47.7% from RMB279.1 million in the year ended December 31, 2011 to RMB412.3 million in the year ended December 31, 2012, primarily due to (i) our decision to increase the after-sales service rates for out-of-warranty services in 2012 and (ii) the increase in the number of customers who used our 4S stores for after-sales services after purchasing their passenger vehicles with us.

Cost of sales and services

Our total cost of sales increased by 91.2% from RMB2.61 billion in the year ended December 31, 2011 to RMB4.99 billion in the year ended December 31, 2012, in line with the increase of our total revenue.

Our cost of procurement of new passenger vehicles increased by 95.1% from RMB2.44 billion in the year ended December 31, 2011 to RMB4.76 billion in the year ended December 31, 2012, in line with a 90.5% increase in revenues from sales of new passenger vehicles during the same periods.

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FINANCIAL INFORMATION

Our cost associated with after-sales services increased by 32.5% from RMB174.1 million in the year ended December 31, 2011 to RMB230.7 million in the year ended December 31, 2012, in line with a 47.7% increase in revenues from after-sales services during the same periods.

Gross Profit Margin

Our gross profit margin decreased from 13.8% in the year ended December 31, 2011 to 11.7% in the year ended December 31, 2012, primarily due to the decrease of the gross profit margin for sales of new passenger vehicles which was partially offset by the increase in the gross profit margin for after-sales services during the same periods.

Gross profit margin for sales of new passenger vehicles decreased from 11.4% in the year ended December 31, 2011 to 9.2% in the year ended December 31, 2012, primarily due to the increase in the supply of BMW passenger vehicles in the market in 2012 which resulted in a decrease in retail prices for various models. Gross profit margin for after-sales services increased from 37.6% in the year ended December 31, 2011 to 44.0% in the year ended December 31, 2012, primarily due to the increase in after-sales service rates we charged in 2012.

Other net income and gain (excluding interest income from the Controlling Shareholders)

Our other net income and gains increased by 250% from RMB25.4 million in the year ended December 31, 2011 to RMB88.9 million in the year ended December 31, 2012, primarily attributable to a 363% increase in commission income from RMB13.2 million in the year ended December 31, 2011 to RMB61.1 million in the year ended December 31, 2012, primarily due to (i) the increase in sales volume of new passenger vehicles; (ii) the increasing number of purchases of new passenger vehicles through financing services provided by manufacturers as compared to with cash; and (iii) the increasing number of customers who used the insurance we referred in connection with purchases of new passenger vehicles.

Interest income from the Controlling Shareholders

Interest income from the Controlling Shareholders increased by 176% from RMB53.5 million in the year ended December 31, 2011 to RMB147.7 million in the year ended December 31, 2012, primarily due to the increase in the amount of loan amount we granted to the Controlling Shareholders.

Operating expenses

Selling expenses. Our selling expenses increased by 122.1% from RMB106.7 million in the year ended December 31, 2011 to RMB237.0 million in the year ended December 31, 2012, primarily attributable to:

a 99.2% increase in salary and welfare expenses from RMB35.7 million in the year ended December 31, 2011 to RMB71.1 million in the year ended December 31, 2012 due to the increase in the number of our sales representatives to accommodate the opening of new outlets;
a 116.7% increase in advertising and promotion expenses from RMB24.0 million in the year ended December 31, 2011 to RMB52.0 million in the year ended December 31, 2012, as a result of our increased advertising and promotion activities, which was in line with the increase in revenues from sales of new passenger vehicles; and
a 138.3% increase in depreciation expenses from RMB14.1 million in the year ended December 31, 2011 to RMB33.6 million in the year ended December 31, 2012, due to the increase in our assets subject to depreciation as we opened new outlets.

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FINANCIAL INFORMATION

Administrative expenses. Our administrative expenses increased by 136.3% from RMB30.3 million in the year ended December 31, 2011 to RMB71.6 million in the year ended December 31, 2012, primarily attributable to a significant increase in professional fees from RMB1.6 million in the year ended December 31, 2011 to RMB13.7 million in the year ended December 31, 2012, primarily attributable to expenses we incurred in connection with the [●].

Finance expense. Our finance expense increased by 88.0% from RMB61.9 million in the year ended December 31, 2011 to RMB116.4 million in the year ended December 31, 2012, primarily attributable to the increase in our interest expenses incurred in connection with bank borrowings repayable in full within five years as we increased our bank borrowings.

Net Profit and Net profit margin

Our net profit increased by 59.0% from RMB220.5 million in the year ended December 31, 2011 to RMB350.7 million in the year ended December 31, 2012. Our net profit margin decreased from 7.3% in the year ended December 31, 2011 to 6.2% in the year ended December 31, 2012, in line with the decrease of our gross profit margin during the same periods. Our adjusted net profit excluding interest incomes from the Controlling Shareholders, after taking into account the related tax impact of RMB13.4 million and RMB36.9 million, respectively, would be RMB180.3 million and RMB239.9 million in the years ended December 31, 2011 and 2012, respectively, representing a 33.1% increase from 2011 to 2012. Such adjusted net profit did not take into account the related interest expenses we incurred for bank loans that were used to grant loans to the Controlling Shareholders. Net profit excluding interest incomes from the Controlling Shareholders and the related tax impact and net profit generated from sales of new passenger vehicles of new brands that we did not sell prior to 2012 would be RMB212.6 million in 2012. Our adjusted net profit margin excluding interest incomes from the Controlling Shareholders and the related tax impact as described above would be 5.9% and 4.2% in the years ended December 31, 2011 and 2012.

The year ended December 31, 2011 compared with the year ended December 31, 2010

Revenue

Our total revenues increased by 68.3% from RMB1.80 billion in the year ended December 31, 2010 to RMB3.03 billion in the year ended December 31, 2011, due to the increase in revenues from both sales of new passenger vehicles and after-sales services.

Revenues from sales of new passenger vehicles increased by 69.8% from RMB1.62 billion in the year ended December 31, 2010 to RMB2.75 billion in the year ended December 31, 2011. The increase in revenues from sales of new passenger vehicles was primarily due to the increase of the sales volumes of new passenger vehicles. The number of new passenger vehicles we sold increased from 3,026 in the year ended December 31, 2010 to 5,086 in the year ended December 31, 2011, primarily attributable to (i) the continued growth in demand for luxury and ultra-luxury passenger vehicles in China, especially in Henan Province; (ii) the increase in sales made by our existing outlets, especially outlets opened in 2010 which past their ramp-up phase; and (iii) sales made by four newly-opened outlets.

Revenues from after-sales services increased by 51.1% from RMB184.7 million in the year ended December 31, 2010 to RMB279.1 million in the year ended December 31, 2011, primarily due to (i) the increase in the number of customers who came to our 4S stores for after-sales services after purchasing their passenger vehicles with us; and (ii) services provided by four new-opened outlets.

Cost of sales and services

Our total cost of sales increased by 66.2% from RMB1.57 billion in the year ended December 31, 2010 to RMB2.61 billion in the year ended December 31, 2011, in line with the increase of our total revenue.

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FINANCIAL INFORMATION

Our cost of procurement of new passenger vehicles increased by 67.1% from RMB1.46 billion in the year ended December 31, 2010 to RMB2.44 billion in the year ended December 31, 2011, in line with a 69.8% increase in revenues from sales of new passenger vehicles during the same periods. Our cost associated with after-sales services increased by 55.9% from RMB111.7 million in the year ended December 31, 2010 to RMB174.1 million in the year ended December 31, 2011, in line with a 51.1% increase in revenues from after-sales services during the same periods.

Gross Profit Margin

Our gross profit margin increased from 12.8% in the year ended December 31, 2010 to 13.8% in the year ended December 31, 2011, primarily due to the increase of the gross profit margin for sales of new passenger vehicles which was partially offset by the decrease in the gross profit margin for after-sales services during the same periods.

Gross profit margin for sales of new passenger vehicles increased from 9.8% in the year ended December 31, 2010 to 11.4% in the year ended December 31, 2011, primarily due to the increase of our pricing power as we increased our number of outlets and strengthen our dominant market share in Henan Province and the fact that we follow the market practice to accept premium payments made by customers who wanted to procure particular models of passenger vehicles that were high in demand. Gross profit margin for after-sales services decreased from 39.6% in the year ended December 31, 2010 to 37.6% in the year ended December 31, 2011, primarily due to the increase in cost of labor and spare parts.

Other net income and gain (excluding interest income from the Controlling Shareholder)

Our other net income and gains increased 149.0% from RMB10.2 million in the year ended December 31, 2010 to RMB25.4 million in the year ended December 31, 2011, primarily attributable to a 187.0% increase in commission income from RMB4.6 million in the year ended December 31, 2010 to RMB13.2 million in the year ended December 31, 2011, primarily due to (i) the increase in sales volume of new passenger vehicles; and (ii) the increasing number of purchases of new passenger vehicles through financing services provided by manufacturers as compared to with cash.

Interest income from the Controlling Shareholders

Interest income from the Controlling Shareholder increased significantly from RMB13.4 million in the year ended December 31, 2010 to RMB53.5 million in the year ended December 31, 2011, primarily due to the increase of loan amount we granted to the Controlling Shareholders.

Operating expenses

Selling expenses. Our selling expenses increased by 65.4% from RMB64.5 million in the year ended December 31, 2010 to RMB106.7 million in the year ended December 31, 2011, primarily attributable to:

a 73.3% increase in salary and welfare expenses from RMB20.6 million in the year ended December 31, 2010 to RMB35.7 million in the year ended December 31, 2011, due to the increase in our sales staff to accommodate the opening of new outlets;
a 54.8% increase in advertising and promotion expenses from RMB15.5 million in the year ended December 31, 2010 to RMB24.0 million in the year ended December 31, 2011, as a result of our increased advertising and promotion activities which was in line with the increase in revenues from sales of new passenger vehicles; and
a 78.5% increase in depreciation expenses from RMB7.9 million in the year ended December 31, 2010 to RMB14.1 million in the year ended December 31, 2011, due to the increase in our assets subject to depreciation as we open new outlets.

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FINANCIAL INFORMATION

Administrative expenses. Our administrative expenses increased by 62.0% from RMB18.7 million in the year ended December 31, 2010 to RMB30.3 million in the year ended December 31, 2011, in line with the increase in our revenues and the expansion of our business.

Finance expense. Our finance expense increased significantly from RMB20.0 million in the year ended December 31, 2010 to RMB61.9 million in the year ended December 31, 2011, primarily attribute to the increase in our interest expenses incurred in connection with bank borrowings wholly repayable within five years as we increased our bank borrowings.

Net Profit and Net profit margin

Our net profit increased by 95.7% from RMB112.7 million in the year ended December 31, 2010 to RMB220.5 million in the year ended December 31, 2011. Our net profit margin increased from 6.3% in the year ended December 31, 2010 to 7.3% in the year ended December 31, 2011, in line with the increase of our gross profit margin during the same periods. Our adjusted net profit excluding interest incomes from the Controlling Shareholders, after taking into account the related tax impact of RMB3.4 million and RMB13.4 million, respectively, would be RMB102.6 million and RMB180.3 million in the years ended December 31, 2010 and 2011, respectively, representing a 75.7% increase from 2010 to 2011. Such adjusted net profit did not take into account the related interest expenses we incurred for bank loans that were used as loan proceeds to the Controlling Shareholders. Our adjusted net profit margin excluding interest incomes from the Controlling Shareholders and the related tax impact would be 5.7% and 5.9% in the years ended December 31, 2010 and 2011, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Our primary uses of cash are to pay for purchases of new passenger vehicles, spare parts and accessories, to establish new outlets and to fund our working capital needs and operations expenses. Our primary sources of liquidity during 2010, 2011 and 2012 were cash generated from operating activities and bank loans. During 2010, 2011 and 2012, we had not had any difficulties extending bank loans when they became due. We believe that we will be able to satisfy our liquidity requirement, including funding the new outlets we plan to construct and operate, at least in the next 12 months, by using a combination of cash generated from operating activities and available bank loans and other borrowings.

The following table sets forth selected cash flow data from our combined cash flow statements for the periods indicated:

for the periods indicated:
	Year	ended December 31,

	2010		2011	2012

			(RMB’000)

Net cash generated from operating activities. . . . . .	97,105		92,843	90,979
Net cash used in investing activities. . . . . . . . . . . . .	(253,339)		(883,232)	(1,202,082)
Net cash generated from financing activities . . . . . .	231,153		776,297	1,274,420
Net (decrease)/increase in cash and cash
equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	74,919		(14,092)	163,317
Cash and cash equivalents at the end of each year .	193,475		179,383	342,685

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FINANCIAL INFORMATION

Net cash generated from operating activities

For the year ended December 31, 2012, our net cash generated from operating activities was RMB91.0 million, which was primarily attributable to, as of December 31, 2012 as compared with December 31, 2011, (i) cash generated from operating activities of RMB475.0 million; (ii) an increase of RMB95.8 million in trade and bills payable which consisted primarily of payments to suppliers in the form of bank acceptance notes; and (iii) an increase of RMB355.1 million in other payables and accruals which consisted primarily of (a) a RMB139.4 million increase of advances from customers due to the amount of prepayment for purchase of new passenger vehicles outstanding as of December 31, 2012 which was in turn attributable to the increase in sales volume in the year ended December 31, 2012; and (b) a RMB170.1 million increase of tax payable other than income tax.The net cash generated was partially offset by (i) an increase of RMB376.9 million in inventories to support our business growth and opening of new outlets; and (ii) an increase of RMB384.0 million in pledged bank deposits due to the increase in our bank acceptance notes which was consistent with the increase in revenues from sales of new passenger vehicles.

For the year ended December 31, 2011, our net cash generated from operating activities was RMB92.8 million, which was primarily attributable to, as of December 31, 2011 as compared with December 31, 2010, (i) cash generated from operating activities of RMB318.8 million; (ii) an increase of RMB304.2 million in trade and bills payable which consisted primarily of payments to suppliers in the form of bank acceptance notes; and (iii) an increase of RMB110.6 million in other payables and accruals which consisted primarily of (a) a RMB42.9 million increase of advances from customers due to the amount of prepayment for purchase of new passenger vehicles as of December 31, 2011 which was in turn attributable to the increase in sales volume in the year ended December 31, 2011; and (b) a RMB54.7 million increase of tax payables other than income tax. The net cash generated was partially offset by (i) an increase of RMB389.6 million in prepayment, deposits and other receivable which consisted primarily of prepayments we made to suppliers and rebate receivables; (ii) an increase of RMB173.2 million in inventories to support our business growth and opening of new outlets; and (iii) an increase of RMB65.2 million in pledged bank deposits due to the increase in our bank acceptance notes which was consistent with the increase in revenues from sales of new passenger vehicles.

For the year ended December 31, 2010, our net cash generated from operating activities was RMB97.1 million, which was primarily attributable to, as of December 31, 2010 as compared with December 31, 2009, (i) cash generated from operating activities of RMB166.3 million; (ii) an increase of RMB165.0 million in trade and bills payable which consisted primarily of an increase in payments to suppliers in the form of bank acceptance notes; and (iii) an increase of RMB75.4 million in other payables and accruals which consisted primarily of (a) a RMB42.1 million increase of advances from customers due to the amount of prepayment for purchase of new passenger vehicles outstanding as of December 31, 2010 which was in turn attributable to the increase in sales volume in the year ended December 31, 2010; and (b) a RMB26.1 million increase of tax payables other than income tax. The net cash generated was partially offset by (i) an increase of RMB168.5 million in prepayment, deposits and other receivable which consisted primarily of prepayments we made to suppliers and rebate receivables; (ii) an increase of RMB69.5 million in inventories to support our business growth and opening of new outlets; and (iii) an increase of RMB62.6 million in pledged bank deposits due to the increase in our bank acceptance notes which was consistent with the increase in revenues from sales of new passenger vehicles.

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FINANCIAL INFORMATION

Net cash used in investing activities

For the year ended December 31, 2012, our net cash used in investing activities was RMB1,202.1 million which was primarily attributable to (i) a net advance to the Controlling Shareholders of RMB98.0 million as interest-bearing loans to support the Controlling Shareholders’ other businesses; (ii) purchase of items of property, plant and equipment of RMB877.4 million in connection of constructing and opening of new outlets; and (iii) acquisition of equity interests in certain subsidiaries from the then equity holders who held such equity interests on behalf of the Controlling Shareholders for the amount of RMB250.0 million.

For the year ended December 31, 2011, our net cash used in investing activities was RMB883.2 million which was primarily attributable to (i) a net advance to the Controlling Shareholders of RMB630.9 million as interest-bearing loans to support the Controlling Shareholders’ other businesses; (ii) purchase of items of property, plant and equipment of RMB174.8 million in connection of constructing and opening of new outlets and (iii) acquisition of equity interests in certain subsidiaries from the then equity holders who held such equity interests on behalf of the Controlling Shareholders for the amount of RMB76.0 million.

For the year ended December 31, 2010, our net cash used in investing activities was RMB253.3 million which was primarily attributable to (i) a net advance to the Controlling Shareholders of RMB198.2 million as interest-bearing loans to support the Controlling Shareholders’ other businesses; (ii) purchase of items of property, plant and equipment of RMB56.4 million in connection of constructing and opening of new outlets.

Net cash generated from financing activities

For the year ended December 31, 2012, our net cash generated from financing activities was RMB1.30 billion, which was primarily attributable to proceeds from bank loans and other borrowings of RMB3.71 billion, partially offset by repayment of bank loans and other borrowings of RMB2.51 billion.

For the year ended December 31, 2011, our net cash generated from financing activities was RMB776.3 million, which was primarily attributable to proceeds from bank loans and other borrowings of RMB1.81 billion, partially offset by repayment of bank loans and other borrowings of RMB1.35 billion.

For the year ended December 31, 2010, our net cash generated from financing activities was RMB231.2 million, which was primarily attributable to proceeds from bank loans and other borrowings of RMB660.0 million, partially offset by repayment of bank loans and other borrowings of RMB471.1 million.

Taking into account [●] available to us from the [●], banking facilities available to us and our projected cash generated from our operations, our Directors are of the opinion that we have sufficient working capital for our present requirements and for at least the next 12 months from the date of this document.

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FINANCIAL INFORMATION

NET CURRENT ASSETS AND LIABILITIES

The following table sets forth the breakdown of current assets and current liabilities as of the dates indicated:

dates indicated:
	As	of December		31,

	2010		2011		2012

			(RMB’000)

CURRENT ASSETS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	160,490		333,692		710,554
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . .	11,678		16,666		59,112
Prepayments, deposits and other receivables . . . .	289,756		627,401		688,221
Amounts due from related parties . . . . . . . . . . . .	305,633		993,194		679,448
Pledged bank deposits . . . . . . . . . . . . . . . . . . . . .	215,837		281,023		665,055
Cash in transit . . . . . . . . . . . . . . . . . . . . . . . . . . .	9,974		13,646		17,333
Cash and cash equivalents . . . . . . . . . . . . . . . . . .	193,475		179,383		342,685
Total current assets. . . . . . . . . . . . . . . . . . . . . . . .	1,186,843		2,490,005		3,162,408

CURRENT LIABILITIES
Bank loans and other borrowings. . . . . . . . . . . . .	395,416		859,535		1,777,774
Trade and bills payables . . . . . . . . . . . . . . . . . . . .	418,081		722,329		818,129
Other payables and accruals. . . . . . . . . . . . . . . . .	131,760		274,992		626,852
Income tax payable . . . . . . . . . . . . . . . . . . . . . . .	58,161		134,977		255,415
Total current liabilities . . . . . . . . . . . . . . . . . . . . .	1,003,418		1,991,833		3,478,170

Net current assets/(liabilities) . . . . . . . . . . . . . . .	183,425		498,172		(315,762)

As of December 31, 2012, we had net current liability of RMB315.8 million, compared to our net current assets of RMB498.2 million as of December 31, 2011. The change was an result of an increase of RMB1.5 billion in current liability partially offset by an increase of RMB672 million in current assets. The increase in current liability was primarily attributable to (i) an increase of RMB918.2 million in bank loans and other borrowings to satisfy our increasing capital needs as we expend our business; and (ii) an increase of RMB351.9 million in other payables and accruals. The increase in current assets was primarily attributable to (i) an increase of RMB376.9 million in inventories; (ii) an increase of RMB384.0 million in pledged bank deposits and (iii) an increase of RMB163.3 million in cash and cash equivalents, which was partially offset by a decrease of RMB313.7 million in amounts due from related parties which was partially settled by dividend entitlement of the controlling shareholders in the amount of RMB559 million. As of April 30, 2013, we had credit line of approximately RMB3.5 billion, of which RMB1.3 billion remained undrawn. We expect we will be able to repay our short-term bank loans when they become due with cash generated from our operating activities. For more details, see “Risk Factors – Risks Relating to Our Business – We were in a net current liabilities position as of December 31, 2012 and we cannot assure you that we will not experience net current liabilities position in the future”.

Inventories

Our inventories include mainly new passenger vehicles procured for sales, and after-sales products such as spare parts and accessories. Each of our outlets individually manages its orders for new passenger vehicles and after-sales products, but a monthly report is submitted by each outlet to our headquarters for review. For more details on inventory management, see “Our Business – Inventory Management.” Inventories are carried at the lower of cost and net realizable value. Cost is calculated on specific identification basis as appropriate and comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realizable

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FINANCIAL INFORMATION

value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. During 2010, 2011 and 2012 we did not have any inventory provision. The following table sets forth a breakdown of our inventories as of the dates indicated:

the dates indicated:
	As	of December	31,

	2010	2011	2012

		(RMB’000)

Passenger vehicles . . . . . . . . . . . . . . . . . . . . . . . . . .	145,817	309,027	655,809
Spare parts and accessories . . . . . . . . . . . . . . . . . . .	14,673	24,665	54,745
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	160,490	333,692	710,554

Our inventories increased by 107.9% from RMB160.5 million as of December 31, 2010, to RMB333.7 million as of December 31, 2011 and then further increased by 113.0% to RMB710.6 million as of December 31, 2012. The increases were primarily due to (i) our decision to increase our stock of passenger vehicles in our existing outlets in response to a continued increase in demand for luxury and ultra-luxury passenger vehicles in China in recent years; and (ii) the expansion of our business scales as we open new outlets. As of March 31, 2013, we had sold inventories in the amount of approximately RMB437.9 million that were outstanding as of December 31, 2012, representing 61.6% of the total outstanding inventories as of December 31, 2012.

We periodically assess our inventories to ensure we have enough stock to satisfy customer needs while strive to maintain an optimal turnover rate. We also periodically assess if the inventories have been suffered from any impairment when the cost of the inventories are lower than their net realizable value. The amount of impairment loss is measured as the difference between the asset’s carrying amount and the net realizable value. The following table sets forth our average inventory turnover days[(1)] for the periods indicated:

turnover days(1) for the periods indicated:
	Year	ended December		31,

	2010		2011	2012

Passenger vehicles . . . . . . . . . . . . . . . . . . . . . . . . . .	28		34	37
Spare parts and accessories . . . . . . . . . . . . . . . . . . .	40		41	63
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29		34	38

(1) The average inventory turnover days of a period was calculated by dividing the number of days in the period by the inventory turnover ratio. The inventory turnover ratio was calculated by dividing cost of sales of the period by the average of (i) inventory balance as of the beginning of the period and (ii) inventory balance as of the end of the period.

Our average inventory turnover days were 29 days, 34 days, and 38 days for the years ended December 31, 2010, 2011 and 2012, respectively. The average inventory turnover day during 2010, 2011 and 2012 was primarily affected by the average inventory turnover days of passenger vehicles, as passenger vehicles consisted the substantial majority of our inventories. Our average inventory turnover day for spare parts and accessories increased from 41 days for the year ended December 31, 2011 to 63 days for the year ended December 31, 2012, primarily due to the spare parts and accessories we ordered for newly-opened outlets, which typically have a ramp-up period in terms of demands for after-sales services.

Our average inventory turnover days for passenger vehicles increased from 28 days in the year ended December 31, 2010 to 34 days in the year ended December 31, 2011 and to 37 days in the year ended December 31, 2012, primarily due to our efforts to build up our inventories for the newly-opened outlets during the periods.

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FINANCIAL INFORMATION

Certain of our inventories with a carrying amount of RMB100.2 million, RMB220.6 million and RMB408.4 million as of December 31, 2010, 2011 and 2012, respectively, were pledged as security for our bank loans and other borrowings and bill payables.

Trade receivables

Our trade receivables consisted of (i) receivables of purchase prices from financing companies in connection with the purchase of new passenger vehicles for which the customers used the financing companies’ mortgage services to make payment; (ii) receivables of after-sales service fees from insurance companies in connection with after-sale services we provided which were covered by insurance; and (iii) receivables of commission fees from financing and insurance companies in connection with the purchase of new passenger vehicles. Trade receivables are initially measured at fair value, and are subsequently measured at amortized cost using the effective interest method less impairment. Appropriate allowances for the estimated irrecoverable amounts are recognized in profit or loss when there is objective evidence that the asset is impaired. The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimate future cash flow (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition).

The credit term granted to the financing and insurance companies ranges from 60 to 90 days. The underlying transactions for these trade receivables were all transactions with the diversified individual customers with no significant concentration of credit risk.

We seek to maintain strict control over our outstanding receivables and has a credit control department to minimize credit risk. Overdue balances are reviewed regularly by senior management. Trade receivables are non-interest-bearing. During 2010, 2011 and 2012, we did not make any provision for trade receivables. Our trade receivables were RMB11.7 million, RMB16.7 million and RMB59.1 million as of December 31, 2010, 2011 and 2012. The significant increase as of December 31, 2012 was primarily due to the increase in our sales volume and our efforts to promote financing and insurance services in connection with sales of new passenger vehicles. We calculated our average trade receivables turnover days by dividing the number of days in the period by the trade receivables turnover ratio. The trade receivables turnover ratio was calculated by dividing revenue of the period by the average of (i) trade receivables balance as of the beginning of the period and (ii) trace receivables balance as of the end of the period. Our average trade receivables turnover days were approximately two days, two days and two days for the years ended December 31, 2010, 2011 and 2012, respectively, which were relatively stable as financing and insurance companies typically make payments to us on a regular and frequent basis. All trade receivables as of December 31, 2012 were subsequently settled. Substantially all of our trade receivables had ages of less than three months and none had an age over one year.

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FINANCIAL INFORMATION

Prepayments, deposits and other receivables

The following table sets forth a breakdown of our prepayments, deposits and other receivables as of the dates indicated:

as of the dates indicated:
	As	of December	31,

	2010	2011	2012

		(RMB’000)

Prepayments to suppliers . . . . . . . . . . . . . . . . . . . . .	198,557	532,738	262,433
Rebate receivables . . . . . . . . . . . . . . . . . . . . . . . . . .	77,380	101,018	229,329
VAT recoverable(1) . . . . . . . . . . . . . . . . . . . . . . . . . .	11,027	30,376	164,094
Staff advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	626	1,673	9,629
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,166	6,596	22,736

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	289,756	672,401	688,221

(1) Our sales of passenger vehicles are subject to Mainland China Value Added Tax (“VAT”), which include input VAT tax and output VAT payable. Input VAT tax on purchases can be deducted from output VAT payable. The VAT recoverable is input VAT tax deductible from output VAT tax payable which has not been claimed to the tax bureau. Our applicable tax rate for domestic sales is 17%.

Our prepayments, deposits and other receivables consisted primarily of prepayment to suppliers and rebate receivables.

Our prepayment to suppliers was RMB198.6 million, RMB532.7 million and RMB262.4 million for the years ended December 31, 2010, 2011 and 2012, respectively. An increase in prepayments to suppliers is usually in line with the increase of the numbers of passenger vehicles we procured from automobile manufacturers which were in turn a result of (i) the increases of our sales volumes of new passenger vehicles and (ii) our needs to increase our inventories as we open new outlets. The higher balance of prepayments to suppliers as of December 31, 2011 was primarily due to the fact that certain outlet was newly opened near the end of 2011. We paid large amount of advances to the suppliers to build up the inventory level for that outlet. Such passenger vehicles purchased from the suppliers had been shipped to the respective outlets as of December 31, 2012, resulting in an increase in inventories and a decrease in prepayments to suppliers.

Our rebate receivables were RMB77.4 million, RMB101.0 million and RMB229.3 million for the years ended December 31, 2010, 2011 and 2012, respectively. The increases were generally in line with the increase of our sales volumes of new passenger vehicles. Our VAT recoverable increased significantly from RMB30.4 million as of December 31, 2011 to RMB164.1 million as of December 31, 2012 due to the amount of VAT tax receipts not yet submitted to be certified by relevant tax authorities as of December 31, 2012, which was in line with the increase in the number of new passenger vehicles we purchased from automobile manufacturers due to the expansion of our business scale, as it usually takes time for the management to finish the certification process with the relevant tax authorities before new receipts can be submitted for certification. All the VAT recoverables as of December 31, 2012 has subsequently been utilized to offset VAT payables as of the Latest Practicable Date.

