For the transition period from ___________________________
to ___________________________
Tower A, No. 20 Guogongzhuang
Middle Street
Securities registered
or to be registered pursuant to Section 12(b) of the Act:
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “large accelerated filer,
“accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
† The term “new or revised
financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this filing:
(APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Except where the context otherwise requires
and for purposes of this annual report on Form 20-F only:
This annual report includes our audited consolidated statements of comprehensive income (loss) for 2016,
2017 and 2018, our audited consolidated balance sheets as of December 31, 2017 and 2018, our audited consolidated statements
of shareholder
s’ equity and our audited consolidated
statements of cash flows for 2016, 2017 and 2018.
This annual report contains forward-looking
statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking
statements. These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities
Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking
statements.
You can identify these forward-looking
statements by words or phrases such as “may,” “will,” “expect,” “is expected to,”
“anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,”
“are likely to” or other similar expressions. We have based these forward-looking statements largely on our current
expectations and projections about future events and financial trends that we believe may affect our financial condition, results
of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to:
You should not rely upon forward-looking
statements as predictions of future events. Except as required by law, we undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Market data and certain industry forecasts
used in this annual report were obtained from internal surveys, market research, publicly available information and industry publications.
Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable,
but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry forecasts
and market research, while believed to be reliable, have not been independently verified, and we make no representation as to
the accuracy of such information.
PART I
ITEM 1. IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS
AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
We have derived our selected consolidated
statement of comprehensive income (loss) data (except for ADS information) for 2016, 2017 and 2018 and our selected consolidated
balance sheet data as of December 31, 2017 and 2018, from our audited consolidated financial statements included in this
annual report. Our selected statement of comprehensive income (loss) data (except for ADS information) for 2014 and 2015 and our
selected consolidated balance sheet data as of December 31, 2014, 2015 and 2016, have been derived from our audited consolidated
financial statements not included in this annual report. Our financial statements have been prepared in accordance with U.S. GAAP.
You should read the following information
in conjunction with our audited consolidated financial statements and related notes and “Item 5. Operating and Financial
Review and Prospects” in this annual report. Our historical operating results presented below are not necessarily indicative
of the results to be expected for any future fiscal period.
|
|
Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands, except share data and ADS data)
|
|
Consolidated statement of comprehensive income (loss)
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-commerce services
|
|
|
244,344
|
|
|
|
474,810
|
|
|
|
577,684
|
|
|
|
87,809
|
|
|
|
15,384
|
|
Marketing services
|
|
|
294,484
|
|
|
|
249,862
|
|
|
|
165,437
|
|
|
|
149,267
|
|
|
|
119,680
|
|
Listing services
|
|
|
145,654
|
|
|
|
107,922
|
|
|
|
118,109
|
|
|
|
165,374
|
|
|
|
113,534
|
|
Financial services
|
|
|
3,235
|
|
|
|
29,582
|
|
|
|
29,602
|
|
|
|
12,055
|
|
|
|
18,060
|
|
Value-added services
|
|
|
15,165
|
|
|
|
21,373
|
|
|
|
25,559
|
|
|
|
29,791
|
|
|
|
36,358
|
|
Total revenues
|
|
|
702,882
|
|
|
|
883,549
|
|
|
|
916,391
|
|
|
|
444,296
|
|
|
|
303,016
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
(145,739
|
)
|
|
|
(555,389
|
)
|
|
|
(687,184
|
)
|
|
|
(174,599
|
)
|
|
|
(58,570
|
)
|
Gross profit
|
|
|
557,143
|
|
|
|
328,160
|
|
|
|
229,207
|
|
|
|
269,697
|
|
|
|
244,446
|
|
Operating income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(147,874
|
)
|
|
|
(236,603
|
)
|
|
|
(229,817
|
)
|
|
|
(91,250
|
)
|
|
|
(69,532
|
)
|
General and administrative expenses
|
|
|
(100,571
|
)
|
|
|
(125,405
|
)
|
|
|
(151,251
|
)
|
|
|
(135,688
|
)
|
|
|
(138,386
|
)
|
Other income (loss)
|
|
|
835
|
|
|
|
(625
|
)
|
|
|
415
|
|
|
|
(567
|
)
|
|
|
3,275
|
|
Operating income (loss)
|
|
|
309,533
|
|
|
|
(34,473
|
)
|
|
|
(151,446
|
)
|
|
|
42,192
|
|
|
|
39,803
|
|
|
|
Year
Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S.
dollars in thousands, except share data and ADS data)
|
|
Foreign
exchange gain (loss)
|
|
|
(44
|
)
|
|
|
1,464
|
|
|
|
(1,882
|
)
|
|
|
15
|
|
|
|
(598
|
)
|
Interest
income
|
|
|
43,857
|
|
|
|
22,221
|
|
|
|
11,367
|
|
|
|
11,322
|
|
|
|
10,302
|
|
Interest
expense
|
|
|
(17,308
|
)
|
|
|
(16,519
|
)
|
|
|
(20,791
|
)
|
|
|
(16,153
|
)
|
|
|
(21,174
|
)
|
|
Change
in fair value of securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
518
|
|
|
|
(167,402
|
)
|
|
Realized
gain on available-for-sale securities (including accumulated other comprehensive income reclassifications for unrealized gain
on available-for-sale securities of US$10,583, US$2,736 and US$1,493 for the years ended December 31, 2016, 2017 and 2018
respectively)
|
|
|
—
|
|
|
|
—
|
|
|
|
10,583
|
|
|
|
2,736
|
|
|
|
1,493
|
|
Government
grants
|
|
|
7,205
|
|
|
|
4,936
|
|
|
|
6,469
|
|
|
|
3,154
|
|
|
|
1,435
|
|
Investment
income, net
|
|
|
—
|
|
|
|
1,333
|
|
|
|
3,281
|
|
|
|
6,692
|
|
|
|
6,816
|
|
Other
non-operating loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,562
|
)
|
|
|
(30
|
)
|
Impairment
on investments
|
|
|
(8,417
|
)
|
|
|
—
|
|
|
|
(2,232
|
)
|
|
|
(2,768
|
)
|
|
|
—
|
|
Income
(loss) before income taxes and noncontrolling interests
|
|
|
334,826
|
|
|
|
(21,038
|
)
|
|
|
(144,651
|
)
|
|
|
43,146
|
|
|
|
(129,355
|
)
|
Income
tax (expenses) benefit
|
|
|
(81,609
|
)
|
|
|
5,905
|
|
|
|
(24,984
|
)
|
|
|
(21,442
|
)
|
|
|
14,446
|
|
Net
income (loss)
|
|
|
253,217
|
|
|
|
(15,133
|
)
|
|
|
(169,635
|
)
|
|
|
21,704
|
|
|
|
(114,909
|
)
|
Net
(loss) income attributable to noncontrolling interests
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
2
|
|
Net
income (loss) attributable to Fang Holdings Limited’s shareholders
|
|
|
253,217
|
|
|
|
(15,096
|
)
|
|
|
(169,635
|
)
|
|
|
21,707
|
|
|
|
(114,911
|
)
|
Other
comprehensive income (loss), before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(4,323
|
)
|
|
|
(55,928
|
)
|
|
|
(60,732
|
)
|
|
|
56,571
|
|
|
|
(46,648
|
)
|
Unrealized
gain (loss) on available-for-sale securities
|
|
|
10,508
|
|
|
|
(4,002
|
)
|
|
|
7,326
|
|
|
|
212,838
|
|
|
|
1,493
|
|
Amounts
reclassified from accumulated other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,583
|
)
|
|
|
(2,736
|
)
|
|
|
(1,493
|
)
|
Gain
(loss) on intra-entity foreign transactions of long-term-investment nature
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,996
|
)
|
|
|
1,872
|
|
|
|
(3,034
|
)
|
Other
comprehensive income (loss), before tax
|
|
|
6,185
|
|
|
|
(59,930
|
)
|
|
|
(70,985
|
)
|
|
|
268,545
|
|
|
|
(
49,682
|
)
|
Income
tax expense related to components of other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(49,566
|
)
|
|
|
—
|
|
Other
comprehensive income (loss), net of tax
|
|
|
6,185
|
|
|
|
(59,930
|
)
|
|
|
(70,985
|
)
|
|
|
218,979
|
|
|
|
(49,682
|
)
|
Comprehensive
income (loss)
|
|
|
259,402
|
|
|
|
(75,063
|
)
|
|
|
(240,620
|
)
|
|
|
240,683
|
|
|
|
(164,591
|
)
|
Comprehensive
(loss) income attributable to noncontrolling interests
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
2
|
Comprehensive
income (loss) attributable to Fang Holdings Limited’s shareholders
|
|
|
259,402
|
|
|
|
(75,026
|
)
|
|
|
(240,620
|
)
|
|
|
240,686
|
|
|
|
(164,593
|
)
|
Earnings
(loss) per share for Class A and Class B ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3.08
|
|
|
|
(0.18
|
)
|
|
|
(1.81
|
)
|
|
|
0.25
|
|
|
|
(1.29
|
)
|
Diluted(1)
|
|
|
2.87
|
|
|
|
(0.18
|
)
|
|
|
(1.81
|
)
|
|
|
0.24
|
|
|
|
(1.29
|
)
|
Dividend
declared per ordinary share(2)
|
|
|
1.00
|
|
|
|
0.87
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands, except share data and ADS data)
|
|
Earnings (loss) per ADS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.62
|
|
|
|
(0.04
|
)
|
|
|
(0.36
|
)
|
|
|
0.05
|
|
|
|
(0.26
|
)
|
Diluted(1)
|
|
|
0.57
|
|
|
|
(0.04
|
)
|
|
|
(0.36
|
)
|
|
|
0.05
|
|
|
|
(0.26
|
)
|
Weighted average number of Class
A and Class B ordinary shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
82,163,135
|
|
|
|
85,170,886
|
|
|
|
93,605,749
|
|
|
|
88,475,665
|
|
|
|
88,749,432
|
|
Diluted
|
|
|
92,208,620
|
|
|
|
85,170,886
|
|
|
|
93,605,749
|
|
|
|
91,585,677
|
|
|
|
88,749,432
|
|
Weighted average number of outstanding ADS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
410,815,675
|
|
|
|
425,854,430
|
|
|
|
468,028,745
|
|
|
|
442,378,325
|
|
|
|
443,747,158
|
|
Diluted
|
|
|
461,043,100
|
|
|
|
425,854,430
|
|
|
|
468,028,745
|
|
|
|
457,928,385
|
|
|
|
443,747,158
|
|
Share-based compensation expenses
included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
782
|
|
|
|
471
|
|
|
|
443
|
|
|
|
364
|
|
|
|
506
|
|
Selling expenses
|
|
|
1,122
|
|
|
|
446
|
|
|
|
512
|
|
|
|
479
|
|
|
|
405
|
|
General and administrative expenses
|
|
|
2,779
|
|
|
|
3,485
|
|
|
|
5,597
|
|
|
|
6,375
|
|
|
|
13,171
|
|
|
(1)
|
Earnings
(loss) per share for Class A and Class B ordinary shares (diluted) and earnings (loss)
per ADS (diluted) for each year from 201
4 to 2018 have been computed, after considering
the potential dilutive effect of the shares underlying employees’ share options,
restricted shares and convertible senior notes.
|
|
(2)
|
Dividend declared per ordinary share represents the dividend declared
divided by the number of outstanding ordinary shares as of the period end.
|
|
|
As
of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S.
dollars in thousands)
|
|
Consolidated
balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and short-term investments
|
|
|
809,944
|
|
|
|
880,480
|
|
|
|
379,457
|
|
|
|
284,077
|
|
|
|
211,151
|
|
Total
current assets
|
|
|
1,173,457
|
|
|
|
1,514,738
|
|
|
|
793,210
|
|
|
|
748,412
|
|
|
|
668,837
|
|
Total
assets
|
|
|
1,737,805
|
|
|
|
2,292,042
|
|
|
|
1,614,813
|
|
|
|
2,000,255
|
|
|
|
1,824,436
|
|
Long
term loans
|
|
|
100,000
|
|
|
|
—
|
|
|
|
65,190
|
|
|
|
114,109
|
|
|
|
123,215
|
|
Convertible
senior notes
|
|
|
393,568
|
|
|
|
287,887
|
|
|
|
295,268
|
|
|
|
291,365
|
|
|
|
254,435
|
|
Total
Fang shareholder’s equity
|
|
|
632,609
|
|
|
|
853,766
|
|
|
|
487,130
|
|
|
|
739,583
|
|
|
|
594,506
|
|
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
An investment in our ADSs or notes involves
risks. You should carefully consider the risks described below, as well as the other information included or incorporated by reference
in this annual report, before making an investment decision. Our business, financial condition or results of operations could
be materially adversely affected by any of these risks. The market or trading price of our ADSs or notes could decline due to
any of these risks, and you may lose all or part of your investment. In addition, the risks discussed below also include forward-looking
statements and our actual results may differ substantially from those discussed in these forward-looking statements. You should
also review the section of this annual report captioned “Forward-Looking Statements.” Please note that additional
risks not presently known to us, that we currently deem immaterial or that we have not anticipated may also impair our business
and operations.
Risks related to our business
We may continue to incur losses in the future, and may
not be able to return to profitability, which may cause the market price of our ADSs to decline.
We incurred net loss of US$114.9 million
in 2018, primarily due to the combined effect of the decrease in our revenues and the decrease in fair value of our equity investments. Prior to January 1, 2018, such unrealized change in fair value of equity
investments was recorded in other comprehensive income or loss, while such unrealized change in fair value of equity investments
is recorded in earnings after January 1, 2018 due to the adoption of ASU 2016-01. Our ability to achieve profitability in the future depends on our ability to control
costs and to provide products and services to meet the market demands and attract new customers, the competitiveness of our products
and services, and the regulatory environment in China’s real estate market. Due to the numerous risks and uncertainties
associated with the development of our business and the regulatory environment, we cannot guarantee that we may be able to return
to profitability in the short-term or long-term, which may cause the market price of our ADSs to decline.
Our business could be materially and adversely
affected by fluctuations in, and government measures influencing, China’s real estate industry.
We
conduct our real estate services business primarily in China, and our business depends substantially on conditions of the PRC
real estate market. In particular, our new home business, which accounted for 47.2%, 34.2% and 41.8%
of our total revenues
in 2016, 2017 and 2018, respectively, depends upon growth in the real estate-related industry nationwide and in specific regions
in China. Demand for private residential property in China has grown rapidly in recent years, but such growth is often coupled
with volatility in market conditions and fluctuation in property prices. Fluctuations of supply and demand in China’s real
estate market are caused by economic, social, political and other factors. To the extent fluctuations in the real estate market
adversely affect the demand for real estate and home-related products and services and for real estate- and home-related advertising
and financing, demand for our products and services, as well as the level of our growth and profitability, may be materially reduced.
The real estate market in China is typically
affected by changes in government policies affecting the real estate and financial markets and related areas. In the past, the
PRC government has adopted various administrative measures to curb what it perceived as unsustainable growth in the real estate
market, particularly when the real estate market in China experienced rapid and significant increases in home sales as well as
prices. In February 2013, for example, the State Council announced certain plans to address the rapid increase in property
prices in certain cities since late 2012, including raising minimum down-payments and loan rates for second home buyers in cities
where prices experienced a rapid increase and enforcing a 20% capital gains tax on the sale of existing homes. In part due to
these policies, the real estate market in China experienced a slowdown and real estate development declined in 2014. In March 2015,
the PRC government issued a new policy to reduce the down-payment requirements and exempt certain home owners from paying sales
taxes if they sell after owning the property for two years. Beginning in September 2016, certain cities, such as Beijing
and Shanghai, increased the down-payment requirements again and tightened the determination of first home buyers who are often
eligible for relaxed regulations. Relevant government authorities have recently also promulgated legislations to ban financings
to home buyers for down-payment and ceased granting or renewing real estate broker licenses in certain cities
.
Beginning
in March 2017, certain cities, such as Beijing and Guangzhou, further increased the minimum down-payments for second home
buyers.
In addition to government policies aimed
specifically at controlling growth in real estate markets in China, our business, financial condition and results of operations
may also be negatively affected by other macroeconomic and regulatory measures. Any future policies in the following areas could
cause a decline in home sales and prices, which in turn could affect the demand for our services and negatively impact our business,
financial condition and results of operation:
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restrictive monetary
policies adopted by the PRC government, including any significant increase in interest
rates;
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adverse developments
in the credit markets and/or mortgage financing markets resulting from PRC government
policies;
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policies regarding
land supply;
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significant increases
in transaction costs as a result of changes in PRC government policies regarding transaction
taxes, such as the sales tax on residential property sales by individuals within two
years of purchase;
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adverse changes
in PRC government policies regarding the acquisition and/or ownership of real estate;
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adverse changes
in PRC national or local government policies or practices regarding brokerage, referral
or related fees and commissions; or
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other PRC government
policies or regulations that burden real estate transactions or ownership.
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Our business depends substantially on revenues
from our marketing services, and participants in the real estate and home-related sectors may choose other advertising media over
online advertising or other online advertisers, which could lead to a decline in our revenues.
All of our marketing service revenues are
generated through our websites and mobile apps, and we expect to continue to derive a significant portion of our revenues from
marketing services. Marketing services accounted for 18.1%, 33.6% and 39.5% of our revenues in 2016, 2017 and 2018, respectively,
constituting our largest source of revenues in 2018. In particular, our new home business accounted for 87.4%, 81.4% and 99.7%
of our marketing service revenues in 2016, 2017 and 2018, respectively. Our new home business primarily consists of sales of marketing
services to residential property developers and their sales agents who are promoting newly developed properties
for sale.
Although the online marketing industry
in China has been growing, advertisers in the real estate sector in China have typically relied on traditional forms of advertising
media, such as newspapers, magazines and outdoor advertising. If we are unable to retain and develop our base of advertising customers,
including real estate developers, our business may not grow as quickly as we expect. Moreover, advertisers may not continue to
do business with us if they do not perceive our marketing services to be effective or our user demographics to be desirable.
Our ability to continue to generate and
maintain marketing service revenues depends on a number of factors, many of which are beyond our control, including:
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overall demand
from property developers for online advertising;
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the amount of
user traffic on our websites and mobile apps, our ability to achieve user demographic
characteristics that are attractive to advertisers, and our ability to demonstrate such
user traffic and demographic characteristics through our website traffic tracking tools
and reporting systems;
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potential downward
pressure on online marketing pricing due to increased competition from other online advertisers
and traditional advertising media;
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widespread adoption
of technologies that permit Internet users to selectively block unwanted web views, including
advertisements on web pages; and
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emergence and
user acceptance of new marketing channels, including social networking platforms and
“We Media.”
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If we are unable to remain competitive
and provide value to our advertisers, they may stop placing advertisements with us, which would have a material adverse effect
on our business, financial condition and results of operations.
If we are unable to continue to obtain listings
from our key customer groups, including real estate developers, agents, brokers and property owners and managers, our business,
financial condition and results of operations could be materially and adversely affected.
We
derive a significant portion of our revenues from our listing services. In 2016, 2017 and 2018, listing service revenues represented
approximately 12.9%, 37.2% and
37.5% of our total revenues, respectively. The success of the listing service business depends on our ability to persuade real estate developers, real
estate agents, brokers, developers and property owners and managers to list their properties on our websites and mobile apps.
We believe having large numbers of high-quality listings from such real estate professionals attracts users to our websites and
mobile apps, thereby enhancing our attractiveness to advertisers and other real estate market participants. However, substantially
all of our listing agreements are nonexclusive. Our listing customers may stop using our listing services and may choose to use
the services of one or more of our competitors or seek alternative means of listing, such as real estate magazines or newspapers.
If owners of large numbers of property listings, such as major developers or large brokers or property owners in key real estate
markets, choose not to renew their existing agreements with us, our websites and mobile apps could become less attractive to users.
If we experience reduced user traffic on our websites and mobile apps, advertisers and other real estate market participants may
discontinue the use of or be unwilling to pay for our services. In such an event, our competitive position could be significantly
weakened and our business, financial condition and results of operations could be materially and adversely affected.
Our future growth depends in part on our ability to continue
to operate the retained business after the proposed separation of CIH.
On May 10, 2019, CIH publicly filed a registration
statement on Form F-1 with SEC to effect its separation from Fang through a dividend distribution of Class A ordinary shares (including
those represented by ADSs) in CIH to our equity holders. Upon the completion of the proposed separation and distribution, CIH
will have the exclusive right to operate the spun-off business comprising certain portions of our listing and value-added services,
and we will have the exclusive right to operate the retained business. CIH plans to cooperate with us to operate its commercial
property-related business through our web pages after the proposed separation and distribution and ultimately migrate such business
to its own website. For more details, see “Item 4. Information on the Company— B. Business Overview— Separation
of CIH.”
Whether we can continue to grow the retained
business depends on our ability to manage and develop these services effectively. If we are not successful in assuring our employees
of our prospects after the proposed separation and distribution, our employees may seek other employment, which could materially
and adversely affect our business operation. If we fail to retain our qualified personnel or replace them when they leave, we may
be unable to continue our development, which may cause the price of our ADSs to fall.
We derive a substantial portion of our revenues
from several major urban centers in China, in particular, Beijing, Shanghai, Chengdu, Chongqing, Tianjin and Shenzhen and we face
market risks due to concentration of our revenues in these major urban areas.
We derive a substantial portion of our
revenues from several major urban centers in China, including Beijing, Shanghai, Chengdu, Chongqing, Tianjin and Shenzhen. In
2016, 2017 and 2018, we generated revenues of US$465.6 million, US$180.5 million and US$152.9 million, respectively, from these
six urban centers, representing 51.0%, 41.0% and 50.5%, respectively, of our total revenues. We expect these six urban centers
to continue to be important regional sources of revenues in all of our revenue categories. If any of these major urban centers
experience events which negatively impact the real estate industry or online advertising, such as a serious economic downturn
or contraction, a natural disaster, or slower growth due to adverse governmental policies or otherwise, demand for our services
could decline significantly and our business and revenue growth prospects could be materially and adversely impacted.
We may fail to compete successfully against
current or future competitors, which could significantly reduce our market share and materially and adversely affect our business,
financial condition and results of operations.
We face competition from other companies
in each of our primary business activities. In particular, the online real estate Internet service market in China is becoming
increasingly competitive. For example, in March 2015, 58.com, an online marketplace, acquired Anjuke.com, an online real
estate sales and rental service provider in China, which will likely increase competition in our market. The barriers of entry
for establishing Internet-based businesses are low, thereby allowing new entrants to emerge rapidly. As the online real estate
Internet service industry in China is relatively new and constantly evolving, our current or future competitors may be able to
better position themselves to compete as the industry matures. We also face competition from companies in other media that offer
online advertising, online listing and similar services. Any of these competitors may offer products and services that provide
significant advantages over those offered by us in terms of performance, price, scope, creativity or other advantages. These products
and services may achieve greater market acceptance than our service offerings, and thus weaken our brand. Increased competition
in the online real estate Internet service industry in China could make it difficult for us to retain existing customers and attract
new customers, and could lead to a reduction in our fees. Furthermore, our current competitors include major Internet portals
in China that provide real estate Internet services, such as Sina.com and Sohu.com, which may have more established brand names,
larger visitor numbers and more extensive Internet distribution channels than we do.
In addition, we have faced and may continue
to face strong competition from regionally focused websites and mobile apps providing regional real estate listings together with
localized services, as well as other emerging channels, including social network platforms and “We Media.” Any of
our current or future competitors may also receive investments from or enter into other commercial or strategic relationships
with larger, well-established and well-financed companies and obtain significantly greater financial, marketing and content licensing
and development resources than us. Furthermore, some of our competitors receive support from local governments, which may place
us at a disadvantage when competing with them in their local markets. We cannot assure you that we will be able to compete successfully
against our current or future competitors. Any failure to compete effectively in the real estate Internet services market in China
would have a material adverse effect on our business, financial condition and results of operations.
Failure to maintain and enhance brand awareness
for our websites and mobile apps could lead to loss of existing customers and qualified personnel.
We
believe maintaining and enhancing our brand name as a leading real estate Internet company in China is a critical part of our
strategy. In July 2014, we changed the address of our principal website from www.soufun.com to www.fang.com. “Fang”
means “home” in Chinese. In conjunction with our change of web address, we also launched our new “Fang Tian
Xia” brand (“
房天下
”
in Chinese, which can be approximately translated as “world of homes” in English). In September 2016, we changed
our name to Fang Holdings Limited. We believe that this new and simplified address will be much easier for Chinese users to remember
and access, thereby improving our brand recognition. In addition to promoting our websites and brand through our direct sales
force, we also intend to continue to pursue other means to enhance brand awareness, including publication of real estate research
reports, event sponsorships, portal collaboration arrangements, and advertising and marketing activities. We cannot assure you
that our efforts will be successful in maintaining or enhancing our brand awareness. If our brand enhancement strategy is unsuccessful,
or if other brands surpass our brand in market recognition in one or more cities in which we operate, we may fail to attract new
or retain existing users, customers or qualified personnel, which could materially decrease our revenues and profitability.
Unauthorized use of our intellectual property
by third parties, and the expenses incurred in protecting our intellectual property rights, may materially and adversely affect
our business, financial condition, results of operations, reputation and competitive advantage.
Our copyrights, trademarks, trade secrets,
domain names and other intellectual property are important to our business. Unauthorized use of such intellectual property, whether
owned by us or licensed to us, may materially and adversely affect our business, financial condition, results of operations, reputation
and competitive advantages. We rely on intellectual property laws and contractual arrangements with our key employees and certain
of our customers, collaborators and others to protect our intellectual property rights. The measures we take to protect our intellectual
property rights may not be adequate and policing the unauthorized use of our intellectual property is difficult and expensive.
In addition, the validity, enforceability
and scope of protection of intellectual property in Internet-related industries in China are uncertain and still evolving, and
could involve substantial risks. The laws and enforcement procedures in China are not yet well developed, and do not protect intellectual
property rights to the same extent as laws and enforcement procedures in the United States and other jurisdictions. Furthermore,
litigation may be necessary in the future to enforce our intellectual property rights, which could result in substantial costs
and diversion of our resources and have a material adverse effect on our business, financial condition and results of operations.
If we are unable to adequately protect the intellectual property rights that we own or use, we may lose these rights and our business,
growth prospects and profitability may suffer.
Regulation of the Internet industry
in China, including censorship of information distributed over the Internet, may materially and adversely affect our business.
China has enacted laws, rules and regulations
governing Internet access and the distribution of news, information or other content, as well as products and services, through
the Internet. In the past, the PRC government has prohibited the distribution of information through the Internet that it deems
to be in violation of applicable PRC laws, rules and regulations. In particular, under regulations promulgated by the State Council,
the MIIT, the General Administration of Press, Publication , Radio, Film and Television (formerly the State Press and Publications
Administration) and the Ministry of Culture, Internet content providers and Internet publishers are prohibited from posting or
displaying content over the Internet that, among other things: (1) opposes the fundamental principles of the PRC constitution,
(2) compromises state security, divulges state secrets, subverts state power or damages national unity, (3) disseminates rumors,
disturbs social order or disrupts social stability, (4) propagates obscenity, pornography, gambling, violence, murder or fear
or incites the commission of crimes, or (5) insults or slanders a third party or infringes upon the lawful right of a third party.
If any Internet content we offer through
our consolidated controlled entities were deemed by the PRC government to violate any of such content restrictions, we would not
be able to continue such offerings and could be subject to penalties, including confiscation of illegal revenues, fines, suspension
of business and revocation of required licenses, which could have a material adverse effect on our business, financial condition
and results of operations. We may also be subject to potential liability for any unlawful actions of our customers or affiliates
or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content that may result
in liability to us, and if we are found to be liable, we may be forced to cease operation of our websites and mobile apps in China.
If we fail to maintain the applicable licenses
and approvals under the complex regulatory environment for Internet-based businesses and online advertising businesses in China,
or fail to pass annual government inspection or obtain renewal of the business license, our business, financial condition and
results of operations would be materially and adversely affected.
The Internet and online advertising industries
in China are still at a relatively early stage of development and are highly regulated by the PRC government. Various regulatory
authorities of the PRC government, such as the State Council, the MIIT, the SAIC, the General Administration of Press, Publication,
Radio, Film and Television, and the Ministry of Public Security, are empowered to issue and implement regulations governing various
aspects of the Internet and advertising industries. Moreover, new laws, rules and regulations may be adopted, or new interpretations
of existing laws, rules and regulations may be released, to address issues that arise from time to time. As a result, substantial
uncertainties exist regarding the interpretation and implementation of any current and future PRC laws, rules and regulations
applicable to the Internet and online advertising industries.
We are required to obtain applicable licenses
or approvals from various regulatory authorities in order to provide advertising and value-added services and products. These licenses
or approvals are essential to the operation of our business and are generally subject to annual review by the relevant PRC governmental
authorities. For example, each of Beijing Technology, Beijing JTX Technology, Beijing Tuo Shi Hong Ye Technology Development Co.,
Ltd. (“Beijing Tuo Shi Hong Ye”) and Beijing Gu Tian Xia Information Co., Ltd. (“Beijing Gu Tian Xia”)
currently holds an ICP license, as required under the applicable PRC laws, rules and regulations; and each of Beijing Technology,
Beijing JTX Technology and Beijing Gu Tian Xia currently holds an approval for operating electronic bulletin board services as
required under the applicable PRC laws, rules and regulations. Beijing Advertising, Shanghai Century JTX Network and
certain other consolidated controlled entities are allowed to provide marketing services in accordance with the business scope
indicated in each of their respective business licenses.
Some of our consolidated controlled entities,
however, may be required to obtain additional licenses. For example, since our websites and mobile apps include online residential
communities that allow visitors to post information, including graphics or weblinks to videos, other websites and mobile apps
or data in microblogs or online discussion forums, on our websites and mobile apps for discussion with other users, the release
of such information on our websites and mobile apps may be deemed as providing Internet publication services and therefore require
Internet publication licenses. Similarly, if we or third parties post information that may be viewed as news information, the
release of such information on our websites and mobile apps may be deemed as Internet news information services and therefore
require Internet news information licenses. We, like many other similarly situated business operators, have been operating our
businesses without such licenses. Certain of our relevant consolidated controlled entities have applied to the relevant government
authorities for Internet publication licenses again in accordance with applicable PRC laws, rules and regulations, and pursuant
to the request by the relevant governmental authorities, we are now preparing the relevant supplementary materials for such application.
In addition, we are still in discussions with the relevant government authorities on our application for, and the authorities’
issuance of, Internet news information service licenses.
Moreover, certain services licenses, including,
for example, the financing guarantee license, the online video recording and broadcasting license and real estate service licenses,
held by certain of our subsidiaries, have expired, and the holders have applied for renewals, which are currently awaiting approval
from the relevant regulators.
Under the applicable PRC laws, rules and
regulations, the failure to obtain and/or maintain business licenses, an Internet publication licenses and/or Internet news information
service licenses may subject the entity to various penalties, including confiscation of revenues, imposition of fines and/or restrictions
on the entity conducting such activities’ business operations, or the discontinuation of their operations. Although our
relevant consolidated controlled entities have not received any revenues directly from Internet publication services or Internet
news information services, we cannot assure you that the PRC regulatory authorities will not impose any such penalties. Any such
disruption in the business operations of our consolidated controlled entities could materially and adversely affect our business,
financial condition and results of operations.
Unexpected network interruptions or security
breaches, including “hacking” or computer virus attacks, may cause delays or interruptions of service, resulting in
reduced use and performance of our websites and mobile apps and damage our reputation and brands.
Our business depends heavily on the performance
and reliability of China’s Internet infrastructure, the continued accessibility of bandwidth and servers on our service
providers’ networks and the continuing performance, reliability and availability of our technology platform. Any failure
to maintain the satisfactory performance, reliability, security and availability of our computer and hardware systems may cause
significant harm to our reputation and our ability to attract and maintain customers and visitor traffic. Major risks related
to our network infrastructure include:
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any breakdown
or system failure resulting in a sustained shutdown of our servers, including failures
which may be attributable to sustained power shutdowns, or efforts to gain unauthorized
access to our systems causing loss or corruption of data or malfunctions of software
or hardware;
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any disruption
or failure in the national backbone network, which would prevent our customers and users
from accessing our websites and mobile apps;
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any damage from
fire, flood, earthquake and other natural disasters; and
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computer viruses,
hackings and similar events.
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Computer viruses and hackings may cause
delays or other service interruptions and could result in significant damage to our hardware, software systems and databases,
disruptions to our business activities, such as to our e-mail and other communication systems, breaches of security and inadvertent
disclosure of confidential or sensitive information, inadvertent transmissions of computer viruses and interruptions of access
to our websites and mobile apps through the use of denial-of-service or similar attacks. In addition, the inadvertent transmission
of computer viruses could expose us to a material risk of loss or litigation and possible liability. All of our servers and routers,
including back-up servers, are currently hosted by third-party service providers in Beijing and Shanghai and all information on
our websites and mobile apps is backed up periodically. Any hacking, security breach or other system disruption or failure which
occurs in between our backups could disrupt our business or cause us to lose, and be unable to recover, data such as real estate
listings, contact information and other important customer information.
We also do not maintain insurance policies
covering losses relating to our systems and do not have business interruption insurance. Moreover, the low coverage limits of
our property insurance policies may not be adequate to compensate us for all losses, particularly with respect to any loss of
business and reputation that may occur. To improve our performance and to prevent disruption of our services, we may have to make
substantial investments to deploy additional servers or create one or more copies of our websites and mobile apps to mirror our
online resources, either of which could increase our expenses and reduce our net income.
Breaches of security in connection with our
websites could expose us to potential liability and harm our reputation.
Ensuring secured transmission of confidential
information through public networks is essential to maintaining the confidence of our customers and users. Our existing security
measures may not be adequate to protect such confidential information. In addition, computer and network systems are susceptible
to breaches by computer hackers. Security breaches could expose us to litigation and potential liability for failing to secure
confidential customer information, and could harm our reputation and reduce our ability to attract customers and users. Any future
security breaches, if any, may result in a material adverse effect on our business, financial condition and results of operations.
The successful operation of our business
depends upon the performance and reliability of the Internet infrastructure and telecommunications networks in China.
Our business depends on the performance
and reliability of the Internet infrastructure in China. Substantially all access to the Internet is maintained through state-controlled
telecommunication operators under the administrative control and regulatory supervision of MIIT. In addition, the national networks
in China are connected to the Internet through international gateways controlled by the PRC government. These international gateways
are generally the only channels through which a domestic user can connect to the Internet. We cannot assure you that more sophisticated
Internet infrastructure will be developed in China. We may not have access to alternative networks in the event of disruptions,
failures or other problems with China’s Internet infrastructure. In addition, the Internet infrastructure in China may not
support the demands associated with the continued growth in Internet usage.
We also rely on China Telecommunications
Corporation (“China Telecom”) and China United Network Communications Group Co., Ltd. (“China Unicom”)
to provide us with data communications capacity primarily through local telecommunications lines and Internet data centers to
host our servers. We do not have access to alternative services in the event of disruptions, failures or other problems with the
fixed telecommunications networks of China Telecom and China Unicom, or if China Telecom or China Unicom otherwise fails to provide
such services. Any unscheduled service interruption could disrupt our operations, damage our reputation and result in a decrease
in our revenues. Furthermore, we have no control over the costs of the services provided by China Telecom and China Unicom. If
the prices that we pay for telecommunications and Internet services rise significantly, our gross margins could be significantly
reduced. In addition, if Internet access fees or other charges to Internet users increase, our user traffic may decrease, which
in turn may cause our revenues to decline.
You should not rely on our quarterly operating
results as an indication of our future performance because our quarterly financial results are subject to fluctuations.
The real estate sector in China is characterized
by seasonal fluctuations, which may cause our revenues to fluctuate significantly from quarter to quarter. The first quarter of
each year generally contributes the smallest portion of our annual revenues due to reduced advertising and marketing activity
of our customers in the PRC real estate industry during and around the Chinese Lunar New Year holiday, which generally occurs
in January or February of each year. Furthermore, as we are substantially dependent on sales of listing and marketing,
our quarterly revenues and results of operations are likely to be affected by:
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seasonality of
the real estate market and real estate consumers’ purchasing patterns;
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our ability to
retain existing customers and attract new customers for our listing, marketing and e-commerce
services;
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our ability to
successfully introduce new service offerings on our platform;
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the amount and
timing of our operating expenses and capital expenditures;
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the adoption of
new, or changes to existing, governmental regulations;
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a shortfall in
our revenues relative to our forecasts and a decline in our operating results; and
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economic conditions
in general and specific to the real estate industry and to China.
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As a result, you should not rely on our
quarter-to-quarter comparisons of our results of operations as indicators of likely future performance.
Failure to continue to develop and expand
our content, service offerings and features, and to develop or incorporate the technologies that support them, could jeopardize
our competitive position.
As an Internet portal company, we participate
in an industry characterized by rapidly changing technology and new products and services. To remain competitive, we must continue
to develop and expand our content and service offerings. We must also continue to enhance and improve the user interface, functionality
and features of our websites and mobile apps. These efforts may require us to develop internally, or to license, increasingly
complex technologies. In addition, many of our competitors are continually introducing new Internet-related products, services
and technologies, which will require us to update or modify our own technology to keep pace. Developing and integrating new products,
services and technologies into our existing businesses could be expensive and time-consuming. Furthermore, such new features,
functions and services may not achieve market acceptance or serve to enhance our brand loyalty. We may not succeed in incorporating
new Internet technologies, or, in order to do so, we may incur substantial expenses. If we fail to develop and introduce or acquire
new features, functions, services or technologies effectively and on a timely basis, we may not continue to attract new users
and may be unable to retain our existing users, which could affect our marketability as a popular advertising and listing media.
If we are not successful in incorporating new Internet technologies, our future profitability and revenue growth could be materially
and adversely affected.
Our revenues and profitability could suffer
if we are unable to successfully implement our growth strategies or manage our growth effectively.
We intend to grow our business by rolling
out our full suite of services to more cities across China. We also plan to expand into new sectors. We intend to improve our open
platform business by introducing a number of cloud products empowered by our big data capabilities. However, some of our growth
strategies relate to new services and technologies for which there are no established markets in China or relate to services, technologies,
new geographic markets or new businesses in which we have limited or no experience. We do not have experience providing these services
and may not select the right third parties to partner with or establish or maintain some business relationship with them at commercially
reasonable terms. Moreover, due to the breadth and diversity of the PRC real estate market and the PRC microfinance market as well
as other industries and sectors we plan to expand into, our business model may not be successful in new and untested markets as
demand and preferences may vary significantly by region. As a result, we may not be able to leverage our experience to expand into
other parts of China or to enter into businesses with respect to new products or services. We cannot assure you that we will be
able to successfully grow our business in our existing cities. There can be no assurance that we will be able to enter new geographic
markets or deliver new services and technologies on a commercially viable basis or in a timely manner, or at all. If we are unable
to successfully implement our growth strategies, our revenues and profitability may not grow as we expect, and our competitiveness
may be materially and adversely affected.