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FINANCIAL INFORMATION

Trade and bill payables

Our trade and bill payables related primarily to our purchase of spare parts and accessories from manufacturers, some of which grant credit lines to certain individual outlets. Our bills payable related primarily to our purchases of new passenger vehicles from manufacturers using bank acceptance notes in addition to cash. We were required to bear applicable bank charges in connection with the issuance of such bank acceptance notes. The suppliers do not grant us any credit period. The following table sets forth a breakdown of our trade and bill payables as of the date indicated:

	As	of December	31,

	2010	2011	2012

		(RMB’000)

Trade payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5,633	7,457	11,383
Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	412,448	714,872	806,746
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	418,081	722,329	818,129

The following table sets forth an aging analysis of the trade and bill payables based on the invoice dates as of the date indicated:

invoice dates as of the date indicated:
	As	of December	31,

	2010	2011	2012

		(RMB’000)

Within 3 months . . . . . . . . . . . . . . . . . . . . . . . . . . .	376,984	616,424	777,735
3 to 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	40,759	105,455	37,193
6 to 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . .	–	151	2,836
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . .	338	299	365

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	418,081	722,329	818,129

The substantial majority of our trade and bill payables were payable within 3 months, accounting for 90.2%, 85.3% and 95.1% of the total trade and bill payables as of December 31, 2010, 2011 and 2012. We calculate our average turnover days for trade and bill payable by dividing the number of days in the period by the trade and bill payables turnover ratio. The trade and bill payables turnover ratio was calculated by dividing cost of sales and services of the period by the average of (i) trade and bill payables balance as of the beginning of the period and (ii) trade and bill payables balance as of the end of the period. The average turnover days of our trade and bills payables was 77 days, 79 days and 56 days for the years ended December 31, 2010, 2011 and 2012, respectively. The trend of our bills payable turnover rate was largely in line with our inventory turnover rate during the same periods.

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FINANCIAL INFORMATION

Other payables and accruals

The following table sets forth our other payables and accruals for the periods indicated:

	As of December	As of December	31,

	2010	2011	2012

		RMB’000

Payables for purchase of items of property, plant
and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .	10,546	43,197	39,992
Advances and deposits from distributors . . . . . . . . .	900	3,864	8,764
Advances from customers . . . . . . . . . . . . . . . . . . . .	62,017	104,946	244,313
Taxes payable (other than income tax) . . . . . . . . . . .	46,869	101,531	271,641
Lease payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	186	1,232	10,846
Staff payroll and welfare payables . . . . . . . . . . . . .	9,148	17,207	25,851
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,094	3,015	25,445

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	131,760	274,992	626,852

Our other payables and accruals consist primarily of advances from customers, tax payables other than income tax and payables for purchase of items of property, plant and equipment. Advances from customers are prepayment and deposit made by customers in connection with the purchases of new passenger vehicles, and was RMB62.0 million, RMB104.9 million and RMB244.3 million as of December 31, 2010, 2011 and 2012, respectively. The increases were generally in line with the increase in sales volume of new passenger vehicles. Tax payable other than income tax is VAT tax payables in connection with the sales of new passenger vehicles, and was RMB46.9 million, RMB101.5 million and RMB271.6 million as of December 31, 2010, 2011 and 2012, respectively. The increases were in line with the increase in the sales volume of new passenger vehicles.

Our advances and deposit from distributors was RMB0.9 million, RMB3.9 million and RMB8.8 million as of December 31, 2010, 2011 and 2012, respectively which was in connection with our engagement of distributors to source customers for BMW passenger vehicles in certain areas of Henan Province, as the distributors were required to pay a performance deposit at the beginning of their cooperation with us. For more details, see “Our Business – Our Services – Sales of new passenger vehicles – Engagement of distributors”.

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FINANCIAL INFORMATION

Capital expenditure

Our capital expenditure consist primarily of purchase of items of property, plant and equipment in connection of establishment of new outlets. Our capital expenditure was RMB67.5 million, RMB201.0 million and RMB893.3 million for the years ended December 31, 2010, 2011 and 2012, respectively. The increases were in line with our opening of new outlets during the periods. Capital expenditure for 4S stores vary with size, location and other factors. We incurred capital expenditure of RMB31.4 million for one 4S store, RMB168.1 million for two 4S stores and RMB314.1 million for seven 4S stores that commenced operation in the years ended December 31, 2010, 2011 and 2012, respectively. Capital expenditure for exhibition galleries is relatively small compared with that for 4S stores. We incurred capital expenditure of RMB1.0 million for one exhibition gallery, RMB2.0 million for one exhibition gallery and RMB59.0 million for six exhibition galleries that commenced operation in the years ended December 31, 2010, 2011 and 2012, respectively. The following table sets forth a breakdown of our capital expenditure recognized for the periods indicated:

	Year	ended December	31,

	2010	2011	2012

		(RMB’000)

Purchase of items of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67,287	200,736	892,903
Purchase of intangible assets(1) . . . . . . . . . . . . . . . .	225	238	377
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67,512	200,974	893,280

(1) Our intangible assets consisted primarily of software related to business operations and insignificant compared with the Company’s total assets. The Company’s intangible assets was RMB1.0 million, RMB1.0 million and RMB1.1 million as of December 31, 2010, 2011 and 2012, respectively.

Capital and operating lease commitments

Our capital commitments consisted primarily of unpaid amount of executed agreements for the acquisition of land use rights and buildings. Our capital commitment was RMB164.6 million as of December 31, 2012, which we expect to fulfill mainly through a combination of cash on hand and bank loans. The following table sets forth our outstanding capital commitments in respect of property and equipment as of the dates indicated:

and equipment as of the dates indicated:
	As	of December	31,

	2010	2011	2012

		(RMB’000)

Unpaid contractual obligations for land use rights
and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32,856	5,600	164,592

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FINANCIAL INFORMATION

Our operating leases typically run for an initial period of 1 to 30 years, with an option of renewal upon expiration, subject to renegotiation of the terms of the leases. The following table sets forth our total future minimum lease payments under non-cancellable operating leases as of the dates indicated:

indicated:
			As of December 31,

	2010		2011		2012

	Properties	Land	Properties	Land	Properties	Land
			(RMB’000)

Within 1 year . . . . . . . . . . . . . .	979	1,608	10,446	3,342	23,451	11,277
After 1 year but within 5 years . .	2,818	7,165	76,342	12,273	73,019	38,763
After 5 years . . . . . . . . . . . . . . .	2,966	87,032	67,572	103,708	30,078	163,138
Total . . . . . . . . . . . . . . . . . . . .	6,763	95,805	154,360	119,323	126,548	213,178

Related party transactions

Loans to certain related parties

The following table sets forth outstanding amount of our loans to related parties as of the date indicated:

indicated:
	As	of December		31,

	2010		2011		2012

			(RMB’000)

The Controlling Shareholder
– Mr. Feng Changge . . . . . . . . . . . . . . . . . . . . . .	305,633		990,077		676,452
An associate
– Yongda Hexie . . . . . . . . . . . . . . . . . . . . . . . . . .	–		3,117		2,996
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	305,633		993,194		679,448

During 2010, 2011 and 2012, we granted to the Controlling Shareholders, certain loans which bore interest at a rate of 15% per annum in support of the development and capital needs of the Controlling Shareholders’ other businesses. Historically, the Group has been part of Hexie Industrial Group and was managed as part of a conglomerate. As such, Hexie Industrial Group managed its finances on a group-wide basis and, in view of the cash flows of the dealership business, the Group was often the entity within the conglomerate to lend to the Controlling Shareholders. We are advised by our PRC Legal Adviser that such loans to the Controlling Shareholders do not breach any PRC laws and regulations, including but not limited to, the General Rules of Loans (貸款通則). The loan interest was agreed upon between the Controlling Shareholders and us by referencing to the then market interest rates for bank loans and other alternative financing channels. There had been no change in the interest rate during the term of the loans.

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FINANCIAL INFORMATION

The following table sets forth the relevant balances of the loans during 2010, 2011 and 2012:

	Year	ended December 31,	ended December 31,

	2010	2011	2012

		(RMB’000)

Maximum balance . . . . . . . . . . . . . . . . . . . . . . . . . .	305,633	990,077	1,648,198
Minimum balance . . . . . . . . . . . . . . . . . . . . . . . . . .	31,029	232,552	980,577
Average balance of the year . . . . . . . . . . . . . . . . . .	94,070	375,551	1,036,772

Interest income generated from loans to the Controlling Shareholders was RMB13.4 million, RMB53.5 million and RMB147.7 million for the years ended December 31, 2010, 2011 and 2012, respectively, accounting for 7.8%, 14.9% and 25.0% of our profit from operations for the same periods. Taking into account the related tax impact of RMB3.4 million, RMB13.4 million and RMB36.9 million, respectively, our adjusted net profit excluding such interest incomes from the Controlling Shareholders and the related tax impact would be RMB102.6 million, RMB180.3 million and RMB239.9 million for the years ended December 31, 2010, 2011 and 2012, respectively. Such adjusted net profit did not take into account the related interest expenses we incurred for bank loans that were used to grant loans to the Controlling Shareholders. As of the Latest Practicable Date, the Controlling Shareholders repaid in cash all outstanding amount as of December 31, 2012.

We do not plan to grant similar loans to any related party going forward. The Controlling Shareholders will comply with the relevant provisions in the Listing Rules, in particular Chapter 14A, if the Group enters into other transactions with the Controlling Shareholders after [●].

Guarantee and pledge in connection with bank loans

Our bank loans and other borrowings in the aggregate amount of RMB345.4 million, RMB724.5 million and RMB1.56 billion as of December 31, 2010, 2011 and 2012 were guaranteed by some of our related parties, including the Controlling Shareholders, entities controlled by the Controlling Shareholders and relatives of the Controlling Shareholders. In particular, we had bank loans and other borrowings in the amount of RMB160.4 million, RMB168.0 million and RMB315.2 million as of December 31, 2010 and 2011 and 2012, respectively, that were guaranteed by the Controlling Shareholders. We plan to enter into agreement with our creditor banks to release all such guarantees on our outstanding bank loans upon [●].

The equity shares of four of our subsidiaries were pledged as security of the credit facilities of RMB180 million granted to Hexie Industrial Group by HAT. Mr. Feng and Hexie Industrial Group have obtained the agreement of HAT to release the pledges over the equity interests of the Pledged Subsidiaries as well as the guarantees by Zhongdebao and Yuanda Lexus on or prior to [●]. For more details, see “Relationship With Our Controlling Shareholders −Independence From Our Controlling Shareholders −Financial Independence”.

We do not plan to provide or receive any guarantee or pledge in connection with bank loans after [●].

Sales of new passenger vehicles

We sold 16 BMW, 2 Rolls-Royce and 2 Aston Martin passenger vehicles to 5 companies controlled by relatives of the Controlling Shareholders in the aggregate amount of RMB32.6 million in the year ended December 31, 2012. The Directors believe that such sales of new passenger vehicles to related parties were based on normal commercial terms and were not materially different from the transactions entered into between other third party customers and us in terms and conditions.

– 162 –

FINANCIAL INFORMATION

We are in the process of implementing enhanced internal control procedures to ensure, among other things, that sales of new passenger vehicles to related parties, if any, would be entered into through arms’-length transactions based on normal commercial terms.

Our Directors expect all corporate guarantees provide by and to related parties will be released and all outstanding amount due from related parties will be fully settled before [●].

Our Directors believe that the related party transactions described above were based on normal commercial terms. Save for the possibility of purchase of motor vehicles by related parties including relatives of the Controlling Shareholders on normal commercial terms in the ordinary course of business, the other related party transactions will be discontinued after [●]. Any future purchases of passenger vehicles, being consumer goods, in our ordinary course of business by related parties on normal commercial terms is exempted connected transactions under Rule 14A.31(7) of the Listing Rules, and thus is exempted from the reporting, announcement and independent shareholders’ approval requirement of the Listing Rules.

INDEBTEDNESS

We obtained borrowings from banks to finance our working capital and network expansion needs. We also obtain other borrowings which consist primarily of bills payable to certain financing companies affiliated with manufacturers in connection of our procurement of new passenger vehicles. The following table sets forth a breakdown of our indebtedness as of the dates indicated:

			As of December 31,	As of December 31,				As of April 30,	As of April 30,	As of April 30,
	2010		2011			2012		2013

	Effective		Effective			Effective		Effective
	interest		interest			interest		interest
	rate		rate			rate		rate

	(%)	RMB’000	(%)	RMB’000		(%)	RMB’000	(%)		RMB’000

Current
Bank loans. . . . . . .	5.3-8.3	320,000	6.6-12.8	671,000		6.2-12.0	1,283,000	6.0-12.0	1,188,846
Other borrowings . .	5.3-6.0	75,416	5.8-9.2	188,535		5.8-8.5	494,774	5.8-8.5	1,226,376
		395,416		859,535			1,777,774		2,415,222

Non-current
Bank loans. . . . . . .		–			–	6.6-7.2	60,000	8.7		59,630
Other borrowings . .		–			–	8.5	230,000	8.5		50,000
		–			–		290,000			109,630

		395,416		859,535			2,067,774		2,524,852

– 163 –

FINANCIAL INFORMATION

Our bank loans in the aggregate amount of RMB150.4 million, RMB498.5 million and RMB1,344.8 million as of December 31, 2010, 2011 and 2012 were secured by our land use rights, building, inventories or shares of our certain subsidiaries. The increase in bank loans during 2010, 2011 and 2012 was in line with the expansion of our business and the increasing need for working capital. Certain of our bank loans and other borrowings were guaranteed by some of our related parties. For more details, see “– Related party transactions”. The following table sets forth a breakdown of our indebtedness as of the dates indicated:

						As of
	As	of December		31,		April 30,
	2010		2011		2012	2013

Secured . . . . . . . . . . . . . . . . . . . . . . . . . .	30,000		105,000		455,000	722,899
Guaranteed . . . . . . . . . . . . . . . . . . . . . . .	225,000		331,000		675,000	904,340
Secured and guaranteed . . . . . . . . . . . . .	120,416		393,535		889,774	877,613
Unsecured . . . . . . . . . . . . . . . . . . . . . . . .	20,000		30,000		48,000	20,000

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . .	395,416		859,535		2,067,774	2,524,852

During 2010, 2011 and 2012 and as of the Latest Practicable Date, we were in compliance with all financial covenants and other requirements set forth in our loan agreements.

As of the Latest Practicable Date, except for bank borrowings disclosed above and intra-group liabilities, and we did not have any loan capital or debt securities issued or agreed to be issued, outstanding bank overdrafts and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits, finance leases or hire purchase commitments or guarantees or material contingent liabilities.

Contingent liabilities

As at December 31, 2011, the Group provided corporate guarantee to Tongle Pharmaceutical for its bank loans of RMB13,000,000. As at December 31, 2010 and 2012, neither the Group nor the Company had any significant contingent liabilities. As of the Latest Practicable Date, we did not have any material contingent liabilities or guarantees.

No material adverse change

Off-balance sheet commitments and arrangements

As of the Latest Practicable Date, we had not entered into any off-balance sheet transactions.

MARKET RISK DISCLOSURE

Our principal financial instruments comprise bank loans, other interest-bearing loans, and cash and short term deposits. The main purpose of these financial instruments is to raise finance for our operations. We have various other financial assets and liabilities such as trade receivables, trade and bills payables, which arise directly from our operations.

The main risks arising from our financial instruments are interest rate risk, credit risk and liquidity risk. The Directors review and agree policies for managing each of these risks.

Interest rate risk

We have no significant interest-bearing assets other than pledged bank deposits, cash and cash equivalents and amounts due from the Controlling Shareholders.

– 164 –

FINANCIAL INFORMATION

Our interest rate risk arises from our bank loans and other borrowings. Borrowings at variable rates expose us to the risk of changes in market interest rates. Our exposure to the risk of changes in market interest rates relates primarily to our debt obligations with a floating interest rate. We did not use any interest rate swaps to hedge our exposure to interest rate risk during 2010, 2011 and 2012.

Credit risk

We do not have any significant concentrations of credit risk. The carrying amounts of pledged bank deposits, cash in transit, cash and cash equivalents, trade and other receivables, amounts due from a related party, amounts due from an associate included in the Financial Information represent our maximum exposure to credit risk in relation to our financial assets.

As of December 31, 2010, 2011 and 2012, all pledged bank deposits and cash and cash equivalents were deposited in high quality financial institutions without significant credit risk.

Liquidity risk

We monitor our risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial instruments and financial assets (e.g., trade receivables) and projected cash flows from operations.

The following table sets forth the maturity profile of our financial liabilities based on the contractual undiscounted payments as of the dates indicated:

As of December 31, 2010

			Less
		On	than 3	3 to 12	1 to 5		Over
		Demand	months	months	years		5 years	Total
				(RMB’000)

Bank loans	and other
borrowings. . . . . . . . .		–	90,613	314,030		–	–	404,643
Trade and bills payables.		1,106	380,527	36,448		–	–	418,081
Other payables and
accruals	. . . . . . . . . .	13,540	–	–		–	–	13,540

Total. . . . . . . . . . . . . . .		14,646	471,140	350,478		–	–	836,264

			As of December 31,			2011

			Less
		On	than 3	3 to 12	1 to 5		Over 5
		Demand	months	months	years		years	Total
				(RMB’000)

Bank loans	and other
borrowings. . . . . . . . .		–	261,075	625,915		–	–	886,990
Trade and bills payables.		725	561,699	159,905		–	–	722,329
Other payables and
accruals	. . . . . . . . . .	50,076	–	–		–	–	50,076

Total. . . . . . . . . . . . . . .		50,801	822,774	785,820		–	–	1,659,395

– 165 –

FINANCIAL INFORMATION

		As of December 31,	As of December 31,	As of December 31,	2012	2012

		Less
	On	than 3	3 to 12	1 to 5		Over 5
	Demand	months	months	years		years	Total
			(RMB’000)

Bank loans and other
borrowings. . . . . . . . .	–	753,563	1,094,347	298,412		–	2,146,322
Trade and bills payables.	3,805	584,558	229,766		–	–	818,129
Other payables and
accruals . . . . . . . . . . .	74,434	–	–		–	–	74,434

Total. . . . . . . . . . . . . . .	78,239	1,338,121	1,324,113	298,412		–	3,038,885

Capital management

The primary objectives of our capital management are to safeguard our ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholder value.

We manage our capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, we may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. We are not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes for managing capital during the years ended December 31, 2010, 2011 and 2012.

We monitor capital using a gearing ratio, which is net debt divided by the total equity attributable to owners of the parent plus net debt. Net debt includes bank loans and other borrowings, trade and bills payables, other payables and accruals, less cash and cash equivalents. The following table sets forth our gearing ratios as of the dates indicated:

following table sets forth our gearing ratios as of the	dates indicated:	dates indicated:
	As of December		31,

	2010	2011		2012

		(RMB’000)

Bank loans and other borrowings . . . . . . . . . . . . . .	395,416	859,535		2,067,774
Trade and bills payables. . . . . . . . . . . . . . . . . . . . . .	418,081	722,329		818,129
Other payables and accruals . . . . . . . . . . . . . . . . . .	131,760	274,992		626,852
Less: Cash and cash equivalents . . . . . . . . . . . . . . .	(193,475)	(179,383)		(342,685)
Net debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	751,782	1,677,473		3,170,070

Equity attributable to owners of the parent . . .	339,855	853,371		588,758

Gearing ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	68.9% 66.3%			84.3%

– 166 –

FINANCIAL INFORMATION

KEY FINANCIAL RATIOS

The following tables set forth our key financial ratios as of the dates or for the years indicated.

																														As of	December 31,

																														2010	2011	2012

Current	ratio(1)	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	1.18	1.25	0.91
Gearing	ratio(2)	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	68.9%	66.3%	84.3%

Notes:

(1) Current ratio represents current assets divided by current liabilities at the end of each year.
(2) Gearing ratio represents net debt divided by the total equity attributable to owners of the parent company plus net debt at the end of each year.

				Year ended	December 31,

				2010	2011	2012

Return	on	invested	capital(3) . . . . . . . . . . . . . . . . . .	32.1%	25.6%	22.6%
Return	on	equity(4)	. . . . . . . . . . . . . . . . . . . . . . . . .	44.7%	36.8%	48.0%
Return	on	assets(5).	. . . . . . . . . . . . . . . . . . . . . . . . .	11.1%	10.5%	9.7%

Notes:

(3) Return on invested capital represents the net operating profits after tax divided by average total invested capital during each reporting period.
(4) Return on equity represents profit for the year divided by the average of (i) total equity as of the beginning of the period and (ii) total equity as of the end of the period.
(5) Return on assets represents profit for the year divided by the average of (i) total assets as of the beginning of the period and (ii) total assets as of the end of the period.

Current ratio

As of December 31, 2010, 2011 and 2012, our current ratio was 1.18, 1.25 and 0.91, respectively. Our current ratio increased from 1.18 as of December 31, 2010 to 1.25 as of December 31, 2011 primarily due to the capital injection of RMB120 million as part of the Phase 3 at the Reorganization which increased our equity. Our current ratio decreased from 1.25 as of December 31, 2011 to 0.91 as of December 31, 2012 primarily due to the increase in our bank loans and other borrowings in 2012 to fund our construction of new outlets as we expanded our business.

Gearing ratio

As at December 31, 2010, 2011 and 2012, our gearing ratio was 68.9%, 66.3% and 84.3%, respectively. Our gearing ratio decreased from 68.9% as of December 31, 2010 to 66.3% as of December 31, 2011 primarily due to the capital injection of RMB120 million as part of the Phase 3 at the Reorganization which increased our equity. Our gearing ratio increased from 66.3% as of December 31, 2011 to 84.3% as of December 31, 2012 primarily due to the increase in our bank loans and other borrowings in 2012 to fund our construction of new outlets as we expanded our business.

For more information on our gearing ratios, see “– Market Risk Disclosure – Capital Management”.

– 167 –

FINANCIAL INFORMATION

Return on invested capital

Return on invested capital was 32.1%, 25.6% and 22.6% for the years ended December 31, 2010, 2011 and 2012, respectively. The major financial drivers for our return on invested capital are (i) net operating profit margins, which are affected by gross margins and expense levels, and (ii) invested capital turnovers, which are affected by sales and invested capital base.

The net operating profit margin was 7.1%, 8.8% and 7.7% for the years ended December 31, 2010, 2011 and 2012, respectively. The invested capital turnover was 4.5x, 2.9x and 2.9x for the years ended December 31, 2010, 2011 and 2012, respectively. The high net operating profit margins we have been able to achieve during 2010-2012 are due to (i) our focus exclusively on luxury and ultra-luxury brands, which typically enjoys higher margins than other lower-end dealerships, and (ii) our dominant market share in Henan Province which enables us to exercise greater pricing power to improve margins. However, our invested capital turnover decreased from 4.5x for the year ended December 31, 2010 to 2.9x for the years ended December 31, 2011 and December 31, 2012 due to the changes in our capital base. The significant increase in our capital base in 2011 was due to significant increases in both equity base and debt base. The increase in equity base was mainly due to the equity issuance to investors; and the increase in debt base was due to the increased use of our bank loans as a result of our business expansion needs.

The increase in invested capital in 2011 did not lead to a proportional increase in total sales in the same year. This was due to the delayed effect of turning invested capital into sales. A majority of the capital investment in 2011 was devoted to the construction of new outlets, most of which were eventually constructed and opened in 2012. Since it ordinarily takes one year to one and a half year to open a new store and for such store to reach full sales capacity, the driver for the increase in sales for investments on new outlets in 2011 would only be reflected in full by 2013.

Return on equity

For the years ended December 31, 2010, 2011 and 2012, our return on equity was 44.7%, 36.8% and 48.0%, respectively. Our return on equity decreased from 44.7% for the year ended December 31, 2010 to 36.8% for the year ended December 31, 2011 principally due to the increase of our total equity as a result of the capital injection of RMB120 million as part of the Phase 3 of the Reorganization, which was partially offset by the increase in our profit. Our return on equity increased from 36.8% for the year ended December 31, 2011 to 48.0% primarily due to (i) the increase in our profit and (ii) the decrease of our total equity as a result of the settlement of the dividend we declared in the amount of RMB559.3 million.

Return on assets

For the years ended December 31, 2010, 2011 and 2012, our return on assets was 11.1%, 10.5% and 9.7%, respectively. Our return on assets decreased from 11.1% for the year ended December 31, 2010 to 10.5% for the year ended December 31, 2011 primarily due to the increase of our assets primarily attributable to (i) the capital investment we made in the construction of new outlets and procurement of inventories of newly opened outlets and (ii) the capital injection of RMB120 million as part of the Phase 3 at the Reorganization which increased our equity, which was partially offset by the increase in our profit from our existing and newly opened outlets. Our return on assets decreased from 10.5% for the year ended December 31, 2011 to 9.7% primarily due to the increase of our assets primarily as a result of the capital investment we made in the construction of new outlets and procurement of inventories of newly opened outlets, which was partially offset by the increase in our profit from our existing and newly opened outlets.

– 168 –

FINANCIAL INFORMATION

SHARE-BASED COMPENSATION

On May 20, 2013, our shareholders conditionally approved and adopted the RSU Scheme. The purpose of the RSU Scheme is to attract skilled and experienced personnel, to incentivize them to remain with the Group and to motivate them to strive for the future development and expansion of the Group by providing them with the opportunity to own equity interests in our Company. The principal terms of the RSU Scheme are described in the sections headed “Statutory and General Information – Restricted Share Unit Scheme” in Appendix IX to this document.

As of the date of this document, RSU Awards in respect of an aggregate of 19,110,898 Shares, granted to 18 grantees. Please refer to the section headed “Statutory and General Information – Restricted Share Unit Scheme” in Appendix IV to this document for further details.

We will account for the RSUs granted pursuant to the RSU Schemes using the fair value based method of accounting. The fair value of the RSU Awards granted is recognized as an expense in profit or loss over the vesting period with a corresponding amount recorded in equity. The total amount to be expensed over the vesting period is determined by reference to the fair value of the RSU Awards granted as of the grant date with reference to the vesting period. At the end of each period, we will revise our estimates of the number of RSU Awards that are expected to vest. We will recognize the impact of the revision to original estimates, if any, in profit or loss with a corresponding adjustment to equity. However, no subsequent adjustment to total equity is made after the vesting date.

The RSU Awards granted pursuant to the RSU Scheme are subject to vesting conditions and will vest over a period of four years. For further details, please refer to the section headed “Statutory and General Information – Restricted Share Unit Scheme” in Appendix IV to this document.

DIVIDEND POLICY

We may declare dividends in the future after taking into account our operations, earnings, financial condition, cash requirements and availability and other factors as our Board may deem relevant at such time. Any declaration and payment as well as the amount of dividends will be subject to our constitutional documents and the Cayman Companies Law. Our Shareholders in general meeting may approve and make any declaration of dividends, which must not exceed the amount recommended by our Board. In addition, our Directors may from time to time pay such interim dividends as appear to them to be justified by our profits. No dividend shall be declared or paid except out of our profits or reserves set aside from profits in our Directors’ discretion. Dividends may also be declared and paid out of share premium account or any other fund or account which can be authorized for such purpose in accordance with the Cayman Companies Law and our Articles of Association. Any declaration of dividends may or may not reflect our prior declarations of dividends and any dividend recommendation will be at the absolute discretion of our Board.

Future dividend payments will also depend upon the availability of dividends received from our subsidiaries in China. PRC laws require that dividends be paid only out of net profit calculated according to PRC accounting principles, which differ from generally accepted accounting principles in other jurisdictions, including HKFRS. Some of our subsidiaries in China, which are foreign-invested enterprises, set aside part of their net profit as statutory reserves, in accordance with the requirements of relevant PRC laws and the provisions of their respective articles of association. These portions of our subsidiaries’ net profits are not available for distribution as cash dividends. Distributions from our subsidiaries may also be restricted if they incur debt or losses, or in accordance with any restrictive covenants in bank credit facilities or other agreements that we or our subsidiaries and associated companies may enter into in the future.

– 169 –

FINANCIAL INFORMATION

Our Board has absolute discretion in whether to declare any dividend for any year and, if it decides to declare a dividend, how much dividend to declare. In 2012, our Board declared a one-time dividend in the amount of RMB559.3 million, all of which was entitled to our Controlling Shareholders and was settled with outstanding loan amount due to us from the Controlling Shareholders. Our directors decided that all of our accumulated earnings prior to December 31, 2012 will be retained by our PRC subsidiaries. We currently intend to pay dividends of no more than 20% of our profits available for distribution of each accounting year beginning from the year ended December 31, 2013. Going forward, we will re-evaluate our dividend policy in light of our financial position and the prevailing economic climate. The determination to pay dividends, however, will be made at the discretion of our Board and will be based upon our earnings, cash flow, financial condition, capital requirements, statutory fund reserve requirements and any other conditions that our Directors deem relevant. The payment of dividends may also be limited by legal restrictions and by financing agreements that we may enter into in the future. The amounts of distribution that we have declared and made in the past should not be taken as indications of the dividends, if any, that we may pay in the future.

DISCLOSURE UNDER RULES 13.13 TO 13.19 OF THE LISTING RULES

Our Directors confirm that, as of the Latest Practicable Date, there was no circumstance which would give rise to a disclosure requirement under Rule 13.13 to 13.19 of the Listing Rules.

– 170 –

APPENDIX I

ACCOUNTANTS’ REPORT

The following is the text of a report, prepared for the purpose of incorporation in this document, received from the Company’s reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong.

[To insert the firm’s letterhead]

DRAFT

The Directors China Harmony Auto Holding Limited [●] [●]

[●]

Dear Sirs,

We set out below our report on the financial information of China Harmony Auto Holding Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) comprising the consolidated income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows of the Group for each of the years ended 31 December 2010, 2011 and 2012 (the “Relevant Periods”), and the consolidated statements of financial position of the Group as at 31 December 2010, 2011 and 2012, and the statement of financial position of the Company as at 31 December 2012, together with the notes thereto (the “Financial Information”), prepared on the basis of presentation set out in note 2.1 of Section II below, for inclusion in this document of the Company dated [Date] (the “Document”).

The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 24 September 2012. Pursuant to a group reorganisation (the “Reorganisation”) as set out in note 2.1 of Section II below, which was completed on 29 September 2012, the Company became the holding company of the other subsidiaries comprising the Group. Apart from the Reorganisation, the Company has not commenced any business or operation since its incorporation.

As at the date of this report, no statutory financial statements have been prepared for the Company, as the Company has not been involved in any significant business transaction other than the Reorganisation described above.

As at the date of this report, the Company has direct and indirect interests in the subsidiaries as set out in note 39 of Section II below. All companies now comprising the Group have adopted 31 December as their financial year end date. The statutory financial statements of the companies now comprising the Group were prepared in accordance with the relevant accounting principles applicable to these companies in the countries in which they were incorporated and/or established. Details of their statutory auditors during the Relevant Periods are set out in note 39 of Section II below.

– I-1 –

APPENDIX I

ACCOUNTANTS’ REPORT

For the purpose of this report, the directors of the Company (the “Directors”) have prepared the consolidated financial statements of the Group (the “Underlying Financial Statements”) in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”), which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). The Underlying Financial Statements for each of the years ended 31 December 2010, 2011 and 2012 were audited by us in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

The Financial Information set out in this report has been prepared from the Underlying Financial Statements with no adjustments made thereon.

Directors’ responsibility

The Directors are responsible for the preparation of the Underlying Financial Statements and the Financial Information that give a true and fair view in accordance with HKFRSs, and for such internal control as the Directors determine is necessary to enable the preparation of the Underlying Financial Statements and the Financial Information that are free from material misstatement, whether due to fraud or error.

Reporting accountants’ responsibility

It is our responsibility to form an independent opinion on the Financial Information, and to report our opinion thereon to you.

For the purpose of this report, we have carried out procedures on the Financial Information in accordance with [●].

Opinion in respect of the Financial Information

In our opinion, for the purpose of this report and on the basis of presentation set out in note 2.1 of Section II below, the Financial Information gives a true and fair view of the state of affairs of the Company as at 31 December 2012, and the Group as at 31 December 2010, 2011 and 2012 and of the consolidated results and cash flows of the Group for each of the Relevant Periods.

– I-2 –

APPENDIX I

ACCOUNTANTS’ REPORT

I. FINANCIAL INFORMATION

The following is the Financial Information of the Group for the Relevant Periods prepared on the basis set out in Note 2.1 of Section II:

1. Consolidated income statements

1. Consolidated income statements
			Year ended 31 December

	Section II		2010	2011	2012
		Notes	RMB’000	RMB’000	RMB’000

REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . .		5(a)	1,801,358	3,031,856	5,656,744
Cost of sales and services provided . . . . . . . .		6(b)	(1,569,951)	(2,614,356)	(4,993,298)
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . .			231,407	417,500	663,446
Other income and gains, net . . . . . . . . . . . . .		5(b)	23,634	78,903	236,658
Selling and distribution costs . . . . . . . . . . . . .			(64,517)	(106,737)	(237,030)
Administrative expenses. . . . . . . . . . . . . . . . .			(18,716)	(30,330)	(71,611)
Profit from operations . . . . . . . . . . . . . . . .			171,808	359,336	591,463
Finance costs . . . . . . . . . . . . . . . . . . . . . . . . .		7	(19,956)	(61,872)	(116,403)
Share of profit of an associate. . . . . . . . . . . .		17	–	–	222
Profit before tax. . . . . . . . . . . . . . . . . . . . .		6	151,852	297,464	475,282
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		8(a)	(39,152)	(77,014)	(124,563)

Profit for the year. . . . . . . . . . . . . . . . . . . .			112,700	220,450	350,719

Attributable to:
Owners of the parent. . . . . . . . . . . . . . . . .			112,700	220,466	350,822
Non-controlling interests . . . . . . . . . . . . . .			–	(16)	(103)
			112,700	220,450	350,719

Earnings per share attributable to equity
holders of the parent . . . . . . . . . . . . . . .		12	N/A	N/A	N/A

– I-3 –

APPENDIX I

ACCOUNTANTS’ REPORT

2. Consolidated statements of comprehensive income

	Year	Year	ended 31	December	December

	2010		2011		2012

	RMB’000		RMB’000		RMB’000

PROFIT FOR THE YEAR . . . . . . . . . . . . . . . . . . . . . . .	112,700		220,450		350,719

OTHER COMPREHENSIVE INCOME
Exchange differences on translation of
foreign operations . . . . . . . . . . . . . . . . . . . . . . . .		–		–	(15)
Total comprehensive income for the year. . . . . . . . .	112,700		220,450		350,704

Attributable to:
Owners of the parent. . . . . . . . . . . . . . . . . . . . . .	112,700		220,466		350,807
Non-controlling interests . . . . . . . . . . . . . . . . . . .		–		(16)	(103)
	112,700		220,450		350,704

– I-4 –

APPENDIX I

ACCOUNTANTS’ REPORT

3. Consolidated statements of financial position

				31 December

	Section II		2010	2011	2012
		Notes	RMB’000	RMB’000	RMB’000

NON-CURRENT ASSETS
Property, plant and equipment . . . . . . . . . . .		13	130,550	311,130	1,149,926
Land use rights . . . . . . . . . . . . . . . . . . . . . . .		14	14,297	13,897	13,497
Intangible assets . . . . . . . . . . . . . . . . . . . . . .		15	974	1,007	1,050
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . .		16	7,803	21,417	31,943
Investment in an associate. . . . . . . . . . . . . . .		17	–	6,000	6,222
Deferred tax assets . . . . . . . . . . . . . . . . . . . .		28	2,806	6,732	10,092

Total non-current assets. . . . . . . . . . . . . . . . .			156,430	360,183	1,212,730

CURRENT ASSETS
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . .		18	160,490	333,692	710,554
Trade receivables . . . . . . . . . . . . . . . . . . . . . .		19	11,678	16,666	59,112
Prepayments, deposits and other receivables .		20	289,756	672,401	688,221
Amounts due from related parties . . . . . . . . .		35(b)	305,633	993,194	679,448
Pledged bank deposits. . . . . . . . . . . . . . . . . .		21	215,837	281,023	665,055
Cash in transit. . . . . . . . . . . . . . . . . . . . . . . .		22	9,974	13,646	17,333
Cash and cash equivalents. . . . . . . . . . . . . . .		23	193,475	179,383	342,685
Total current assets . . . . . . . . . . . . . . . . . . . .			1,186,843	2,490,005	3,162,408

CURRENT LIABILITIES
Bank loans and other borrowings . . . . . . . . .		24	395,416	859,535	1,777,774
Trade and bills payables. . . . . . . . . . . . . . . . .		25	418,081	722,329	818,129
Other payables and accruals . . . . . . . . . . . . .		26	131,760	274,992	626,852
Income tax payable . . . . . . . . . . . . . . . . . . . .			58,161	134,977	255,415
Total current liabilities . . . . . . . . . . . . . . . . . .			1,003,418	1,991,833	3,478,170

NET CURRENT ASSETS/(LIABILITIES) . . . . . . . .			183,425	498,172	(315,762)

TOTAL ASSETS LESS CURRENT LIABILITIES . . .			339,855	858,355	896,968

NON-CURRENT LIABILITIES
Bank loans and other borrowings . . . . . . . . .		24	–	–	290,000
Deferred tax liabilities . . . . . . . . . . . . . . . . . .		28	–	–	4,929

Total non-current liabilities . . . . . . . . . . . . . .			–	–	294,929

NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . .			339,855	858,355	602,039

EQUITY
Equity attributable to owners of the
parent
Share capital . . . . . . . . . . . . . . . . . . . . . . . . .		29	–	–	–
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . .		30	339,855	853,371	588,758

			339,855	853,371	588,758
Non-controlling interests . . . . . . . . . . . . . .			–	4,984	13,281
Total equity. . . . . . . . . . . . . . . . . . . . . . . . .			339,855	858,355	602,039

– I-5 –

APPENDIX I

ACCOUNTANTS’ REPORT

4. Consolidated statements of changes in equity

Attributable to owners of the parent

				Exchange			Non-
	Share	Statutory	Merger	fluctuation	Retained		controlling	Total
	capital	reserve	reserve	reserve	earnings	Total	interests	equity
	Note 29	Note 30(i)	Note 30(ii)
	RMB’000	RMB’000*	RMB’000*	RMB’000*	RMB’000*	RMB’000	RMB’000	RMB’000

At 31 December 2009. . . . . . . . . .	–	9,542	72,000	–	83,363	164,905	–	164,905
Contribution by the then equity holders .	–	–	62,250	–	–	62,250	–	62,250
Total comprehensive income for the year .	–	–	–	–	112,700	112,700	–	112,700
Transfer from retained profits . . . . . . .	–	10,001	–	–	(10,001)	–	–	–
At 31 December 2010. . . . . . . . . .	–	19,543	134,250	–	186,062	339,855	–	339,855

Contribution by the then equity holders .	–	–	369,050	–	–	369,050	–	369,050
Non-controlling interest arising from
establishing of a new subsidiary . . . .	–	–	–	–	–	–	5,000	5,000
Acquisition of equity interests by the
Group from the then equity holders . .	–	–	(76,000)	–	–	(76,000)	–	(76,000)
Total comprehensive income for the year .	–	–	–	–	220,466	220,466	(16)	220,450
Transfer from retained profits . . . . . . .	–	18,242	–	–	(18,242)	–	–	–
At 31 December 2011. . . . . . . . . .	–	37,785	427,300	–	388,286	853,371	4,984	858,355

Contribution by the then equity holders .	–	–	193,900	–	–	193,900	–	193,900
Non-controlling interest arising from
establishing of a new subsidiary . . . .	–	–	–	–	–	–	8,400	8,400
Acquisition of equity interests by the
Group from the then equity holders . .	–	–	(250,000)	–	–	(250,000)	–	(250,000)
Dividends paid to the then equity holders.	–	–	–	–	(559,320)	(559,320)	–	(559,320)
Total comprehensive income for the year .	–	–	–	(15)	350,822	350,807	(103)	350,704
Transfer from retained profits . . . . . . .	–	20,664	–	–	(20,664)	–	–	–
At 31 December 2012. . . . . . . . . .	–	58,449	371,200	(15)	159,124	588,758	13,281	602,039

These reserve accounts comprise the consolidated reserves of RMB339,855,000, RMB853,371,000 and RMB558,758,000 in the consolidated statements of financial position as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively.

– I-6 –

APPENDIX I

ACCOUNTANTS’ REPORT

5. Consolidated cash flow statements

5. Consolidated cash flow statements
			Year ended 31 December

	Section II		2010	2011	2012
		Notes	RMB’000	RMB’000	RMB’000

Operating activities
Profit before tax. . . . . . . . . . . . . . . . . . . . . . . . . . . .			151,852	297,464	475,282
Adjustments for:
– Share of profit of an associate. . . . . . . . . . . . . . . . .			–	–	(222)
– Depreciation of property, plant and equipment . . . . .		13	8,792	15,659	37,368
– Amortisation of land use rights . . . . . . . . . . . . . . . .		14	400	400	400
– Amortisation of intangible assets . . . . . . . . . . . . . . .		15	234	205	334
– Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .		5(b)	(14,919)	(56,334)	(156,169)
– Net loss/(gain) on disposal of property, plant and
equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .		6(c)	–	(497)	1,630
– Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .		7	19,956	61,872	116,403

			166,315	318,769	475,026

Increase in pledged bank deposits . . . . . . . . . . . . . . .			(62,647)	(65,186)	(384,032)
Increase in cash in transit . . . . . . . . . . . . . . . . . . . . .			(5,324)	(3,672)	(3,687)
Increase in trade receivables. . . . . . . . . . . . . . . . . . . .			(509)	(4,988)	(42,446)
Increase in prepayments, deposits and
other receivables . . . . . . . . . . . . . . . . . . . . . . . . . .			(168,511)	(389,583)	(25,329)
Increase in inventories. . . . . . . . . . . . . . . . . . . . . . . .			(69,539)	(173,202)	(376,862)
Increase in trade and bills payables . . . . . . . . . . . . . . .			164,954	304,248	95,800
Increase in other payables and accruals . . . . . . . . . . . .			75,426	110,581	355,065
Cash generated from operations . . . . . . . . . . . . . .			100,165	96,967	93,535
Income Tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .			(3,060)	(4,124)	(2,556)
Net cash generated from operating activities . . . . .			97,105	92,843	90,979

– I-7 –

APPENDIX I

ACCOUNTANTS’ REPORT

			Year ended 31 December	Year ended 31 December	Year ended 31 December

	Section II		2010	2011	2012
		Notes	RMB’000	RMB’000	RMB’000

Investing activities
Purchase of items of property, plant and equipment . . .			(56,437)	(174,761)	(877,409)
Proceeds from disposal of items of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–	4,994	15,109
Purchase of intangible assets . . . . . . . . . . . . . . . . . . .			(225)	(238)	(377)
Investment in an associate. . . . . . . . . . . . . . . . . . . . .			–	(6,000)	–
Advance to/(Repayment of advance from) an associate .			–	(3,117)	121
Advance to the Controlling Shareholder, net . . . . . . . .			(198,191)	(630,928)	(97,955)
Acquisition of equity interests by the Group from the
then equity holders . . . . . . . . . . . . . . . . . . . . . . . .			–	(76,000)	(250,000)
Interest received. . . . . . . . . . . . . . . . . . . . . . . . . . . .			1,514	2,818	8,429

Net cash used in investing activities. . . . . . . . . . . .			(253,339)	(883,232)	(1,202,082)
Financing activities
Proceeds from bank loans and other borrowings. . . . . .			659,981	1,810,166	3,714,604
Repayment of bank loans and other borrowings . . . . . .			(471,122)	(1,346,047)	(2,506,365)
Contribution by the then equity holders . . . . . . . . . . .			62,250	369,050	193,900
Contributions by non-controlling shareholders . . . . . . .			–	5,000	8,400
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			(19,956)	(61,872)	(136,119)
Net cash generated from financing activities			231,153	776,297	1,274,420
Net increase/(decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . .			74,919	(14,092)	163,317
Cash and cash equivalents at the beginning of
each year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			118,556	193,475	179,383
Effect of foreign exchange rate changes . . . . . . . . . . .			–	–	(15)
Cash and cash equivalents at the end of
each year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		23	193,475	179,383	342,685

– I-8 –

APPENDIX I

ACCOUNTANTS’ REPORT

6. Company Statements of Financial Position

6. Company Statements of Financial Position
			31 December
	Section II		2012
		Note	RMB’000

NON-CURRENT ASSETS
Interest in a subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–
Total non-current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–

CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–

CURRENT LIABILITIES
Other payables and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–

NET CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–

TOTAL ASSETS LESS CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . .			–

NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–

EQUITY
Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		29	–
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–

Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			–

– I-9 –

APPENDIX I

ACCOUNTANTS’ REPORT

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION

The Company was incorporated on 24 September 2012 as an exempted company in the Cayman Islands with limited liability under the Companies Law of the Cayman Islands in preparation. The registered office of the Company is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Particulars of the companies now comprising the Group are set out in Note 39 of Section II below.

The Company is an investment holding company. During the Relevant Periods, the Company’s subsidiaries were principally engaged in the sale and service of motor vehicles (the “Listing Business”).

In the opinion of the directors of the Company (the “Directors”), the ultimate holding company of the Company is Eagle Seeker Company Limited, which is incorporated in the British Virgin Islands (“BVI”).

Before the formation of the Group, the Listing Business was carried out by the subsidiaries now comprising the Group as set out in Note 39 of section II below, all of which were controlled by Mr. Feng Changge (the “Controlling Shareholder”).

Pursuant to the Reorganisation as described in the section headed “Our History and Reorganisation” in the Document and in Appendix IV “Statutory and General Information” to the Document, the Company became the holding company of the subsidiaries now comprising the Group on 29 September 2012.

2.1 BASIS OF PRESENTATION

Pursuant to the Reorganisation as more fully explained in the paragraph headed “Our Reorganisation” in the section headed “Our History and Reorganisation” in the Document, the Company became the holding company of the companies now comprising the Group on 29 September 2012. The companies now comprising the Group were under the common control of the Controlling Shareholder before and after the Reorganisation. Accordingly, for the purpose of this report, the Financial Information has been prepared on a consolidated basis by applying the principles of merger accounting as if the Reorganisation had been completed at the beginning of the Relevant Periods.

The consolidated income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows of the Group for the Relevant Periods include the results and cash flows of all companies now comprising the Group from the earliest date presented or since the date when the subsidiaries first came under the common control of the Controlling Shareholder, where this is a shorter period. The consolidated statements of financial position of the Group as at 31 December 2010, 2011 and 2012 have been prepared to present the assets and liabilities of the subsidiaries using the existing book values from the Controlling Shareholder’s perspective. No adjustments are made to reflect fair values, or recognise any new assets or liabilities as a result of the Reorganisation.

Equity interest in subsidiaries held by parties other than the Controlling Shareholder, and changes therein, prior to the Reorganisation are presented as non-controlling interests in equity applying the principles of merger accounting.

All intra-group transactions and balances have been eliminated on consolidated in full.

2.2 BASIS OF PREPARATION

The Financial Information has been prepared in accordance with HKFRSs (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong. All HKFRSs effective for the accounting period commencing from 1 January 2012, together with the relevant transitional provisions, have been early adopted by the Group in the preparation of the Financial Information throughout the Relevant Periods.

The Financial Information has been prepared under the historical cost convention. The Financial Information is presented in Renminbi (“RMB”) and all values are rounded to the nearest thousand except when otherwise indicated.

– I-10 –

APPENDIX I

ACCOUNTANTS’ REPORT

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

3.1 ADOPTION OF NEW AND REVISED HKFRSs

For the purpose of this Financial Information, the Group has adopted, at the beginning of the Relevant Periods, all the new and revised HKFRSs applicable to the Relevant Periods.

3.2 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements.

HKFRS 1 Amendments	Amendments to HKFRS 1 First-time Adoption of Hong Kong Financial
	_Reporting Standards – Government Loans_2
HKFRS 7 Amendments	Amendments to HKFRS 7 Financial Instruments:
	_Disclosures – Offsetting Financial Assets and Financial Liabilities_2
HKFRS 9	_Financial Instruments_4
HKFRS 10	_Consolidated Financial Statements_2
HKFRS 11	_Joint Arrangements_2
HKFRS 12	_Disclosure of Interests in Other Entities_2
HKFRS 10, HKFRS 11 and HKFRS 12	Amendments to HKFRS 10, HKFRS 11 and HKFRS 12 – _Transition Guidance_2
Amendments
HKFRS 10, HKFRS 12 and HKAS 27	Amendments to HKFRS 10, HKFRS 12 and HKAS 27 (2011) – Investment
(2011) Amendments	_Entities_3
HKFRS 13	_Fair Value Measurement_2
HKAS 1 Amendments	Amendments to HKAS 1 Presentation of Financial Statements
	_– Presentation of Items of Other Comprehensive Income_1
HKAS 19 (2011)	_Employee Benefits_2
HKAS 27 (2011)	_Separate Financial Statements_2
HKAS 28 (2011)	_Investments in Associates and Joint Ventures_2
HKAS 32 Amendments	Amendments to HKAS 32 Financial Instruments:
	_Presentation – Offsetting Financial Assets and Financial Liabilities_3
HK(IFRIC)-Int 20	_Stripping Costs in the Production Phase of a Surface Mine_2
Annual Improvements 2009-2011 Cycle	Amendments to a number of HKFRSs issued in June 20122

1 Effective for annual periods beginning on or after 1 July 2012 2 Effective for annual periods beginning on or after 1 January 2013 3 Effective for annual periods beginning on or after 1 January 2014 4 Effective for annual periods beginning on or after 1 January 2015

The Group is in the process of making an assessment of the impact of these new and revised HKFRSs upon initial application. So far, the Group considers that these new and revised HKFRSs may result in changes in accounting policies and are unlikely to have a significant impact on the Group’s results of operations and financial position.

3.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of combination

This Financial Information incorporates the financial statements of the Company and its subsidiaries for the Relevant Periods.

As explained in Note 2.1 above, the acquisition of subsidiaries under common control has been accounted for using merger accounting principles. The merger method of accounting involves incorporating the financial statement items of the combining entities or businesses in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party.

No amount is recognised in respect of goodwill or the excess of the acquirers’ interest in the net fair value of acquirees’ identifiable assets, liabilities and contingent liabilities over the cost of investment at the time of common control combination.

– I-11 –

APPENDIX I

ACCOUNTANTS’ REPORT

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

All significant intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated on combination in full.

Non-controlling interests represent the interests of outside shareholders not held by the Group in the results and net assets of the companies now comprising the Group.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

Subsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities.

The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s investments in subsidiaries that are not classified as held for sale in accordance with HKFRS 5 are stated at cost less any impairment losses.

Associates

An associate is an entity, not being a subsidiary or a jointly-controlled entity, in which the Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.

The Group’s investments in associates are stated in the consolidated statement of financial position at the Group’s share of net assets under the equity method of accounting, less any impairment losses. The Group’s share of the post-acquisition results and reserves of associates is included in the consolidated income statement and consolidated reserves, respectively. Unrealised gains and losses resulting from transactions between the Group and its associates are eliminated to the extent of the Group’s investments in the associates, except where unrealised losses provide evidence of an impairment of the asset transferred. Goodwill arising from the acquisition of associates is included as part of the Group’s investments in associates and is not individually tested for impairment.

Impairment of non-financial assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories and financial assets), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises in those expense categories consistent with the function of the impaired asset.

An assessment is made at the end of each reporting period as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation) had no impairment loss been recognised for the asset in prior years. A reversal of such an impairment loss is credited to the income statement in the period in which it arises.

– I-12 –

APPENDIX I

ACCOUNTANTS’ REPORT

Related parties

A party is considered to be related to the Group if:

(a) the party is a person or a close member of that person’s family and that person:
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or of a parent of the Group;
or
(b) the party is an entity where any of the following conditions applies:
(i) the entity and the Group are members of the same group;
(ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);
(iii) the entity and the Group are joint ventures of the same third party;
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a); and
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalised in the carrying amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly.

Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal estimated useful lives and residual value of property, plant and equipment are as follows:

equipment are as follows:
		Estimated residual
Category	Estimated useful life	value
Buildings . . . . . . . . . . . . . . . .	20 years	5%
Leasehold improvements . . . . . . .	Over the shorter of the lease terms and 20 years	–
Plant and machinery . . . . . . . . .	5-10 years	5%
Furniture and fixtures . . . . . . . . .	3-10 years	5%
Motor vehicles . . . . . . . . . . . . .	4-10 years	5%

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

An item of property, plant and equipment including any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents buildings, plant and machinery under construction or pending installation, which are stated at cost less any impairment losses, and are not depreciated. Cost comprises the direct costs of construction and capitalised borrowing costs during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

– I-13 –

APPENDIX I

ACCOUNTANTS’ REPORT

Intangible assets (other than goodwill)

Intangible assets acquired separately are measured on initial recognition at cost. The useful lives of intangible assets are assessed to be finite. Intangible assets with finite lives are subsequently amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end.

Intangible assets are stated at cost less any impairment losses and are amortised on the straight-line basis over their estimated useful lives. The principal estimated useful life of software is 5 years.

Leases

Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalised finance leases, including prepaid land lease payment under finance lease, are included in property, plant and equipment, and depreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such leases are charged to the income statement so as to provide a constant periodic rate of charge over the lease terms.

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets, and rentals receivable under the operating leases are credited to the income statement on the straight-line basis over the lease terms. Where the Group is the lessee, rentals payable under the operating leases are charged to the income statement on the straight-line basis over the lease terms.

Land use rights

All land in Mainland China is state-owned and no individual land ownership rights exist. The Group acquires the rights to use certain land and the consideration paid for such rights are recorded as land use rights, which are amortised over the lease terms of 40 years using the straight-line method.

Investments and other financial assets

Initial recognition and measurement

Financial assets within the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, available-for-sale financial investments, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition. When financial assets are recognised initially, they are measured at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by HKAS 39.

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with positive net changes in fair value presented as other income and gains and negative net changes in fair value presented as finance costs in the income statement. These net fair value changes do not include any dividends or interest earned on these financial assets, which are recognised in accordance with the policies set out for “Revenue recognition” below.

Financial assets designated upon initial recognition at fair value through profit or loss are designated at the date of initial recognition and only if the criteria under HKAS 39 are satisfied.

The Group evaluates its financial assets at fair value through profit or loss (held for trading) to assess whether the intent to sell them in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management’s intent to sell them in the foreseeable future significantly changes, the Group may elect to reclassify them. The reclassification from financial assets at fair value through profit or loss to loans and receivables, available-for-sale financial assets or held-to-maturity investments depends on the nature of the assets. This evaluation does not affect any financial assets designated at fair value through profit or loss using the fair value option at designation, as these instruments cannot be reclassified after initial recognition.

– I-14 –

APPENDIX I

ACCOUNTANTS’ REPORT

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such assets are subsequently measured at amortised cost using the effective interest method less any allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and includes fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in other income and gains in the income statement. The loss arising from impairment is recognised in the income statement in finance costs for loans and in other expenses for receivables.

Available-for-sale financial investments

Available-for-sale financial investments are non-derivative financial assets in listed and unlisted equity investments and debt securities. Equity investments classified as available for sale are those which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in market conditions.

After initial recognition, available-for-sale financial investments are subsequently measured at fair value, with unrealised gains or losses recognised as other comprehensive income in the available-for-sale investment revaluation reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in the income statement in other income, or until the investment is determined to be impaired, when the cumulative gain or loss is reclassified from the available-for-sale investment revaluation reserve to the income statement in other expenses. Interest and dividends earned whilst holding the available-for-sale financial investments are reported as interest income and dividend income, respectively and are recognised in the income statement as other income in accordance with the policies set out for “Revenue recognition” below.

When the fair value of unlisted equity investments cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such investments are stated at cost less any impairment losses.

The Group evaluates whether the ability and intention to sell its available-for-sale financial assets in the near term are still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management’s intent to do so significantly changes in the foreseeable future, the Group may elect to reclassify these financial assets. Reclassification to loans and receivables is permitted when the financial assets meet the definition of loans and receivables and the Group has the intent and ability to hold these assets for the foreseeable future or to maturity. Reclassification to the held-to-maturity category is permitted only when the Group has the ability and intent to hold until the maturity date of the financial asset.

For a financial asset reclassified from the available-for-sale category, the fair value carrying amount at the date of reclassification becomes its new amortised cost and any previous gain or loss on that asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest rate. Any difference between the new amortised cost and the maturity amount is also amortised over the remaining life of the asset using the effective interest rate. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the income statement.

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

the rights to receive cash flows from the asset have expired; or
the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

– I-15 –

APPENDIX I

ACCOUNTANTS’ REPORT

Impairment of financial assets

The Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Group firstly assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group.

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to other expenses in the income statement.

Assets carried at cost

If there is objective evidence that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Impairment losses on these assets are not reversed.

Available-for-sale financial investments

For available-for-sale financial investments, the Group assesses at the end of each reporting period whether there is objective evidence that an investment or a group of investments is impaired.

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is removed from other comprehensive income and recognised in the income statement.

In the case of equity investments classified as available for sale, objective evidence would include a significant or prolonged decline in the fair value of an investment below its cost. The determination of what is “significant” or “prolonged” requires judgement. “Significant” is to be evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement – is removed from other comprehensive income and recognised in the income statement. Impairment losses on equity instruments classified as available for sale are not reversed through the income statement. Increases in their fair value after impairment are recognised directly in other comprehensive income.

Financial liabilities

Initial recognition and measurement

Financial liabilities within the scope of HKAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, net of directly attributable transaction costs.