Increases in the volume of our website
traffic as a result of our expansion into new geographic regions could also strain the capacity of our existing computer systems,
which could lead to slower response times or system failures. This would cause the number of real estate search inquiries, advertising
impressions, other revenue producing offerings and our informational offerings to decline, any of which could significantly reduce
our revenue growth and our brand loyalty. We may need to incur additional costs to upgrade our computer systems in order to accommodate
increased demand if our systems cannot handle current or higher volumes of traffic. Mismanagement of any of our services in new
or existing markets or the deterioration of the quality of our services could significantly damage our brand names and reputation
and adversely impact our ability to attract and retain customers and visitor traffic.
Our growth plans place a significant demand
on our management, systems and other resources. In addition to training and managing a growing workforce, we will need to continue
to develop and improve our financial and management controls and our reporting systems and procedures. We cannot assure you that
we will be able to efficiently or effectively manage the growth of our operations, and any failure to do so may limit our future
growth and have a material adverse effect on our business, financial condition and results of operations.
We rely on the creditworthiness of our borrowers,
which may limit our ability to recover from a defaulting borrower.
We
launched our financial services focusing on the provision of loans to home buyers and other borrowers in 2015. A significant portion
of our loan portfolio consists of secured loans. As of December 31, 2018, 3.1% of our outstanding loans receivable were unsecured.
We have implemented credit evaluation procedures to enable us to select borrowers based on their creditworthiness. However, we
do not have significant experience with assessing creditworthiness and loan underwriting and, as a result, our evaluation may
not be reliable. We also do not have experience in collecting loans in default or working with borrowers to resolve payment difficulties
with their loans. Our ability to recover payments from defaulting borrowers of unsecured loans may be more limited than those
secured by collateral or mortgage. For our secured loans, the value of collateral securing our loans is subject to change, and
may fall below the outstanding amount of the loans and thus be insufficient to cover our loss in the event of a customer default.
Our borrowers’
ability to repay our loans is affected by a number of factors, including economic development in the regions where these borrowers
reside or operate, market conditions in the industries where these borrowers conduct business, development of these borrowers’
businesses, borrowers’ employment situations and, in particular, as well as the conditions of the real estate market in
China. If our borrowers default, we may apply to enforce our claims against the defaulting borrowers and their assets, including
the collateral pledged to us, through court proceedings. However, the procedures for enforcing the assets and liquidating or otherwise
realizing the value of the assets may be protracted or ultimately unsuccessful, and the enforcement process may be difficult for
various reasons. As a result, if our borrowers default for any reason, our business, results of operations and financial condition
may be materially and adversely affected.
Our financial services are subject to
various regulatory restrictions.
We obtained approvals to engage in the microfinancing
business from government authorities of four cities, including Beihai, Shanghai, Chongqing and Tianjin. Pursuant to Notice on Regulating
the “Cash Loan” Business, issued by Office of the Leading Group for the Special Campaign against Internet Financial
Risks and the Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks on December 1, 2017, or Notice on Regulating Cash Loan, internet microfinance businesses is strictly regulated. According to the Notice
on Regulating Cash Loan, among other requirements, microfinance companies are required to suspend distribution of internet microloans
that are not supported by specific scenarios and no specific purpose, gradually reduce the outstanding loan balance within the
prescribed time limit and complete rectifications within the prescribed time limit. Our subsidiaries with microfinancing approvals
in Shanghai and Chongqing also provide a small amount of unsecured loans for our employees, which may be deemed as “cash
loans” and be prohibited under the Notice on Regulating Cash Loan.
According to the Guiding Opinions on the
Pilot Operation of Microfinance Companies, or the Guiding Opinions jointly issued by the China Banking Regulatory
Commission and the PBOC on May 4, 2008, microfinance companies are limited liability companies or joint stock companies established
with the capital contribution from natural persons, legal persons and other organizations, which do not accept public deposits
and engage in the microfinance business. To set up a microfinance company, an applicant shall submit a formal application to the
competent administrative departments at the provincial level. Upon approval, the applicant shall apply to the local branch of
the SAIC to obtain a business license for the microfinance company. In addition, the applicant shall complete certain filings
with the local police department, the local office of the China Banking Regulatory Commission and the local branch of the PBOC.
According to the Guiding Opinions, a provincial government may launch pilot programs for microfinance companies within prefectural
regions of the province only after it designates a department (finance office or other relevant institutions) to be in charge
of supervision and administration of microfinance companies and is willing to be responsible for risk management and disposals
with respect to microfinance companies. Consequently, microfinance companies are primarily regulated locally by provincial governments
under rules and regulations promulgated by the provincial governments.
In November 2009, the provincial government
of the Guangxi Zhuang Autonomous Region issued the Management Measures of Microfinance Companies in Guangxi Zhuang Autonomous Region.
In 2014, we obtained approvals to engage in the microfinancing business from government authorities of Beihai city, Guangxi Zhuang
Autonomous Region. Pursuant to the Management Measures of Microfinance Companies in Guangxi Zhuang Autonomous Region, Beihai Tian
Xia Dai Microfinance Co., Ltd. (“Beihai Tian Xia Dai Microfinance”) with microfinancing approvals cannot conduct microfinancing
business outside Beihai city. However, Beihai Tian Xia Dai Microfinance provided loans outside Beihai city, and as a result, it
may face the risk of being rectified by the relevant authorities.
Changes in the interest rates and spread
could negatively affect the revenue generated from our financial services.
Our financial services generate
revenue primarily from interest income. The interest rates we charge the borrowers are linked to the PBOC benchmark rate,
which may fluctuate significantly due to changes in the PRC government’s monetary policies. If we are required to lower
the interest rates we charge our borrowers to reflect the decrease in the PBOC benchmark interest, the interest earned from
our loans will decline. Furthermore, we may face fierce price competition, and as a result we may also lower our interest
rates. Either case could negatively affect the revenue generated from our financial services.
The members of our senior management team,
in particular, Mr. Vincent Tianquan Mo (“Mr. Mo”), our founding shareholder, director and executive chairman,
have played an important role in the growth and development of our business, and if we are unable to continue to retain their
services, our business, financial condition and results of operations could be materially and adversely affected.
Our future success is significantly dependent
upon the continued services of our senior management. In particular, Mr. Mo has played an important role in the growth and
development of our business. To date, we have relied heavily on the expertise and experience of Mr. Mo and other senior management
personnel in our business operations, including their extensive knowledge of the PRC real estate market, their strong reputation
in the PRC real estate industry, and their relationships with our employees, relevant regulatory authorities and many of our customers.
If Mr. Mo or other senior management personnel are unable or unwilling to continue in their present positions, we may not
be able to locate suitable or qualified replacements and may incur additional expenses to identify their successors. In addition,
if Mr. Mo or other senior management personnel joins a competitor or forms a competing company, we may lose our customers,
and our collaboration arrangements may be disrupted, which would have a material adverse effect on our business, financial condition
and results of operations. We do not maintain key-man insurance for Mr. Mo or other senior management personnel.
Failure to attract and retain qualified personnel
could jeopardize our competitive position.
As our industry is characterized by high
demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to attract and
retain quality sales, technical and other operational personnel in the future. We have from time to time in the past experienced,
and we expect in the future to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate
qualifications. We cannot assure you we will be able to attract or retain the quality personnel that we need to achieve our business
objectives. If we fail to successfully attract new personnel or retain and motivate our current personnel, we may lose competitiveness
and our business, financial condition and results of operations could be materially and adversely affected.
We may be subject to intellectual property
infringement or misappropriation claims by third parties, which may force us to incur substantial legal expenses and, if determined
adversely against us, could materially disrupt our business.
We cannot be certain that our services
and information provided on our websites and mobile apps do not or will not infringe patents, copyrights or other intellectual
property rights held by third parties. From time to time, we may be subject to legal proceedings and claims alleging infringement
of patents, trademarks or copyrights, or misappropriation of creative ideas or formats, or other infringement of proprietary intellectual
property rights.
We
have applied to register in China the Chinese and English dual-language “SouFun” trademark as well as “SouFun”
in English and “
搜房
” (“SouFun”
in Chinese) individually, and have successfully registered such trademarks in some industry categories, but our applications for
certain other industry categories conflict with existing registrations or applications for similar trademarks by another PRC company
in such industry categories, which have resulted in litigations. In April 2014, the Higher People’s Court of Beijing
Municipality reversed a lower court’s judgment in favor of us and ordered the PRC Trademark Review and Adjudication Board
of SAIC to reconsider another PRC company’s trademark application for “SOFANG” that it had previously rejected.
In April 2015, the Supreme People’s Court of the PRC accepted our application for retrial over the judgment of the
Higher People’s Court of Beijing Municipality but ultimately denied our application. Nevertheless, in 2015, we obtained
new trademarks “Fang.com” in English and “
房天下
”
(“Fang Tian Xia” in Chinese) and began to market our services under these new brands in connection with the transformation
of our business model. We therefore do not currently expect our business would be materially and adversely affected even if we
lose the right to use the trademark relating to “SouFun” in certain limited industry categories.
Moreover, we have previously been involved
in disputes arising from alleged infringement of third parties’ copyrights on our websites and mobile apps, such as the
use of photos or articles to which we did not have the rights, which led to judgments against us. We could be subject to similar
claims, suits or judgments in the future if we post information to which we do not have the rights. Any such claims, regardless
of merits, may involve us in time-consuming and costly litigation or investigation and divert significant management and staff
resources. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual
property and may also be ordered to pay fines or monetary damages. As a result, we would be required to enter into expensive royalty
or licensing arrangements or to develop alternative technologies, business methods, content or other intellectual property. We
expect that the likelihood of such claims may increase as the number of competitors in our markets grows and as related patents
and trademarks are registered and copyrights are obtained by such competitors. In addition, as we have expanded, and may continue
to expand, our business into new geographical markets, we may be exposed to such claims in jurisdictions other than China and
the scope of intellectual property protection in these overseas jurisdictions may be different from or greater than that in China.
The intellectual property laws in overseas jurisdictions may also impose more stringent compliance requirements and cause more
potential damages or penalties than those in China. Such claims in overseas jurisdictions, if successful, could require us to
pay significant compensatory and punitive damage awards as well as expose us to costly and time-consuming litigation or investigations,
all of which could materially disrupt our business and have a material adverse effect on our growth and profitability.
We are exposed to potential liability for
information on our websites and mobile apps and for products and services sold through our websites and mobile apps and we may
incur significant costs and damage to our reputation as a result of defending against such potential liability.
We provide third-party content on our websites
and mobile apps such as real estate listings, links to third-party websites, advertisements and content provided by customers
and users of our community-oriented services. We could be exposed to liability with respect to such third-party information. Among
other things, we may face assertions that, by directly or indirectly providing such third-party content or links to other websites,
we should be liable for defamation, negligence, copyright or trademark infringement, or other actions by parties providing such
content or operating those websites. We may also face assertions that content on our websites, including statistics or other data
we compile internally, or information contained in websites linked to our websites and mobile apps contains false information,
errors or omissions, and users and our customers could seek damages for losses incurred as a result of their reliance upon or
otherwise relating to incorrect information. We may also be subject to fines and other sanctions by the government for such incorrect
information. Moreover, our relevant consolidated controlled entities, as Internet advertising service providers, are obligated
under PRC laws and regulations to monitor the advertising content shown on our websites and mobile apps for compliance with applicable
law. Violation of applicable law may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination
of the offending advertisements and orders to publish advertisements correcting the misleading information. In case of serious
violations, the PRC authorities may revoke the offending entities’ advertising licenses and/or business licenses. In addition,
our websites and mobile apps could be used as a platform for fraudulent transactions and third party products and services sold
through our websites and mobile apps may be defective. The measures we take to guard against liability for third-party content,
information, products and services may not be adequate to exonerate us from relevant civil and other liabilities.
Any such claims, with or without merit,
could be time-consuming to defend and result in litigation and significant diversion of management’s attention and resources.
Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against
these claims and suffer damage to our reputation.
Potential acquisitions and office, training
facility and land purchases, which form part of our strategy, may disrupt our ability to manage our business effectively, including
our ability to successfully integrate acquired businesses into our existing operations.
Potential acquisitions form part of our
strategy to further expand and operate our business. Acquisitions and the subsequent integration of new companies or businesses
will require significant attention from our management, in particular to ensure that the acquisition does not disrupt any existing
collaborations, or affect our users’ opinion and perception of our services and customer support. In addition, our management
will need to ensure that the acquired business is effectively integrated into our existing operations.
The diversion of our management’s
attention and any difficulties encountered in integration could have a material adverse effect on our ability to manage our business.
In addition, acquisitions could expose us to potential risks, including:
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risks associated
with the assimilation of new operations, services, technologies and personnel;
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unforeseen or
hidden liabilities;
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the diversion
of resources from our existing businesses and technologies;
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the inability
to generate sufficient revenues to offset the costs and expenses of acquisitions; and
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potential loss
of, or harm to, relationships with employees, customers and users as a result of the
integration of new businesses.
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In addition, in connection with our business
expansion, we have acquired office space and training facilities as well as commercial land and may continue to do so in the future
if suitable opportunities arise. For more details on our recent office, training facility and land acquisitions, see “Item
5.D. Operating and Financial Review and Prospects—A. Operating Results” and “Item 4. Information on the Company—Facilities”
in this annual report. Acquisition of property has inherent risks, including the fluctuation of property value, which could potentially
lead to potential asset write-off if the value of such properties were to substantially decrease.
If we fail to achieve and maintain an
effective system of internal control over financial reporting, we may be unable to accurately report our financial results or
prevent fraud, which could result in harm to our business, loss of investor confidence in our financial reporting and a lower
trading price of our ADSs or notes.
Effective internal controls are
necessary for us to provide accurate and timely financial reports and effectively prevent fraud. We discovered in 2018 and in
the past, and may in the future discover, areas of our internal controls involving deficiencies, significant deficiencies or
material weaknesses that have required or will require improvements in our procedures on the preparation, review, approval
and disclosure of financial reports.
In the course of preparing and auditing
our consolidated financial statements for the year ended December 31, 2018, we and our independent registered public accounting
firm identified one material weakness in our internal control over financial reporting as of December 31, 2018. A “material
weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements
will not be prevented or detected on a timely basis. The material weakness identified is that we did not have sufficient financial
reporting and accounting personnel to formalize, design, implement and operate key controls over financial reporting process in
order to report financial information in accordance with U.S. GAAP and SEC reporting requirements. To remedy our identified material
weakness subsequent to December 31, 2018, we plan to undertake steps to strengthen our internal control over financial reporting,
including: (1) hiring more qualified resources including financial controller, equipped with relevant U.S. GAAP and SEC reporting
experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework,
(2) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and
financial reporting personnel, (3) establishing effective oversight and clarifying reporting requirements for non-recurring and
complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance
with SEC reporting requirements, and (4) upgrading our operating and accounting systems to prevent systematic errors.
Our internal control over financial reporting
will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will
not occur or that all control issues and instances of fraud will be detected.
A lack of effective internal control over
financial reporting in the future could result in the loss of investor confidence in the reliability of our financial statements
and negatively impact the trading price of our ADSs. In addition, if we fail to maintain the adequacy of our internal controls,
as such standards are modified, supplemented or amended from time to time or as necessary to correct deficiencies or weaknesses
in our controls, we may not be able to provide accurate financial statements, which could cause us to fail to meet our reporting
obligations or provide accurate financial statements, and cause investors to lose confidence in our reported financial information
and have a negative effect on the trading price of our ADSs.
Certain of our leased property interests
may be defective and we may be forced to relocate operations affected by such defects, which could cause significant disruption
to our business.
As
of December 31, 2018, we had leased properties in approximately
60 cities in China in addition to our principal executive
offices in Beijing, China. A number of these leased properties, all of which were used as offices, contained defects in the leasehold
interests. Such defects included the lack of proper title or right to lease and the landlords’ failure to duly register
the leases with the relevant PRC government authority. A number of lease agreements were not renewed timely.
In situations where a tenant lacks evidence
of the landlord’s title or right to lease, the relevant lease agreement may not be valid or enforceable under PRC laws,
rules and regulations, and may also be subject to challenge by third parties. In addition, under PRC laws, rules and regulations,
the failure to register the lease agreement will not affect its effectiveness between the tenant and the landlord, however, such
lease agreement may be subject to challenge by and unenforceable against a third party who leases the same property from the landlord
and has duly registered the lease with the competent PRC government authority. Furthermore, the landlord and the tenant may be
subject to administrative fines for such failure to register the lease.
We have taken steps to renew lease agreements
and cause our landlords to procure valid evidence as to the title or right to lease, as well as to complete the lease registration
procedures. However, we cannot assure you that such defects will be cured in a timely manner or at all. Our business may be interrupted
and additional relocation costs may be incurred if we are required to relocate operations affected by such defects. Moreover,
if our lease agreements are challenged by third parties, it could result in diversion of management attention and cause us to
incur costs associated with defending such actions, even if such challenges are ultimately determined in our favor.
We have limited business insurance coverage
in China.
The insurance industry in China is still
at an early stage of development and PRC insurance companies offer only limited business insurance products. As a result, we do
not have any business disruption insurance or litigation insurance coverage for our operations in China. Any business disruption,
litigation or natural disaster may cause us to incur substantial costs and result in the diversion of our resources, as well as
significantly disrupt our operations, and have a material adverse effect on our business, financial position and results of operations.
Certain of our loans may be declared immediately
repayable.
Certain
of our consolidated controlled entities obtained from a PRC commercial bank loans in the aggregated principal amount of approximately
RMB
1.1 billion. According to loan agreement, if the borrowers fail to maintain certain financial indicators, the bank will
be entitled to declare the loans immediately repayable. Even though we obtained a waiver from the lender indicating that the lender permanently gave up its right
to demand payment as a result of the violation as of December 31, 2018, we would be in default at the December 31, 2018 balance
sheet date and it is probable that we will be unable to comply with all provisions of the debt agreement for a period of one year
from the balance sheet date. As of the date of this annual report, the bank has not indicated its intention
for us to immediately repay such loans; however, we cannot assure you that the bank would not change its position and declare
such loans immediately repayable in the future, which may adversely affect our liquidity position.
We may be subject to liabilities as a result of the separation
and distribution.
We have entered into various business, financing
and other contracts in the ordinary course of business. Some of the contracts require us to notify or seek prior consent from the
counterparties in connection with material changes to our business operations or corporate structure. We believe that we have carried
out our contractual obligations and are not otherwise in material default or violation of those contracts. However, if any contractual
counterparties find us in default or violation due to failure to notify them or seek their prior consent in connection with the
proposed separation of CIH or otherwise, they may terminate their business relationship with us, declare any repayment obligations
immediately due and/or pursue legal actions against us, which may materially and adversely affect our business operations, financial
condition and results of operations.
Third party claims, litigation or government investigations
to which we may be subject or in which we may be involved may significantly increase our expenses and adversely affect our stock
price.
We may be or may be expected to be a party
to various third party claims, lawsuits, or government investigations from time to time. For example, in February 2019, we were
served with a subpoena from a court in Beijing, in which a third party claimed that a contract we entered into was invalid. Pursuant
to such contract, we received certain assets from a debtor’s nominee to discharge its indebtedness. The debtor subsequently
alleged that such contract was invalid because the transfer price of such assets was below the fair market value. We intend to
vigorously contest the allegation. Any lawsuits or government investigations, whether actual or threatened, in which we may be
involved, whether as plaintiff or defendant, could cost us a significant amount of time and money, could distract management’s
attention away from operating our business, could result in negative publicity and could adversely affect our stock price. In addition,
if any claims are determined against us or if a settlement requires us to pay a large monetary amount or take other action that
materially restricts or impedes our operations, our profitability could be significantly reduced and our financial position could
be adversely affected. Our insurance may not be sufficient to cover any losses we incur in connection with litigation claims.