– I-16 –

APPENDIX I

ACCOUNTANTS’ REPORT

The Group’s financial liabilities include trade and bills payables, other payables, and bank loans and other borrowings.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss includes financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by HKAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the income statement. The net fair value gain or loss recognised in the income statement does not include any interest charged on these financial liabilities.

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the date of initial recognition and only if the criteria in HKAS 39 are satisfied.

Loans and borrowings

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance costs in the income statement.

Financial guarantee contracts

Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. A financial guarantee contract is recognised initially as a liability at its fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequent to initial recognition, the Group measures the financial guarantee contract at the higher of: (i) the amount of the best estimate of the expenditure required to settle the present obligation at the end of the reporting period; and (ii) the amount initially recognised less, when appropriate, cumulative amortisation.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the income statement.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Fair value of financial instruments

The fair value of financial instruments that are traded in active markets is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For financial instruments where there is no active market, the fair value is determined using appropriate valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; a discounted cash flow analysis; and other option pricing models.

Inventories

Inventories are carried at the lower of cost and net realisable value. Cost is calculated on specific identification basis as appropriate and comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

– I-17 –

APPENDIX I

ACCOUNTANTS’ REPORT

Cash and cash equivalents

For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the statements of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits with initial terms of three months or less, which are not restricted as to use.

Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognised outside profit or loss is recognised outside profit or loss, either in other comprehensive income or directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Group operates.

Deferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, the carryforward of unused tax credits and any unused tax losses. Deferred tax assets recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carryforward of unused tax credits and unused tax losses can be utilised, except:

when the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries, associates and joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Government grants

Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. Where the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the costs which it is intended to compensate, are expensed.

Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments or deducted from the carrying amount of the asset and released to the income statement by way of a reduced depreciation charge.

– I-18 –

APPENDIX I

ACCOUNTANTS’ REPORT

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) from the rendering of services, on the percentage of completion basis, in the period in which the services are rendered;
(c) rental income, on a time proportion basis over the lease terms;
(d) interest income, on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument to the net carrying amount of the financial asset; and
(e) dividend income, when the shareholders’ right to receive payment has been established.

Vendor rebate

Volume-related vendor rebates are recognised as a deduction from cost of sales on an accruals basis based on the expected entitlement earned up to the reporting date for each relevant supplier contract.

Rebates relating to items purchased but still held at the reporting date are deducted from the carrying value of these items so that the cost of inventories is recorded net of applicable rebates.

Employee benefits

The employees of the Group’s subsidiaries which operate in Mainland China are required to participate in a central pension scheme operated by the local municipal government. These subsidiaries are required to contribute certain percentage of their payroll costs to the central pension scheme. The contributions are charged to the income statement as they become payable in accordance with the rules of the central pension scheme.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Where funds have been borrowed generally, and used for the purpose of obtaining qualifying assets, a capitalisation rate of 8.0% has been applied to the expenditure on the individual assets during the year ended 31 December 2012.

Dividends

Final dividends proposed by the directors are classified as a separate allocation of retained profits within the equity section of the statement of financial position, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability.

Foreign currencies

These financial statements are presented in RMB. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the end of the reporting period. Differences arising on settlement or translation of monetary items are recognised in the income statement.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The gain or loss arising on translation of a non-monetary item measured at fair value is treated in line with the recognition of the gain or loss on change in fair value of the item (i.e., translation difference on the item whose fair value gain or loss is recognised in other comprehensive income or profit or loss is also recognised in other comprehensive income or profit or loss, respectively).

The functional currencies of the Company and certain overseas subsidiaries are currencies other than RMB. As at the end of the reporting period, the assets and liabilities of these entities are translated into the presentation currency of the Company at the exchange rates prevailing at the end of the reporting period, and their income statements are translated into RMB at the weighted average exchange rates for the year.

– I-19 –

APPENDIX I

ACCOUNTANTS’ REPORT

The resulting exchange differences are recognised in other comprehensive income and accumulated in the exchange fluctuation reserve. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in the income statement.

For the purpose of the consolidated statement of cash flows, the cash flows of overseas subsidiaries are translated into RMB at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into RMB at the weighted average exchange rates for the year.

3.4 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Group’s Financial Information requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and their accompanying disclosure, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.

Judgements

In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial information:

Deferred tax assets

Deferred tax assets are recognised for all deductible temporary differences and unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. The carrying values of deferred tax assets were RMB2,806,000, RMB6,732,000 and RMB10,092,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively. More details are given in Note 28.

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Impairment of non-financial assets (other than goodwill)

The Group assesses whether there are any indicators of impairment for all non-financial assets at the end of each reporting period. Indefinite life intangible assets are tested for impairment annually and at other times when such an indicator exists. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The calculation of the fair value less costs to sell is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.

4. SEGMENT INFORMATION

The Group’s principal business is the sale and service of motor vehicles. For management purposes, the Group operates in one business unit based on its products, and has one reportable segment which is the sale of motor vehicles and the provision of related services.

No operating segments have been aggregated to form the above reportable operating segment.

Information about geographical area

Since all of the Group’s revenue were generated from the sale and service of motor vehicles in Mainland China and all of the Group’s identifiable assets and liabilities were located in Mainland China, no geographical information is presented in accordance with HKFRS 8 Operating Segments .

Information about major customers

Since none of the Group’s sales to a single customer amounted to 10% or more of the Group’s revenue during each of the Relevant Periods, no major customers segment information is presented in accordance with HKFRS 8 Operating Segments .

– I-20 –

APPENDIX I

ACCOUNTANTS’ REPORT

5. REVENUE, OTHER INCOME AND GAINS, NET

(a) Revenue:

Revenue:
		Year ended 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Revenue from the sale of motor vehicles . . . . . . . . . . .	1,616,681	2,752,772	5,244,449
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	184,677	279,084	412,295

	1,801,358	3,031,856	5,656,744

(b) Other income and gains, net:

Other income and gains, net:
		Year	ended 31 December

		2010	2011	2012

	Note	RMB’000	RMB’000	RMB’000

Commission income. . . . . . . . . . . . . . . . . . .		4,563	13,211	61,141
Advertisement support received from motor
vehicle manufacturers . . . . . . . . . . . . . . . .		2,474	3,843	5,326
Bank interest income . . . . . . . . . . . . . . . . . .		1,514	2,818	8,429
Interest income from the Controlling Shareholder .	(i)	13,405	53,516	147,740
Net gain on disposal of items of property, plant
and equipment . . . . . . . . . . . . . . . . . . . .		–	497	–
Others . . . . . . . . . . . . . . . . . . . . . . . . . . .		1,678	5,018	14,022

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .		23,634	78,903	236,658

(i) Interest income from the Controlling Shareholder was generated from loans the Group granted to the Controlling Shareholder which bore an annual interest rate of 15% during the Relevant Periods.

6. PROFIT BEFORE TAX

The Group’s profit before tax is arrived at after charging/(crediting):

		Year	ended 31	December	December

		2010	2011		2012

		RMB’000	RMB’000		RMB’000

(a)	Employee benefit expense (including directors’ and
	chief executive’s remuneration (Note 9)):
	Wages and salaries . . . . . . . . . . . . . . . . . . . . . .	16,769	29,994		61,664
	Other welfare . . . . . . . . . . . . . . . . . . . . . . . . .	6,094		9,695	20,847

		22,863	39,689		82,511

(b)	Cost of sales and services:
	Cost of sales of motor vehicles . . . . . . . . . . . . . . .	1,458,326	2,440,304		4,762,592
	Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	111,625	174,052		230,706

		1,569,951	2,614,356		4,993,298

(c)	Other items:
	Depreciation of items of property, plant and equipment .	8,792	15,659		37,368
	Amortisation of land use rights . . . . . . . . . . . . . . .	400		400	400
	Amortisation of intangible assets . . . . . . . . . . . . . .	234		205	334
	Net loss/(gain) on disposal of items of property, plant
	and equipment. . . . . . . . . . . . . . . . . . . . . . .	–		(497)	1,630
	Advertisement and business promotion expenses . . . . .	15,489	24,005		51,989
	Bank charges . . . . . . . . . . . . . . . . . . . . . . . . .	1,734		3,487	9,285
	Lease expenses . . . . . . . . . . . . . . . . . . . . . . . .	2,202		6,814	18,649
	Logistics and petroleum expenses. . . . . . . . . . . . . .	3,991		5,424	15,103
	Office expenses . . . . . . . . . . . . . . . . . . . . . . . .	5,273		7,368	11,015

– I-21 –

APPENDIX I

ACCOUNTANTS’ REPORT

7. FINANCE COSTS

FINANCE COSTS
	Year	ended 31	December

	2010	2011		2012

	RMB’000	RMB’000		RMB’000

Interest expense on bank borrowings wholly repayable
within five years. . . . . . . . . . . . . . . . . . . . . . . . .	19,654	60,327		131,275
Interest expense on other borrowings . . . . . . . . . . . . .	302	1,545		4,844
Less: Interest capitalised . . . . . . . . . . . . . . . . . . . . .	–		–	(19,716)

	19,956	61,872		116,403

8. TAX

(a) Tax in the consolidated income statements represents:

Tax in the consolidated income statements represents:
	Year	ended 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Current Mainland China corporate income tax. . . . . . . .	40,339	80,940	122,994
Deferred tax (Note 28) . . . . . . . . . . . . . . . . . . . . . .	(1,187)	(3,926)	1,569

	39,152	77,014	124,563

Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, the Company and the subsidiary incorporated in the Cayman Islands has obtained an undertaking from the Governor-in-Council that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gain or appreciation shall apply to the Company and the subsidiary incorporated in the Cayman Islands.

The subsidiaries incorporated in the BVI are not subject to income tax as these subsidiaries does not have a place of business (other than a registered office only) or carry on any business in the BVI.

The subsidiaries incorporated in Hong Kong are subject to an income tax at the rate of 16.5% during the Relevant Periods. No provision for Hong Kong profits tax has been made as the Group had no assessable profits arising in Hong Kong during the Relevant Periods.

According to the Corporate Income Tax Law of the People’s Republic of China (the “CIT Law”), the income tax rate of the Mainland China subsidiaries is 25%.

(b) Reconciliation between tax expense and accounting profit at applicable tax rates:

A reconciliation of the tax expense applicable to profit before tax using the applicable rates for the regions in which the Company and its subsidiaries are domiciled to the tax expense at the effective tax rates is as follows:

	Year	ended 31	December	December

	2010	2011		2012

	RMB’000	RMB’000		RMB’000

Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . .	151,852	297,464		475,282

Tax at applicable tax rates (25%) . . . . . . . . . . . . . . . .	37,963	74,366		118,821
Lower tax rates enacted by local authority . . . . . . . . . .	–		–	127
Profit attributable to an associate . . . . . . . . . . . . . . .	–		–	(56)
Tax effect of non-deductible expenses . . . . . . . . . . . . .	1,189	2,648		5,671

Tax charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	39,152	77,014		124,563

– I-22 –

APPENDIX I

ACCOUNTANTS’ REPORT

9. DIRECTORS’ AND CHIEF EXECUTIVE’S REMUNERATION

Details of the directors’ and chief executive’s remuneration during the Relevant Periods, disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance, is as follows:

Year ended 31 December 2010

				Contributions
		Salaries,		to defined
		allowances		contribution
	Directors’	and other	Discretionary	retirement
	fees	benefits	bonuses	schemes	Total

	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000

Executive directors
– Feng Changge . . . . . . . . . . . .	–	501	–	28	529
– Yu Feng (i) . . . . . . . . . . . . . .	–	350	–	28	378
– Yang Lei. . . . . . . . . . . . . . . .	–	331	–	28	359
– Cui Ke. . . . . . . . . . . . . . . . .	–	292	–	23	315
– Ma Lintao . . . . . . . . . . . . . .	–	280	–	28	308

	–	1,754	–	135	1,889

Year ended 31 December 2011

				Contributions
		Salaries,		to defined
		allowances		contribution
	Directors’	and other	Discretionary	retirement
	fees	benefits	bonuses	schemes	Total

	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000

Executive directors
– Feng Changge . . . . . . . . . . . .	–	700	–	31	731
– Yu Feng (i) . . . . . . . . . . . . . .	–	450	–	31	481
– Yang Lei. . . . . . . . . . . . . . . .	–	372	–	31	403
– Cui Ke. . . . . . . . . . . . . . . . .	–	371	–	49	420
– Ma Lintao. . . . . . . . . . . . . . .	–	300	–	31	331
– Liu Wei . . . . . . . . . . . . . . . .	–	180	–	31	211

	–	2,373	–	204	2,577

Year ended 31 December 2012

				Contributions
		Salaries,		to defined
		allowances		contribution
	Directors’	and other	Discretionary	retirement
	fees	benefits	bonuses	schemes	Total

	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000

Executive directors
– Feng Changge . . . . . . . . . . . .	–	900	–	34	934
– Yu Feng (i) . . . . . . . . . . . . . .	–	600	–	34	634
– Liu Wei . . . . . . . . . . . . . . . .	–	500	–	34	534
– Yang Lei. . . . . . . . . . . . . . . .	–	454	–	34	488
– Cui Ke. . . . . . . . . . . . . . . . .	–	474	–	54	528
– Ma Lintao. . . . . . . . . . . . . . .	–	360	–	34	394
– Fong Heung Sang, Addy (Dexter).	–	140	–	–	140

	–	3,428	–	224	3,652

(i) Mr. Yu Feng is also the chief executive of the Group.

There was no arrangement under which a director or the chief executive waived or agreed to waive any remuneration during the Relevant Periods.

No emoluments were paid to the non-executive director and the independent non-executive directors of the Company during the Relevant Periods.

– I-23 –

APPENDIX I

ACCOUNTANTS’ REPORT

10. FIVE HIGHEST PAID INDIVIDUALS

The five individuals whose emoluments were the highest in the Group for the years ended 31 December 2010, 2011 and 2012 include four, four and five directors, respectively, whose emoluments are reflected in the analysis presented above.

Details of the remuneration of the remaining one, one and nil highest paid employees for the Relevant Periods are as follows:

s:
		Year	ended 31	December

		2010	2011		2012

		RMB’000	RMB’000		RMB’000

Salaries,	bonuses, allowances and benefits in kind . . . . .	280		300	–
Pension	scheme contributions . . . . . . . . . . . . . . . . . .	28		31	–

		308		331	–

The number of non-director, highest paid employees whose remuneration fell within the following band is as follows:

			Year	ended 31	December	December

			2010	2011		2012

Nil	to	HK$1,000,000	1		1	–

11. PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT

The consolidated profit attributable to owners of the parent for the years ended 31 December 2010, 31 December 2011 and 31 December 2012 were all generated by the subsidiaries now comprising the Group (Note 2.1).

12. EARNINGS PER SHARE

No earnings per share information is presented as its inclusion is not considered meaningful for the purpose of this report.

– I-24 –

APPENDIX I

ACCOUNTANTS’ REPORT

13. PROPERTY, PLANT AND EQUIPMENT

				Furniture
		Leasehold	Plant and	and	Motor	Construction
	Buildings	improvements	machinery	fixtures	vehicles	in progress	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000

Cost:
At 1 January 2010 . . . . . . . . .	57,689	978	9,915	7,352	9,781	–	85,715
Additions . . . . . . . . . . . . . .	21,341	981	8,049	3,184	22,682	11,050	67,287
Disposals . . . . . . . . . . . . . .	–	–	–	–	–	–	–

At 31 December 2010 . . . . . . .	79,030	1,959	17,964	10,536	32,463	11,050	153,002

Accumulated depreciation:
At 1 January 2010 . . . . . . . . .	4,278	140	3,334	2,430	3,478	–	13,660
Depreciation provided during the
year. . . . . . . . . . . . . . . .	2,916	389	1,531	1,294	2,662	–	8,792
Disposals . . . . . . . . . . . . . .	–	–	–	–	–	–	–

At 31 December 2010 . . . . . . .	7,194	529	4,865	3,724	6,140	–	22,452

Net book value:
At 31 December 2010 . . . . . . .	71,836	1,430	13,099	6,812	26,323	11,050	130,550

Cost:
At 1 January 2011 . . . . . . . . .	79,030	1,959	17,964	10,536	32,463	11,050	153,002
Additions . . . . . . . . . . . . . .	59	–	6,170	5,668	45,658	143,181	200,736
Transfers . . . . . . . . . . . . . .	142,718	–	5,291	372	–	(148,381)	–
Disposals . . . . . . . . . . . . . .	–	–	–	–	(5,875)	–	(5,875)

At 31 December 2011 . . . . . . .	221,807	1,959	29,425	16,576	72,246	5,850	347,863

Accumulated depreciation:
At 1 January 2011 . . . . . . . . .	7,194	529	4,865	3,724	6,140	–	22,452
Depreciation provided during the
year. . . . . . . . . . . . . . . .	4,000	568	2,137	1,792	7,162	–	15,659
Disposals . . . . . . . . . . . . . .	–	–	–	–	(1,378)	–	(1,378)

At 31 December 2011 . . . . . . .	11,194	1,097	7,002	5,516	11,924	–	36,733

Net book value:
At 31 December 2011 . . . . . . .	210,613	862	22,423	11,060	60,322	5,850	311,130

Cost:
At 1 January 2012 . . . . . . . . .	221,807	1,959	29,425	16,576	72,246	5,850	347,863
Additions . . . . . . . . . . . . . .	30,207	5,276	14,113	15,072	80,935	747,300	892,903
Transfers . . . . . . . . . . . . . .	171,079	65,624	2,898	2,300	–	(241,901)	–
Disposals . . . . . . . . . . . . . .	–	–	–	–	(22,763)	–	(22,763)

At 31 December 2012 . . . . . . .	423,093	72,859	46,436	33,948	130,418	511,249	1,218,003

Accumulated depreciation:
At 1 January 2012 . . . . . . . . .	11,194	1,097	7,002	5,516	11,924	–	36,733
Depreciation provided during the
year. . . . . . . . . . . . . . . .	11,299	1,758	3,946	3,483	16,882	–	37,368
Disposals . . . . . . . . . . . . . .	–	–	–	–	(6,024)	–	(6,024)

At 31 December 2012 . . . . . . .	22,493	2,855	10,948	8,999	22,782	–	68,077

Net book value:
At 31 December 2012 . . . . . . .	400,600	70,004	35,488	24,949	107,636	511,249	1,149,926

The application for the property ownership certificates for certain buildings with a net book value of approximately RMB29,700,000, RMB170,797,000 and RMB363,104,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively, was still in progress.

Certain of the Group’s buildings with aggregate net book values of approximately RMB42,136,000, RMB39,816,000 and RMB37,496,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively, were pledged as security for the Group’s bank borrowings (Note 24(a)).

– I-25 –

APPENDIX I

ACCOUNTANTS’ REPORT

14. LAND USE RIGHTS

LAND USE RIGHTS
		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Cost:
At the beginning of each year . . . . . . . . . . . . . . . . .	15,981	15,981	15,981
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	–	–	–

At the end of each year . . . . . . . . . . . . . . . . . . . . .	15,981	15,981	15,981

Accumulated amortisation:
At the beginning of each year . . . . . . . . . . . . . . . . .	(1,284)	(1,684)	(2,084)
Charged for the year . . . . . . . . . . . . . . . . . . . . . . .	(400)	(400)	(400)

At the end of each year . . . . . . . . . . . . . . . . . . . . .	(1,684)	(2,084)	(2,484)

Net book value:
At the end of each year . . . . . . . . . . . . . . . . . . . . .	14,297	13,897	13,497

The lease prepayments of the Group represent the cost of the Group’s land use rights in respect of land located in Mainland China and are held under medium-term lease.

All of the Group’s land use rights were pledged as security for the Group’s bank loans and other borrowings as at 31 December 2010, 2011 and 2012 (Note 24(a)).

15. INTANGIBLE ASSETS

		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Cost:
At the beginning of each year . . . . . . . . . . . . . . . . .	1,421	1,646	1,884
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	225	238	377

At the end of each year . . . . . . . . . . . . . . . . . . . . .	1,646	1,884	2,261

Accumulated amortisation:
At the beginning of each year . . . . . . . . . . . . . . . . .	(438)	(672)	(877)
Charged for the year . . . . . . . . . . . . . . . . . . . . . . .	(234)	(205)	(334)

At the end of each year . . . . . . . . . . . . . . . . . . . . .	(672)	(877)	(1,211)

Net book value:
At the end of each year . . . . . . . . . . . . . . . . . . . . .	974	1,007	1,050

16. PREPAYMENTS

PREPAYMENTS
		At	31 December

	2010		2011	2012

	RMB’000		RMB’000	RMB’000

Prepayments for purchase of items of plant,
property and equipment . . . . . . . . . . . . . . . . . . . .	2,519		9,195	10,212
Prepaid lease for buildings and land use rights . . . . . . .	5,284		12,222	21,731

	7,803		21,417	31,943

– I-26 –

APPENDIX I

ACCOUNTANTS’ REPORT

17. INVESTMENT IN AN ASSOCIATE

INVESTMENT IN AN ASSOCIATE
	2010 RMB’000	At 31 December
		2011 RMB’000	2012 RMB’000

鄭州永達和諧汽車銷售服務有限公司 (Zhengzhou Yongda Hexie Automobile Sales & Services Co., Ltd.) (“Yongda Hexie”) is an associate of the Group and is considered to be a related party of the Group.

(a) Particulars of an associate

			Percentage of	Percentage of
	Place and date of	Registered/	Ownership	Voting	Profit	Principal
Associate	incorporation	paid-in capital	interest	power	sharing	activities
Yongda Hexie	Zhengzhou, the PRC	RMB20,000,000	30%	30%	30%	Sale and service of
	26 December 2011					motor vehicles

(b) The following table illustrates the summarised financial information of the Group’s associate shared by the Group:

Share of the associate’s assets and liabilities:

Share of the associate’s assets and liabilities:
		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Non-current assets. . . . . . . . . . . . . . . . . . . . . . . . .	–	–	11,959
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .	–	6,000	57,660
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . .	–	–	63,397

Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	–	6,000	6,222

Share of the associate’s results:

Share of	the associate’s results:
		Year	ended 31	December

		2010	2011		2012

		RMB’000	RMB’000		RMB’000

Revenue	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	–		–	28,092
Expenses	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	–		–	(27,795)
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		–		–	(75)

Profit for	the year . . . . . . . . . . . . . . . . . . . . . . . . .	–		–	222

18. INVENTORIES

			At 31 December

		2010	2011	2012

		RMB’000	RMB’000	RMB’000

Motor	vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . .	145,817	309,027	655,809
Spare	parts and accessories . . . . . . . . . . . . . . . . . . .	14,673	24,665	54,745

		160,490	333,692	710,554

Certain of the Group’s inventories with a carrying amount of RMB31,030,000, RMB87,842,000 and RMB242,559,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively, were pledged as security for the Group’s bank loans and other borrowings (Note 24(a)).

Certain of the Group’s inventories with a carrying amount of RMB69,146,000, RMB132,776,000 and RMB165,826,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively, were pledged as security for the Group’s bills payables (Note 25(a)).

As at 31 December 2010, 31 December 2011 and 31 December 2012, none of the Group’s inventories were carried at fair value less costs to sell.

– I-27 –

APPENDIX I

ACCOUNTANTS’ REPORT

19. TRADE RECEIVABLES

TRADE RECEIVABLES
	2010 RMB’000	At 31 December
		2011 RMB’000	2012 RMB’000

The Group seeks to maintain strict control over its outstanding receivables and has a credit control department to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that the Group’s trade receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. Trade receivables are non-interest-bearing.

An aged analysis of the trade receivables as at each reporting date (based on the invoice date) is as follows:

		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Within 3 months. . . . . . . . . . . . . . . . . . . . . . . . . .	10,738	15,284	54,222
More than 3 months but less than 1 year. . . . . . . . . . .	940	1,382	4,890

	11,678	16,666	59,112

An aged analysis of the trade receivables that are not considered to be impaired is as follows:

																							December

																						2010	2011	2012

																						RMB’000	RMB’000	RMB’000

Neither	past	due	nor	impaired	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	11,678	16,666	59,112

Receivables that were neither past due nor impaired relate to a large number of diversified customers for whom there was no recent history of default.

20. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Prepayments to suppliers . . . . . . . . . . . . . . . . . . . . .	198,557	532,738	262,433
Rebate receivables . . . . . . . . . . . . . . . . . . . . . . . . .	77,380	101,018	229,329
VAT recoverable (i). . . . . . . . . . . . . . . . . . . . . . . . .	11,027	30,376	164,094
Staff advances . . . . . . . . . . . . . . . . . . . . . . . . . . .	626	1,673	9,629
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,166	6,596	22,736

	289,756	672,401	688,221

Note:

(i) The Group’s sales of motor vehicles are subject to Mainland China Value Added Tax (“VAT”). Input VAT on purchases can be deducted from output VAT payable. The VAT recoverable is deductible input VAT which has not been claimed to the tax bureau. The applicable tax rate for domestic sales of the Group is 17%.

None of the above assets is past due. The financial assets included in the above balances relate to receivables for which there was no recent history of default.

– I-28 –

APPENDIX I

ACCOUNTANTS’ REPORT

21. PLEDGED BANK DEPOSITS

PLEDGED BANK DEPOSITS
		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Deposits pledged with banks as collateral against credit
facilities granted by the banks . . . . . . . . . . . . . . . .	215,837	281,023	665,055

Pledged bank deposits, which are all denominated in RMB at each end of the reporting period, earn interest at interest rates stipulated by respective finance institutions.

22. CASH IN TRANSIT

																															December

																														2010	2011	2012

																														RMB’000	RMB’000	RMB’000

Cash	in	transit	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	9,974	13,646	17,333

Cash in transit represents the sales proceeds settled by credit cards, which have yet to be credited to the Group by the

banks.

23. CASH AND CASH EQUIVALENTS

					31 December

				2010	2011	2012

				RMB’000	RMB’000	RMB’000

Cash	and	bank	balances . . . . . . . . . . . . . . . . . . . . .	193,475	179,383	342,685

Cash	and	cash	equivalents . . . . . . . . . . . . . . . . . . . .	193,475	179,383	342,685

Cash at banks earns interest at floating rates based on daily bank deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default. The carrying amounts of the cash and cash equivalents approximate to their fair values.

The Group’s cash and bank balances at each reporting date are denominated in the following currencies:

																																			December

																																		2010	2011	2012

																																		RMB’000	RMB’000	RMB’000

RMB	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	193,475	179,383	332,609
US$	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	–	–	10,047
HK$	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	.	–	–	29

																																		193,475	179,383	342,685

– I-29 –

APPENDIX I

ACCOUNTANTS’ REPORT

24. BANK LOANS AND OTHER BORROWINGS

BANK LOANS AND OTHER BORROWINGS	BANK LOANS AND OTHER BORROWINGS	BANK LOANS AND OTHER BORROWINGS
At 31 December 2010 2011 2012 Effective interest rate (%) RMB’000 Effective interest rate (%) RMB’000 Effective interest rate (%) RMB’000
Current Bank loans . . . . . . . . . . . . . . . . . . . 5.3-8.3 320,000 6.6-12.8 Other borrowings . . . . . . . . . . . . . . . 5.3-6.0 75,416 5.8-9.2 395,416 Non-current Bank loans . . . . . . . . . . . . . . . . . . . – Other borrowings . . . . . . . . . . . . . . . – – 395,416 Bank loans and other borrowings representing: – secured . . . . . . . . . . . . . . . . . . . (a) 30,000 – guaranteed . . . . . . . . . . . . . . . . . (b) 225,000 – secured and guaranteed . . . . . . . . . (a)(b) 120,416 – unsecured. . . . . . . . . . . . . . . . . . 20,000 395,416 2010 RMB’000	671,000 6.2-12.0 1,283,000 188,535 5.8-8.5 494,774 859,535 1,777,774 – 6.6-7.2 60,000 – 8.5 230,000 – 290,000 859,535 2,067,774 105,000 455,000 331,000 675,000 393,535 889,774 30,000 48,000 859,535 2,067,774 At 31 December
	2011 RMB’000	2012 RMB’000

(a) Certain of the Group’s bank loans and other borrowing are secured by:

(i) mortgages over the Group’s land use rights situated in Mainland China, which had an aggregate carrying value of approximately RMB14,297,000, RMB13,897,000 and RMB13,497,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively;

(ii) mortgages over the Group’s buildings, which had an aggregate carrying value of approximately RMB42,136,000, RMB39,816,000 and RMB37,496,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively;

(iii) mortgages over the Group’s inventories, which had an aggregate carrying value of approximately RMB31,030,000, RMB87,842,000 and RMB242,559,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively; (iv) As at 31 December 2011 and 31 December 2012, certain of the Group’s bank loans amounted to RMB95,000,000 and RMB35,000,000 were secured by the equity shares of two subsidiaries of the Group, Henan Zhongdebao Automobile Sales & Services Co., Ltd. and Beijing Huadebao Automobile Sales & Services Co., Ltd., respectively;

– I-30 –

APPENDIX I

ACCOUNTANTS’ REPORT

(v) As at 31 December 2011, certain of the Group’s bank loans amounted to RMB50,000,000 were secured by the equity shares of two subsidiaries of the Group, Luoyang Yudebao Automobile Sales & Services Co., Ltd. and Nanyang Wandebao Automobile Sales & Services Co., Ltd.;
(vi) As at 31 December 2011 and 31 December 2012, certain of the Group’s bank loans amounted to RMB60,000,000 and RMB60,000,000 were secured by the equity share of a subsidiary of the Group, Zhengzhou Yuanda Lexus Automobile Sales & Services Co., Ltd., respectively;
(vii) As at 31 December 2012, certain of the Group’s bank loans amounted to RMB40,000,000 were secured by the equity shares of a subsidiary of the Group, Henan Zhongdebao Automobile Sales & Services Co., Ltd.; and
(viii) As at 31 December 2012, certain of the Group’s bank loans amounted to RMB200,000,000 were secured by the equity shares of two subsidiaries of the Group, Zhengzhou Huacheng Automobile Sales & Services Co., Ltd. and Zhengzhou Huading Automobile Sales & Services Co., Ltd.
(b) Certain of the Group’s bank loans and other borrowing are guaranteed by:
(i) Certain of the Group’s bank loans and other borrowing amounted to RMB160,416,000, RMB167,952,000 and RMB315,228,000 were guaranteed by the Controlling Shareholder as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively;
(ii) Certain of the Group’s bank loans amounted to RMB60,000,000 and RMB15,000,000 were guaranteed by the Controlling Shareholder and 河南遠達投資有限公司 (Henan Yuanda Investment Co., Ltd. (“Yuanda Investment”)), which is controlled by the Controlling Shareholder, as at 31 December 2010 and 31 December 2011, respectively;
(iii) Certain of the Group’s bank loans amounted to RMB45,000,000, RMB35,000,000 and RMB35,000,000 were guaranteed by the Controlling Shareholder and 河南省同樂醫藥有限公司 (Henan Tongle Pharmaceutical Co., Ltd. (“Tongle Pharmaceutical”)), which is controlled by a close family member of the Controlling Shareholder, as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively;
(iv) Certain of the Group’s bank loans amounted to RMB30,000,000 were guaranteed by Yuanda Investment as at 31 December 2010;
(v) Certain of the Group’s bank loans amounted to RMB10,000,000 were guaranteed by the Controlling Shareholder, Tongle Pharmaceutical and Mr. Liu Fenglei, who is an employee of the Group, as at 31 December 2010;
(vi) Certain of the Group’s bank loans amounted to RMB20,000,000 and RMB20,000,000 were guaranteed by Mr. Liu Fenglei as at 31 December 2010 and 31 December 2011, respectively;
(vii) Certain of the Group’s bank loans which amounted to RMB20,000,000 were guaranteed by Mr. Lan Haibo, who is an employee of the Group, and Mr. Zhang Junsheng, who is a close family member of the Controlling Shareholder, as at 31 December 2010;
(viii) Certain of the Group’s bank loans amounted to RMB20,000,000 was guaranteed by Mr. Lan Haibo as at 31 December 2011;
(ix) Certain of the Group’s bank loans amounted to RMB15,000,000 and RMB15,000,000 were guaranteed by the Controlling Shareholder and Mr. Liu Fenglei as at 31 December 2011 and 31 December 2012, respectively;
(x) Certain of the Group’s bank loans and other borrowing amounted to RMB220,583,000 and RMB679,546,000 were guaranteed by the Controlling Shareholder and 河南和諧實業集團有限公司 (Henan Hexie Industrial Group Co., Ltd. (“Hexie Industrial Group”)), which is controlled by the Controlling Shareholder, as at 31 December 2011 and 31 December 2012, respectively;
(xi) Certain of the Group’s bank loans amounted to RMB60,000,000 was guaranteed by the Controlling Shareholder, Mr. Liu Fenglei and Hexie Industrial Group as at 31 December 2011;
(xii) Certain of the Group’s bank loans amounted to RMB26,000,000 was guaranteed by the Controlling Shareholder, Mr. Liu Fenglei, Hexie Industrial Group, Ms. Liu Dan and Mr. Li Lusheng, who are both close family members of the Controlling Shareholder and employees of the Group, as at 31 December 2011;
(xiii) Certain of the Group’s bank loans amounted to RMB50,000,000 were guaranteed by the Controlling Shareholder, Hexie Industrial Group and 河南東方金沙湖國際高爾夫俱樂部有限公司 (“Henan Jinshahu Golf Club Co., Ltd.”), which is controlled by the Controlling Shareholder, as at 31 December 2011;
(xiv) Certain of the Group’s bank loans amounted to RMB95,000,000 and RMB35,000,000 were guaranteed by the Controlling Shareholder, Hexie Industrial Group, Henan Jinshahu Golf Club Co., Ltd. and Ms. Zhao Lu, who is a close family member of the Controlling Shareholder, as at 31 December 2011 and 31 December 2012, respectively;

– I-31 –

APPENDIX I

ACCOUNTANTS’ REPORT

(xv) Certain of the Group’s bank loans amounted to RMB285,000,000 were guaranteed by the Controlling Shareholder, and secured by certain of the land use rights of 河南和諧置業有限公司 (“Henan Hexie Property Co., Ltd.”), which is controlled by the Controlling Shareholder, as at 31 December 2012;
(xvi) Certain of the Group’s bank loans amounted to RMB60,000,000 was guaranteed by the Controlling Shareholder, Liu Fenglei, Hexie Industrial Group, Henan Jinshahu Golf Club CO., Ltd. and Henan Hexie Property Co., Ltd. as at 31 December 2012;
(xvii) Certain of the Group’s bank loans amounted to RMB40,000,000 was guaranteed by Hexie Industrial Group as at 31 December 2012; and
(xviii) Certain of the Group’s bank loans amounted to RMB100,000,000 was guaranteed by the Controlling Shareholder, Hexie Industrial Group and Henan Hexie Property Co., Ltd. as at 31 December 2012.

25. TRADE AND BILLS PAYABLES

TRADE AND BILLS PAYABLES
		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . .	5,633	7,457	11,383
Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .	412,448	714,872	806,746

Trade and bills payables . . . . . . . . . . . . . . . . . . . . .	418,081	722,329	818,129

An aged analysis of the trade and bills payables as at each reporting date, based on the invoice date, is as follows:

		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Within 3 months. . . . . . . . . . . . . . . . . . . . . . . . . .	376,984	616,424	777,735
3 to 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . .	40,759	105,455	37,193
6 to 12 months . . . . . . . . . . . . . . . . . . . . . . . . . .	–	151	2,836
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . .	338	299	365

	418,081	722,329	818,129

The trade and bills payables are non-interest-bearing.

(a) Certain of the Group’s bills payable are secured by mortgages over the Group’s inventories, which had an aggregate carrying value of approximately RMB69,146,000, RMB132,776,000 and RMB165,826,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively.
(b) Certain of the Group’s bills payable amounted to RMB412,448,000, RMB504,909,000 and RMB505,745,000 were guaranteed by the Controlling Shareholder as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively.
(c) Certain of the Group’s bills payable amounted to RMB209,963,000 and RMB139,202,000 were guaranteed by the Controlling Shareholder and Hexie Industrial Group as at 31 December 2011 and 31 December 2012, respectively.
(d) Certain of Group’s bills payable which amounted to RMB40,000,000 were guaranteed by the Controlling Shareholder and Tongle Pharmaceutical as at 31 December 2012.
(e) Certain of Group’s bills payable which amounted to RMB32,235,000 were guaranteed by Hexie Industrial Group as at 31 December 2012.

– I-32 –

APPENDIX I

ACCOUNTANTS’ REPORT

26. OTHER PAYABLES AND ACCRUALS

OTHER PAYABLES AND ACCRUALS
		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Payables for purchase of items of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10,546	43,197	39,992
Advances and deposits from distributors . . . . . . . . . . .	900	3,864	8,764
Advances from customers . . . . . . . . . . . . . . . . . . . .	62,017	104,946	244,313
Taxes payable (other than income tax). . . . . . . . . . . . .	46,869	101,531	271,641
Lease payables . . . . . . . . . . . . . . . . . . . . . . . . . . .	186	1,232	10,846
Staff payroll and welfare payables . . . . . . . . . . . . . . .	9,148	17,207	25,851
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,094	3,015	25,445

	131,760	274,992	626,852

27. EMPLOYEE RETIREMENT BENEFITS

As stipulated by the People’s Republic of China (the “PRC”) state regulations, the subsidiaries of Mainland China participate in a defined contribution retirement scheme. All employees are entitled to an annual pension equal to a fixed proportion of the average basic salary amount of the geographical area of their last employment at their retirement date. The Mainland China subsidiaries are required to make contributions to the local social security bureau at 20% to 22% (2011: 20% to 22%; 2010: 20%) of the previous year’s average basic salary amount of the geographical area where the employees are under employment with the Mainland China subsidiaries.

The Group has no obligation for the payment of pension benefits beyond the annual contributions as set out above.

According to the relevant rules and regulations of the PRC, the Mainland China subsidiaries and their employees are each required to make contributions to an accommodation fund at 5% to 12% (2011: 5% to 12%; 2010: 5% to 12%) of the salaries and wages of the employees which is administered by the Public Accumulation Funds Administration Centre. There is no further obligation on the part of the Group except for such contributions to the accommodation fund.

As at 31 December 2010, 31 December 2011 and 31 December 2012, the Group had no significant obligation apart from the contributions as stated above.

28. DEFERRED TAX

Deferred tax assets:

The components of deferred tax assets recognised in the consolidated statements of financial position and the movements during the years are as follows:

ments during the years are as follows:
	Losses
	available for
	offset
	against
	future		Deferred
	taxable	Accrued	rental
	profit	payroll	expenses	Total
	RMB’000	RMB’000	RMB’000	RMB’000

At 1 January 2010. . . . . . . . . . . . . . . . .	504	1,115	–	1,619
Deferred tax credited/(charged) to
the consolidated income statement
during the year (Note 8(a)) . . . . . . . . . .	(32)	1,172	47	1,187

At 31 December 2010 . . . . . . . . . . . . . .	472	2,287	47	2,806
Deferred tax credited/(charged) to
the consolidated income statement
during the year (Note 8(a)) . . . . . . . . . .	1,650	2,015	261	3,926

At 31 December 2011 . . . . . . . . . . . . . .	2,122	4,302	308	6,732
Deferred tax credited/(charged) to
the consolidated income statement
during the year (Note 8(a)) . . . . . . . . . .	(2,023)	1,752	3,631	3,360

At 31 December 2012 . . . . . . . . . . . . . .	99	6,054	3,939	10,092

– I-33 –

APPENDIX I

ACCOUNTANTS’ REPORT

Deferred tax liabilities:

The components of deferred tax liabilities recognised in the consolidated statements of financial position and the movements during the years are as follows:

ments during the years are as follows:
	Capitalised interest expense RMB’000
At 1 January 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax charged to the consolidated income statement during the year (Note 8(a)) . . . . At 31 December 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	– 4,929 4,929

Pursuant to the CIT Law, a 10% withholding tax is levied on dividends declared to foreign investors from the PRC effective from 1 January 2008. A lower withholding tax rate may be applied if there is a tax arrangement between the PRC and the jurisdiction of the foreign investors.

The Group has not provided for withholding taxes on accumulated earnings amounting to RMB188,763,000, RMB404,123,000 and RMB150,329,000 as at 31 December 2010, 31 December 2011 and 31 December 2012, respectively, generated by its PRC entities during the Relevant Periods. In the opinion of the Director, it is not probable that such accumulated earnings will be distributed to the holding company outside the PRC in the foreseeable future.

29. SHARE CAPITAL

The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 24 September 2012 with an initial authorised share capital of HK$380,000 divided into 38,000,000 shares of a nominal or par value of HK$0.01 each. On the date of incorporation, 1 ordinary share of HK$0.01 was allotted and issued by the Company to its then shareholder.

30. RESERVES

(i) Statutory reserve

Pursuant to the relevant PRC rules and regulations, those PRC subsidiaries which are domestic enterprises in the PRC as mentioned in Note 39 of this report are required to transfer no less than 10% of their profits after taxation, as determined under PRC accounting regulations, to the statutory reserve until the reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before the distribution of a dividend to shareholders.

(ii) Merger reserve

The merger reserve of the Group represents the capital contributions from the equity holders of the Company. The additions during the Relevant Periods represent the injection of additional paid-up capital by the equity holders of the subsidiaries to the respective companies, which were consolidated from the earliest date presented or since the date when the subsidiaries first came under the common control of the Controlling Shareholder. The deductions during the Relevant Periods represent the decrease in the Group’s net assets resulted from distribution to equity holders of the Company and acquisition of equity interests in subsidiaries from the Controlling Shareholder for business combination under common control.

31. FINANCIAL INSTRUMENTS

The carrying amounts of each of the categories of financial instruments as at the reporting date were as follows:

Financial assets

Financial assets
	Loans and receivables

		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Trade receivables. . . . . . . . . . . . . . . . . . . . . . . . . .	11,678	16,666	59,112
Financial assets included in prepayments, deposits and
other receivables . . . . . . . . . . . . . . . . . . . . . . . .	80,172	109,287	261,694
Amounts due from related parties . . . . . . . . . . . . . . .	305,633	993,194	679,448
Pledged bank deposits . . . . . . . . . . . . . . . . . . . . . .	215,837	281,023	665,055
Cash in transit . . . . . . . . . . . . . . . . . . . . . . . . . . .	9,974	13,646	17,333
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . .	193,475	179,383	342,685

	816,769	1,593,199	2,025,327

– I-34 –

APPENDIX I

ACCOUNTANTS’ REPORT

Financial liabilities

Financial liabilities
	Financial	liabilities at amortised cost

		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Trade and bills payables . . . . . . . . . . . . . . . . . . . . .	418,081	722,329	818,129
Financial liabilities included in other payables and
accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13,540	50,076	74,201
Bank loans and other borrowings . . . . . . . . . . . . . . .	395,416	859,535	2,067,774

	827,037	1,631,940	2,960,104

32. CONTINGENT LIABILITIES

As at 31 December 2011, the Group provided corporate guarantee to Tongle Pharmaceutical for its bank loans of RMB13,000,000. As at 31 December 2010 and 2012, neither the Group nor the Company had any significant contingent liabilities.

33. COMMITMENTS

(a) Capital commitments

Capital commitments of the Group in respect of property and equipment outstanding at each reporting date not provided for in the Financial Information were as follows:

			At 31 December

		2010	2011	2012

		RMB’000	RMB’000	RMB’000

Contracted,	but not provided for land use rights and
buildings	. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32,856	5,600	164,592

(b) Operating lease commitments

At each reporting date, the Group had total future minimum lease payments under non-cancellable operating leases payable as follows:

le as follows:
			At 31 December

	2010		2011		2012

	Properties	Land	Properties	Land	Properties	Land

	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000

Within 1 year. . . . . . . . . . . . . .	979	1,608	10,446	3,342	23,451	11,277
After 1 year but within 5 years . . .	2,818	7,165	76,342	12,273	73,019	38,763
After 5 years . . . . . . . . . . . . . .	2,966	87,032	67,572	103,708	30,078	163,138

	6,763	95,805	154,360	119,323	126,548	213,178

The Group is the lessee in respect of a number of properties and land held under operating leases. The leases typically run for an initial period of one to thirty years, with an option to renew the leases when all the terms are renegotiated.

34. PLEDGE OF ASSETS

Further to the details of the Group’s assets pledged for its bank loans and other borrowings and bills payable as disclosed in Note 13, Note 14, Note 18 and Note 21 to the Financial Information, as at 31 December 2011 and 31 December 2012, the equity shares of four subsidiaries of the Group, Nanyang Wandebao Automobile Sales & Services Co., Ltd., Henan Hedabao Automobile Services Co., Ltd., Anyang Andebao Automobile Sales & Service Co., Ltd. and Beijing Huadebao Automobile Sales & Services Co., Ltd. (“Huadebao”) were pledged to Hua Ao International Trust Co., Ltd. (“HAT”) as security of the credit facilities of RMB180 million granted to Hexie Industrial Group by HAT. In addition, two subsidiaries of the Group, Henan Zhongdebao Automobile Sales & Services Co., Ltd. and Zhengzhou Yuanda Lexus Automobile Sales & Services Co., Ltd., provided corporate guarantee to Hexie Industrial Group by HAT.

– I-35 –

APPENDIX I

ACCOUNTANTS’ REPORT

35. RELATED PARTY TRANSACTIONS AND BALANCES

Mr. Feng Changge is the Controlling Shareholder of the Group and is also considered to be a related party of the Group.

Save as disclosed in Note 5, Note 24, Note 25, Note 32 and Note 34, other significant related party transactions are set out below:

(a) Transactions with related parties

(i) During the Relevant Periods, revenue from sale of motor vehicles to certain related parties are as follow:

		Year	ended 31	December	December

		2010	2011		2012

		RMB’000	RMB’000		RMB’000

Tongle Pharmaceutical . . . . . . . . . . . . . . . . .	(a)	–		–	15,480
河南省醫藥超市有限公司(“Henan Pharmaceutical
Supermarket Co., Ltd.”) . . . . . . . . . . . . . . .	(a)	–		–	6,684
河南銀保投資擔保有限公司(“Henan Yinbao
Investment Guarantee Co., Ltd.”) . . . . . . . . .	(b)	–		–	8,204
鄭州金沙湖置業有限公司(“Henan Jinshahu
Property Co., Ltd.”) . . . . . . . . . . . . . . . . .	(c)	–		–	1,521
Henan Jinshahu Golf Club Co., Ltd. . . . . . . . . .	(c)	–		–	699

		–		–	32,588

(a) Tongle Pharmaceutical & Henan Pharmaceutical Supermarket Co., Ltd. are both controlled by a close family member of the Controlling Shareholder.
(b) Henan Yinbao Investment Guarantee Co., Ltd. is controlled by a close family member of the Controlling Shareholder.
(c) Henan Jinshahu Golf Club Co., Ltd. and Henan Jinshahu Property Co., Ltd. are both controlled by the Controlling Shareholder.

(b) Balances with related parties

The Group had the following significant balances with its related parties during the Relevant Periods:

Due from related parties:

Due from related parties:
		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Non-trade related:
The Controlling Shareholder
– Mr. Feng Changge . . . . . . . . . . . . . . . . . . . . . .	305,633	990,077	676,452
An associate
– Yongda Hexie . . . . . . . . . . . . . . . . . . . . . . . . .	–	3,117	2,996

	305,633	993,194	679,448

Except for the amounts due from the Controlling Shareholder which are interest-bearing and had no fixed repayment terms, other balances with related parties were unsecured and non-interest-bearing and had no fixed repayment terms.

(c) Compensation of key management personnel of the Group:

Compensation of key management personnel of the Group:
	Year	ended 31	December

	2010	2011		2012

	RMB’000	RMB’000		RMB’000

Short term employee benefits . . . . . . . . . . . . . . . . . .	2,065	2,752		3,744
Post-employee benefits . . . . . . . . . . . . . . . . . . . . . .	105		148	162

Total compensation paid to key management personnel . .	2,170	2,900		3,906

Further details of directors’ and chief executive’s emoluments are included in Note 9 to the Financial Information.

– I-36 –

APPENDIX I

ACCOUNTANTS’ REPORT

36. Notes to the Consolidated Statement of Cash Flows

(a) Major non-cash transactions During the year ended 31 December 2012, certain of the subsidiaries now comprising the Group declared dividend of RMB559,320,000 to the Controlling Shareholder, which was then offset against the loan due from the Controlling Shareholder to the Group.

37. FAIR VALUE

The fair value of current portion of the Group’s and the Company’s financial instruments approximate to their carrying amounts due to the short term maturities. For non-current portion of bank loans and other borrowings, the fair value has been calculated by discounting the expected future cash flows using rates currently available for instruments on similar terms, credit risk and remaining maturities, which is also approximate to their carrying amounts.

38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments comprise bank loans, other interest-bearing loans, and cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables, trade and bills payables, which arise directly from its operations.

The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.

Interest rate risk

The Group has no significant interest-bearing assets other than pledged bank deposits (Note 21), cash and cash equivalents (Note 23) and amounts due from the Controlling Shareholders (Note 35(b)).

The Group’s interest rate risk arises from its bank loans and other borrowings, details of which are set out in Note 24. Borrowings at variable rates expose the Group to the risk of changes in market interest rates.

The Group has not used any interest rate swaps to hedge its exposure to interest rate risk.

The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s debt obligations with floating interest rates.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax (through the impact on floating rate borrowings).

		Increase/	Increase/(decrease)
	(decrease) in		in profit before
	basis points		tax

			RMB’000

Year	ended 31 December 2012
RMB	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	50	(1,171)
RMB	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(50)	1,171
Year	ended 31 December 2011
RMB	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	50	(1,251)
RMB	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(50)	1,251
Year	ended 31 December 2010
RMB	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	50	(806)
RMB	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(50)	806

Foreign currency risk

The Group’s businesses are located in Mainland China and all transactions are conducted in RMB. Most of the Group’s assets and liabilities were denominated in RMB, except for certain bank balances denominated in US$ and HK$ as disclosed in note 23.

The Group’s assets and liabilities denominated in US$ and HK$ were mainly held by certain subsidiaries incorporated outside Mainland China who had US$ and HK$ as their functional currencies, and the Group did not have material foreign currency transactions in Mainland China during the year. Therefore, the Group had immaterial foreign currency risk.

Credit risk

The Group has no significant concentrations of credit risk. The carrying amounts of pledged bank deposits, cash in transit, cash and cash equivalents, trade and other receivables, amounts due from related parties included in the Financial Information represent the Group’s maximum exposure to credit risk in relation to its financial assets.

– I-37 –

APPENDIX I

ACCOUNTANTS’ REPORT

As at 31 December 2010, 31 December 2011 and 31 December 2012, all pledged bank deposits and cash and cash equivalents were deposited in high quality financial institutions without significant credit risk.

Liquidity risk

The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial instruments and financial assets (e.g., trade receivables) and projected cash flows from operations.

The maturity profile of the Group’s financial liabilities as at the end of each of the reporting periods, based on the contractual undiscounted payments, was as follows:

				As at 31 December 2010	As at 31 December 2010	As at 31 December 2010	As at 31 December 2010

		On	Less than		3 to 12	1 to 5		Over 5
		Demand	3 months		months	years		years	Total
		RMB’000	RMB’000		RMB’000	RMB’000		RMB’000	RMB’000

Bank loans and	other
borrowings .	. . . . . .	–	90,613		314,030		–	–	404,643
Trade and bills
payables . .	. . . . . .	1,106	380,527		36,448		–	–	418,081
Other payables	and
accruals . .	. . . . . .	13,540	–		–		–	–	13,540

		14,646	471,140		350,478		–	–	836,264

				As at 31 December 2011

		On	Less than		3 to 12	1 to 5		Over 5
		Demand	3 months		months	years		years	Total
		RMB’000	RMB’000		RMB’000	RMB’000		RMB’000	RMB’000

Bank loans and	other
borrowings .	. . . . . .	–	261,075		625,915		–	–	886,990
Trade and bills
payables . .	. . . . . .	725	561,699		159,905		–	–	722,329
Other payables	and
accruals . .	. . . . . .	50,076	–		–		–	–	50,076

		50,801	822,774		785,820		–	–	1,659,395

				As at 31 December 2012

		On	Less than		3 to 12	1 to 5		Over 5
		demand	3 months		months	years		years	Total
		RMB’000	RMB’000		RMB’000	RMB’000		RMB’000	RMB’000

Bank loans and	other
borrowings	. . . . . .	–	753,563	1,094,347		298,412		–	2,146,322
Trade and bills
payables . .	. . . . . .	3,805	584,558		229,766		–	–	818,129
Other payables	and
accruals . . .	. . . . . .	74,434	–		–		–	–	74,434

		78,239	1,338,121	1,324,113		298,412		–	3,038,885

Capital management

The primary objectives of the Group’s capital management are to safeguard the Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholder value.

The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Group is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2010, 31 December 2011 and 31 December 2012.

– I-38 –

APPENDIX I

ACCOUNTANTS’ REPORT

The Group monitors capital using a gearing ratio, which is net debt divided by the total equity attributable to owners of the parent plus net debt. Net debt includes bank loans and other borrowings, trade and bills payables, other payables and accruals, less cash and cash equivalents. The gearing ratios as at each of the statement of financial position dates were as follows:

s:
		At 31 December

	2010	2011	2012

	RMB’000	RMB’000	RMB’000

Bank loans and other borrowings . . . . . . . . . . . . . . .	395,416	859,535	2,067,774
Trade and bills payables . . . . . . . . . . . . . . . . . . . . .	418,081	722,329	818,129
Other payables and accruals . . . . . . . . . . . . . . . . . . .	131,760	274,992	626,852
Less: Cash and cash equivalents . . . . . . . . . . . . . . . .	(193,475)	(179,383)	(342,685)

Net debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	751,782	1,677,473	3,170,070

Equity attributable to owners of the parent . . . . . . . . .	339,855	853,371	588,758

Gearing ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .	68.9%	66.3%	84.3%

39. DETAILS OF SUBSIDIARIES NOW COMPRISING THE GROUP

As at the date of this report, the Company had direct or indirect interests in the following subsidiaries:

				Proportion of	Proportion of
		Place and	Authorised/	ownership	interest
		date of incorporation/	registered/ paid-in/issued	Direct	Indirect
Company name	Notes	operations	capital	%	%	Principal activities
河南和諧汽車貿易有限公司(Henan	(i)	Zhengzhou, the PRC	Registered and	–	100%	Investment holding
Hexie Automobile Trading		2011	paid-in capital of
Co., Ltd.)			RMB245,000,000
河南中德寶汽車銷售服務有限公司	(iii)(x)	Zhengzhou, the PRC	Registered and	–	100%	Sale and service of
(Henan Zhongdebao Automobile		2005	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)			RMB42,860,000
鄭州鄭德寶汽車銷售服務有限公司	(i)	Zhengzhou, the PRC	Registered and	–	100%	Sale and service of
(Zhengzhou Zhengdebao		2009	paid-in capital of			motor vehicles
Automobile Sales & Services Co.,			RMB40,000,000
Ltd.)
西安華都汽車銷售服務有限公司(Xi’an	(ii)	Xian, the PRC	Registered and	–	100%	Sale and service of
Huadu Automobile Sales & Services		2012	paid-in capital of			motor vehicles
Co., Ltd.)			RMB10,000,000
河南英之翼汽車銷售有限公司(Henan	(ii)	Zhengzhou, the PRC	Registered and	–	100%	Sale of motor
Yingzhiyi Automobile Sales &		2012	paid-in capital of			vehicles
Services Co., Ltd.)		under construction	RMB10,010,000
廣州市廣德寶汽車銷售服務有限公司	(ii)	Guangzhou, the PRC	Registered and	–	100%	Sale and service of
(Guangzhou Guangdebao		2012	paid-in capital of			motor vehicles
Automobile Sales & Services Co.,		under construction	RMB30,000,000
Ltd.)
鄭州華鼎汽車銷售服務有限公司	(ii)(xiii)	Zhengzhou, the PRC	Registered and	–	100%	Sale and service of
(Zhengzhou Huading Automobile		2012	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)			RMB10,000,000
洛陽路和汽車銷售服務有限公司	(ii)	Luoyang, the PRC	Registered and	–	100%	Sale and service of
(Luoyang Luhe Automobile Sales &		2012	paid-in capital of			motor vehicles
Services Co., Ltd.)		under construction	RMB10,000,000