Risks related to our corporate structure
If the PRC government determines that the
structure contracts that establish the structure for our business operations do not comply with applicable PRC laws, rules and
regulations, we could be subject to severe penalties or be forced to restructure our ownership structure.
As we are a Cayman Islands company and
our PRC subsidiaries and their branch companies in China are treated as foreign-invested enterprises under applicable PRC laws,
we are subject to ownership limitations as well as special approval requirements on foreign investment. We used to operate under
a tighter regulatory regime which was restrictive of foreign investment in advertising and Internet content distribution businesses,
except for the further lifting up of value-added telecommunication services by foreign enterprises in China (Shanghai) Pilot Free
Zone as otherwise provided. Under the current regulatory regime, Internet content distribution is permitted to operators with
less than 50.0% foreign investment and advertising is permitted to all qualified operators. We may consider further optimizing
our corporate structure in light of the evolving regulatory environment.
To comply with applicable PRC laws, rules
and regulations, we conduct our operations in China primarily through our wholly-owned PRC subsidiaries and our consolidated controlled
entities. Our wholly-owned PRC subsidiaries, our consolidated controlled entities (excluding their subsidiaries) and their respective
shareholders have entered into a series of contractual arrangements, which consist of exclusive technical consultancy and service
agreements, equity pledge agreements, operating agreements, shareholders’ proxy agreements, loan agreements and exclusive
call option agreements (collectively, the “Structure Contracts”). See “Item 7.B. Major Shareholders and Related
Party Transactions—Related Party Transactions—Structure Contracts” of this annual report. As a result of these
contractual arrangements, we exercise the ability to control the consolidated controlled entities through our power to direct
the activities of consolidated controlled entities that most significantly impact their economic performance, and the obligation
to absorb losses of or the right to all the residual benefits of the consolidated controlled entities that could potentially be
significant to these entities. Accordingly, we consolidate their results in our financial statements. Our consolidated controlled
entities hold the licenses and approvals that are essential to the operation of our Internet content distribution business. As
certain agreements with our customers for Internet content distribution were entered into directly with our PRC subsidiaries and
not our consolidated controlled entities, there can be no assurance that the PRC government will not deem our Internet content
distribution to be in violation of applicable PRC laws, rules and regulations.
On July 13, 2006, MIIT publicly released
the Notice on Strengthening the Administration of Foreign Investment in Operating Value-Added Telecommunications Business (the
“MIIT Notice”), which reiterates certain provisions under China’s Administrative Rules on Foreign-Invested Telecommunications
Enterprises prohibiting, among others, the renting, transferring or sale of a telecommunications license to foreign investors
in any form. Under the MIIT Notice, holders of valued-added telecommunications business operating licenses, or their shareholders,
must also directly own the domain names and trademarks used by such license holders in their daily operations. To comply with
this requirement under the MIIT Notice, we have assigned all registered trademarks, trademark applications and domain names relating
to “SouFun,” “Jia Tian Xia,” “Fang.com” and “Fang Tian Xia” to the relevant majority-owned
subsidiary or consolidated controlled entities in order to maintain their respective ICP licenses to operate as value-added telecommunication
service providers. Due to a lack of interpretative materials from the authorities, we cannot assure you that MIIT will not consider
our corporate structure and the contractual arrangements as a kind of foreign investment in telecommunication services, in which
case we may be found in violation of the MIIT Notice.
In 2011, various media sources reported
that the CSRC prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based
companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment
restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government
authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures
will be adopted or what they would provide.
On March 15, 2019, the Foreign Investment
Law was formally passed by the thirteenth National People’s Congress and will take effect on January 1, 2020. For further
details of the Foreign Investment Law, please see “—Substantial uncertainties exist with respect to the adoption of
new or revised PRC laws relating to our corporate structure, corporate governance and business operations.”
If the past or current ownership structures,
Structure Contracts and businesses of our company, our PRC subsidiaries and our consolidated controlled entities are found to
be in violation of any existing or future PRC laws, rules or regulations, MIIT and other relevant PRC regulatory authorities would
have broad discretion in dealing with such violations, including:
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revoking the business
and operating licenses of our PRC subsidiaries or consolidated controlled entities, whose
business and operating licenses are essential to the operation of our business;
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levying fines
and/or confiscating our income or the income of our PRC subsidiaries and/or consolidated
controlled entities;
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shutting down
our servers or blocking our websites;
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discontinuing
or restricting our operations or the operations of our PRC subsidiaries and/or consolidated
controlled entities;
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imposing conditions
or requirements with which we, our PRC subsidiaries and/or consolidated controlled entities
may not be able to comply;
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requiring us,
our PRC subsidiaries and/or consolidated controlled entities to restructure the relevant
ownership structure, operations or contractual arrangements; and
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taking other regulatory
or enforcement actions that could be harmful to our business.
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We cannot assure you that the relevant
PRC regulatory authorities will not require that we amend our Structure Contracts to comply with the MIIT Notice or that we can
restructure our ownership structure without material disruption to our business. In addition, new PRC laws, rules and regulations
may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements.
The imposition of any of these penalties and the effect of any new PRC laws, rules and regulations applicable to our corporate
structure and contractual arrangements could materially disrupt our ability to conduct our business and have a material adverse
effect on our financial condition and results of operations.
We cannot assure you that we will be able
to enforce the Structure Contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you
that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory
requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations
governing the validity of these contractual arrangements are open to varying interpretations and the relevant government authorities
have broad discretion in interpreting these laws and regulations.
Substantial uncertainties exist with respect
to the adoption of new or revised PRC laws relating to our corporate structure, corporate governance and business operations.
On March 15, 2019, the National People’s
Congress promulgated the Foreign Investment Law, which will become effective on January 1, 2020 and replace the trio of existing
laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative
Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law. The Foreign Investment Law embodies an expected PRC
regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the
legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is
relatively new, uncertainties still exist in relation to its interpretation and implementation, and failure to take timely and
appropriate measures to cope with the regulatory-compliance challenges could result in material and adverse effect on us. For
instance, though the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment,
it contains a catch-all provision under the definition of ‘‘foreign investment’’, which includes investments
made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed
by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated
by the Stale Council to provide for contractual arrangements as a form of foreign investment, at which time it will be uncertain
whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment
in the PRC and if yes, how our contractual arrangements should be dealt with. In addition, if future laws, administrative regulations
or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all.
In the worst-case scenario, we may be required to unwind our existing contractual arrangements and/or dispose of the relevant
business operations, which could have a material adverse effect on our current corporate structure, our listing service business
and results of operations.
We may lose the ability to utilize assets
held by our consolidated controlled entities that are important to the operation of our business if any of these entities goes
bankrupt or becomes subject to a dissolution or liquidation proceeding.
Our wholly-owned PRC subsidiaries are considered
foreign-invested enterprises in China and are, therefore, not permitted under PRC law to hold the ICP licenses and to operate the
online advertising businesses that are critical to our operations. As a result, our consolidated controlled entities are the holders
of the ICP licenses required for operating our websites and our advertising business in China. We do not have any direct or indirect
shareholding interests in these consolidated controlled entities. They are instead held directly or indirectly by Mr. Mo,
our founder and executive chairman, together with Richard Jiangong Dai (“Mr. Dai”), our former director and former
chief executive officer, or Ms. Yu Huang, the chief executive officer of CIH. Mr. Dai is a nephew of Mr. Mo. Each of
Mr. Mo, Mr. Dai and Ms. Huang is a PRC citizen. Through the Structure Contracts, we exercise management, financial and
voting control over these consolidated controlled entities through our rights to all the residual benefits of the consolidated
controlled entities and our obligation to fund losses of the consolidated controlled entities and also have a contractual right,
to the extent permitted by PRC laws, rules and regulations, to acquire the equity interests in these entities. Consequently, if
any of these consolidated controlled entities goes bankrupt and all or part of its assets become subject to liens or rights of
third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely
affect our business, financial condition and results of operations. If any of our consolidated controlled entities undergoes a
voluntary or involuntary liquidation proceeding, the shareholders or unrelated third-party creditors may claim rights to some or
all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business,
financial condition and results of operations.
Contractual or other arrangements among our
affiliates may be subject to scrutiny by PRC tax authorities, and a finding that we or our affiliates owe additional taxes could
substantially reduce our profitability and the value of your investment.
As a result of the Structure Contracts,
we are entitled to substantially all of the economic benefits of ownership of the consolidated controlled entities and also bear
substantially all of the economic risks associated with consolidated controlled entities. If the PRC tax authorities determine
that the economic terms, including pricing, of our arrangements with our consolidated controlled entities were not determined
on an arm’s length basis, we could be subject to significant additional tax liabilities. In particular, the PRC tax authorities
may perform a transfer pricing adjustment, which could result in a reduction, for PRC tax purposes, of deductions recorded by
our consolidated controlled entities. Such a reduction could increase the tax liabilities of our consolidated controlled entities
without reducing the tax liabilities of our PRC subsidiaries. This increased tax liability could further result in late payment
fees and other penalties to our consolidated controlled entities for underpaid taxes. Any of these events could materially reduce
our net income.
Contractual arrangements, including voting
proxies, with our consolidated controlled entities for our Internet content distribution and marketing businesses may not be as
effective in providing operational control as direct or indirect ownership.
Since the applicable PRC laws, rules and
regulations restrict foreign ownership in the Internet content distribution and marketing businesses, we conduct our Internet
content distribution and advertising businesses and derive related revenues through the Structure Contracts with our consolidated
controlled entities. As we have no direct or indirect ownership interest in our consolidated controlled entities, these Structure
Contracts, including the voting proxies granted to us, may not be as effective in providing us with control over these companies
as direct or indirect ownership. If we were the controlling shareholders of these companies with direct or indirect ownership,
we would be able to exercise our rights as shareholders to effect changes in the board of directors, which in turn could effect
change, subject to any applicable fiduciary obligations, at the management level. However, if any of our consolidated controlled
entities or their shareholders fail to perform their obligations under these contractual arrangements, or if they were otherwise
to act in bad faith towards us, we may be forced to (1) incur substantial costs and resources to enforce such arrangements, including
the voting proxies, and (2) rely on legal remedies available under PRC law, including exercising our call option right over the
equity interests in our consolidated controlled entities, seeking specific performance or injunctive relief, and claiming monetary
damages.
Furthermore, pursuant to the equity interest
pledge agreements between certain of our PRC subsidiaries and the individual shareholders of our consolidated controlled entities,
each individual shareholder of our consolidated controlled entity agrees to pledge his equity interests in the consolidated controlled
entities to our subsidiaries to secure the relevant consolidated controlled entities’ performance of their obligations under
the exclusive technical consultancy and service agreements of the Structure Contracts. The equity interest pledges of shareholders
of consolidated controlled entities under these equity pledge agreements have been registered with the relevant local branch of
SAIC. The equity interest pledge agreements with the consolidated controlled entities’ individual shareholders provide that
the pledged equity interest shall constitute security for consulting and service fees under the exclusive technical consultancy
and service agreements. The scope of pledge is not limited by the amount of the registered capital of that consolidated controlled
entity. However, it is possible that a PRC court may take the position that the amount listed on the equity pledge registration
forms represents the full amount of the collateral that has been registered and perfected. If this is the case, the obligations
that are supposed to be secured in the equity interest pledge agreements in excess of the amount listed on the equity pledge registration
forms could be determined by the PRC court as unsecured debt, which takes last priority among creditors. Such a decision could
materially and adversely affect our liquidity and our ability to fund and expand our business.
In
anticipation of our originally proposed acquisition of a controlling stake in Chongqing Wanli New Energy Co., Ltd., a PRC
company listed on the Shanghai Stock Exchange (stock code: 600847) (“Wanli”) and the sale of a portion of our
equity interest in five wholly-owned subsidiaries that operate as our service platforms for online advertising business to
Wanli (which was terminated in February 2017), in December 2015, we underwent an internal restructuring, whereby we
terminated all of our previous structure contracts and caused Beijing Zhong Zhi Shi Zheng and Jia Tian Xia Network, our
wholly-owned PRC subsidiaries, to enter into a series of structure contracts in 2016, or the
2016 Structure Contracts,
with our consolidated controlled entities, with terms and conditions substantially similar to those of our previous structure
contracts. In February 2017, we terminated the transaction with Wanli in light of substantial regulatory uncertainties
in China. Nevertheless, we do not plan to recover the original Structure Contracts before the internal restructuring. Among
the 2016 Structure Contracts, Beijing Zhong Zhi Shi Zheng entered into a series of contractual arrangements with certain of
our consolidated controlled entities and their nominee shareholders. In anticipation of the separation and distribution in
relation to CIH, we terminated the foregoing contractual arrangements between our group and these entities on May 15, 2018,
and subsequently caused Beijing Tuo Shi Huan Yu Network Technology Co., Ltd. (“Beijing TuoShi”), our wholly-owned
PRC subsidiary, to enter into a new series of contractual arrangements with these consolidated controlled entities in 2018,
with terms and conditions substantially similar to the 2016 Structure Contracts. CIH, through its wholly-owned subsidiary,
Beijing Zhong Zhi Shi Zheng, has entered into new contractual arrangements with Beijing Zhong Zhi Hong Yuan, which is held by
our nominee shareholders, i.e., Vincent Tianquan Mo and Ms. Yu Huang, the chief executive officer of CIH, with terms and
conditions substantially similar to those of our previous structure contracts. See “Item 7.B. Major Shareholders and
Related Party Transactions—Related Party Transactions—Structure Contracts” of this annual report. We
believe that our contractual arrangements with our consolidated controlled entities for our Internet content distribution and
marketing businesses are not materially affected by our internal restructuring. We cannot assure you, however, that our
current Structure Contracts are as effective as the previous ones in terms of controlling our Internet content
distribution and marketing businesses, nor can we assure you that these contractual arrangements will not be further
modified. Any modification could potentially adversely affect our control, or result in our loss of control, over the
Internet content distribution and marketing businesses. In the event that we are unable to enforce these contractual
arrangements, or if we experience significant delays or other obstacles in the process of enforcing these contractual
arrangements, our business, financial condition and results of operations could be materially and adversely affected.
Our business may suffer if we fail to carry
out our business arrangements related to online video broadcasting related business with certain consolidated controlled entities
of our company.
Beijing Technology, which holds licenses
of online video recording and broadcasting, entered into a cooperation agreement with certain of our wholly-owned subsidiaries,
under which Beijing Technology is responsible for the operation of online video broadcasting, while those subsidiaries are responsible
for relevant technical support. During its possession of the domain name “fang.com,” Beijing Technology published
online videos by embedding videos on webpages or placing video links on “fang.com.”
Although such business cooperation agreement
does not violate current PRC laws and regulations regarding online broadcasting and recording, we cannot assure you that due to
any change of laws and regulatory policies, the abovementioned business cooperation agreement will not be deemed void, revocable
or unenforceable under then applicable PRC laws amended from time to time or by regulatory authorities in the future. Should any
of the above occur, the relevant business of the relevant subsidiaries will be impaired, which would have a material adverse effect
on our business, financial condition and results of operations.
Moreover, under the applicable PRC laws,
rules and regulations, the failure to maintain licenses of online video recording and broadcasting may subject the entity to various
penalties, including confiscation of revenues, imposition of fines and/or restrictions on the entity conducting such activities’
business operations, or the discontinuation of their operations.
The shareholders of our consolidated controlled
entities may have potential conflicts of interest with us, and if any such conflicts of interest are not resolved in our favor,
our business may be materially and adversely affected.
We operate through a number of consolidated
controlled entities in China. Mr. Mo, Mr. Dai and Ms. Huang, together hold 100.0% of the equity interest in these consolidated
controlled entities. The interests of Mr. Mo, Mr. Dai and Ms. Huang as the controlling shareholders of the consolidated controlled
entities may differ from the interests of our company as a whole, as what is in the best interests of our consolidated controlled
entities may not be in the best interests of us and our other shareholders. We cannot assure you that when conflicts of interest
arise, Mr. Mo, Mr. Dai and Ms. Huang will act in the best interests of our company or that conflicts of interest will be
resolved in our favor. In addition, Mr. Mo, Mr. Dai and Ms. Huang may breach or cause our consolidated controlled entities
and their respective subsidiaries to breach or refuse to renew the existing contractual arrangements with us. We rely on Mr. Mo,
Mr. Dai and Ms. Huang to comply with the laws of China, which protect contracts and provide that directors and executive officers
owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions
for personal gains. We also rely on Mr. Mo to abide by the laws of the Cayman Islands, which provide that directors have
a duty of care and a duty of loyalty to act honestly in good faith with a view to our best interests. However, the legal frameworks
of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict between the laws of
China and the Cayman Islands regarding which corporate governance regime controls. If we cannot resolve any conflicts of interest
or disputes between us and Mr. Mo, Mr. Dai or Ms. Huang, we would have to rely on legal proceedings, which could result in
disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
In addition, Mr. Dai continued to
be a nominee shareholder of our certain consolidated controlled entities following his resignation from our board of directors
in February 2016. We did not exercise, nor did we designate any third party to exercise, the call option under the Structure
Contracts to acquire from Mr. Dai the equity interests he holds in our consolidated controlled entities. Although the relevant
Structure Contracts to which Mr. Dai is a party remain to be effective and binding, we cannot assure you that we will be
able to fully exercise our contractual rights against Mr. Dai (e.g., to request him to sell his equity interests in our consolidated
controlled entities to us when permitted by applicable PRC laws). Nor can we assure you that Mr. Dai will not act against
the best interests of us and our other shareholders in the future since he no longer owes any fiduciary duties to our company.
Should we encounter any difficulties in exercising our contractual rights under the Structure Contracts against Mr. Dai to
retain our control over such consolidated controlled entities, our business, financial condition and results of operations will
be materially and adversely affected.
We are controlled by our significant shareholders
and their affiliated entities, whose interests may differ from our other shareholders.
As of March 31, 2019, Mr. Mo
may be deemed to have voting and dispositive power with respect to: (1) 510,994 Class A ordinary shares and 11,355,645 Class B
ordinary shares owned by Media Partner Technology Limited (“Media Partner”), with respect to Mr. Mo and his family
members, (2) 1,138,132 Class A ordinary shares and 10,230,645 Class B ordinary shares owned by Next Decade Investments Limited
(“Next Decade”), with respect to Mr. Mo and his family members, (3) 957,264 Class A ordinary shares owned by
Safari Group Holdings Limited (“Safari”), (4) 1,472,298 Class A ordinary shares owned by IDG Alternative Global Limited
(“IDG Alternative”), and (5) 926,461 Class A ordinary shares owned by Karistone Limited, collectively presenting approximately
29.8% of our outstanding share capital and approximately 71.6% of our voting power under our dual-class ordinary share structure.
The shares in Media Partner and Next Decade are held in irrevocable discretionary trusts, for which Mr. Mo acts as a protector.
Media Partner and Next Decade could exert substantial influence over the outcome of any corporate transaction or other matters
submitted to the shareholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets,
election of directors and other significant corporate actions. This concentration of ownership may also discourage, delay or prevent
a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares
as part of a sale of our company and might reduce the price of our ADSs or notes. These actions may be taken even if they are
opposed by our other shareholders, including the investors in the ADSs.
The continuing cooperation of our significant
shareholders on an on-going basis, including Media Partner and Next Decade, is important to our businesses. Without their consent
or cooperation, we could be prevented from entering into transactions or conducting business that could be beneficial to us. We
cannot assure you, however, that the interests of our significant shareholders would not differ from the interests of our other
shareholders, including investors in the ADSs.
Risks related to doing business in China
China’s economic, political and social
conditions, as well as government policies, could have a material adverse effect on our business, financial condition and results
of operations.