– I-39 –

APPENDIX I

ACCOUNTANTS’ REPORT

				Proportion of	Proportion of
		Place and	Authorised/	ownership	interest
		date of incorporation/	registered/ paid-in/issued	Direct	Indirect
Company name	Notes	operations	capital	%	%	Principal activities
上海上德寶駿汽車銷售服務有限公司	(i)	Shanghai, the PRC	Registered and	–	90%	Sale and service of
(Shanghai Shangdebaojun		2011	paid-in capital of			motor vehicles
Automobile Sales & Services Co.,			RMB50,000,000
Ltd.)
宜昌路順汽車銷售服務有限公司	(ii)	Yichang, the PRC	Registered and	–	65%	Sale and service of
(Yichang Lushun Automobile Sales		2012	paid-in capital of			motor vehicles
& Services Co., Ltd.)			RMB10,000,000
新鄉市新德寶汽車服務有限公司	(iv)	Xinxiang, the PRC	Registered and	–	100%	Service of motor
(Xinxiang Xindebao Automobile		2009	paid-in capital of			vehicles
Services Co., Ltd.)			RMB1,500,000
洛陽豫德寶汽車銷售服務有限公司	(v)(xi)	Luoyang, the PRC	Registered and	–	100%	Sale and service of
(Luoyang Yudebao Automobile Sales		2009	paid-in capital of			motor vehicles
& Services Co., Ltd.)			RMB30,000,000
南陽宛德寶汽車銷售服務有限公司	(vi)(xi)(xiv)	Nanyang, the PRC	Registered and	–	100%	Sale and service of
(Nanyang Wandebao Automobile		2010	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)			RMB30,000,000
河南和德寶汽車服務有限公司(Henan	(vii)(xiv)	Zhengzhou, the PRC	Registered and	–	100%	Service of motor
Hedebao Automobile Services Co.,		2011	paid-in capital of			vehicles
Ltd.)		under construction	RMB20,000,000
鄭州華誠汽車銷售服務有限公司	(viii)(xiii)	Zhengzhou, the PRC	Registered and	–	100%	Sale and service of
(Zhengzhou Huacheng Automobile		2011	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)			RMB20,000,000
安陽安德寶汽車銷售服務有限公司	(ix)(xiv)	Anyang, the PRC	Registered and	–	100%	Sale and service of
(Anyang Andebao Automobile Sales		2011	paid-in capital of			motor vehicles
& Services Co., Ltd.)			RMB30,000,000
開封汴德寶汽車銷售服務有限公司	(ii)	Kaifeng, the PRC	Registered and	–	100%	Sale and service of
(Kaifeng Biandebao Automobile		2012	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)			RMB10,000,000
北京市華德寶汽車銷售服務有限公司	(i)(x)(xiv)	Beijing, the PRC	Registered and	–	100%	Sale and service of
(Beijing Huadebao Automobile Sales		2010	paid-in capital of			motor vehicles
& Services Co., Ltd.)			RMB55,000,000
鄭州遠達雷克薩斯汽車銷售服務有限公	(i)(xii)	Zhengzhou, the PRC	Registered and	–	100%	Sale and service of
司(Zhengzhou Yuanda Lexus		2006	paid-in capital of			motor vehicles
Automobile Sales & Services Co.,			RMB50,000,000
Ltd.)
廈門遠達雷克薩斯汽車銷售服務有限公	(i)	Xiamen, the PRC	Registered and	–	100%	Sale and service of
司(Xiamen Yuanda Lexus		2011	paid-in capital of			motor vehicles
Automobile Sales & Services Co.,		under construction	RMB30,000,000
Ltd.)
武漢漢德寶汽車銷售服務有限公司	(ii)	Wuhan, the PRC	Registered and	–	100%	Sale and service of
(Wuhan Handebao Automobile		2012	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)		under construction	RMB20,000,000

– I-40 –

APPENDIX I

ACCOUNTANTS’ REPORT

				Proportion of	Proportion of
		Place and	Authorised/	ownership	interest
		date of incorporation/	registered/ paid-in/issued	Direct	Indirect
Company name	Notes	operations	capital	%	%	Principal activities
武漢華鄭汽車銷售服務有限公司	(ii)	Wuhan, the PRC	Registered and	–	100%	Sale and service of
(Wuhan Huazheng Automobile Sales		2012	paid-in capital of			motor vehicles
& Services Co., Ltd.)			RMB10,000,000
蘇州意駿汽車銷售服務有限公司	(ii)	Suzhou, the PRC	Registered and	–	100%	Sale and service of
(Suzhou Yijun Automobile Sales &		2012	paid-in capital of			motor vehicles
Services Co., Ltd.)			RMB50,000,000
新鄉和德寶汽車銷售服務有限公司	(ii)	Xinxiang, the PRC	Registered and	–	51%	Sale and service of
(Xinxiang Hedebao Automobile		2012	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)		under construction	RMB10,000,000
瀋陽瀋德寶汽車銷售服務有限公司	(ii)	Shenyang, the PRC	Registered and	–	100%	Sale and service of
(Shenyang Shendebao Automobile		2013	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)		under construction	RMB20,000,000
瀋陽瀋之翼汽車銷售服務有限公司	(ii)	Shenyang, the PRC	Registered and	–	100%	Sale and service of
(Shenyang Shenzhiyi Automobile		2013	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)		under construction	RMB10,000,000
北京豪駿行汽車銷售服務有限公司	(ii)	Beijing, the PRC	Registered and	–	100%	Sale and service of
(Beijing Haojunhang Automobile		2013	paid-in capital of			motor vehicles
Sales & Services Co., Ltd.)		under construction	RMB50,000,000
漯河漯德寶汽車銷售服務有限公司	(ii)	Luohe, the PRC	Registered and	–	100%	Sale and service of
(Luohe Luodebao Automobile Sales		2013	paid-in capital of			motor vehicles
& Services Co., Ltd.)		under construction	RMB10,000,000
Crystalline Prestige Investments	(ii)	Tortola, British Virgin	Registered capital of	100%	–	Investment holding
Limited		Islands	USD500 and
		2012	paid-in capital of
			USD0.01
LC Gloricar Investment Limited	(i)	Tortola, British Virgin	Registered capital of	–	100%	Investment holding
		Islands	USD1,000,000 and
		2011	paid-in capital of
			USD10,000
Ace Manufacturing Holding Limited	(ii)	Hong Kong, the PRC	Registered capital of	–	100%	Investment holding
		2012	HKD10,000 and
			paid-in capital of
			HKD100
Daoable Future Limited	(i)	Hong Kong, the PRC	Registered capital of	–	100%	Investment holding
		2011	USD10,000 and
			paid-in capital of
			USD100

Notes:

(i) No statutory accounts have been prepared for these subsidiaries since their incorporation as there is no statutory requirement for these companies to prepare audited financial statements.
(ii) For the year ended 31 December 2011, these subsidiaries have not yet to be incorporated.
(iii) No statutory account for the year ended 31 December 2010 has been prepared for this subsidiary as there is no statutory requirement for this company to prepare audited financial statements. The statutory account for the year ended 31 December 2011 was audited by 河南鑫華會計師事務所 (Henan Xinhua Certified Public Accountants).
(iv) The statutory accounts for the year ended 31 December 2010 and 2011 were audited by 河南中新會計師事務所有限公司 (Henan Zhongxin Certified Public Accountants Co., Ltd.).

– I-41 –

APPENDIX I

ACCOUNTANTS’ REPORT

(v) No statutory account for the year ended 31 December 2010 has been prepared for this subsidiary as there is no statutory requirement for this company to prepare audited financial statements. The statutory account for the year ended 31 December 2011 was audited by 河南捷創會計師事務所 (Henan Jiechuang Certified Public Accountants).
(vi) No statutory account for the year ended 31 December 2010 has been prepared for this subsidiary as there is no statutory requirement for this company to prepare audited financial statements. The statutory account for the year ended 31 December 2011 was audited by 南陽宏泰聯合會計師事務所 (Nanyang Hongtai United Certified Public Accountants).
(vii) The statutory account for the year ended 31 December 2011 was audited by 河南鑫華會計師事務所 (Henan Xinhua Certified Public Accountants).
(viii) The statutory account for the year ended 31 December 2011 was audited by 河南明泰會計師事務所 (Henan Mingtai Certified Public Accountants).
(ix) The statutory account for the year ended 31 December 2011 was audited by 河南永太會計師事務所 (Henan Yongtai Certified Public Accountants).
(x) As disclosed in Note 24(a), the equity shares of these companies have been pledged for certain of the Group’s bank loans which amounted to RMB95,000,000 and RMB35,000,000 as at 31 December 2011 and 31 December 2012, respectively.
(xi) As disclosed in Note 24(a), the equity shares of these companies have been pledged for certain of the Group’s bank loans which amounted to RMB50,000,000 as at 31 December 2011.
(xii) As disclosed in Note 24(a), the equity share of this company has been pledged for certain of the Group’s bank loans which amounted to RMB60,000,000 and RMB60,000,000 as at 31 December 2011 and 31 December 2012, respectively.
(xiii) As disclosed in Note 24(a), the equity shares of these companies have been pledged for certain of the Group’s bank loans which amounted to RMB200,000,000 as at 31 December 2012.
(xiv) As disclosed in Note 34, the equity shares of these companies have been pledged to HAT as security of the credit facilities of RMB180 million granted to Hexie Industrial Group by HAT as at 31 December 2011 and 31 December 2012.
(xv) No statutory accounts for the year ended 31 December 2012 have been prepared by any of the subsidiaries as at the date of this report.

40. POST BALANCE SHEET EVENTS

On 23 April 2013, the authorized share capital of the Company was increased from HK$380,000 to HK$20,000,000 by the creation of an additional 1,962,000,000 shares with a nominal value of HK$0.01 each.
On 20 May 2013, a restricted share unit scheme was conditionally approved and adopted by the Company’s shareholders. Details of the principal terms of this schemes and the restricted share units granted are summarized in the section headed “Statutory and General Information” in Appendix IV of this Document.

41. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Group or any of its subsidiaries in respect of any period subsequent to 31 December 2012.

Yours faithfully [ERNST & YOUNG] Certified Public Accountants Hong Kong

– I-42 –

APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

This Appendix contains a summary of the Memorandum and Articles of Association of our Company. As the information set out below is in summary form, it does not contain all of the information that may be important to potential investors. As stated in the section headed “Documents Delivered to the Registrar of Companies and Available for Inspection” in V to this document, a copy of the Memorandum and Articles of Association is available for inspection.

Set out below is a summary of certain provisions of the Memorandum and Articles of Association of the Company and of certain aspects of Cayman Companies Law.

The Company was incorporated in the Cayman Islands as an exempted company with limited liability on September 24, 2012 under the Cayman Companies Law. The Memorandum of Association (the “ Memorandum ”) and the Articles of Association comprise its constitution.

1. MEMORANDUM OF ASSOCIATION

(a) The Memorandum states, inter alia, that the liability of members of the Company is limited to the amount, if any, for the time being unpaid on the Shares respectively held by them and that the objects for which the Company is established are unrestricted (including acting as an investment company), and that the Company shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit, as provided in section 27(2) of the Companies Law and in view of the fact that the Company is an exempted company that the Company will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands.
(b) The Company may by special resolution alter its Memorandum with respect to any objects, powers or other matters specified therein.

2. ARTICLES OF ASSOCIATION

The Articles were conditionally adopted on May 20, 2013. The following is a summary of certain provisions of the Articles:

(a) Directors

(i) Power to allot and issue shares and warrants

Subject to the provisions of the Companies Law and the Memorandum and Articles and to any special rights conferred on the holders of any shares or class of shares, any share may be issued with or have attached thereto such rights, or such restrictions, whether with regard to dividend, voting, return of capital, or otherwise, as the Company may by ordinary resolution determine (or, in the absence of any such determination or so far as the same may not make specific provision, as the board may determine). Subject to the Companies Law, the rules of any Designated Stock Exchange (as defined in the Articles) and the Memorandum and Articles, any share may be issued on terms that, at the option of the Company or the holder thereof, they are liable to be redeemed.

The board may issue warrants conferring the right upon the holders thereof to subscribe for any class of shares or securities in the capital of the Company on such terms as it may from time to time determine.

– III-1 –

APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

Subject to the provisions of the Companies Law and the Articles and, where applicable, the rules of any Designated Stock Exchange (as defined in the Articles) and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares, all unissued shares in the Company shall be at the disposal of the board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times, for such consideration and on such terms and conditions as it in its absolute discretion thinks fit, but so that no shares shall be issued at a discount.

Neither the Company nor the board shall be obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, or make available, any such allotment, offer, option or shares to members or others with registered addresses in any particular territory or territories being a territory or territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever.

(ii) Power to dispose of the assets of the Company or any subsidiary

There are no specific provisions in the Articles relating to the disposal of the assets of the Company or any of its subsidiaries. The Directors may, however, exercise all powers and do all acts and things which may be exercised or done or approved by the Company and which are not required by the Articles or the Companies Law to be exercised or done by the Company in general meeting.

(iii) Compensation or payments for loss of office

Pursuant to the Articles, payments to any Director or past Director of any sum by way of compensation for loss of office or as consideration for or in connection with his retirement from office (not being a payment to which the Director is contractually entitled) must be approved by the Company in general meeting.

(iv) Loans and provision of security for loans to Directors

There are provisions in the Articles prohibiting the making of loans to Directors.

(v) Disclosure of interests in contracts with the Company or any of its subsidiaries

A Director may hold any other office or place of profit with the Company (except that of the auditor of the Company) in conjunction with his office of Director for such period and, subject to the Articles, upon such terms as the board may determine, and may be paid such extra remuneration therefor (whether by way of salary, commission, participation in profits or otherwise) in addition to any remuneration provided for by or pursuant to any other Articles. A Director may be or become a director or other officer of, or otherwise interested in, any company promoted by the Company or any other company in which the Company may be interested, and shall not be liable to account to the Company or the members for any remuneration, profits or other benefits received by him as a director, officer or member of, or from his interest in, such other company. Subject as otherwise provided by the Articles, the board may also cause the voting power conferred by the shares in any other company held or owned by the Company to be exercised in such manner in all respects as it thinks fit, including the exercise thereof in favor of any resolution appointing the Directors or any of them to be directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company.

– III-2 –

APPENDIX III

SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

Subject to the Companies Law and the Articles, no Director or proposed or intended Director shall be disqualified by his office from contracting with the Company, either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatsoever, nor shall any such contract or any other contract or arrangement in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company or the members for any remuneration, profit or other benefits realized by any such contract or arrangement by reason of such Director holding that office or the fiduciary relationship thereby established. A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with the Company shall declare the nature of his interest at the meeting of the board at which the question of entering into the contract or arrangement is first taken into consideration, if he knows his interest then exists, or in any other case, at the first meeting of the board after he knows that he is or has become so interested.

A Director shall not vote (nor be counted in the quorum) on any resolution of the board approving any contract or arrangement or other proposal in which he or any of his associates is materially interested, but this prohibition shall not apply to any of the following matters, namely:

(aa) any contract or arrangement for giving to such Director or his associate(s) any security or indemnity in respect of money lent by him or any of his associates or obligations incurred or undertaken by him or any of his associates at the request of or for the benefit of the Company or any of its subsidiaries;
(bb) any contract or arrangement for the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or his associate(s) has himself/themselves assumed responsibility in whole or in part whether alone or jointly under a guarantee or indemnity or by the giving of security;
(cc) any contract or arrangement concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase, where the Director or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting of the offer;
(dd) any contract or arrangement in which the Director or his associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company; or
(ee) any proposal or arrangement concerning the adoption, modification or operation of a share option scheme, a pension fund or retirement, death, or disability benefits scheme or other arrangement which relates both to Directors, his associates and employees of the Company or of any of its subsidiaries and does not provide in respect of any Director, or his associate(s) as such any privilege or advantage not accorded generally to the class of persons to which such scheme or fund relates.

(vi) Remuneration

The ordinary remuneration of the Directors shall from time to time be determined by the Company in general meeting, such sum (unless otherwise directed by the resolution by which it is voted) to be divided amongst the Directors in such proportions and in such manner as the board may agree or, failing agreement, equally, except that any Director holding office for part only of the period in respect of which the remuneration is payable shall only rank in such division in proportion to the

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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

time during such period for which he held office. The Directors shall also be entitled to be prepaid or repaid all traveling, hotel and incidental expenses reasonably expected to be incurred or incurred by them in attending any board meetings, committee meetings or general meetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connection with the discharge of their duties as Directors.

Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the board go beyond the ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the board may determine and such extra remuneration shall be in addition to or in substitution for any ordinary remuneration as a Director. An executive Director appointed to be a managing director, joint managing director, deputy managing director or other executive officer shall receive such remuneration (whether by way of salary, commission or participation in profits or otherwise or by all or any of those modes) and such other benefits (including pension and/or gratuity and/or other benefits on retirement) and allowances as the board may from time to time decide. Such remuneration may be either in addition to or in lieu of his remuneration as a Director.

The board may establish or concur or join with other companies (being subsidiary companies of the Company or companies with which it is associated in business) in establishing and making contributions out of the Company’s monies to any schemes or funds for providing pensions, sickness or compassionate allowances, life assurance or other benefits for employees (which expression as used in this and the following paragraph shall include any Director or ex-Director who may hold or have held any executive office or any office of profit with the Company or any of its subsidiaries) and ex-employees of the Company and their dependents or any class or classes of such persons.

The board may pay, enter into agreements to pay or make grants of revocable or irrevocable, and either subject or not subject to any terms or conditions, pensions or other benefits to employees and ex-employees and their dependents, or to any of such persons, including pensions or benefits additional to those, if any, to which such employees or ex-employees or their dependents are or may become entitled under any such scheme or fund as is mentioned in the previous paragraph. Any such pension or benefit may, as the board considers desirable, be granted to an employee either before and in anticipation of, or upon or at any time after, his actual retirement.

(vii) Retirement, appointment and removal

At each annual general meeting, one third of the Directors for the time being (or if their number is not a multiple of three, then the number nearest to but not less than one third) will retire from office by rotation provided that every Director shall be subject to retirement at an annual general meeting at least once every three years. The Directors to retire in every year will be those who have been longest in office since their last re-election or appointment but as between persons who became or were last re-elected Directors on the same day those to retire will (unless they otherwise agree among themselves) be determined by lot. There are no provisions relating to retirement of Directors upon reaching any age limit.

The Directors shall have the power from time to time and at any time to appoint any person as a Director either to fill a casual vacancy on the board or as an addition to the existing board. Any Director appointed to fill a casual vacancy shall hold office until the first general meeting of members after his appointment and be subject to re-election at such meeting and any Director appointed as an addition to the existing board shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election. Neither a Director nor an alternate Director is required to hold any shares in the Company by way of qualification.

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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

A Director may be removed by an ordinary resolution of the Company before the expiration of his period of office (but without prejudice to any claim which such Director may have for damages for any breach of any contract between him and the Company) and may by ordinary resolution appoint another in his place. Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than two. There is no maximum number of Directors.

The office of director shall be vacated:

(aa) if he resigns his office by notice in writing delivered to the Company at the registered office of the Company for the time being or tendered at a meeting of the Board;
(bb) becomes of unsound mind or dies;
(cc) if, without special leave, he is absent from meetings of the board (unless an alternate director appointed by him attends) for six (6) consecutive months, and the board resolves that his office is vacated;
(dd) if he becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors;
(ee) if he is prohibited from being a director by law;
(ff) if he ceases to be a director by virtue of any provision of law or is removed from office pursuant to the Articles.

The board may from time to time appoint one or more of its body to be managing director, joint managing director, or deputy managing director or to hold any other employment or executive office with the Company for such period and upon such terms as the board may determine and the board may revoke or terminate any of such appointments. The board may delegate any of its powers, authorities and discretions to committees consisting of such Director or Directors and other persons as the board thinks fit, and it may from time to time revoke such delegation or revoke the appointment of and discharge any such committees either wholly or in part, and either as to persons or purposes, but every committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations that may from time to time be imposed upon it by the board.

(viii) Borrowing powers

The board may exercise all the powers of the Company to raise or borrow money, to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and, subject to the Companies Law, to issue debentures, bonds and other securities of the Company, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.

Note: These provisions, in common with the Articles in general, can be varied with the sanction of a special resolution of the Company.

(ix) Proceedings of the Board

The board may meet for the despatch of business, adjourn and otherwise regulate their meetings as they think fit. Questions arising at any meeting shall be determined by a majority of votes. In the case of an equality of votes, the chairman of the meeting shall have an additional or casting vote.

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SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

(x) Register of Directors and Officers

The Companies Law and the Articles provide that the Company is required to maintain at its registered office a register of directors and officers which is not available for inspection by the public. A copy of such register must be filed with the Registrar of Companies in the Cayman Islands and any change must be notified to the Registrar within thirty (30) days of any change in such directors or officers.

(b) Alterations to constitutional documents

The Articles may be rescinded, altered or amended by the Company in general meeting by special resolution. The Articles state that a special resolution shall be required to alter the provisions of the Memorandum, to amend the Articles or to change the name of the Company.

(c) Alteration of capital

The Company may from time to time by ordinary resolution in accordance with the relevant provisions of the Companies Law:

(i) increase its capital by such sum, to be divided into shares of such amounts as the resolution shall prescribe;
(ii) consolidate and divide all or any of its capital into shares of larger amount than its existing shares;
(iii) divide its shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares attach thereto respectively any preferential, deferred, qualified or special rights, privileges, conditions or restrictions as the Company in general meeting or as the directors may determine;
(iv) sub-divide its shares or any of them into shares of smaller amount than is fixed by the Memorandum, subject nevertheless to the provisions of the Companies Law, and so that the resolution whereby any share is sub-divided may determine that, as between the holders of the shares resulting from such sub-division, one or more of the shares may have any such preferred or other special rights, over, or may have such deferred rights or be subject to any such restrictions as compared with the others as the Company has power to attach to unissued or new shares; or
(v) cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken, by any person, and diminish the amount of its capital by the amount of the shares so canceled.

The Company may subject to the provisions of the Companies Law reduce its share capital or any capital redemption reserve or other undistributable reserve in any way by special resolution.

(d) Variation of rights of existing shares or classes of shares

Subject to the Companies Law, all or any of the special rights attached to the shares or any class of shares may (unless otherwise provided for by the terms of issue of that class) be varied, modified or abrogated either with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. To every such separate general meeting the provisions of the Articles relating to general meetings will mutatis mutandis apply, but so that the necessary quorum (other than at an adjourned meeting) shall be two persons holding or

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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

representing by proxy not less than one-third in nominal value of the issued shares of that class and at any adjourned meeting two holders present in person or by proxy whatever the number of shares held by them shall be a quorum. Every holder of shares of the class shall be entitled to one vote for every such share held by him.

The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.

(e) Special resolution-majority required

Pursuant to the Articles, a special resolution of the Company must be passed by a majority of not less than three-fourths of the votes cast by such members as, being entitled so to do, vote in person or, in the case of such members as are corporations, by their duly authorized representatives or, where proxies are allowed, by proxy at a general meeting of which notice of not less than twenty-one (21) clear days and not less than ten (10) clear business days specifying the intention to propose the resolution as a special resolution, has been duly given. Provided that if permitted by the Designated Stock Exchange (as defined in the Articles), except in the case of an annual general meeting, if it is so agreed by a majority in number of the members having a right to attend and vote at such meeting, being a majority together holding not less than ninety-five per cent. (95%) in nominal value of the shares giving that right and, in the case of an annual general meeting, if so agreed by all Members entitled to attend and vote thereat, a resolution may be proposed and passed as a special resolution at a meeting of which notice of less than twenty-one (21) clear days and less than ten (10) clear business days has been given.

A copy of any special resolution must be forwarded to the Registrar of Companies in the Cayman Islands within fifteen (15) days of being passed.

An ordinary resolution is defined in the Articles to mean a resolution passed by a simple majority of the votes of such members of the Company as, being entitled to do so, vote in person or, in the case of corporations, by their duly authorized representatives or, where proxies are allowed, by proxy at a general meeting held in accordance with the Articles.

(f) Voting rights

Subject to any special rights or restrictions as to voting for the time being attached to any shares by or in accordance with the Articles, at any general meeting on a poll every member present in person or by proxy or, in the case of a member being a corporation, by its duly authorized representative shall have one vote for every fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share in advance of calls or installments is treated for the foregoing purposes as paid up on the share. A member entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.

At any general meeting a resolution put to the vote of the meeting is to be decided by way of a poll save that the chairman of the meeting may in good faith, allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands in which case every member present in person (or being a corporation, is present by a duly authorized representative), or by proxy(ies) shall have one vote provided that where more than one proxy is appointed by a member which is a clearing house (or its nominee(s)), each such proxy shall have one vote on a show of hands.

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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

If a recognized clearing house (or its nominee(s)) is a member of the Company it may authorize such person or persons as it thinks fit to act as its representative(s) at any meeting of the Company or at any meeting of any class of members of the Company provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized.A person authorized pursuant to this provision shall be deemed to have been duly authorized without further evidence of the facts and be entitled to exercise the same powers on behalf of the recognized clearing house (or its nominee(s)) as if such person was the registered holder of the shares of the Company held by that clearing house (or its nominee(s)) including, where a show of hands is allowed, the right to vote individually on a show of hands.

Where the Company has any knowledge that any shareholder is, under the rules of the Designated Stock Exchange (as defined in the Articles), required to abstain from voting on any particular resolution of the Company or restricted to voting only for or only against any particular resolution of the Company, any votes cast by or on behalf of such shareholder in contravention of such requirement or restriction shall not be counted.

(g) Requirements for annual general meetings

An annual general meeting of the Company must be held in each year, other than the year of adoption of the Articles (within a period of not more than fifteen (15) months after the holding of the last preceding annual general meeting or a period of eighteen (18) months from the date of adoption of the Articles, unless a longer period would not infringe the rules of any Designated Stock Exchange (as defined in the Articles)) at such time and place as may be determined by the board.

(h) Accounts and audit

The board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receipt and expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the Companies Law or necessary to give a true and fair view of the Company’s affairs and to explain its transactions.

The accounting records shall be kept at the registered office or at such other place or places as the board decides and shall always be open to inspection by any Director. No member (other than a Director) shall have any right to inspect any accounting record or book or document of the Company except as conferred by law or authorized by the board or the Company in general meeting.

A copy of every balance sheet and profit and loss account (including every document required by law to be annexed thereto) which is to be laid before the Company at its general meeting, together with a printed copy of the Directors’ report and a copy of the auditors’ report, shall not less than twenty-one (21) days before the date of the meeting and at the same time as the notice of annual general meeting be sent to every person entitled to receive notices of general meetings of the Company under the provisions the Articles; however, subject to compliance with all applicable laws, including the rules of the Designated Stock Exchange (as defined in the Articles), the Company may send to such persons summarized financial statements derived from the Company’s annual accounts and the directors’ report instead provided that any such person may by notice in writing served on the Company, demand that the Company sends to him, in addition to summarized financial statements, a complete printed copy of the Company’s annual financial statement and the directors’ report thereon.

Auditors shall be appointed and the terms and tenure of such appointment and their duties at all times regulated in accordance with the provisions of the Articles. The remuneration of the auditors shall be fixed by the Company in general meeting or in such manner as the members may determine.

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SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

The financial statements of the Company shall be audited by the auditor in accordance with generally accepted auditing standards. The auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the auditor shall be submitted to the members in general meeting. The generally accepted auditing standards referred to herein may be those of a country or jurisdiction other than the Cayman Islands. If so, the financial statements and the report of the auditor should disclose this fact and name such country or jurisdiction.

(i) Notices of meetings and business to be conducted thereat

An annual general meeting shall be called by notice of not less than twenty-one (21) clear days and not less than twenty (20) clear business days and any extraordinary general meeting at which it is proposed to pass a special resolution shall (save as set out in sub-paragraph (e) above) be called by notice of at least twenty-one (21) clear days and not less than ten (10) clear business days. All other extraordinary general meetings shall be called by notice of at least fourteen (14) clear days and not less than ten (10) clear business days. The notice must specify the time and place of the meeting and, in the case of special business, the general nature of that business. In addition notice of every general meeting shall be given to all members of the Company other than such as, under the provisions of the Articles or the terms of issue of the shares they hold, are not entitled to receive such notices from the Company, and also to the auditors for the time being of the Company.

Notwithstanding that a meeting of the Company is called by shorter notice than that mentioned above if permitted by the rules of the Designated Stock Exchange, it shall be deemed to have been duly called if it is so agreed:

(i) in the case of a meeting called as an annual general meeting, by all members of the Company entitled to attend and vote thereat; and
(ii) in the case of any other meeting, by a majority in number of the members having a right to attend and vote at the meeting, being a majority together holding not less than ninety-five per cent (95%) in nominal value of the issued shares giving that right.

All business shall be deemed special that is transacted at an extraordinary general meeting and also all business shall be deemed special that is transacted at an annual general meeting with the exception of the following, which shall be deemed ordinary business:

(aa) the declaration and sanctioning of dividends;
(bb) the consideration and adoption of the accounts and balance sheet and the reports of the directors and the auditors;
(cc) the election of directors in place of those retiring;
(dd) the appointment of auditors and other officers;
(ee) the fixing of the remuneration of the directors and of the auditors;
(ff) the granting of any mandate or authority to the directors to offer, allot, grant options over or otherwise dispose of the unissued shares of the Company representing not more than twenty per cent (20%) in nominal value of its existing issued share capital; and
(gg) the granting of any mandate or authority to the directors to repurchase securities of the Company.

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SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

(j) Transfer of shares

All transfers of shares may be effected by an instrument of transfer in the usual or common form or in a form prescribed by the Designated Stock Exchange (as defined in the Articles) or in such other form as the board may approve and which may be under hand or, if the transferor or transferee is a clearing house or its nominee(s), by hand or by machine imprinted signature or by such other manner of execution as the board may approve from time to time. The instrument of transfer shall be executed by or on behalf of the transferor and the transferee provided that the board may dispense with the execution of the instrument of transfer by the transferee in any case in which it thinks fit, in its discretion, to do so and the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the register of members in respect thereof. The board may also resolve either generally or in any particular case, upon request by either the transferor or the transferee, to accept mechanically executed transfers.