Our business and operations are primarily
conducted in China. Accordingly, our financial condition and results of operations have been, and are expected to continue to
be, affected by the economic, political and social developments in relation to the Internet, online marketing and real estate
industries in China. A slowdown of economic growth in China could reduce the sale of real estate and related products and services,
which in turn could materially and adversely affect our business, financial condition and results of operations.
The PRC economy differs from the economies
of most developed countries in many respects, including: a higher level of government involvement; the on-going development of
a market-oriented economy; a rapid growth rate; a higher level of control over foreign exchange; and a less efficient allocation
of resources.
While the PRC economy has experienced significant
growth since the late 1970s, growth has been uneven, both geographically and among various sectors of the economy. Growth rates
in China have lowered in recent years. The PRC government has implemented various measures to encourage economic growth and guide
the allocation of resources. These measures are intended to benefit the overall PRC economy, but may also have a negative effect
on us. For example, our business, financial condition and results of operations could be adversely affected by PRC government
control over capital investments or changes in tax regulations that are applicable to us.
The PRC economy has been transitioning
from a centrally-planned economy to a more market-oriented economy. Although the PRC government has implemented measures since
the late 1970s which emphasize the utilization of market forces for economic reform, the PRC government continues to play a significant
role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control
over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies.
According to the Guiding Opinions on the
Pilot Operation of Microfinance Companies (the “Guiding Opinions”) jointly issued by the China Banking Regulatory
Commission and the PBOC on May 4, 2008, microfinance companies are limited liability companies or joint stock companies established
with the capital contribution from natural persons, legal persons and other organizations, which do not accept public deposits
and engage in the microfinance business. To set up a microfinance company, an applicant shall submit a formal application to the
competent administrative departments at the provincial level. Upon approval, the applicant shall apply to the local branch of
the SAIC to obtain a business license for the microfinance company. In addition, the applicant shall complete certain filings
with the local police department, the local office of the China Banking Regulatory Commission and the local branch of the PBOC.
According to the Guiding Opinions, a provincial
government may launch pilot programs for microfinance companies within prefectural regions of the province only after it designates
a department (finance office or other relevant institutions) to be in charge of supervision and administration of microfinance
companies and is willing to be responsible for risk management and disposals with respect to microfinance companies. Consequently,
microfinance companies are primarily regulated locally by provincial governments under rules and regulations promulgated by the
provincial governments.
In November 2009, the provincial government
of the Guangxi Zhuang Autonomous Region issued the Management Measures of Microfinance Companies in Guangxi Zhuang Autonomous
Region. In 2014, we obtained approvals to engage in the microfinancing business from government authorities of Beihai city, Guangxi
Zhuang Autonomous Region.
Pursuant to the Management Measures of
Microfinance Companies in Guangxi Zhuang Autonomous Region, Beihai Tian Xia Dai Microfinance Co., Ltd. (“Beihai Tian Xia
Dai Microfinance”) with microfinancing approvals cannot conduct microfinancing business outside Beihai city. However, Beihai
Tian Xia Dai Microfinance has provided loans outside Beihai city. Beihai Tian Xia Dai Microfinance may face the risk of being
rectified by relevant authorities.
The discontinuation of any of the preferential
tax treatments currently available to us in China could materially and adversely affect our financial condition and results of
operations
In March 2007, the National People’s
Congress of China enacted the PRC Enterprise Income Tax Law (the “New EIT Law”), which became effective on January 1,
2008 and was amended in February 2017 and December 2018. In April 2008, the relevant PRC governmental authorities issued
the Administrative Measures for Certification of High and New Technology Enterprises which was amended in January 2016. “High
and new technology enterprises” would be entitled to a statutory tax rate of 15.0%. Currently, ten of our PRC subsidiaries
or consolidated controlled entities are qualified as “high and new technology enterprises.” We cannot assure you that
our PRC subsidiaries or consolidated controlled entities will continue to be entitled to preferential tax rates as qualified “high
and new technology enterprises” under the New EIT Law. We also cannot assure you that the tax authorities will not, in the
future, discontinue any of our preferential tax treatments, potentially with retroactive effect. In the event that preferential
tax treatment for any of our subsidiaries or consolidated controlled entities is discontinued, the affected entity will become
subject to a 25.0% standard enterprise income tax rate, which would increase our income tax expenses and could materially reduce
our net income and profitability. See also “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Components
of our Results of Operations—Taxation—China” of this annual report.
We may be treated as a resident enterprise
for PRC tax purposes under the New EIT Law and therefore be subject to PRC taxation on our worldwide income.
We are incorporated under the laws of the
Cayman Islands. Under the New EIT Law and its implementation rules, an enterprise incorporated in a foreign country or region
may be classified as either a “non-resident enterprise” or a “resident enterprise.” If any enterprise
incorporated in a foreign country or region has its “de facto management bodies” located within the PRC territory,
such enterprise will be considered a PRC tax resident enterprise and thus will normally be subject to enterprise income tax at
the rate of 25.0% on its worldwide income. The relevant implementing rules provide that “de facto management bodies”
means the bodies which exercise substantial and overall management and control over the manufacturing and business operations,
personnel, accounting, properties and other factors of an enterprise. In April 2009, the SAT issued the Notice Regarding
the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto
Management Bodies (“Circular 82”), which sets forth certain specific criteria for determining whether the “de
facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. However, Circular 82
only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners in
China, such as our company. See “Item 10.D. Additional Information—Exchange Controls—Regulations relating to
Foreign Exchange, Taxation and Dividend Distribution—Taxation and Dividend Distribution” of this annual report. Substantially
all of the members of our management are currently located in China and we expect them to continue to be located in China. Due
to the lack of clear guidance on the criteria pursuant to which the PRC tax authorities will determine our tax residency under
the New EIT Law, it remains unclear whether the PRC tax authorities will treat us as a PRC resident enterprise. As a result, our
PRC legal counsel is unable to express an opinion as to the likelihood that we will be subject to the tax applicable to resident
enterprises or non-resident enterprises under the New EIT Law. If we are deemed to be a PRC tax resident enterprise, we will be
subject to an enterprise income tax rate of 25.0% on our worldwide income, which would have an impact on our effective tax rate
and an adverse effect on our net income and results of operations. The New EIT Law provides that dividend income between qualified
resident enterprises is exempt income, which the implementing rules have clarified to mean a dividend derived by a resident enterprise
on an equity interest it directly owns in another resident enterprise. It is possible, therefore, that dividends we receive through
our offshore subsidiaries from our PRC subsidiaries, would be exempt income under the New EIT Law and its implementing rules if
our offshore subsidiaries are deemed to be a “resident enterprise.” If we are deemed to be a PRC tax resident enterprise,
we would then be obliged to withhold PRC withholding income tax on the gross amount of dividends we pay to shareholders who are
non-PRC tax residents. The withholding income tax rate is 10.0% for non-resident enterprises and 20.0% for non-resident individuals,
unless otherwise provided under the applicable double tax treaties between China and the governments of other jurisdictions.
We rely primarily on dividends and other
distributions on equity paid by our subsidiaries, and any limitation on the ability of our subsidiaries to make payments to us
could have a material adverse effect on our ability to conduct our business as well as our liquidity.
As a holding company, we rely primarily
on dividends and other distributions on equity paid by our subsidiaries for our cash and financing requirements, which include
funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and to pay our
operating expenses. If our subsidiaries incur debt in the future, the instruments governing the debt may restrict their ability
to pay dividends or make other distributions to us.
Our subsidiaries are primarily entities
incorporated and established in China and therefore, are subject to certain limitations with respect to dividend payments. PRC
regulations currently allow payment of dividends only out of accumulated profits determined in accordance with accounting standards
and regulations in China. Each year, our subsidiaries in China and our consolidated controlled entities are required to allocate
a portion of their after-tax profits to their respective reserve funds, until the reserves reach 50.0% of their respective registered
capital. Allocations to these reserves and funds can only be used for specific purposes and are not transferable to us in the
form of loans, advances or cash dividends. Such restrictions on the ability of our subsidiaries and consolidated controlled entities
to transfer funds to us could adversely limit our ability to grow, pay dividends, make investments or acquisitions that could
benefit our businesses or otherwise fund and conduct our businesses.
Under the relevant PRC tax law applicable
to us prior to January 1, 2008, dividend payments to foreign investors made by foreign-invested enterprises were exempted
from PRC withholding tax. However, under the New EIT Law and its implementing rules, non-resident enterprises without an establishment
in China, or whose income has no connection with their institutions and establishment inside China, are subject to withholding
tax at the rate of 10.0% with respect to their PRC-sourced dividend income, subject to applicable tax agreements or treaties between
the PRC and other tax jurisdictions. Similarly, any gains realized on the transfer of shares by such investors are also subject
to a 10.0% PRC income tax if such gains are regarded as income from sources within China.
According to the Mainland and Hong Kong
Special Administrative Region Arrangement on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income (the “Avoidance of Double Taxation Arrangement”), dividends derived by a Hong Kong resident enterprise
from a PRC resident enterprise are subject to withholding tax at the rate of 5.0%, provided that such Hong Kong resident enterprise
directly owns at least 25.0% of the equity interest in the PRC resident enterprise. However, under the New EIT Law and its implementation
rules, as well as Circular No. 9 issued by SAT in February 2018 (“Circular 9”), dividends from our PRC subsidiaries
paid to us through our Hong Kong subsidiaries may be subject to withholding tax at a rate of 10.0% if our Hong Kong subsidiaries
cannot be considered as a “beneficial owner” or the main purpose test clause of Avoidance of Double Taxation Arrangement
may apply to us.
We hold equity interests in several of
our major PRC subsidiaries indirectly through subsidiaries incorporated in Hong Kong. Neither we nor our PRC legal counsel is
certain as to whether it is more likely than not that PRC tax authorities would require or permit our Hong Kong-incorporated subsidiaries
to be treated as PRC resident enterprises. To the extent that such Hong Kong-incorporated subsidiaries are each considered a “non-resident
enterprise” under the Avoidance of Double Taxation Arrangement, dividends derived by such Hong Kong-incorporated subsidiaries
from our PRC subsidiaries may be subject to a maximum withholding tax rate of 10.0%. See “Item 10.E. Additional Information—Taxation—Regulation of
Foreign Exchange, Taxation and Dividend Distribution—Taxation and Dividend Distribution” of this annual report.
The discontinuation of the previously available
exemption from withholding tax as a result of the New EIT Law and its implementing rules have and will increase our income tax
expenses and reduce our net income, and may materially reduce our profitability.
PRC regulations on loans to PRC entities
by offshore holding companies may affect our ability to capitalize or otherwise fund our PRC operations.
On August 29, 2008, SAFE promulgated
the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of
Foreign Currency Capital of Foreign Invested Enterprises (“SAFE Circular 142”), regulating the conversion by a foreign-invested
enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142
provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be
used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments
within China. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency
registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE approval, and such
RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of SAFE
Circular 142 could result in severe monetary or other penalties.
On March 30, 2015, SAFE promulgated
the Circular on the Reform of Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises
(“SAFE Circular 19”), which became effective on June 1, 2015. SAFE Circular 19 abolishes the SAFE Circular 142,
providing that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise shall be used
for purposes within its approved business scope, and allows a foreign-invested enterprise to use the RMB capital converted from
its foreign currency registered capital for equity investments within China. However, such converted RMB capital still cannot
be used to repay RMB loans between enterprises under SAFE Circular 19. However, the Circular of the State Administration of Foreign
Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“SAFE
Circular 16”) implemented in June 2016 removes the prohibition of using the RMB capital converted from foreign currency
registered capital to repay RMB loans between enterprises.
In light of the various requirements imposed
by PRC regulations on loans to PRC entities by offshore holding companies, we may not be able to obtain the necessary government
approvals with respect to future loans by us to our wholly-owned subsidiaries or consolidated controlled entities or with respect
to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals,
our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely affect our liquidity
and our ability to fund and expand our business.
We may be subject to fines and legal or administrative
sanctions in connection with certain historical intra-group funding transactions.
We have occasionally engaged in intra-group
funding transactions, including dividend distributions from our consolidated controlled entities and payment advances made by
one subsidiary on behalf of another. These transactions are typically deemed as non-interest bearing loans and receivables from
the relevant “debtors.”
Pursuant to the General Lending Code implemented
in August 1996 by the PBOC, the central bank of China, commercial lending in China must be made by or through a PRC-qualified
financial institution as defined under the General Lending Code. As none of the payors in our intra-group transactions is or was
at the relevant time a PRC qualified financial institution as defined under the General Lending Code, the PBOC may impose a fine
for non-compliance on each of the payors in an amount equal to one to five times the value of any income received from its non-compliance,
and the payors may be required to terminate such loans. On August 6, 2015, the Supreme People’s Court issued the Provisions
of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases
(the “Provisions”), which provide that if the purpose of a lending contract concluded between two enterprises is for
their business operation, and the lending contract does not contain the circumstances as stipulated in Article 52 of the PRC Contract
Law and Article 14 of the Provisions, i.e., those that will result in contracts being null and void, the people’s court
shall consider such lending contract to be effective. As the General Lending Code has not been repealed and the Provisions were
issued by the Supreme People’s Court as guidance for courts’ trial in private lending cases, it remains uncertain
how the General Lending Code will be interpreted and implemented. If the PBOC and/or other governmental authorities decide to
apply the General Lending Code and thereby instruct the payors to terminate such transactions, we have to fully repay the funds
advanced in such transactions.
Moreover, pursuant to the PRC Foreign Currency
Administration Regulations promulgated by the State Council in January 1996, and amended in August 2008, a PRC entity
is required to apply for SAFE approval prior to extending commercial loans to offshore entities such as our company. As there
is no specific definition of “commercial loans” under the Foreign Currency Administration Regulations and PRC governmental
authorities have not issued any implementation rules with respect to the provision of commercial loans to offshore entities, it
is not clear whether such provision will be applied to the non-interest bearing loans described above. Under the Foreign Currency
Administration Regulations, an entity may be required to correct the violation and be subject to a warning and/or a fine for the
violation of the foreign registration administrative regulations. If SAFE determines that the PRC Foreign Currency Administration
Regulations do apply to us, it may require us to register the deemed overseas loans and rectify any prior non-compliance by properly
obtaining SAFE approval. SAFE may also impose a warning and/or fine based on the PRC Foreign Currency Administration Regulations.
We cannot assure you that we will be able to complete the necessary registration and filing procedures required by the PRC Foreign
Currency Administration Regulations. In addition, it is not clear whether SAFE may consider the making of payments in Renminbi
which should have been made in foreign currency to be foreign currency arbitrage, which may be deemed a violation and may subject
a violator to warnings, penalties or other sanctions. Due to a general uncertainty over the interpretation and implementation
of the PRC Foreign Currency Administration Regulations as well as the broad enforcement discretion granted to SAFE, we cannot
assure you that we will not be subject to such warnings, penalties or other administrative penalties resulting from our intra-group
transactions that may be deemed as overseas loans.
According to the New EIT Law, loan arrangements
between related parties without interest are not considered arms-length transactions. Therefore, the PRC taxation authorities
could impose enterprise income and VAT on the payors for the deemed interest income that would have been derived from
our intra-group transactions. The deemed interest rate would be determined by reference to the lending rate over the relevant
period published by the PBOC. We cannot assure you that we will not be subject to fines, or legal or administrative sanctions
as a result of non-compliance with the General Lending Code and the Foreign Currency Administration Regulations. Further, we cannot
assure you that the PRC taxation authorities will not impose enterprise income and VAT taxes on the payors for any deemed
interest income with respect to our intra-group transactions. Because the applicable PRC laws, rules and regulations do not provide
clear definitions for several key terms and because the relevant PRC regulatory authorities have significant discretion on the
interpretation of such matters, we cannot predict the likelihood that the risks described here will materialize.
The PRC legal system embodies uncertainties,
which could limit the legal protections available to you and us.
In 1979, the PRC government began to promulgate
a comprehensive system of laws and regulations governing economic matters in general. The overall effect of such legislation has
significantly enhanced the protections afforded to various forms of foreign investment in China. Our PRC operating subsidiaries
are subject to laws and regulations applicable to foreign-invested enterprises in China. In particular, they are subject to PRC
laws, rules and regulations governing foreign companies’ ownership and operation of Internet content distribution and advertising
businesses as well as of the real estate and microfinancing sectors. Such laws and regulations are subject to change, and their
interpretation and enforcement involve uncertainties, which could limit the legal protections available to us and our investors.
In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws,
changes to existing laws or the interpretation or enforcement of such laws, or the preemption of local regulations by PRC laws,
rules and regulations.
Moreover, China has a civil law system
based on written statutes, which, unlike common law systems, is a system in which decided judicial cases have little precedential
value. Furthermore, interpretation of statutes and regulations may be subject to government policies reflecting domestic political
changes. The relative inexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of
litigation. In addition, enforcement of existing laws or contracts based on existing laws may be uncertain and sporadic, and it
may be difficult to obtain swift and equitable enforcement within China. All such uncertainties could materially and adversely
affect our business, financial condition and results of operations.
Government control of currency conversion
may limit our ability to utilize our revenues effectively.
Substantially all of our revenues and operating
expenses are denominated in Renminbi. Under applicable PRC law, the Renminbi is freely convertible to foreign currencies with
respect to “current account” transactions, but not with respect to “capital account” transactions. Current
account transactions include ordinary course import or export transactions, payments for services rendered and payments of license
fees, royalties, interest on loans and dividends. Capital account transactions include cross-border investments and repayments
of the principal of loans.
Accordingly, our PRC subsidiaries currently
may purchase foreign currencies for settlement of current account transactions, including payment of dividends to us, without
prior SAFE approval by complying with certain procedural requirements. However, we cannot assure you that the relevant PRC governmental
authorities will not limit or eliminate the ability of our PRC subsidiaries to purchase and retain foreign currencies in the future.
Foreign exchange transactions under the capital account are still subject to limitations and require approvals from or registration
with relevant government authorities. This could affect our PRC subsidiaries’ ability to obtain debt or equity financing
from outside China, including by means of loans or capital contributions from us.
Since substantially all of our revenues
are denominated in Renminbi, including fees and payments from our PRC consolidated controlled entities pursuant to the Structure
Contracts, existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi
to fund expenditures denominated in foreign currencies, including any dividends that our PRC subsidiaries may pay to us in the
future.
PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability
or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase
their registered capital or distribute profits to us, or may otherwise adversely affect us.
SAFE
promulgated
the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles (“SAFE Circular 37”) on July 4, 2014, which replaced the
former circular commonly known as Circular 75 promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity,
for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests
in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.”
Pursuant to SAFE Circular 37, “control” refers to the act through which a PRC resident obtains the right to carry
out business operation of, to gain proceeds from or to make decisions on a special purpose vehicle by means of, among others,
shareholding entrustment arrangement. SAFE Circular 37 further requires amendment to the registration in the event of any significant
changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share
transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special
purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited
from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities,
and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange
Administration of Direct Investment released on February 13, 2015 by SAFE, local banks will examine and handle foreign exchange
registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under
SAFE Circular 37 from June 1, 2015.
We are aware that Mr. Vincent Tianquan
Mo, controlling shareholder of Fang and a PRC resident, has not completed the registration as of the date of this prospectus.
We have notified all PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and
who are known to us as being PRC residents to complete the foreign exchange registrations. However, we may not be informed of
the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our
beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders
or beneficial owners who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable
registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE
regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or
legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make
distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
Regulations in China may make it more difficult
for us to pursue growth through acquisitions.