The board in so far as permitted by any applicable law may, in its absolute discretion, at any time and from time to time transfer any share upon the principal register to any branch register or any share on any branch register to the principal register or any other branch register.

Unless the board otherwise agrees, no shares on the principal register shall be transferred to any branch register nor may shares on any branch register be transferred to the principal register or any other branch register. All transfers and other documents of title shall be lodged for registration and registered, in the case of shares on a branch register, at the relevant registration office and, in the case of shares on the principal register, at the registered office in the Cayman Islands or such other place at which the principal register is kept in accordance with the Companies Law.

The board may, in its absolute discretion, and without assigning any reason, refuse to register a transfer of any share (not being a fully paid up share) to a person of whom it does not approve or any share issued under any share incentive scheme for employees upon which a restriction on transfer imposed thereby still subsists, and it may also refuse to register any transfer of any share to more than four joint holders or any transfer of any share (not being a fully paid up share) on which the Company has a lien.

The board may decline to recognize any instrument of transfer unless a fee of such maximum sum as any Designated Stock Exchange (as defined in the Articles) may determine to be payable or such lesser sum as the Directors may from time to time require is paid to the Company in respect thereof, the instrument of transfer, if applicable, is properly stamped, is in respect of only one class of share and is lodged at the relevant registration office or registered office or such other place at which the principal register is kept accompanied by the relevant share certificate(s) and such other evidence as the board may reasonably require to show the right of the transferor to make the transfer (and if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do).

The registration of transfers may be suspended and the register closed on giving notice by advertisement in a relevant newspaper and, where applicable, any other newspapers in accordance with the requirements of any Designated Stock Exchange (as defined in the Articles), at such times and for such periods as the board may determine and either generally or in respect of any class of shares. The register of members shall not be closed for periods exceeding in the whole thirty (30) days in any year.

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APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

(k) Power for the Company to purchase its own shares

The Company is empowered by the Companies Law and the Articles to purchase its own Shares subject to certain restrictions and the Board may only exercise this power on behalf of the Company subject to any applicable requirements imposed from time to time by any Designated Stock Exchange (as defined in the Articles).

(l) Power for any subsidiary of the Company to own shares in the Company and financial assistance to purchase shares of the Company

There are no provisions in the Articles relating to ownership of shares in the Company by a subsidiary.

Subject to compliance with the rules and regulations of the Designated Stock Exchange (as defined in the Articles) and any other relevant regulatory authority, the Company may give financial assistance for the purpose of or in connection with a purchase made or to be made by any person of any shares in the Company.

(m) Dividends and other methods of distribution

Subject to the Companies Law, the Company in general meeting may declare dividends in any currency to be paid to the members but no dividend shall be declared in excess of the amount recommended by the board.

The Articles provide dividends may be declared and paid out of the profits of the Company, realized or unrealized, or from any reserve set aside from profits which the directors determine is no longer needed. With the sanction of an ordinary resolution dividends may also be declared and paid out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Law.

Except in so far as the rights attaching to, or the terms of issue of, any share may otherwise provide, (i) all dividends shall be declared and paid according to the amounts paid up on the shares in respect whereof the dividend is paid but no amount paid up on a share in advance of calls shall for this purpose be treated as paid up on the share and (ii) all dividends shall be apportioned and paid pro rata according to the amount paid up on the shares during any portion or portions of the period in respect of which the dividend is paid. The Directors may deduct from any dividend or other monies payable to any member or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise.

Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared on the share capital of the Company, the board may further resolve either (a) that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that the shareholders entitled thereto will be entitled to elect to receive such dividend (or part thereof) in cash in lieu of such allotment, or (b) that shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as the board may think fit. The Company may also upon the recommendation of the board by an ordinary resolution resolve in respect of any one particular dividend of the Company that it may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders to elect to receive such dividend in cash in lieu of such allotment.

Any dividend, interest or other sum payable in cash to the holder of shares may be paid by cheque or warrant sent through the post addressed to the holder at his registered address, or in the case of joint holders, addressed to the holder whose name stands first in the register of the Company

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SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

in respect of the shares at his address as appearing in the register or addressed to such person and at such addresses as the holder or joint holders may in writing direct. Every such cheque or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the register in respect of such shares, and shall be sent at his or their risk and payment of the cheque or warrant by the bank on which it is drawn shall constitute a good discharge to the Company. Any one of two or more joint holders may give effectual receipts for any dividends or other moneys payable or property distributable in respect of the shares held by such joint holders.

Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared the board may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind.

All dividends or bonuses unclaimed for one year after having been declared may be invested or otherwise made use of by the board for the benefit of the Company until claimed and the Company shall not be constituted a trustee in respect thereof. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the board and shall revert to the Company.

No dividend or other monies payable by the Company on or in respect of any share shall bear interest against the Company.

(n) Proxies

Any member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company and shall be entitled to exercise the same powers on behalf of a member who is an individual and for whom he acts as proxy as such member could exercise. In addition, a proxy shall be entitled to exercise the same powers on behalf of a member which is a corporation and for which he acts as proxy as such member could exercise if it were an individual member. Votes may be given either personally (or, in the case of a member being a corporation, by its duly authorized representative) or by proxy.

(o) Call on shares and forfeiture of shares

Subject to the Articles and to the terms of allotment, the board may from time to time make such calls upon the members in respect of any monies unpaid on the shares held by them respectively (whether on account of the nominal value of the shares or by way of premium). A call may be made payable either in one lump sum or by installments. If the sum payable in respect of any call or installment is not paid on or before the day appointed for payment thereof, the person or persons from whom the sum is due shall pay interest on the same at such rate not exceeding twenty per cent. (20%) per annum as the board may agree to accept from the day appointed for the payment thereof to the time of actual payment, but the board may waive payment of such interest wholly or in part. The board may, if it thinks fit, receive from any member willing to advance the same, either in money or money’s worth, all or any part of the monies uncalled and unpaid or installments payable upon any shares held by him, and upon all or any of the monies so advanced the Company may pay interest at such rate (if any) as the board may decide.

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SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

If a member fails to pay any call on the day appointed for payment thereof, the board may serve not less than fourteen (14) clear days’ notice on him requiring payment of so much of the call as is unpaid, together with any interest which may have accrued and which may still accrue up to the date of actual payment and stating that, in the event of non-payment at or before the time appointed, the shares in respect of which the call was made will be liable to be forfeited.

If the requirements of any such notice are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the board to that effect. Such forfeiture will include all dividends and bonuses declared in respect of the forfeited share and not actually paid before the forfeiture.

A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture, were payable by him to the Company in respect of the shares, together with (if the board shall in its discretion so require) interest thereon from the date of forfeiture until the date of actual payment at such rate not exceeding twenty per cent. (20%) per annum as the board determines.

(p) Inspection of register of members

Pursuant to the Articles the register and branch register of members shall be open to inspection for at least two (2) hours on every business day by members without charge, or by any other person upon a maximum payment of HK$2.50 or such lesser sum specified by the board, at the registered office or such other place at which the register is kept in accordance with the Companies Law or, upon a maximum payment of HK$1.00 or such lesser sum specified by the board, at the Registration Office (as defined in the Articles), unless the register is closed in accordance with the Articles.

(q) Quorum for meetings and separate class meetings

No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the appointment of a chairman.

Save as otherwise provided by the Articles the quorum for a general meeting shall be two members present in person (or, in the case of a member being a corporation, by its duly authorized representative) or by proxy and entitled to vote. In respect of a separate class meeting (other than an adjourned meeting) convened to sanction the modification of class rights the necessary quorum shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class.

A corporation being a member shall be deemed for the purpose of the Articles to be present in person if represented by its duly authorized representative being the person appointed by resolution of the directors or other governing body of such corporation to act as its representative at the relevant general meeting of the Company or at any relevant general meeting of any class of members of the Company.

(r) Rights of the minorities in relation to fraud or oppression

There are no provisions in the Articles relating to rights of minority shareholders in relation to fraud or oppression. However, certain remedies are available to shareholders of the Company under Cayman law, as summarized in paragraph 3(f) of this Appendix.

– III-13 –

APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

(s) Procedures on liquidation

A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution.

Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares (i) if the Company shall be wound up and the assets available for distribution amongst the members of the Company shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst such members in proportion to the amount paid up on the shares held by them respectively and (ii) if the Company shall be wound up and the assets available for distribution amongst the members as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the members in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively.

If the Company shall be wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution and any other sanction required by the Companies Law divide among the members in specie or kind the whole or any part of the assets of the Company whether the assets shall consist of property of one kind or shall consist of properties of different kinds and the liquidator may, for such purpose, set such value as he deems fair upon any one or more class or classes of property to be divided as aforesaid and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator, with the like authority, shall think fit, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.

(t) Untraceable members

Pursuant to the Articles, the Company may sell any of the shares of a member who is untraceable if (i) all cheques or warrants in respect of dividends of the shares in question (being not less than three in total number) for any sum payable in cash to the holder of such shares have remained uncashed for a period of 12 years; (ii) upon the expiry of the 12 year period, the Company has not during that time received any indication of the existence of the member; and (iii) the Company has caused an advertisement to be published in accordance with the rules of the Designated Stock Exchange (as defined in the Articles) giving notice of its intention to sell such shares and a period of three (3) months, or such shorter period as may be permitted by the Designated Stock Exchange (as defined in the Articles), has elapsed since the date of such advertisement and the Designated Stock Exchange (as defined in the Articles) has been notified of such intention. The net proceeds of any such sale shall belong to the Company and upon receipt by the Company of such net proceeds, it shall become indebted to the former member of the Company for an amount equal to such net proceeds.

(u) Subscription rights reserve

The Articles provide that to the extent that it is not prohibited by and is in compliance with the Companies Law, if warrants to subscribe for shares have been issued by the Company and the Company does any act or engages in any transaction which would result in the subscription price of such warrants being reduced below the par value of a share, a subscription rights reserve shall be established and applied in paying up the difference between the subscription price and the par value of a share on any exercise of the warrants.

– III-14 –

APPENDIX III

SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

3. CAYMAN ISLANDS COMPANIES LAW

The Company is incorporated in the Cayman Islands subject to the Companies Law and, therefore, operates subject to Cayman law. Set out below is a summary of certain provisions of the Companies Law, although this does not purport to contain all applicable qualifications and exceptions or to be a complete review of all matters of the Companies Law and taxation, which may differ from equivalent provisions in jurisdictions with which interested parties may be more familiar:

(a) Operations

As an exempted company, the Company’s operations must be conducted mainly outside the Cayman Islands. The Company is required to file an annual return each year with the Registrar of Companies of the Cayman Islands and pay a fee which is based on the amount of its authorized share capital.

(b) Share capital

The Companies Law provides that where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the value of the premiums on those shares shall be transferred to an account, to be called the “share premium account”. At the option of a company, these provisions may not apply to premiums on shares of that company allotted pursuant to any arrangement in consideration of the acquisition or cancellation of shares in any other company and issued at a premium. The Companies Law provides that the share premium account may be applied by the company subject to the provisions, if any, of its memorandum and articles of association in (a) paying distributions or dividends to members; (b) paying up unissued shares of the company to be issued to members as fully paid bonus shares; (c) the redemption and repurchase of shares (subject to the provisions of section 37 of the Companies Law); (d) writing-off the preliminary expenses of the company; and (e) writing-off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company.

No distribution or dividend may be paid to members out of the share premium account unless immediately following the date on which the distribution or dividend is proposed to be paid, the company will be able to pay its debts as they fall due in the ordinary course business.

The Companies Law provides that, subject to confirmation by the Grand Court of the Cayman Islands (the “Court”), a company limited by shares or a company limited by guarantee and having a share capital may, if so authorized by its articles of association, by special resolution reduce its share capital in any way.

The Articles includes certain protections for holders of special classes of shares, requiring their consent to be obtained before their rights may be varied. The consent of the specified proportions of the holders of the issued shares of that class or the sanction of a resolution passed at a separate meeting of the holders of those shares is required.

(c) Financial assistance to purchase shares of a company or its holding company

Subject to all applicable laws, the Company may give financial assistance to Directors and employees of the Company, its subsidiaries, its holding company or any subsidiary of such holding company in order that they may buy Shares in the Company or shares in any subsidiary or holding company. Further, subject to all applicable laws, the Company may give financial assistance to a trustee for the acquisition of Shares in the Company or shares in any such subsidiary or holding company to be held for the benefit of employees of the Company, its subsidiaries, any holding company of the Company or any subsidiary of any such holding company (including salaried Directors).

– III-15 –

APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

There is no statutory restriction in the Cayman Islands on the provision of financial assistance by a company to another person for the purchase of, or subscription for, its own or its holding company’s shares. Accordingly, a company may provide financial assistance if the directors of the company consider, in discharging their duties of care and acting in good faith, for a proper purpose and in the interests of the company, that such assistance can properly be given. Such assistance should be on an arm’s-length basis.

(d) Purchase of shares and warrants by a company and its subsidiaries

Subject to the provisions of the Companies Law, a company limited by shares or a company limited by guarantee and having a share capital may, if so authorized by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or a shareholder and the Companies Law expressly provides that it shall be lawful for the rights attaching to any shares to be varied, subject to the provisions of the company’s articles of association, so as to provide that such shares are to be or are liable to be so redeemed. In addition, such a company may, if authorized to do so by its articles of association, purchase its own shares, including any redeemable shares. However, if the articles of association do not authorize the manner and terms of purchase, a company cannot purchase any of its own shares unless the manner and terms of purchase have first been authorized by an ordinary resolution of the company. At no time may a company redeem or purchase its shares unless they are fully paid. A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any issued shares of the company other than shares held as treasury shares. A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment is proposed to be made, the company shall be able to pay its debts as they fall due in the ordinary course of business.

Shares purchased by a company shall be treated as canceled unless, subject to the memorandum and articles of association of the company, the directors of the company resolve to hold such shares in the name of the company as treasury shares prior to the purchase. Where shares of a company are held as treasury shares, the company shall be entered in the register of members as holding those shares, however, notwithstanding the foregoing, the company shall not be treated as a member for any purpose and shall not exercise any right in respect of the treasury shares, and any purported exercise of such a right shall be void, and a treasury share shall not be voted, directly or indirectly, at any meeting of the company and shall not be counted in determining the total number of issued shares at any given time, whether for the purposes of the company’s articles of association or the Companies Law. Further, no dividend may be declared or paid, and no other distribution (whether in cash or otherwise) of the company’s assets (including any distribution of assets to members on a winding up) may be made to the company, in respect of a treasury share.

A company is not prohibited from purchasing and may purchase its own warrants subject to and in accordance with the terms and conditions of the relevant warrant instrument or certificate. There is no requirement under Cayman Islands law that a company’s memorandum or articles of association contain a specific provision enabling such purchases and the directors of a company may rely upon the general power contained in its memorandum of association to buy and sell and deal in personal property of all kinds.

Under Cayman Islands law, a subsidiary may hold shares in its holding company and, in certain circumstances, may acquire such shares.

– III-16 –

APPENDIX III

SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

(e) Dividends and distributions

With the exception of section 34 of the Companies Law, there is no statutory provisions relating to the payment of dividends. Based upon English case law, which is regarded as persuasive in the Cayman Islands, dividends may be paid only out of profits. In addition, section 34 of the Companies Law permits, subject to a solvency test and the provisions, if any, of the company’s memorandum and articles of association, the payment of dividends and distributions out of the share premium account (see paragraph 2(m) above for further details).

(f) Protection of minorities

The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against or derivative actions in the name of the company to challenge (a) an act which is ultra vires the company or illegal, (b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company, and (c) an irregularity in the passing of a resolution which requires a qualified (or special) majority.

In the case of a company (not being a bank) having a share capital divided into shares, the Court may, on the application of members holding not less than one fifth of the shares of the company in issue, appoint an inspector to examine into the affairs of the company and to report thereon in such manner as the Court shall direct.

Any shareholder of a company may petition the Court which may make a winding up order if the Court is of the opinion that it is just and equitable that the company should be wound up or, as an alternative to a winding up order, (a) an order regulating the conduct of the company’s affairs in the future, (b) an order requiring the company to refrain from doing or continuing an act complained of by the shareholder petitioner or to do an act which the shareholder petitioner has complained it has omitted to do, (c) an order authorizing civil proceedings to be brought in the name and on behalf of the company by the shareholder petitioner on such terms as the Court may direct, or (d) an order providing for the purchase of the shares of any shareholders of the company by other shareholders or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.

Generally claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by the company’s memorandum and articles of association.

(g) Management

The Companies Law contains no specific restrictions on the power of directors to dispose of assets of a company. However, as a matter of general law, every officer of a company, which includes a director, managing director and secretary, in exercising his powers and discharging his duties must do so honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

(h) Accounting and auditing requirements

A company shall cause proper books of account to be kept with respect to (i) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (ii) all sales and purchases of goods by the company; and (iii) the assets and liabilities of the company.

– III-17 –

APPENDIX III SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

Proper books of account shall not be deemed to be kept if there are not kept such books as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.

(i) Exchange control

There are no exchange control regulations or currency restrictions in the Cayman Islands.

(j) Taxation

Pursuant to section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, the Company has obtained an undertaking from the Governor-in-Cabinet:

(1) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciation shall apply to the Company or its operations; and
(2) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on or in respect of the shares, debentures or other obligations of the Company.

The undertaking for the Company is for a period of twenty years from October 10, 2012.

The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to the Company levied by the Government of the Cayman Islands save certain stamp duties which may be applicable, from time to time, on certain instruments executed in or brought within the jurisdiction of the Cayman Islands. The Cayman Islands are not party to any double tax treaties.

(k) Stamp duty on transfers

No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands.

(l) Loans to directors

There is no express provision in the Companies Law prohibiting the making of loans by a company to any of its directors.

(m) Inspection of corporate records

Members of the Company will have no general right under the Companies Law to inspect or obtain copies of the register of members or corporate records of the Company. They will, however, have such rights as may be set out in the Company’s Articles.

An exempted company may maintain its principal register of members and any branch registers at such locations, whether within or without the Cayman Islands, as the directors may, from time to time, think fit. A branch register shall be kept in the same manner in which a principal register is by the Companies Law required or permitted to be kept. The company shall cause to be kept at the place where the company’s principal register is kept a duplicate of any branch register duly entered up from time to time. There is no requirement under the Companies Law for an exempted company to make any returns of members to the Registrar of Companies of the Cayman Islands. The names and addresses of the members are, accordingly, not a matter of public record and are not available for public inspection. However, an exempted company shall make available at its registered office, in electronic form or any other medium, such register of members, including any branch register of members, as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Law (2009 Revision) of the Cayman Islands.

– III-18 –

APPENDIX III

SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

(n) Winding up

A company may be wound up compulsorily by order of the Court; voluntarily; or, under supervision of the Court. The Court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the Court, just and equitable to do so.

A company may be wound up voluntarily when the members so resolve in general meeting by special resolution, or, in the case of a limited duration company, when the period fixed for the duration of the company by its memorandum or articles expires, or the event occurs on the occurrence of which the memorandum or articles provides that the company is to be dissolved, or, the company does not commence business for a year from its incorporation (or suspends its business for a year), or, the company is unable to pay its debts. In the case of a voluntary winding up, such company is obliged to cease to carry on its business from the time of passing the resolution for voluntary winding up or upon the expiry of the period or the occurrence of the event referred to above.

For the purpose of conducting the proceedings in winding up a company and assisting the Court, there may be appointed one or more than one person to be called an official liquidator or official liquidators; and the Court may appoint to such office such qualified person or persons, either provisionally or otherwise, as it thinks fit, and if more persons than one are appointed to such office, the Court shall declare whether any act hereby required or authorized to be done by the official liquidator is to be done by all or any one or more of such persons. The Court may also determine whether any and what security is to be given by an official liquidator on his appointment; if no official liquidator is appointed, or during any vacancy in such office, all the property of the company shall be in the custody of the Court. A person shall be qualified to accept an appointment as an official liquidator if he is duly qualified in terms of the Insolvency Practitioners Regulations. A foreign practitioner may be appointed to act jointly with a qualified insolvency practitioner.

In the case of a members’ voluntary winding up of a company, the company in general meeting must appoint one or more liquidators for the purpose of winding up the affairs of the company and distributing its assets. A declaration of solvency must be signed by all the directors of a company being voluntarily wound up within twenty-eight (28) days of the commencement of the liquidation, failing which, its liquidator must apply to Court for an order that the liquidation continue under the supervision of the Court.

Upon the appointment of a liquidator, the responsibility for the company’s affairs rests entirely in his hands and no future executive action may be carried out without his approval.

A liquidator’s duties are to collect the assets of the company (including the amount (if any) due from the contributories), settle the list of creditors and, subject to the rights of preferred and secured creditors and to any subordination agreements or rights of set-off or netting of claims, discharge the company’s liability to them ( pari passu if insufficient assets exist to discharge the liabilities in full) and to settle the list of contributories (shareholders) and divide the surplus assets (if any) amongst them in accordance with the rights attaching to the shares.

As soon as the affairs of the company are fully wound up, the liquidator must make up an account of the winding up, showing how the winding up has been conducted and the property of the company has been disposed of, and thereupon call a general meeting of the company for the purposes of laying before it the account and giving an explanation thereof. At least twenty-one (21) days before the final meeting, the liquidator shall send a notice specifying the time, place and object of the meeting to each contributory in any manner authorized by the company’s articles of association and published in the Gazette in the Cayman Islands.

– III-19 –

APPENDIX III

SUMMARY OF THE CONSTITUTION OF OUR COMPANY AND CAYMAN COMPANIES LAW

(o) Reconstructions

There are statutory provisions which facilitate reconstructions and amalgamations approved by a majority in number representing seventy-five per cent. (75%) in value of shareholders or class of shareholders or creditors, as the case may be, as are present at a meeting called for such purpose and thereafter sanctioned by the Court. Whilst a dissenting shareholder would have the right to express to the Court his view that the transaction for which approval is sought would not provide the shareholders with a fair value for their shares, the Court is unlikely to disapprove the transaction on that ground alone in the absence of evidence of fraud or bad faith on behalf of management.

(p) Compulsory acquisition

Where an offer is made by a company for the shares of another company and, within four (4) months of the offer, the holders of not less than ninety per cent. (90%) of the shares which are the subject of the offer accept, the offeror may at any time within two (2) months after the expiration of the said four (4) months, by notice in the prescribed manner require the dissenting shareholders to transfer their shares on the terms of the offer. A dissenting shareholder may apply to the Court within one (1) month of the notice objecting to the transfer. The burden is on the dissenting shareholder to show that the Court should exercise its discretion, which it will be unlikely to do unless there is evidence of fraud or bad faith or collusion as between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority shareholders.

(q) Indemnification

Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the court to be contrary to public policy (e.g. for purporting to provide indemnification against the consequences of committing a crime).

4. GENERAL

Conyers Dill & Pearman (Cayman) Limited, the Company’s special legal counsel on Cayman Islands law, have sent to the Company a letter of advice summarizing certain aspects of the Companies Law. This letter, together with a copy of the Companies Law, is available for inspection as referred to in the paragraph headed “Documents available for inspection” in Appendix [V]. Any person wishing to have a detailed summary of the Companies Law or advice on the differences between it and the laws of any jurisdiction with which he is more familiar is recommended to seek independent legal advice.

– III-20 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

A. FURTHER INFORMATION ABOUT OUR GROUP

1. Incorporation of Our Company

We were incorporated in the Cayman Islands under Cayman Companies Law as an exempted company with limited liability on September 24, 2012. We have established a principal place of business in Hong Kong at Level 28, Three Pacific Place, 1 Queen’s Road East, Hong Kong and have been registered with the Registrar of Companies in Hong Kong as a non-Hong Kong company under Part XI of the Companies Ordinance on May 14, 2013 under the same address. Kam Mei Ha, Wendy and Wong Wai Yee, Ella have been appointed as the authorized representatives of our Company for the acceptance of service of process and notices on behalf of our Company in Hong Kong.

As we were incorporated in the Cayman Islands, our corporate structure and Memorandum of Association and Articles of Association are subject to the relevant laws and regulations of the Cayman Islands. A summary of the relevant laws and regulations of the Cayman Islands and of the Memorandum of Association and Articles of Association is set out in the section headed “Summary of the Constitution of Our Company and Cayman Companies Law” in Appendix III to this document.

2. Changes in the Share Capital of Our Group

Our Company

As of the date of incorporation of our Company, our Company had an authorized share capital of HK$380,000, divided into 38,000,000 shares of a nominal or par value of HK$0.01 each. One share of HK$0.01 was allotted and issued at nominal or par value to the initial subscriber of the Company, and transferred on the same day to Magic Frontier, a company indirectly wholly owned by our Controlling Shareholders.

The following changes in the share capital of our Company have taken place since the date of incorporation of our Company up to the date of this document:

On April 23, 2013, the authorized share capital of our Company was increased from HK$380,000 to HK$20,000,000 by the creation of an additional 1,962,000,000 shares with a nominal value of HK$0.01 each.

Save as disclosed above and in this document, there has been no alteration in the share capital of our Company since our incorporation.

5. Changes in the Share Capital of Our Subsidiaries

Our subsidiaries are referred to in the Accountants’ Report, the text of which is set out in Appendix I to this document. Save for the subsidiaries mentioned in the Accountants’ Report, we do not have any other subsidiaries.

The following alterations in the share capital (or registered share capital, as the case may be) of our subsidiaries have taken place within the two years immediately preceding the date of this document.

Crystalline Prestige

On September 26, 2012 Crystalline Prestige was incorporated in the British Virgin Islands with an authorized share capital of 50,000 ordinary shares of US$0.01 par value each, and allotted and issued one share of US$0.01 par value to the Company for a consideration of US$0.01.

ACE Manufacturing

On January 16, 2012, ACE Manufacturing was incorporated in Hong Kong with a share capital of HK$10,000 divided into 10,000 shares of HK$1.00 par value each, and allotted and issued 100 shares of HK$1.00 par value each to Magic Frontier for a consideration of HK$100.

– IV-1 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

On September 27, 2012, Magic Frontier transferred its 100 shares of HK$1.00 par value each in ACE Manufacturing to Crystalline Prestige for a consideration of HK$100. As a result, ACE Manufacturing became an indirectly wholly owned subsidiary of our Company.

LC Gloricar

LC Gloricar was incorporated on August 29, 2011 in the British Virgin Islands with an authorized share capital of 100,000,000 ordinary shares of US$0.01 par value each. On the same day, LC Gloricar allotted and issued 1,000,000 shares of US$0.01 each to the initial subscribers, comprising 562,437 shares, 41,011 shares, 284,483 shares, 60,345 shares, 25,862 shares and 25,682 shares for a consideration of US$5,624.37, US$410.11, US$2,844.83, US$603.45, US$258.62 and US$258.62, respectively.

On September 20, 2012, pursuant to a share exchange agreement dated March 5, 2012 under which Success Intergrow received certain cash consideration and issued preferred shares to the initial subscribers, the initial subscribers transferred all their shares in LC Gloricar to Magic Frontier, which is a wholly owned subsidiary of Success Intergrow.

On September 28, 2012, Magic Frontier transferred all its shares in LC Gloricar to Crystalline Prestige pursuant to a share transfer agreement dated September 28, 2012 in consideration for US$10,000. As a result, LC Gloricar became an indirectly wholly owned subsidiary of our Company.

Daoable Future

On August 2, 2011, Daoable Future was incorporated in Hong Kong with a share capital of US$10,000 divided into 100,000,000 shares of US$0.0001 par value each, and allotted and issued 1,000,000 shares of US$0.0001 par value each to LC Fund V for a consideration of US$100.

On September 8, 2011, LC Fund V transferred its 1,000,000 shares of US0.0001 par value each in Daoable Future to LC Gloricar for a consideration of US$100. As a result, Daoable Future became a wholly-owned subsidiary of LC Gloricar.

Hexie Auto

Hexie Auto was established on November 10, 2011 in the PRC with a registered capital of RMB10 million. On March 14, 2012, Hexie Auto’s registered capital was increased to RMB170 million which has been fully paid up. On November 26, 2012, Hexie Auto’s registered capital was increased to RMB245 million which has been fully paid up.

Yuanda Lexus

Yuanda Lexus was established on October 19, 2006 in the PRC with a registered share capital of RMB20 million. On March 25, 2011, Yuanda Lexus’s registered capital was increased to RMB50 million which has been fully paid up.

Yudebao

Yudebao was established on May 8, 2009 in the PRC with a registered share capital of RMB10 million. On October 9, 2010, Yudebao’s registered capital was increased to RMB30 million which has been fully paid up.

Zhengdebao

Zhengdebao was established on July 24, 2009 in the PRC with a registered share capital of RMB20 million. On May 4, 2011, Zhengdebao’s registered capital was increased to RMB40 million which has been fully paid up.