On August 8, 2006, six PRC regulatory
agencies jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors (the “M&A
Rules”), which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules and other
regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger
and acquisition activities by foreign investors more time-consuming and complex. For example, the M&A Rules require that MOFCOM
be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise
or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification
of Concentrations of Undertakings, issued by the State Council on August 3, 2008 and was amended on September 19, 2018,
are triggered. According to the Notice regarding the Establishment of the Security Review System for Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors issued by the General Office of the State Council in February 2011 and the Implementing
Rules Concerning Security Review on the Mergers and Acquisitions by Foreign Investors of Domestic Enterprises issued by MOFCOM
in August 2011, mergers and acquisitions by foreign investors involved in an industry related to national security are subject
to strict review by MOFCOM. These rules also prohibit any transactions attempting to bypass such security review, including by
controlling entities through contractual arrangements. We believe that our business is not in an industry related to national
security. However, we cannot preclude the possibility that MOFCOM or other government agencies may publish interpretations contrary
to our understanding or broaden the scope of such security review in the future. Although we have no current plans to make any
acquisitions, we may elect to grow our business in the future in part by directly acquiring complementary businesses in China.
Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval
processes, including obtaining any required MOFCOM approvals, may delay or inhibit our ability to complete such transactions.
We may be subject to fines and legal or administrative
sanctions if we or our PRC citizen employees fail to comply with PRC regulations with respect to the registration of such employees’
share options and restricted share units.
In February 2012, SAFE promulgated
the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive
Plan of Overseas Publicly-Listed Company (the “Stock Option Rule”). Under the Stock Option Rule, a Chinese entity’s
directors, supervisors, senior management officers, other staff, or individuals who have an employment or labor relationship with
such Chinese entity and who are granted stock options by an overseas publicly listed company are required, through a PRC agent
or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures. Our local
employees who have been granted stock options are subject to these regulations. We have designated our relevant PRC subsidiaries
to handle the registration and other procedures required by the Stock Option Rule. If we or our PRC option holders fail to comply
with these rules, we and our PRC option holders may be subject to fines and other legal or administrative sanctions. See “Item
4.B. Information on the Company—Business Overview—Regulation—Regulations relating to Employee Share Options”
of this annual report.
We face uncertainties with respect to indirect
transfers of equity interests in PRC resident enterprises by their non-PRC holding companies. Enhanced scrutiny over acquisition
transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
On February 3, 2015, the SAT issued
the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises
(“Public Notice 7”). According to Public Notice 7, where a non-resident enterprise investor transfers taxable assets
through the offshore transfer of a foreign intermediate holding company, the non-resident enterprise investor, being the transfer,
may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure
without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC withholding
tax at the rate of up to 10.0%. In addition, Public Notice 7 provides clearer criteria than Circular 698 on how to assess reasonable
commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through
a public securities market. Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person
who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer”
by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident
enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the
relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may
re-characterize such indirect transfer as a direct transfer of the equity interests in the PRC tax resident enterprise and other
properties in China. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the
transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at
a rate of up to 10.0% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee
may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the
taxes.
Pursuant to the Notice on Issues Relevant
to Withholding of Non-PRC Resident Enterprises Income Tax at Source (“SAT Circular 37”) issued by the SAT, which became
effective as of December January 1, 2017, transferees are subject to filing obligations and withholding obligations.
Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the
taxes and the transferor fails to pay the taxes.
We face uncertainties with respect to the
reporting and consequences of private equity financing transactions, share exchange or other transactions involving the transfer
of shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident
companies or other taxable assets by us. Our company and other non-resident enterprises in our group may be subject to filing
obligations or being taxed if our company and other non-resident enterprises in our group are transferors in such transactions,
and may be subject to filling obligations and withholding obligations if our company and other non-resident enterprises in our
group are transferees in such transactions, under SAT Circular 37 and Public Notice 7. For the transfer of shares in our company
by investors that are non-PRC resident enterprises, our PRC subsidiaries may be subject to filing obligations and withholding
obligations under SAT Circular 37 and Public Notice 7. As a result, we may be required to expend valuable resources to comply
with SAT Circular 37 and Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply
with these circulars, or to establish that our company and other non-resident enterprises in our group should not be taxed under
these circulars. The PRC tax authorities have the discretion under SAT Circular 37 and Public Notice 7 to make adjustments to
the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment.
If the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular37 and Public Notice 7,
our income tax costs associated with such transactions will be increased, which may have an adverse effect on our financial condition
and results of operations. We have made acquisitions in the past and may conduct additional acquisitions in the future. We cannot
assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations
on us or require us to provide assistance to them for the investigation of any transactions we were involved in. Heightened scrutiny
over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in
the future.
Our independent registered public accounting
firm is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC
authorities, and as such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting
firm, KPMG Huazhen LLP, which issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies
that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United
States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance
with the laws of the United States and professional standards. Our auditor is located in China, a jurisdiction where PCAOB is
currently unable to conduct inspections without the approval of the PRC authorities, our auditor is not currently inspected by
the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the
U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China.
The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains
unclear what further actions the SEC and the PCAOB will take to address this issue.
Inspections of other firms that PCAOB has
conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections
of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of
our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of
PCAOB inspections.
The inability of the PCAOB to conduct inspections
of auditors in China makes it more difficult to
evaluate
the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China
that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and
the quality of our financial statements.
If additional remedial measures are imposed
on the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting
firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the
SEC, with respect to requests for the production of documents, we could be unable to timely file future financial statements in
compliance with the requirements of the Exchange Act.
Beginning in 2011, the Chinese affiliates
of the “big four” accounting firms (including our independent registered public accounting firm) were affected by
a conflict between the U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in China, the
SEC and the PCAOB sought to obtain access to the audit work papers and related documents of the Chinese affiliates of the “big
four” accounting firms. The accounting firms were, however, advised and directed that, under Chinese law, they could not
respond directly to the requests of the SEC and the PCAOB and that such requests, and similar requests by foreign regulators for
access to such papers in China, had to be channeled through the CSRC.
In late 2012, this impasse led the SEC
to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of
2002 against the “big four” accounting firms (including our independent registered public accounting firm). A first
instance trial of these proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse
judgment against the firms. The administrative law judge proposed penalties on the firms, including a temporary suspension of
their right to practice before the SEC. Implementation of the latter penalty was postponed pending review by the SEC Commissioners.
On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under
the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC.
The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect
to such requests, which in substance require them to facilitate production via the CSRC. If the firms fail to follow these procedures
and meet certain other specified criteria, the SEC retains the authority to impose a variety of additional remedial measures,
including, as appropriate, an automatic six-month bar on a firm’s ability to perform certain audit work, commencement of
new proceedings against a firm or, in extreme cases, the resumption of the current administrative proceeding against all four
firms.
In the event that the SEC restarts administrative
proceedings, depending upon the final outcome, listed companies in the U.S. with major PRC operations may find it difficult or
impossible to retain auditors in respect of their operations in China, which could result in their financial statements being
determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative
news about any such future proceedings against the firms may cause investor uncertainty regarding China-based, U.S.-listed companies,
including our company, and the market price of their shares may be adversely affected.
If our independent registered public accounting
firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered
public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined
not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting
of our shares from the New York Stock Exchange or deregistration from the SEC, or both, which would substantially reduce or effectively
terminate the trading of our shares in the United States.
Fluctuations in the exchange rates of the
Renminbi could materially and adversely affect the value of our shares, ADSs or notes and result in foreign currency exchange
losses.
Substantially all of our revenues, costs
and expenses, are denominated in Renminbi, and the functional currency of our principal operating subsidiaries and consolidated
controlled entities is the Renminbi. On the other hand, a portion of our expenditures are denominated in foreign currencies, primarily
the U.S. dollar, and we use the U.S. dollar as our reporting currency. The ADSs and our convertible senior notes are also denominated
in U.S. dollars. As a result, the value of your investment in our ADSs or notes will be affected by fluctuations in exchange rates,
particularly appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar and other foreign currencies,
without giving effect to any underlying change in our business or results of operations.
The exchange rates between the Renminbi
and the U.S. dollar and other foreign currencies are affected by, among other things, changes in China’s political and economic
conditions. In July 2005, the PRC government discontinued pegging the Renminbi to the U.S. dollar. However, the PBOC regularly
intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate. Between July 2008
and June 2010, the exchange rate between the Renminbi and the U.S. dollar had been stable and traded within a narrow range.
However, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S.
dollar. Since June 2010, the Renminbi had started to slowly appreciate against the U.S. dollar, though there have been periods
when the U.S. dollar has appreciated against the Renminbi. On August 11, 2015, the PBOC allowed the Renminbi to depreciate
by approximately 2% against the U.S. dollar. Since October 1, 2016, the Renminbi has joined the International Monetary Fund
(IMF)’s basket of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese
yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging
U.S. dollar and persistent capital outflows of China. It is therefore difficult to predict how long such depreciation of Renminbi
against the U.S. dollar may last and when and how the relationship between the Renminbi and the U.S. dollar may change again.
Under China’s current exchange rate regime, the Renminbi may appreciate or depreciate significantly in value against the
U.S. dollar in the medium to long term. Moreover, it is possible that in the future the PRC authorities may lift restrictions
on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.
There remains significant international
pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the Renminbi
may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable
on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from offshore financing
transactions into Renminbi to pay our operating expenses, appreciation of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we would receive from the conversion. Conversely, a significant depreciation of the Renminbi against
the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the
price of our ADSs. Fluctuations in the exchange rate will also affect the relative value of any dividend we declare and distribute
that will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make in
the future. To the extent that we need to convert future financing proceeds into Renminbi for our operations, any appreciation
of the Renminbi against the relevant foreign currencies would materially reduce the Renminbi amounts we would receive from the
conversion. On the other hand, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments of dividends
on our shares or for other business purposes when the U.S. dollar appreciates against the Renminbi, the amounts of U.S. dollars
we would receive from such conversion would be reduced. In addition, any depreciation of our U.S. dollar-denominated monetary
assets could result in a charge to our income statement and a reduction in the value of our assets.
In addition, very limited hedging transactions
are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions
to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future,
the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our
exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert Renminbi into foreign currency.
You may experience difficulties in effecting
service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign
laws against us or our management.
We are a company incorporated under the
laws of the Cayman Islands. We conduct our operations in China and substantially all of our assets are located in China. In addition,
certain of our directors and executive officers reside in China, and most of the assets of these persons are located within China.
As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these
directors and executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state
securities laws. Our PRC legal counsel has advised us that the recognition and enforcement of foreign judgments are provided for
under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements
of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity
between jurisdictions. Currently, there are no treaties between the United States and China for the recognition or enforcement
of U.S. court judgments in China. As a result, recognition and enforcement in China of judgments of a court in the United States
or any other jurisdiction in relation to any matter not subject to a binding arbitration agreement may be difficult. Pursuant
to the PRC Civil Procedure Law, any matter, including matters arising under U.S. federal securities laws, in relation to assets
or personal relationships may be brought as an original action in China, only if the institution of such action satisfies the
conditions specified in the PRC Civil Procedure Law. As a result of the conditions set forth in the PRC Civil Procedure Law and
the discretion of the PRC courts to determine whether the conditions are satisfied and whether to accept the action for adjudication,
there remains uncertainty as to whether an investor will be able to bring an original action in a PRC court based on U.S. federal
securities laws. In addition, in the event that foreign judgments contravene the basic principles of laws of China, endanger PRC
state sovereignty or security, or are in conflict with the public interest of China, PRC courts will not recognize and enforce
such foreign judgments.
Risks related to our ADSs, ordinary shares and notes
The market price movement of our ADSs and
notes may be volatile.
The market prices of our ADSs and/or notes
may be volatile and subject to wide fluctuations. Among the factors that could affect the prices of our ADSs and/or notes are
risk factors described in this section and other factors, including:
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announcements
of competitive developments;
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regulatory developments
in our target markets in China which affect us, our users, our customers or our competitors;
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actual or anticipated
fluctuations in our quarterly results of operations;
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market acceptance
of our existing and new services and our expansion from a media platform to media, transaction
and financial platforms;
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failure of our
quarterly financial and results of operations to meet market expectations or failure
to meet our previously announced guidance;
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changes in financial
estimates by securities research analysts;
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changes in the
economic performance or market valuations of other online or offline real estate and
home-related services companies;
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additions or departures
of our executive officers and other key personnel;
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announcements
regarding intellectual property litigation (or potential litigation) involving us or
any of our directors and officers;
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negative publicity
and short seller reports that make allegations against us or our affiliates, even if
unfounded;
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fluctuations in
the exchange rates between the U.S. dollar and the Renminbi;
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fluctuations in
short or long-term interest rates; and
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sales or perceived
sales of additional ordinary shares, ADSs or notes, including under the registration
statement we have on file with the SEC to enable certain of our affiliates to sell their
shares.
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In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular
industries or companies. For example, the capital and credit markets have experienced significant volatility and disruption in
recent years. In September 2008, such volatility and disruption reached extreme levels and developed into a global crisis.
As a result, stock prices of a broad range of companies worldwide, whether or not they were related to financial services, declined
significantly. Future market fluctuations may also have a material adverse effect on the market prices of our ADSs and/or notes.
We may need additional capital, and the sale
of additional ADSs, convertible notes or other equity securities could result in additional dilution to our shareholders, while
the incurrence of debt may impose restrictions on our operations.
We believe that our current cash and cash
equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable
future. We may, however, require additional cash resources due to changed business conditions or other future developments, including
any investments or acquisitions we may decide to pursue and the expansion of our financial services. If these resources are insufficient
to satisfy our cash requirements, we may seek to sell equity or debt securities or obtain a credit facility. The sale of equity
securities would result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service
obligations and could require us to agree to operating and financing covenants that would restrict our operations.
As a foreign private issuer, we are permitted
to, and we rely on exemptions from certain corporate governance standards of The New York Stock Exchange applicable to U.S. issuers,
including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less
protection to holders of our ordinary shares, ADSs and notes.
We are a “foreign private issuer”
under the securities laws of the United States and the rules of The New York Stock Exchange. Under the securities laws of the
United States, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled registrants,
as well as different financial reporting requirements. Under the rules of The New York Stock Exchange, a “foreign private
issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of The
New York Stock Exchange permit a “foreign private issuer” to follow its home country practice in lieu of the listing
requirements of The New York Stock Exchange. The corporate governance practice in our home country, the Cayman Islands, does not
require a majority of our board to consist of independent directors or that we have annual meetings to elect directors. We currently
rely on the exemptions provided by The New York Stock Exchange to a foreign private issuer and have an audit committee comprised
of independent directors, a compensation committee with one non-independent director and a nominating and corporate governance
committee with one non-independent director. As a result, you may not have the same protections afforded to stockholders of companies
that are subject to all of the corporate governance requirements of The New York Stock Exchange.
As a foreign private issuer, we are exempt
from certain disclosure requirements under the Exchange Act, which may afford less protection to our shareholders than they would
enjoy if we were a U.S. company.
As a foreign private issuer, we are exempt
from, among other things, the rules prescribing the furnishing and content of proxy statements under the Exchange Act. In addition,
our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit and recovery
provisions contained in Section 16 of the Exchange Act. We are also not required under the Exchange Act to file periodic
reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under
the Exchange Act. As a result, our shareholders may be afforded less protection than they would under the Exchange Act rules applicable
to U.S. companies.
Since shareholder rights under Cayman Islands
law differ from those under U.S. law, you may have difficulty protecting your shareholder rights.
Our corporate affairs are governed by our
fifth amended and restated memorandum and articles of association, the Companies Law of the Cayman Islands (the “Cayman
Companies Law”) and the common law of the Cayman Islands. The rights of shareholders to take action against our directors,
actions by minority shareholders and the fiduciary responsibilities of our directors to us and to our shareholders under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived
in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive,
but not binding, authority on a court in the Cayman Islands.
The rights of our shareholders and the
fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they are under statutes
or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body
of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially
interpreted bodies of corporate law. In addition, shareholders of Cayman Islands companies may not have standing to initiate a
shareholder derivative action in a federal court of the United States.
As a result, public shareholders of Cayman
Islands companies may have more difficulty in protecting their interests in connection with actions taken by management, members
of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.
The voting rights of holders of ADSs are
limited by the terms of the deposit agreement.
A holder of our ADSs may only exercise
the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Upon
receipt of voting instructions of a holder of ADSs in the manner set forth in the deposit agreement and the restricted deposit
agreement pursuant to which ADSs are issuable upon conversion of the notes, the depositary will endeavor to vote the underlying
ordinary shares in accordance with these instructions. Under our amended and restated articles of association and Cayman Islands
law, the minimum notice period required for convening a general meeting is 10 days. When a general meeting is convened, you may
not receive sufficient notice to permit you to withdraw your ordinary shares and allow you to cast your vote as a direct shareholder
with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to
you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend
voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure
that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for
any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote.
As a result, you may not be able to exercise your right to vote and you may lack recourse if the ordinary shares underlying your
ADSs are not voted as you requested.
You may not be able to participate in rights
offerings and may experience dilution of your holdings.
We may, from time to time, distribute rights
to our shareholders, including rights to acquire securities. We cannot offer or sell securities in the United States unless we
register those securities under the Securities Act or unless an exemption from the registration requirements of the Securities
Act is available. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution
and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act
with respect to all holders of ADSs, or are registered under the Securities Act. The depositary may, but is not required to, attempt
to sell such undistributed rights to third parties in this situation. We can give no assurances that we will be able to establish
an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with
respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly,
holders of ADSs may be unable to participate in any rights offerings and may experience dilution of their holdings as a result.
If the depositary is unable to sell rights that are not exercised or not distributed
or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value
for these rights.
You may not receive distributions on ordinary shares or any
value for them if it is illegal or impractical to make them available to you.
The depositary for our ADSs has agreed to pay
to you the cash dividends or other distributions it or its custodian receives on ordinary shares or other deposited securities
after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your
ADSs represent. For example, as of the date of this annual report, five ADSs represent one Class A ordinary share. However, the
depositary is not required to make such distributions if it decides that it is unlawful or impractical to make a distribution
available to any holder of ADSs. For example, it would be unlawful to make a distribution to holders of ADSs if it consisted of
securities that required registration under the Securities Act, but were not properly registered or distributed pursuant to an
applicable exemption from registration. It could also be impracticable to make a distribution if doing so would entail fees and
expenses that would exceed the value of the distribution or the distribution consisted of property that could not be transported
or transferred. We have not undertaken any obligation to register under U.S. securities laws any ADSs, ordinary shares, rights
or other securities that may be distributed to our shareholders. We also have not undertaken any obligation to take any other
action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may
not receive any distribution we make on our ordinary shares or any value for it if it is illegal or impractical for us to make
such distribution available to you, such as if an exemption from registration under the U.S. securities laws is not available.
These restrictions may decrease the value of your ADSs.
We may be required to withhold PRC income tax on any dividend
we pay you, and any gain you realize on the transfer of our ordinary shares and/or ADSs may also be subject to PRC withholding
tax.
Pursuant to the New EIT Law, we and our offshore
subsidiaries may be treated as a PRC resident enterprise for PRC tax purposes. See “—Risks related to doing business
in China—We may be treated as a resident enterprise for PRC tax purposes under the New EIT Law and therefore be subject
to PRC taxation on our worldwide income.” If we and our offshore subsidiaries are so treated by the PRC tax authorities,
we would be obligated to withhold a 10.0% PRC withholding tax for non-resident enterprises or a 20.0% PRC withholding tax for
non-resident individuals, or a withholding tax at a reduced rate as provided under the applicable double tax treaty between China
and the governments of other jurisdictions on any dividend we pay to you, subject to completion of the record-filing procedures
and approval from the relevant tax authorities, pursuant to a Circular No. 124 issued by SAT in August 2009 (“Circular
124”).
On November 1, 2015, Circular 124 was
repealed by the Administrative Measures for Tax Convention Treatment for Non-resident Taxpayers issued by SAT (“Circular
60”). Circular 60 provides that non-resident taxpayers are not required to obtain pre-approval from the relevant tax authority
in order to enjoy the reduced withholding tax rate. Instead, they may, upon self-assessment that the prescribed criteria are met,
submit the relevant statements and materials directly to the competent tax authorities for the tax return filing, which will be
subject to post-filing examinations by the relevant tax authorities.
In addition, any gain realized by any investors
who are non-resident enterprises or non-resident individuals of China from the transfer of our ordinary shares, ADSs and/or notes
could be regarded as being derived from sources within China and be subject to a 10.0% or 20.0% PRC withholding tax, respectively.
Such PRC withholding tax would reduce your investment return on our ordinary shares, ADSs and/or notes and may also materially
and adversely affect the prices of our ADSs and/or notes.
Our dual-class ordinary share structure with different voting
rights could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and
ADSs may view as beneficial.
Our ordinary shares are divided into Class
A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders
of Class B ordinary shares are entitled to 10 votes per share. Five ADSs represent one Class A ordinary share and the number of
votes to which each ADS would be entitled to is the number of Class A ordinary shares it represents. A number of our shareholders,
including primarily Media Partner and Next Decade, whose shares are held in irrevocable discretionary trusts established by Mr. Mo,
hold Class B ordinary shares. We intend to maintain the dual-class ordinary share structure. Each Class B ordinary share is convertible
into one Class A ordinary share at any time by its holder and Class A ordinary shares are not convertible into Class B ordinary
shares under any circumstances. Upon any transfer of Class B ordinary shares by a Class B ordinary shareholder to any person or
entity which is not a majority-owned and majority-controlled subsidiary of certain of our shareholders as set forth in our amended
and restated articles of association, such Class B ordinary shares will be automatically and immediately converted into the equal
number of Class A ordinary shares.
Due to the disparate voting powers attached
to these classes of shares, our shareholders holding Class B ordinary shares have significant voting power over matters requiring
shareholder approval, including election of directors and significant corporate transactions, such as a merger or sale of our
company or our assets. This concentrated control could discourage others from pursuing any potential merger, takeover or other
change-of-control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
Our articles of association contain anti-takeover provisions
that could adversely affect the rights of holders of our ordinary shares and ADSs
We have included certain provisions in our
current articles of association that would limit the ability of others to acquire control of our company. These provisions could
deprive our shareholders of the opportunity to sell their ordinary shares at a premium over the prevailing market price by discouraging
third parties from seeking to obtain control of our company in a tender offer or similar transactions. These provisions include
the following:
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A
dual-class ordinary share structure; and
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Our
board of directors, without further action by our shareholders, may issue preferred shares
with special voting rights compared to our ordinary shares.
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Servicing our debt requires a significant amount of cash,
and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the
principal of, to pay interest on or to refinance our indebtedness, including the notes, depends on our future performance, which
is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate
cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable
to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or
obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness
will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities
or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We may incur more debt or take other actions which would
intensify the risks discussed above.
We and our subsidiaries and consolidated controlled
entities may incur substantial additional debt in the future, some of which may be secured debt. We will not be restricted under
the terms of the indenture governing the notes from incurring additional debt, securing existing or future debt, recapitalizing
our debt or taking a number of other actions that are not limited by the terms of the indenture governing the notes that could
have the effect of diminishing our ability to make payments on the notes when due.
We may not have the ability to raise the funds necessary
to repurchase the 2022 Notes upon a fundamental change (as defined in the relevant note documents), and our future debt may contain
limitations on our ability to repurchase the notes.
Holders of certain of our outstanding notes
will have the right to require us to repurchase their notes upon the occurrence of a fundamental change (as defined in the relevant
note documents) at a repurchase price equal to 100.0% of the principal amount of the notes to be repurchased, plus accrued and
unpaid interest under certain circumstances. However, we may not have enough available cash or be able to obtain financing at
the time we are required to make repurchases of notes surrendered therefor. In addition, our ability to repurchase the notes may
be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase notes
at a time when the repurchase is required by the relevant note documents would constitute a default under such documents. A default
under the relevant note documents or the fundamental change itself could also lead to a default under agreements governing any
future indebtedness. If the repayment of any future indebtedness were to be accelerated after any applicable notice or grace periods,
we may not have sufficient funds to repay the indebtedness and repurchase the notes.
The future sale of substantial amounts of ADSs and/or convertible
notes could lower the market price for the ADSs and/or our outstanding notes, as the case may be.
Sales of substantial amounts of ADSs and/or
notes that may be converted or exchanged into ADSs or ordinary shares in the public market, or the perception that these sales
could occur, could adversely affect the market price of our ADSs, could materially impair our ability to raise capital through
equity offerings in the future and could adversely impact the trading price of the ADSs and/or the notes. The ADSs outstanding
not held by our affiliates are freely tradable without restriction or further registration under the Securities Act, and shares
held by our affiliates may also be sold in the public market in the future subject to the restrictions in Rule 144 under
the Securities Act. We may also issue additional options in the future which may be exercised for additional ordinary shares and
additional restricted shares and restricted share units. We cannot predict what effect, if any, market sales of securities held
by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on
the market price of the ADSs or the trading price of the notes.
We may become a passive foreign investment company (“PFIC”),
which could result in adverse U.S. tax consequences to U.S. investors.
A non-U.S. corporation is deemed a PFIC for
any taxable year if either (1) at least 75% of its gross income for such year is passive income, or (2) at least 50% of the value
of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce
passive income or are held for the production of passive income. We operate an active real estate Internet portal in China. Based
on the market price of our ADSs, the value of our assets, and the composition of our income and assets, we do not believe we were
a PFIC for the taxable year ended December 31, 2018. The determination of whether a non-U.S. corporation is a PFIC is made
on an annual basis after the close of each tax year. There can be no assurance that we will not be a PFIC for our current taxable
year or any future tax year. One consequential factor affecting the outcome of annual PFIC determination in current and future
tax years will be our market capitalization. Because items of working capital are generally treated as passive assets for PFIC
purposes, accumulating cash, cash equivalents and other assets such as short-term and long-term investments that are readily convertible
into cash increases the risk that we will be classified as a PFIC for U.S. federal income tax purposes. A determination that we
are a PFIC could result in adverse U.S. tax consequences to you if you are a U.S. taxpayer and own our ADSs or ordinary shares,
in the form of increased tax liabilities and burdensome reporting requirements. For example, if we were a PFIC, you would generally
be taxed at the higher ordinary income rates, rather than the lower capital gain rates, if you dispose of ADSs or ordinary shares
at a gain in a later year, even if we are not a PFIC in that year. In addition, a portion of the tax imposed on your gain would
be increased by an interest charge. Certain elections may be available to certain of our holders, however, that would mitigate
these adverse tax consequences to varying degrees. Also, if we were classified as a PFIC in any taxable year, you would not be
able to benefit from any preferential tax rate (if any) with respect to any dividend distribution that you may receive from us
in that year or in the following year. Since our business and assets may evolve over time in ways that are different from what
we currently anticipate, we cannot assure you that we will not be a PFIC for our current taxable year or any future taxable year.
For more information on the tax consequences to you if we were treated as a PFIC, see “Item 10.E. Additional Information—Taxation—U.S.
federal income taxation” of this annual report.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We were incorporated on June 18, 1999
as Fly High Holdings Limited, under the laws of the British Virgin Islands, and on July 14, 1999, we changed our name to
SouFun.com Limited. On June 17, 2004, we changed our corporate domicile to the Cayman Islands, becoming a Cayman Islands
exempted company with limited liability. On June 22, 2004, we changed our name to SouFun Holdings Limited. On September 23,
2016, we changed our name to Fang Holdings Limited. Since our inception, we have conducted our operations in China primarily through
our PRC subsidiaries and consolidated controlled entities.
On September 17, 2010, we completed our
initial public offering and listing of 2,933,238 ADSs, each representing four Class A ordinary shares, on the New York Stock Exchange,
which are traded under the symbol of “SFUN.” Concurrently with our initial public offering, our majority shareholder,
Telstra International Holdings Ltd. (“Telstra International”), an indirect, wholly owned subsidiary of Telstra Corporation
Limited, a Fortune Global 500 company, sold to General Atlantic Mauritius Limited (“General Atlantic”), Hunt 7-A Guernsey
L.P. Inc. (“Hunt 7-A”), Hunt 7-B Guernsey L.P. Inc. (“Hunt 7-B”), Hunt 6-A Guernsey L.P. Inc. (“Hunt
6-A,” together with Hunt 7-A and Hunt 7-B, “Apax”), Next Decade and Digital Link Investments Limited (“Digital
Link”), all of its remaining shares in our company in a private sale at the initial public offering price.
On February 18, 2011, we changed our ADS
share ratio from one ADS representing four Class A ordinary shares to one ADS representing one Class A ordinary share.
On April 7, 2014, we changed our ADS share
ratio from one ADS representing one Class A ordinary share to five ADSs representing one Class A ordinary share.
On July 19, 2018, Fang we entered into
definitive agreements to acquire a 10% equity interest in Wanli from its controlling shareholder for a cash consideration of RMB500
million, of which RMB200 million will compensate the seller in connection with the Business Disposal (defined below). In connection
with the acquisition, the seller agrees agreed (1) to enter into an irrevocable voting proxy agreement with a term of three years
to adhere to our action in Wanli’s future meetings of shareholders and board of directors and (2) to purchase from Wanli
its battery business for a price of no less than RMB680 million within three years after the consummation of the acquisition (the
“Business Disposal”). Following the completion of the acquisition on August 10, 2018, we have become the largest shareholder
of Wanli.
On May 2, 2019, our board of directors approved
our plan to separate CIH into an independent publicly traded company
,
whose business will comprise certain portions of our listing and value-added services
. On May 10, 2019, CIH publicly filed
its registration statement on Form F-1 with SEC to effect the proposed separation and distribution.
Our principal executive offices are located
Tower A, No. 20 Guogongzhuang Middle Street, Fengtai District, Beijing 100070, the People’s Republic of China. Our telephone
number at this address is +8610 5631 8000. Our website address is
www.fang.com
. We do not incorporate the information on
our website into this annual report.
B. Business Overview
Overview
We believe we operate a leading real estate
Internet portal in China in terms of the number of page views and visitors to our websites in 2018. Our user-friendly websites
and mobile apps support active online communities and networks of users seeking information on, and services for, the real estate
and home-related sectors in China. Our service offerings include:
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Marketing
services
: We offer marketing services on our websites and mobile apps, mainly through
advertisements, to real estate developers in the marketing phase of new property developments,
as well as to real estate agencies and suppliers of home furnishing and improvement and
other home-related products and services who wish to promote their products and services.
Marketing services were our largest source of revenues in 2018.
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Listing
services
: We offer basic and special listing services on our websites and mobile
apps. Our basic listing services are primarily offered to real estate agents, brokers,
developers, property owners and managers and suppliers of home furnishing and improvement
and other home-related products and services. Our basic listing services allow our customers
to post information of their products and services on our websites. Our special listing
services offer specialized marketing programs through both online channels and offline
themed events. Listing services were our second largest source of revenues in 2018.
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Financial
services
: We provide financial services primarily though our offline micro loan subsidiaries.
We provide primarily secured consumer loans to individuals that meet our credit assessment
requirements. We launched financial services in August 2014.
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E-commerce services
: Our e-commerce services primarily
include Fang membership services, direct sales services for new homes and online sublease services. We provide both free
and paid Fang membership services to our registered members. Our free services include
primarily regular updates regarding local property developments, tours to visit property developments
and other services relating to property purchases. Our paid services primarily include offers to purchase
properties at a discount from our partner developers and dedicated information and related services to
facilitate property purchases. We ceased entering into new contracts for our direct sales services
for new homes, online home-decorating services and online real estate brokerage services in 2018
due to the change in our business development strategies.
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Value-added
services:
We provide value-added services including subscription services for access
to our information database and consulting services for customized and industry-related
research reports and indices.
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We have built a large and active community
of users, who are attracted by the comprehensive real estate and home related content available on our portal that forms the foundation
of our service offerings. We currently maintain approximately 65 offices across China to focus on local market needs. Our user
base has also attracted numerous customers, which include real estate developers, real estate agents and brokers, property owners,
property managers, mortgage brokers, lenders and suppliers of home furnishing and improvement and other home-related products
and services. Our diverse offerings and broad geographic coverage have resulted in an active and dynamic online community that
provides an effective and targeted channel for advertisers to market their products and services, and serves as a centralized
source of information, products and services for consumers in the real estate and home furnishing and improvement and other home-related
markets. With our leading Internet portal, we believe that we are well positioned to develop integrated media and
financing platforms, increase synergy and capture additional growth opportunities in the real estate market in China.
Following the completion of the proposed
separation of CIH from us, CIH will have the exclusive right to operate the spun-off business comprising certain portions of Fang’s
listing and value-added services, and Fang will have the exclusive right to operate the retained business. In particular, the spun-off
business will comprise (1) certain information and analytics services, initially operated as part of our value-added services,
and (2) certain marketplace services, initially operated as part of our listing services. Following the proposed separation and
distribution, CIH will strategically focus on serving the commercial property sector in China to capture the enormous market opportunity
from its rapid development, while we will retain our business operating a real estate Internet portal focusing primarily on serving
the residential property sector.
Our Services
We provide (1) marketing services, (2)
listing services, (3) financial services, (4) e-commerce services and (5) value-added services to participants in the PRC real
estate and home-related sectors primarily through our websites and our mobile apps.
Marketing Services
We target our marketing services toward participants
in China’s real estate and home-related sectors. Marketing is one of our most important businesses. Revenues from marketing
services were US$165.4 million, US$149.3 million and US$119.7 million in 2016, 2017 and 2018, respectively, representing 18.1%,
33.6% and 39.5% of our revenues, respectively. Our marketing services are delivered through our website
www.fang.com
and
our mobile apps, which can be downloaded for both iOS- and Android-based operating systems, and include traditional Internet advertisements
such as banners, links, logos and floating signs, as well as featured promotions, which are specially-tailored packages of traditional
online advertising tools. Customers of our marketing services include a broad range of participants in the PRC real estate and
home-related sectors, such as:
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real
estate developers;
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real
estate professionals, such as agents and brokers;
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retailers
and other suppliers of home furnishing and improvement products and services; and
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home
design, decoration and re-modeling companies.
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We also combine traditional online advertising
tools with new marketing strategies to create featured promotion packages for our customers. Using the inherent flexibility of
website advertising, we create customized marketing and promotional packages with additional features at the request of our customers
to meet the different needs of various customers operating in diverse geographic markets in China. We believe that we have the
opportunity to provide additional features to generate additional revenues without incurring significant additional costs. Marketing
services have been and will continue to be a growth area for us, as we believe that participants in China’s real estate
and home-related sectors are increasingly looking to the Internet and mobile apps as an additional vehicle through which to attract
customers.
We generally enter into two main types
of marketing contracts with our customers. The first type is a framework contract prescribing the total payment amount and price
of products. The second type is an order contract with payment due within 90 days of the execution of the contract. Our marketing
framework contracts generally have a one-year term.
Listing Services
Our listing services include basic listing
services and special listing services on our websites and mobile apps. Our revenues from listing services were US$118.1 million,
US$165.4 million and US$113.5 million in 2016, 2017 and 2018, respectively, representing 12.9%, 37.2% and 37.5% of our total revenues
in those years, respectively.
Basic Listing Services.
Basic listing
services contributed approximately 78.0%, 85.0% and 74.4% of our listing service revenues in 2016, 2017 and 2018, respectively.
Real estate agents, brokers, managers, developers, owners and suppliers of home furnishing and improvement products and services
subscribe to our basic listing services for a fee, which allow them to post listings for properties or home furnishing and improvement
products and services over the subscription periods. All visitors to our websites and mobile apps have access to listing information
free of charge.
Most of our basic listing subscription contracts
are one to three months in duration. We typically collect payments for such subscriptions for our basic listing services before
the signing of a subscription contract. We also offer longer arrangements, such as to certain large real estate agencies. For
subscription contracts with longer terms, the contract prices are generally payable in installments every one to three months
until the end of the contract term.
We offer free trials of our basic listing services.
These free trials allow users to experience our basic listing services and high user traffic. While there is no time restriction
on our free trials, there are incentives for free trial users to upgrade their free trial accounts to paid subscriptions for our
basic listing services because listings posted through free trial accounts are featured in less prominent positions and rankings
than those of subscribers. The average number of paying subscribers to our listing services was 211,280, 265,649 and 206,250 in
2016, 2017 and 2018, respectively.
In addition, we allow individual property owners
to list their own properties for sale or rent on our property listing sections without charge. Such free listings do not enjoy
prime positioning and are strictly limited to individual, non-real estate professional home owners. To help prevent real estate
professionals from abusing the individual property owner basic listing service, we have created a customer hotline for our users
to report any abuse.
Our basic listing services help us build our
comprehensive database of information regarding new, secondary and rental properties as well as home furnishing and improvement
products and services in major urban centers across China. The large amount of our basic listings attracts significant user traffic
on our websites and mobile apps, which we believe can be leveraged to yield more marketing and special listing customers and higher
marketing and special listing fees from our institutional customers.
We update the listing data on our websites
and mobile apps on a daily basis through our proprietary content management process and software. This proprietary content management
process is monitored by our listing monitoring team and allows our customers to submit listing information in a specific format.
Our listing monitoring team periodically checks all listing information uploaded to our websites and mobile apps to identify common
anomalies in posted information in order to limit unreliable data. Once we discover false information in a listing, we liaise
with the real estate agent or broker to rectify the listing immediately. If such listing information is not revised on a timely
basis, we will move it into a database that cannot be accessed by our users.
Special Listing Services.
Special listing
services are specialized marketing campaigns provided primarily to developers through online channels and offline themed events.
Revenues from special listing services were US$26.4 million, US$24.9 million and US$29.1 million in 2016, 2017 and 2018, respectively,
representing 22.0%, 15.0% and 25.6% of our listing service revenues in those years, respectively.
Leveraging our data analytical capabilities,
we assess the strengths of the brands of companies in various real estate sectors and create a special listing campaign to recognize
the leading companies in those sectors. Once the special listing campaigns are determined, we establish a marketing and promotional
program consisting of various online and offline promotional activities, which together collectively promote each special listing
campaign. The program includes online marketing platforms such as our websites and WeChat and offline themed events such as conferences,
discussion forums and banquets. Prior to the launch of a special listing campaign, our marketing and sales staff directly contact
the targeted leading companies to solicit their participation in the special listing programs for a specified fee. We also provide
our customers with periodical updates on industry developments to help them formulate brand management strategies. The duration
of our special listing services typically lasts one year. Some examples of our special listing campaigns include events and promotions
for the top 100 PRC property developers and the China Villa Festival. For details, see “—Brand Awareness and Marketing—Event
Sponsorships” below.
Financial Services
Revenues from financial services were US$29.6
million, US$12.1 million and US$18.1 million in 2016, 2017 and 2018, respectively, representing 3.2%, 2.7% and 6.0% of our revenues,
respectively.
We primarily provide secured consumer loans
to individuals that meet our credit assessment requirements. We generally charge borrowers both interest and service fees. We
assess each individual loan receivable for impairment on a quarterly basis. As part of our impairment assessment, we consider
the timeliness of collection to date, changes in the value of collateral provided by the borrowers and expected default rates.
We obtained approvals to engage in the microfinancing
business from government authorities of four cities, including Beihai, Shanghai, Chongqing and Tianjin.