– IV-2 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

Zhongdebao

Zhongdebao was established on March 4, 2005 in the PRC with a registered share capital of RMB20 million. On November 3, 2005, Zhongdebao’s registered capital was increased to RMB30 million which has been fully paid up. On October 26, 2011, Zhongdebao’s registered capital was increased to RMB42.86 million which has been fully paid up.

Luohe Luodebao

Luohe Luodebao was established on April 17, 2013 in the PRC with a registered share capital of RMB1 million. On April 28, 2013, Luohe Laode’s registered capital was increased to RMB10 million which has been fully paid up.

Suzhou Yijun

Suzhou Yijun was established on October 24, 2012 in the PRC with a registered share capital of RMB20 million. On December 7, 2012, Suzhou Yijun’s registered capital was increased to RMB50 million which has been fully paid up.

Save as disclosed above, there have been no alterations in the share capital of our subsidiaries within the two years immediately preceding the date of this document.

B. FURTHER INFORMATION ABOUT OUR BUSINESS

2. Intellectual Property Rights of the Group

As of the Latest Practicable Date, we have registered or have applied for the registration of the following intellectual property rights which are material in relation to our business.

(a) Domain Names

As of the Latest Practicable Date, we have registered the following domain names:

Domain Name	Registrant	Expiry Date
(1) hexieauto.cn. . . . . . . . . . . .	Hexie Auto	August 2, 2015
(2) hexieauto.com.cn . . . . . . . .	Hexie Auto	August 2, 2015
(3) hexieauto.com . . . . . . . . . .	Hexie Auto	August 2, 2015
(4) hexieauto.net . . . . . . . . . . .	Hexie Auto	August 2, 2015

(b) Trademarks

As of the Latest Practicable Date, we had applied for the registration of the following trademarks:

trademarks:
	Territory of			Application
Trademark	Registration	Applicant	Class	Number
	Hong Kong	China Harmony	35,36,37,42,45	302449963
		Auto Holding	(Note)
		Limited

– IV-3 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

Notes: Class 35: Advertising; business management; business administration; office functions.

Class 36: Insurance; financial affairs; monetary affairs; real estate affairs.
Class 37: Building construction; repair; installation services.
Class 42: Scientific and technological services and research and design relating thereto; industrial analysis and research services; design and development of computer hardware and software.
Class 45: Legal services; security services for the protection of property and individuals; personal and social services rendered by others to meet the needs of individuals.

2. Directors’ Service Contracts

Each of our executive Directors has entered into a pending Service Agreement with us for an initial fixed period of three years commencing from their respective date of appointment unless terminated earlier. The appointments of the executive Directors are subject to the provisions of retirement and rotation of Directors under the Articles of Association of our Company.

Each of our non-executive Director and independent non-executive Directors has signed an pending Appointment Letter with us for an initial fixed period of three years commencing from their respective date of appointment. Under their respective appointment letters, each of the independent non-executive Directors is entitled to a fixed director’s fee of HK$300,000 per annum while the non-executive Director is not entitled to any remuneration. The appointments are subject to the provisions of retirement and rotation of Directors under the Articles of Associations of our Company.

Save as disclosed above, none of the Directors has entered or has proposed to enter into a service contract with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

3. Directors’ Competing Interests

None of our Directors are interested in any business apart from the Group’s business which competes or is likely to compete, directly or indirectly, with the business of the Group.

D. RESTRICTED SHARE UNIT SCHEME

The following is a summary of the principal terms of our RSU Scheme conditionally approved and adopted by our shareholders on May 20, 2013. The RSU Scheme is not subject to the provisions of Chapter 17 of the Listing Rules as the RSU Scheme does not involve the grant of options by our Company to subscribe for new Shares.

1. Purposes of the RSU Scheme

The purpose of the RSU Scheme is to attract skilled and experienced personnel, to incentivize them to remain with the Group and to motivate them to strive for the future development and expansion of the Group by providing them with the opportunity to own equity interests in our Company.

2. RSU Awards

An RSU Award gives a participant in the RSU Scheme (the “ RSU Participant ”) a conditional right when the RSU Award vests to obtain either Shares or an equivalent value in cash with reference to the market value of the Shares on or about the date of vesting, as determined by the Board in its absolute discretion. An RSU Award may include, if so specified by the Board in its entire discretion, cash and non-cash income, dividends or distributions and/or the sale proceeds of non-cash and non-scrip distributions in respect of those Shares.

– IV-4 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

3. Participants in the RSU Scheme

Persons eligible to receive RSU Awards under the RSU Scheme are existing employees, directors (whether executive or non-executive, but excluding independent non-executive directors) or officers of the Company or any of our subsidiaries (“ RSU Eligible Persons ”). The Board selects the RSU Eligible Persons to receive RSU Awards under the RSU Scheme at its discretion.

4. Status of the RSU Scheme

(a) Conditions of the RSU Scheme

The RSU Scheme is conditional upon the passing by our shareholders of a resolution to approve the adoption of the RSU Scheme and to authorize the Board to grant RSU Awards under the RSU Scheme and to allot and issue, procure the transfer of, and otherwise deal with Shares in connection with the RSU Scheme (which occurred on May 20, 2013).

(b) Term of the RSU Scheme

Subject to the RSU Conditions being satisfied, the RSU Scheme will be valid and effective for a period of 10 years, commencing on the date of its adoption by our sole shareholder (unless it is terminated earlier in accordance with its terms) (the “ RSU Scheme Period ”), after which period no further RSU Awards shall be granted or accepted, but the provisions of the RSU Scheme shall remain in full force and effect in order to give effect to the vesting of RSU Awards granted and accepted prior to the expiration of the RSU Scheme Period.

5. Grant and Acceptance

(a) Making an Offer

An offer to grant an RSU Award will be made to an RSU Eligible Person selected by the Board (“ RSU Selected Person ”) by a letter, in such form as the Board may determine (“ RSU Grant Letter ”). The RSU Grant Letter will specify the value and the number of Shares underlying the RSU Award (or if the value and/or number of Shares is not available, the methodology by which that is calculated), the vesting criteria and conditions, the vesting schedule and such other details as the Board considers necessary, and will require the RSU Selected Person to undertake to hold the RSU Award on the terms on which it is granted and to be bound by the provisions of the RSU Scheme.

(b) Acceptance of an Offer

An RSU Selected Person accepts the grant of an RSU Award by sending a notice of acceptance (“ RSU Acceptance Notice ”) within the prescribed time and in such manner set out in the RSU Grant Letter. Once accepted, the RSU Award is granted from the date on which it was offered to the RSU Selected Person (“ RSU Grant Date ”). Upon acceptance, the RSU Selected Person becomes an RSU Participant in the RSU Scheme. Where the RSU Selected Person does not return the RSU Acceptance Notice within the time and in the manner prescribed, the RSU Award will lapse.

– IV-5 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

(c) Restrictions on Grants

The Board may not grant any RSU Awards to any RSU Selected Persons in any of the following circumstances:

(i) the requisite approvals for that grant from any applicable regulatory authorities have not been granted;
(ii) the securities laws or regulations require that a prospectus or other offering documents be issued in respect of the grant of the RSU Awards or in respect of the RSU Scheme, unless the Board determines otherwise;
(iii) where granting the RSU Award would result in a breach by the Company, our subsidiaries or any of their directors of any applicable securities laws, rules or regulations;
(iv) after a price sensitive event in relation to our securities has occurred or a price sensitive matter in relation to our securities has been the subject of a decision, until an announcement of such price sensitive information has been duly published in accordance with the Listing Rules; or
(v) within the period commencing one month immediately preceding the earlier of:
(1) the date of our meeting of the Board (as such date is first notified to the Hong Kong Stock Exchange in accordance with the Listing Rules) for the approval of our results for any year, half-year, quarterly or any other interim period (whether or not required under the Listing Rules); and
(2) the deadline to publish an announcement of our results for any year or half-year under the Listing Rules, or quarterly or any other interim period (whether or not required under the Listing Rules), and ending on the date of the results announcement; or
(vi) where such grant of any RSU Award would result in a breach of the limits of the RSU Scheme (as set out in paragraph 6 below).

(d) Grants to Directors

Where any RSU Award is proposed to be granted to a Director, it shall not be granted on any day on which our financial results are published and during the period of:

(i) 60 days immediately preceding the publication date of our annual results or, if shorter, the period from the end of our relevant financial year up to the publication date of our results and;
(ii) 30 days immediately preceding the publication date of our quarterly results (if any) and half-year results or, if shorter, the period from the end of our relevant quarterly or half-year period up to the publication date of our results.

(e) Grants to Connected Persons

Before making any grant to a Director, chief executive or substantial shareholder of the Company, or any of their respective associates, all of our independent non-executive Directors must approve the grant of the RSU Award, and such grants shall otherwise be subject to compliance with the Listing Rules.

– IV-6 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

6. Maximum Number of Shares pursuant to RSU Awards

(a) RSU Scheme Limit

Subject to paragraph 6(b) below, no RSU Award shall be granted pursuant to the RSU Scheme if as a result of such grant (assumed accepted), the aggregate number of Shares (or, where cash is awarded in lieu of Shares, the aggregate number of Shares as are equivalent to the amount of cash so awarded (“ Share Equivalents ”)) underlying all grants made pursuant to the RSU Scheme (excluding RSU Awards that have lapsed or been cancelled in accordance with the rules of the RSU Scheme) will exceed in the total number of Shares, as determined by the Board (the “ RSU Scheme Limit ”).

(b) Refreshment of RSU Scheme Limit

The RSU Scheme Limit may be refreshed from time to time subject to prior approval from our shareholders, but in any event the total number of Shares and Share Equivalents that may underlie the RSU Awards granted following the date of approval of the refreshed limit (the “ New Approval Date ”) under the limit as refreshed from time to time must not exceed the percentage of the number of Shares in issue as of the relevant New Approval Date as determined by the Board. Shares or Share Equivalents underlying RSU Awards granted under the RSU Scheme (including those outstanding, cancelled or vested RSU Awards) prior to such New Approval Date will not be counted for the purpose of determining the maximum aggregate number of Shares or Share Equivalents that may underlie the RSU Awards granted following the relevant New Approval Date.

(c) Annual Mandate

To the extent that the Company may, during the Relevant Period (defined below), grant RSU Awards pursuant to the RSU Scheme which may be satisfied by the Company allotting and issuing new Shares upon the vesting of the RSU Awards, the Company shall at its annual general meeting propose for our shareholders to consider and, if thought fit, pass an ordinary resolution approving a mandate specifying:

(a) the maximum number of new Shares that may underlie RSU Awards granted pursuant to the RSU Scheme during the Relevant Period; and
(b) that the Board has the power to allot and issue Shares, procure the transfer of Shares and otherwise deal with Shares pursuant to the vesting of any RSU Awards that are granted pursuant to the RSU Scheme during the Relevant Period as and when the RSU Awards vest.

The above mandate shall remain in effect during the period from the passing of the ordinary resolution granting the mandate until the earliest of:

(A) the conclusion of our next annual general meeting;
(B) the end of the period within which the Company is required by any applicable laws or by our Articles to hold our next annual general meeting; and
(C) the date on which such mandate is varied or revoked by an ordinary resolution of our shareholders in a general meeting,

(the “ Relevant Period ”).

In our annual reports the Company will disclose an analysis or reference of the fair value of the RSU Awards granted for the preceding financial year and the employee costs arising from such grants.

– IV-7 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

7. Rights Attached to RSU Awards

An RSU Participant does not have any contingent interest in any Shares underlying an RSU Award unless and until such Shares are actually transferred to the RSU Participant. Further, an RSU Participant may not exercise voting rights in respect of the Shares underlying their RSU Award and, unless otherwise specified by the Board in its entire discretion in the RSU Grant Letter to the RSU Participant, nor do they have any rights to any cash or non-cash income, dividends or distributions and/or the sale proceeds of non-cash and non-scrip distributions from any Shares underlying an RSU Award.

8. Rights Attached to Shares

Any Shares transferred to an RSU Participant in respect of any RSU Award will be subject to all the provisions of the Articles and will form a single class with the fully paid Shares in issue on the date of the transfer or, if that date falls on a day when the register of members of the Company is closed, the first day of the reopening of the register of members, and accordingly will entitle the holder to participate in all dividends or other distributions paid or made on or after the date of the transfer or, if that date falls on a day when the register of members of the Company is closed, the first day of the reopening of the register of members.

9. Assignment of RSU Awards

RSU Awards granted pursuant to the RSU Scheme will be personal to each RSU Participant, and are not assignable. RSU Participants are prohibited from selling, transferring, assigning, charging, mortgaging, encumbering, hedging or creating any interest in favour of any other person over or in relation to any property held by the Trustee (as defined below) on trust for the RSU Participants, RSU Awards, Shares underlying any RSU Awards or any interest or benefits therein.

10. Vesting of RSU Awards

(a) General

The Board can determine the vesting criteria, conditions and the time when the RSU Awards will vest, but the date between the RSU Acceptance Notice and the date of vesting must be at least [six] months.

Within a reasonable time after the vesting criteria and conditions have been fulfilled, satisfied or waived, the Board will send a vesting notice (“ Vesting Notice ”) to each of the relevant RSU Participants. The Vesting Notice will confirm the extent to which the vesting criteria and conditions have been fulfilled, satisfied or waived, and the number of Shares (and, if applicable, the cash or non-cash income, dividends or distributions and/or the sale proceeds of non-cash and non-scrip distributions in respect of those Shares) or the amount of cash the RSU Participant will receive.

(b) Appointment of Trustee

The Company intends to appoint a professional trustee (the “ Trustee ”) to hold Shares underlying the RSU Awards granted to RSU Participants pending the vesting of the RSU Awards. The Trustee shall subscribe for new Shares or purchase existing Shares from the market. The Company or our subsidiaries shall provide funds to enable the Trustee to subscribe for Shares or to make such on-market purchases of Shares.

– IV-8 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

(c) Award in Cash or Shares

Subject to the RSU Participant executing all documents that the Board considers necessary for vesting (which may include, without limitation, a certification to the Company or our relevant subsidiary that he/she has complied with all the terms and conditions set out in the rules of the RSU Scheme and the RSU Grant Letter), the Board may decide at its absolute discretion to:

(i) direct and procure the Trustee to transfer the Shares underlying the RSU Award (and, if applicable, the cash or non-cash income, dividends or distributions and/or the sale proceeds of non-cash and non-scrip distributions in respect of those Shares) to the RSU Participant which the Trustee has either acquired by making on-market purchases of Shares or which the Company has allotted and issued to the Trustee as fully paid up Shares; or
(ii) pay, or direct and procure the Trustee to pay, to the RSU Participant in cash an amount which is equivalent to the value of the Shares (and, if applicable, the cash or non-cash income, dividends or distributions and/or the sale proceeds of non-cash and non-scrip distributions in respect of those Shares) set out in paragraph 10(c)(i) above.

If an RSU Participant fails to execute the required documents in accordance with the Vesting Notice, the RSU Participant’s RSU Award will lapse.

(d) Rights on a Takeover

If a general offer to acquire the Shares (whether by takeover offer, merger, or otherwise in a like manner) is made to all of our shareholders (or shareholders other than the offeror and/or any person controlled by the offeror and/or any person acting in concert with the offeror) and the general offer to acquire the Shares is approved and the offer becomes or is declared unconditional in all respects, an RSU Participant’s RSU Award will vest immediately to the extent specified in a notice given by the Company to the RSU Participant, even if the vesting period has not yet commenced.

(e) Rights on a Compromise or Arrangement

If a compromise or arrangement between the Company and our shareholders or creditors is proposed in connection with a scheme for the reconstruction of the Company or its amalgamation with any other company or companies and a notice is given by the Company to our shareholders to convene a general meeting to consider and if thought fit approve such compromise or arrangement, an RSU Participant’s RSU Award will vest immediately to the extent specified in a notice given by the Company to the RSU Participant, even if the vesting period has not yet commenced.

(f) Rights on a Voluntary Winding-Up

If an effective resolution is passed during the RSU Scheme Period for the voluntary winding-up of the Company (other than for the purposes of a reconstruction, amalgamation or scheme of arrangement), all outstanding RSU Awards shall be treated as having vested immediately before the passing of such resolution to the extent represented by the proportion that (A) the time between the RSU Grant Date and the passing of the resolution bears to (B) the entire vesting period set out in the RSU Grant Letter. No Shares will be transferred, and no cash alternative will be paid, to the RSU Participant, but the RSU Participant will be entitled to receive out of the assets available in liquidation on an equal basis with our shareholders such sum as they would have received in respect of the RSU Award.

– IV-9 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

11. Lapse of RSU Awards

(a) Full Lapse of RSU Award

An RSU Award will automatically lapse immediately where:

(i) such RSU Participant’s employment or service terminates for any reason, except (A) the employment or service is terminated by reason of death, retirement or disability, (B) where the employment is terminated involuntarily without cause, (C) where the company employing the RSU Participant ceases to be one of our subsidiaries or (D) any other incident occurs as the Board may at its discretion specify; or
(ii) the RSU Participant makes any attempt or takes any action to sell, transfer, assign, charge, mortgage, encumber, hedge or create any interest in favour of any other person over or in relation to any Shares underlying the RSU Award or any interests or benefits pursuant to the RSU Award.
(b) Partial Lapse of RSU Award An RSU Participant’s RSU Award will lapse on a proportional basis based on the proportion that
(A) the time between the RSU Grant Date and the occurrence of the following relevant event bears to
(B) the entire vesting period set out in the RSU Participant’s RSU Grant Letter if:
(i) the RSU Participant’s employment or service is terminated because of the RSU Participant’s death, retirement or disability;
(ii) the RSU Participant’s employment or service is terminated involuntarily without cause;
(iii) the company with which the RSU Participant is employed ceases to be one of our subsidiaries; or
(iv) any other incident occurs as the Board may at its discretion specify,

provided that the performance criteria set out in the RSU Grant Letter have been fully satisfied and fulfilled, if capable of being satisfied or fulfilled, with reference to the date of occurrence of that event (on an annualised basis if applicable).

12. Cancellation of RSU Awards

The Board may at its discretion cancel any RSU Award that has not vested or lapsed, provided

that:

(i) the Company or our subsidiaries pay to the RSU Participant an amount equal to the fair value of the RSU Award at the date of the cancellation as determined by the Board, after consultation with our auditors or an independent financial adviser appointed by the Board;
(ii) the Company or our relevant subsidiary provides to the RSU Participant a replacement RSU Award (or a grant or option under any other restricted share unit scheme, share option scheme or share-related incentive scheme) of equivalent value to the RSU Award to be cancelled; or
(iii) the Board makes any arrangement as the RSU Participant may agree in order to compensate him/her for the cancellation of the RSU Award.

– IV-10 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

13. Reorganisation of Capital Structure

In the event of any capitalisation issue, rights issue, consolidation, sub-division or reduction of the share capital of the Company, the Board may make such equitable adjustments, designed to protect the RSU Participants’ interests, to the number of Shares underlying the outstanding RSU Awards or to the amount of the equivalent value, as it may deem appropriate at its absolute discretion.

14. Amendment of the RSU Scheme

Save as provided in the RSU Scheme, the Board may alter any of the terms of the RSU Scheme at any time. Written notice of any amendment to the RSU Scheme shall be given to all RSU Participants.

Any changes to the authority of the Board in relation to any alteration of the terms of the RSU Scheme shall not be made without the prior approval of our shareholders in general meeting.

Any alterations to the terms and conditions of the RSU Scheme which are of a material nature or any changes to the terms of the RSU Awards granted must be approved by our shareholders in general meeting, except where the alterations or changes take effect automatically under the existing terms of the RSU Scheme. The Board’s determination as to whether any proposed alteration to the terms and conditions of the RSU Scheme is material shall be conclusive.

15. Termination of the RSU Scheme

The Board may terminate the RSU Scheme at any time before the expiry of the RSU Scheme Period and no further RSU Awards shall be granted. The Company or our relevant subsidiary shall notify the Trustee and all RSU Participants of such termination and of how any property held by the Trustee on trust for the RSU Participants (including, but not limited to, any Shares held) and the outstanding RSU Awards shall be dealt with.

16. Administration of the RSU Scheme

The Board has the power to administer the RSU Scheme, including the power to construe and interpret the rules of the RSU Scheme and the terms of the RSU Awards granted under it. The Board may delegate the authority to administer the RSU Scheme to a committee of the Board. The Board may also appoint one or more independent third party contractors to assist in the administration of the RSU Scheme and delegate such powers and/or functions relating to the administration of the RSU Scheme as the Board thinks fit.

The Board’s determinations under the RSU Scheme need not be uniform and may be made by it selectively with respect to persons who receive, or are eligible to receive, RSU Awards under it. If a Director is an RSU Participant he/she may, notwithstanding his/her own interest and subject to our Articles, vote on any Board resolution concerning the RSU Scheme (other than in respect of his/her own participation in it), and may retain RSU Awards under it.

Each RSU Participant waives any right to contest, amongst other things, the value and number of Shares or equivalent value of cash underlying the RSU Awards and the Board’s administration of the RSU Scheme.

– IV-11 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

E. OTHER INFORMATION

1. Estate duty and deed of indemnity

Each of the Controlling Shareholders (the “ Indemnifiers ”) has given indemnities in favor of our Company (for itself and as trustee for its subsidiaries) pursuant to a deed of indemnity dated May 20, 2013 (the “Deed of Indemnity”). Under such deed of indemnity, amongst others, the Indemnifiers irrevocably agree, covenant and undertake with each of the member of our Group that he/it will indemnify each of the members of our Group against:

(i) any tax liabilities which might be payable by any of the Group’s subsidiary or branch in the PRC in respect of any income, profits or gains, transactions, events, acts, omissions, matters or things earned, accrued or received, entered into (or deemed to be so earned, accrued, received or entered into) or occurring on or before the date when the [●] becomes unconditional (the “ Effective Date ”);
(ii) all costs (including all legal costs), expenses or other liabilities which any member of the Group may properly incur in relation to any taxation claims;
(iii) all relocation fees, costs and any losses suffered or incurred by any member of our Group in the event that we cannot continue to use certain leased properties due to the defective titles of the relevant landlords or is otherwise prohibited from using or occupying any of such properties before the Effective Date;
(iv) any losses suffered or incurred by any member of our Group arising out of the contracts we entered into as agent and on behalf of our Controlling Shareholders as described under “Relationship with Our Controlling Shareholders – Background” section of this document; and
(v) any losses in respect of any claims, actions, losses, liability, damages, costs suffered or incurred by any member of our Group as a result of, whether directly or indirectly, any problems relating to the performance or quality of the spare parts provided by third-party suppliers.

The Indemnifiers will, however, not be liable under the deed of indemnity for taxation where, among others, provision has been made for such taxation in the audited accounts of our Group as set out in the Accountants’ Report in Appendix I to this document, but will remain liable for any tax liabilities (notwithstanding such provision has been made in respect of tax liabilities) arising in respect of or in consequence of any act, omissionor event which occured or is deemed to occur on or before the Effective Date.

Our Directors have been advised that no material liability for estate duty is likely to fall on our Company or any of its subsidiaries under the laws of the Cayman Islands, Hong Kong or the PRC, being jurisdictions in which one or more of the companies comprising the Group are incorporated.

2. Litigation

As of the Latest Practicable Date, save as disclosed in the section headed “Our Business – Legal Compliance and Proceedings” in this document, no member of the Group was engaged in any litigation, arbitration or claim of material importance, and no litigation, arbitration or claim of material importance was known to the Directors to be pending or threatened by or against the Group, that would have a material adverse effect on its business, financial condition or results of operations.

4. No Material Adverse Change

The Directors confirm that there has been no material adverse change in the financial or trading position or prospects of the Group since December 31, 2012 (being the date to which the latest audited combined financial statements of the Group were prepared).

– IV-12 –

APPENDIX IV

STATUTORY AND GENERAL INFORMATION

11. Miscellaneous

(a) Save as disclosed in this document, within the two years immediately preceding the date of this document:
(i) neither we nor any of our subsidiaries has issued or agreed to issue any share or loan capital fully or partly paid up either for cash or for a consideration other than cash;
(ii) no share or loan capital of our Company or any of our subsidiaries is under option or is agreed conditionally or unconditionally to be put under option;
(iii) no commissions, discounts, brokerage or other special terms have been granted in connection with the issue or sale of any shares or loan capital of any member of the Group;
(iv) no commission has been paid or payable to any persons for subscription, agreeing to subscribe, procuring subscription or agreeing to procure subscription of any shares of our Company or any of our subsidiaries;
(v) no founder, management or deferred shares of our Company or any of our subsidiaries have been issued or agreed to be issued;
(b) Our Directors confirm that:
(i) there has not been any interruption in the business of our Company which may have or have had a material adverse effect on the financial position of our Company in the 12 months immediately preceding the date of this document; and
(ii) our Company has no outstanding convertible debt securities or debentures.
(c) Our principal register of members will be maintained by our principal registrar, Codan Trust Company (Cayman) Limited, in the Cayman Islands and our Hong Kong register of members will be maintained by the Hong Kong Share Registrar in Hong Kong. Unless the Directors otherwise agree, all transfer and other documents of title of Shares must be lodged for registration with and registered by the Hong Kong Share Registrar and may not be lodged in the Cayman Islands.
(d) No company within our Group is presently listed on any stock exchange or traded on any trading system.

– IV-13 –

AI assistant

China Harmony Auto Holding Limited — Proxy Solicitation & Information Statement 2013

50897_rns_2013-06-13_56fc645d-415c-47fc-b759-6622f056481b.pdf

Web Proof Information Pack of

China Harmony Auto Holding Limited 中國和諧汽車控股有限公司

WARNING

CONTENTS

SUMMARY

OVERVIEW

Our services

Sales network

SUMMARY

Our revenue

SUMMARY

Sales of new passenger vehicles

SUMMARY

After-sales services

Our Dealership Authorization Agreements

SUMMARY

Our customers and sales contracts with customers

Inventories

Recent development

Global economic uncertainties

SUMMARY

Diaoyu Islands dispute

Possible purchase tax on ultra-luxury passenger vehicles

SUMMARY

CONSOLIDATED RESULTS OF OPERATIONS

SUMMARY

OUR SHAREHOLDING STRUCTURE

SUMMARY

DIVIDEND POLICY

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

RISK FACTORS

RISKS RELATING TO OUR BUSINESS

We rely on automobile manufacturers for authorizations to operate our existing dealership outlets. If one or more of these authorizations are terminated or not renewed, our business, results of operations and prospects could be adversely affected

Our business operations are subject to restrictions imposed by, and significant influence from, automobile manufacturers under our dealership authorization agreements

RISK FACTORS

We face uncertainties as a result of our recent rapid expansion

RISK FACTORS

We may not be able to successfully implement and sustain our growth strategies

RISK FACTORS

We generate a significant portion of our revenues from sales of new passenger vehicles of a few luxury and ultra-luxury brands

Our operations are geographically concentrated in Henan Province

RISK FACTORS

We may not be able to sustain our historical growth rate or financial performance in the future

Changes in our revenue sources or composition may adversely affect our gross profit margin

We may not be able to obtain necessary financing on commercially reasonable terms, or at all

RISK FACTORS

Our business operation and financial performance could be materially and adversely affected by our indebtedness

We were in a net current liabilities position as of December 31, 2012 and we cannot assure you that we will not experience net current liabilities position in the future

RISK FACTORS

There can be no assurance that we will continue to receive rebates from the automobile manufacturers

Our results of operations and financial condition depend on our ability to effectively manage our inventory

Product defects and passenger vehicle recalls may adversely affect our results of operations and financial condition

Any reduction by automobile manufacturers of their advertising, marketing and promotional activities could adversely affect our sales of new passenger vehicles

RISK FACTORS

We rely on automobile manufacturers as our major suppliers

We depend on third parties for supplies of spare parts and accessories

If we engage distributors to source customers for a brand in areas where there is no existing dealership outlet, it might be deemed not to be in compliance with the relevant requirement under the relevant dealership authorization agreement

RISK FACTORS

We depend on key individuals of our senior management and skilled employees to effectively conduct our business

Our insurance coverage may be inadequate to cover our potential losses

We may not be able to use certain properties leased by us because of defects affecting our leasehold interests

RISK FACTORS

There can be no assurance that we will be able to enter into definitive dealership authorization agreements for outlets approved to be constructed by automobile manufacturers

RISK FACTORS

Our business may be adversely affected by political and macro-economic events

RISKS RELATING TO OUR INDUSTRY

We operate in an increasingly competitive passenger vehicle dealership market

RISK FACTORS

Strict or stricter fuel economy standards and emission standards, high fuel prices and increased taxes on passenger vehicle consumption may restrict the supply of and/or reduce the demand for new passenger vehicles in China

Government policies on passenger vehicle purchases and ownership may materially affect our results of operations

RISK FACTORS

Anti-traffic congestion measures and ordinances of certain Chinese cities may restrict local demand for automobiles

China Harmony Auto Holding Limited Proxy Solicitation & Information Statement 2013