E-commerce Services
Our e-commerce services, first
launched in 2011, primarily include Fang membership services, direct sales services for new homes and online
sublease services. Our revenues generated from e-commerce services were US$577.7 million, US$87.8 million and US$15.4 million
in 2016, 2017 and 2018, respectively, representing 63.0%, 19.8% and 5.0% of our revenues, respectively. We ceased entering
into new contracts for our direct sales services for new homes, online home-decorating services and online real estate
brokerage services in early 2018 due to the change in our business development strategies.
Fang Membership Services
. We provide
both free and paid membership services to the registered members of our Fang cards on our websites and mobile apps. Our free services
include primarily regular updates regarding local property developments, tours to visit property developments and other services
relating to properties purchases. Our paid services primarily include offers to home buyers to purchase properties with discounts
from our partner developers and dedicated information and related services to facilitate property purchases, which we began to
offer in 2011. Our membership fees for paid services generally range from RMB5,000 to RMB20,000. The discount is reflected as
a fixed amount off, or a percentage discount to, the total purchase price paid by a home buyer for a specified property, or a
combination of both, which is determined by us and our partner developers. The discounts are significantly higher than our membership
fees, resulting in net savings for our members. Membership fees are refundable until our members use the discounts to purchase
properties or pursuant to our refund policy. Our members pay a specified fee each time in order to be eligible for the discount
provided for a particular property. To promote our services and reach additional customers, we may promote the property developments
through other advertising channels and pay real estate agents for customer referrals. In 2018, we offered paid Fang membership
services covering approximately 103 property developments in 30 cities in China. Our revenues from Fang membership services totaled
US$114.7 million, US$10.3 million and US$2.8 million in 2016, 2017 and 2018, respectively, or 12.5%, 2.3% and 0.9%, respectively,
of our total e-commerce revenues for the same periods.
Online Real Estate Brokerage Services
.
We launched our online real estate brokerage services in January 2015, which were offered in 28 major urban centers in China,
such as Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, Chongqing, Wuhan and Nanjing. We acted as an intermediary between sellers
and buyers of secondary real properties, and our services primarily included property listing, advisory services and transaction
negotiation and documentation. In addition to property sales, we also assisted property owners and potential renters with leasing
transactions. Different from conventional real estate brokers in China, we did not maintain extensive physical sales offices and
instead relied primarily on our websites and mobile apps to source customers. Our revenues from online real estate brokerage services
totaled US$248.9 million and US$35.8 million in 2016 and 2017, respectively, or 27.2% and 8.1%, respectively, of our total revenues
for the same periods. We suspended our online real estate brokerage services in early 2018 due to our transformation back to a
technology-driven open platform.
Direct Sales Services
. We launched our
direct sales services in August 2014. We promote property developments of our developer clients primarily through our websites
and mobile apps. Different from our Fang membership services, potential individual buyers can register with us free of charge
if they are interested in any real estate properties covered by our direct sales services. In addition, individual buyers can
enjoy discounted prices for properties that we offer from our developer clients. We charge our developer clients a fee for each
property they sold through our direct sales services. Our fee generally is a predetermined percentage of the value of the individual
transaction and is refundable pursuant to our refund policy. Our revenues from direct sales services totaled US$152.1 million,
US$26.9 million and US$5.3 million in 2016, 2017 and 2018, respectively, or 16.6%, 6.1% and 1.7%, respectively, of our total revenues
for the same periods.
Online Sublease Services
. We launched
our online sublease services in the second quarter of 2015. We promote and market real properties leased from third parties on
our websites and mobile apps, and sublease such properties to our customers for rental fees.
Value-added Services
In addition to listing, marketing, e-commerce
and financial services, we also provide value-added services which primarily include subscriptions to our information database
and research reports services. Revenues from value-added services were US$25.6 million, US$29.8 million and US$36.4 million in
2016, 2017 and 2018, respectively, representing 2.8%, 6.7% and 12.0% of our total revenues, respectively. We utilize our extensive
PRC real estate database, data analytics and research capabilities to provide online content relating to the real estate sector
through our websites and mobile apps, such as real estate database access, research services, real estate industry and company-specific
research reports. Our customers include PRC real estate enterprises, industry professionals as well as government entities.
Our Websites
Our principal website,
www.fang.com
,
is the leading real estate Internet portal and one of the leading home furnishing and improvement websites in China in terms of
visitor traffic. As part of our effort to promote our brand recognition, we changed the address of our principal website from
www.soufun.com
to
www.fang.com
in July 2014. “Fang” means “home” in Chinese. We believe
that this new and simplified address will be much easier for Chinese users to remember and access, thereby improving our brand
recognition. According to our own records,
www.fang.com
received a monthly average of approximately 123 million unique
visitors in the fourth quarter of 2018. In addition, we had approximately 96 million registered members of our
www.fang.com
website and had about 25 million registered members of our free and paid Fang membership services as of December 31,
2018.
As of December 31, 2018, our
www.fang.com
website contained contents covering more than 658 cities across China, as well as Hong Kong, Taiwan, Singapore, Japan, United
States, Canada, Australia, United Kingdom and Spain. This website also contains links to other specialized real estate and home
furnishing and improvement websites, including our
www.jiatx.com
website, our e-commerce transaction and payment platform.
We believe user satisfaction ultimately rests
on the appeal, attraction and functionality of our websites. Our Internet technology and sales and marketing teams spend considerable
time and resources upgrading and enhancing our websites based on market trends and feedback from users and our marketing and listing
customers. We distinguish ourselves from other websites focused on real estate and home-related products and services through
the quality and breadth of our content. We also maintain a centralized customer service hotline and e-mail reporting system through
which users can obtain assistance or otherwise contact us.
Our
www.fang.com
website covers a wide
spectrum of PRC real estate and home furnishing and improvement and other home-related information and constitutes the foundation
and gateway for our primary business activities. We aim at providing a central forum of reliable information regarding China’s
real estate and home-related markets that is helpful to market participants in the transaction process. Our content, which is
generally free to our website users, is designed to assist users with each step of the real estate and home furnishing and improvement
and other home-related transaction process. Our extensive home-related content and information is organized into the following
sections and categories on our website, which are intended to address the individual needs of our users.
Online Property Listings and Search
Engines for New Home and Secondary and Rental Properties
Our
www.fang.com
website contains databases
for new home, secondary and rental properties, and provides search engines on such properties in our databases.
With our on-the-ground capabilities in approximately
65 offices in China, we devote significant resources to collect first-hand real estate market intelligence and listing information
in such markets and to update such information on a regular basis. Our user-friendly search engines and website interfaces allow
users to tailor their searches to specific types of properties by using search criteria. Users seeking information on properties
in specific geographic locations can narrow their searches to a specific city and often to specific districts or areas in the
vicinity of a particular subway line within that city by using pull-down menus. Users can further refine their searches using
selection criteria, including price range, type of property, number of rooms and size. After selecting search parameters, users
are directed to a page listing available properties as well as basic information about each individual property, including location,
price, number of rooms and the source of the listing.
Information on Home Related Products
and Services
Our
www.fang.com
website contains information
regarding design firms, contractors, do-it-yourself projects, building materials and a wide range of products and services relevant
to home decoration and re-modeling, furniture and other home furnishing and services. We provide an efficient platform for companies
in the home-related sector, which primarily include suppliers of furnishing and improvement products and services and are usually
small in size, to promote their brands and establish their presence on the Internet. We also provide search tools enabling visitors
to search for specific businesses by area of expertise, product or service category. For example, a visitor interested in searching
for suppliers and installers of window products in Beijing can use our pull-down search tools to focus their search for businesses
providing such products and services.
Other pull-down menus allow visitors to view
numerous design concepts, model interior decoration plans or other home improvement ideas. After selecting search parameters,
users are directed to a page listing applicable home furnishing and improvement products and services as well as basic information
about each home furnishing and improvement product or service, including price, product and service information and the source
of the information. Much of the content, pictures and graphics are provided by other users of the website, which allows people
interested in home decoration and furnishing to share ideas and information online. Users can also use this section to find and
compare the work and experience of architects and interior designers.
Real Estate Database and Information
Our website
provides an extensive database for users to search real estate information, as well as general research reports regarding the
PRC real estate industry at both the national and regional levels. The research section of our website provides research coverage
of different topics within the PRC real estate industry. For example, our research database contains information on topics such
as real estate projects, land information, real estate financing information, real estate-related laws and regulations and real
estate public company information. We believe our research section serves to raise our profile as experts on the PRC real estate
industry. Supported by a dedicated research team and an advisory board of leading real estate experts and industry professionals,
our research section offers a collective body of knowledge that we believe is well-known in the PRC real estate industry.
Online Residential Communities
We offer online residential community services
through our website,
www.fang.com
. Such online residential community services provide a forum for visitors to share personal
views, anecdotes and other information regarding different aspects of the PRC real estate market, specific property developments
and residential communities and other subjects. They also provide a platform for conducting real estate and home furnishing and
improvement and other home-related transactions online. We believe our electronic bulletin board forums, blogs and other online
community-oriented services are valuable means for enhancing loyalty and brand awareness among our users by creating virtual communities
sharing a common interest in PRC real estate and home-related topics. In addition to using such forums to increase website traffic,
we are also exploring ways to generate new revenue streams from our online forums and community-oriented services.
Our Mobile Apps
We have developed a series of mobile apps to
meet the diverse needs of home buyers, renters and real estate agents. As of March 31, 2019, we had approximately ten iOS
and seven Android-based mobile apps, respectively. These mobile apps are downloadable through our websites and major app stores
in China. At the end of 2018, approximately 76% of the daily active users were accessing our contents through our mobile platform
(including WAP and mobile apps).
Our National Coverage
Currently we provide real estate-related
content, search services, marketing and listing coverage of more than 658 cities across China and have on-the-ground personnel
located in approximately 65 offices nationwide. In addition, we began to offer e-commerce services in 2011, and our Fang membership
services had already extended to 98 cities as of December 31, 2018. We believe this extensive nationwide coverage enhances
our national brand image, and enables us to deliver consistent and quality listing, marketing and e-commerce services to customers.
The real estate industry is inherently a local industry, and online listing and online marketing services targeted at the real
estate industry are most effective when delivered by personnel familiar with and experienced in the relevant local markets. Our
local personnel also provide our central office staff with valuable data regarding these local real estate markets, which contributes
to our knowledge and expertise about real estate markets throughout China. In addition, our network of branch offices helps us
to tailor our listing, marketing and e-commerce services to local conditions and the needs of local real estate developers and
real estate professionals.
We have established a strong presence in 11
major cities, including Beijing and Shanghai, which are our level 1 cities, and Shenzhen, Chongqing, Tianjin, Chengdu, Guangzhou,
Hangzhou, Wuhan, Suzhou and Nanjing, which are our level 2 cities. We entered these cities in the early stages of our development,
and these cities have contributed and are expected to continue to contribute a majority of our revenues in the near future. In
most of these cities, we offer our full line of services and target a full range of customers, including new home developers,
agents, brokers, property managers and suppliers of home furnishing and improvement and other home-related products and services.
We also offer limited listing and other information
relating to the real estate markets in Hong Kong, Taiwan, Singapore, Japan, United States, Canada, Australia, United Kingdom and
Spain, but these markets do not constitute a material part of our business.
Brand Awareness and Marketing
We believe our comprehensive content has made
www.fang.com
a leading destination website for real estate participants in China. In addition, we seek to promote our websites
and mobile apps and the related “Fang Tian Xia” and other brands through our directed selling efforts and other means,
including our support for research, academic organizations and the publication of various research reports, event sponsorships,
portal collaboration arrangements and marketing alliances. As a result, we believe we have become commonly associated with China’s
growing real estate and home-related sectors.
Real Estate Research and Reports
We believe our knowledge of China’s real
estate and home-related sectors provides a valuable competitive advantage and helps promote our brand name in the PRC real estate
and furnishing and improvement market. The attractiveness of our listing, marketing and e-commerce services is rooted in our ability
to commercialize various aspects of our databases and industry knowledge to create new and innovative services for our listing,
marketing and e-commerce customers. To maintain and extend our leading position in this area, we seek to recruit and retain employees
knowledgeable about China’s real estate and home-related sectors through a variety of incentive measures, including share-based
compensation plans. Members of our research department produce research reports and provide other information services that help
promote our reputation as an informed participant in China’s real estate and home-related sectors.
Event Sponsorships
We regularly sponsor real estate and home
furnishing and improvement events attended by industry participants. We organized and hosted, both online and offline, ten consecutive
China Villa Festivals from 2004 to 2013, each of which is an annual event that attracts media, real estate professionals, economists
and industry academics. This special listing event was coupled with a marketing program which promoted and advertised various
villa projects across 100 cities in China. In March 2019, we also hosted our sixteenth annual conference in Beijing to announce
the “Top 100 Property Developers in China” together with the Enterprise Economic Research Institute of the Development
Research Center of the PRC State Council and the Institute of Real Estate Studies of Tsinghua University, two of China’s
leading research institutions. Many PRC real estate developers and government agencies involved in the PRC real estate sector
attended this conference. The event also attracted broad media attention and interest from the public in each of the past ten
years that we held the event.
Portal Collaboration Arrangements
We work with well-known Internet portals to
attract additional users to our websites and mobile apps. Our portal collaboration arrangements typically have terms ranging from
one to three years, with fees paid to our portal collaboration partners in installments every three months.
We currently have portal collaboration arrangements
with some of China’s large Chinese-language portals to generate user traffic to our website.
Advertising and Marketing
We began to conduct general marketing and advertising
activities to promote awareness of our new “Fang Tian Xia” and “Fang.com” brands in July 2014. We
have also used outdoor advertisements in the Beijing Capital International Airport, bus bulletin boards and subway stations.
Our Sales Force
We have built a sales and marketing team that
is experienced in the online advertising, Internet and real estate industries. As of December 31, 2018, our sales and marketing
team consisted of approximately 2,463 persons located in approximately 65 offices across China. We also occasionally engage sales
agents for collecting information on local markets or for specific business lines within local markets. Our sales and marketing
team, together with these sales agents, work closely with our customers in local markets and help us gain insight into developments
in these local markets, the competitive landscape and new market opportunities, which helps us to set our prices and strategies
for each locality.
Our sales and marketing personnel are divided
into the new homes, secondary and rental properties, home furnishing and improvements and research product groups. This structure
allows our sales and marketing personnel to gain expertise with a specific subset of customers within the market sectors that
we target, and to effectively design and market tailored services to customers within each subset.
To motivate our sales and marketing personnel,
a majority of their compensation consists of performance incentives such as commissions and bonuses. Sales quotas are assigned
to all sales personnel according to monthly, quarterly and annual sales plans. In addition, we apply a merit based promotion system
to motivate our sales personnel.
Because sales of online marketing services
are highly competitive, we strongly emphasize training programs designed to improve the sales and marketing skills of our staff.
We provide three types of training to our sales and marketing personnel: (1) mandatory entrance training for each new sales and
marketing employee during a three-month probationary period, (2) rotation training that aims to rotate every sales and marketing
employee in different posts for a certain period of time, and (3) regular training in which weekly seminars and case studies are
conducted for sales and marketing personnel. Our combination of training, performance-based compensation and a merit based promotion
system have been effective in identifying, motivating and retaining strong performers.
We also have key account sales representatives
in Beijing that serve our approximately 310 key account customers, which are identified based on their reputation, the scope of
their operations as well as the amount of their contracts with us. We appoint one designated contact person to serve each key
account customer. Key account customers in our new home business are generally entitled to more benefits than our other customers,
such as preferential service fee discounts and preferential positioning within our nationwide real estate listings. We also prepare
press release and reports for our key account customers.
Information Technology Systems and Infrastructure
We maintain most of our servers and backup
servers in Beijing and Shanghai. We believe our server hosting partners provide significant operating advantages, including high-quality
bandwidth, constant room temperature and an enhanced ability to protect our systems from power loss, break-ins and other external
causes of service interruption. We have not experienced any material system failures over the past 15 years.
To better serve our website visitors, we have
utilized our key proprietary technologies and developed a technology platform that is specifically used for our real estate and
home related Internet portal services. The key components of our technology platform include:
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Search
platform
. Our search platform is designed to support targeted searches of our listing
databases. Besides the key word search function, our search platform provides additional
search functions that improve search accuracy with various search criteria, including
searches based on the location, price and type of the property. In addition, our search
engine is able to refine the search by conditional filtering and aggregation of the search
results.
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Large-scale
system infrastructure
. With a combination of proprietary in-house and third-party
solutions, we have designed our system to handle large amounts of data flow with a high
degree of scalability and reliability. Our distributed architecture uses parallel computing
technology and clusters of low-cost computers to handle high-volume visitor traffic and
process large amounts of information.
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Anti-fraud
and anti-spam technology
. We have also developed a proprietary anti-fraud and anti-spam
system through which we are able to detect fraudulent activities and identify and filter
spam messages. We attempt to continuously improve the accuracy and effectiveness of this
technology through machine-learning capability and customizable rules.
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Seasonality
The real estate sector in China is characterized
by seasonal fluctuations, which may cause our revenues to fluctuate significantly from quarter to quarter. The first quarter of
each year generally contributes the smallest portion of our annual revenues due to reduced advertising and marketing activity
of our customers in the PRC real estate industry during and around the Chinese Lunar New Year holiday, which generally occurs
in January or February of each year. In contrast, the third quarter of each year generally contributes the largest portion
of our annual revenues due to increased advertising and marketing activity of our customers in the PRC real estate industry as
most property purchases take place in September and October of each year in terms of monthly transaction volumes. See
“Item 3.D. Key Information—Risk Factors—Risks related to our business—You should not rely on our quarterly
operating results as an indication of our future performance because our quarterly financial results are subject to fluctuations.”
Competition
We face competition from other companies in
each of our primary business activities. We compete with these companies principally on the basis of website traffic volume, the
quality and quantity of real estate and home furnishing and improvement listings and other information content, geographic coverage,
service offerings and listing, marketing and e-commerce customers. We also compete for qualified employees with sales, real estate,
home furnishing and improvement and other home-related products and services and Internet industry experience. We monitor our
market share in the online advertising industry in China through market information gathered internally as well as from independent
market research institutions such as Analysys and Talkingdata. Due to the nature of online residential real estate listings and
the fact that the PRC market for residential real estate is a developing industry, there is limited independent third-party information
on the market share of websites and mobile apps that provide residential real estate listings. To help assess our competitiveness
and market position, our listing services division gathers information on the number and prices of paid online listing subscription
accounts and similar information on our competitors from public sources for our internal records. Based on these internal records,
we believe we are currently one of the leading Internet portals for residential real estate listings in China.
Some of our competitors may have greater access
to capital markets, more financial and other resources and a longer operating history than us. For instance, major general-purpose
Internet portals, such as Sina.com and Sohu.com, which provide real estate and home furnishing and improvement information services,
may have an advantage over us due to their more established brand name, larger user base and extensive Internet distribution channels.
Other existing and potential competitors primarily
include:
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real
estate and home furnishing and improvement websites and mobile apps offering listing
and marketing services in China including real estate websites and mobile apps sponsored
or supported by local governments in China, which may be able to use such government
connections to develop relationships with locally-active real estate developers;
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traditional
advertising media such as general-purpose and real estate-focused newspapers, magazines,
television and outdoor advertising that compete for overall advertising spending;
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websites
and mobile apps focused on real estate research services in China; and
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online
listing service providers, including general-purpose Internet portals and regional websites
and mobile apps dedicated to online listing. We believe the key players in the markets
for online real estate marketing and listing services in China include E-House (China)
Holdings, Sohu.com Inc.’s focus.cn, Leju Holdings Limited, Tencent’s fangqq.com,
58.com, Anjuke.com (acquired by 58.com in March 2015), Szhome.com and House365.com.
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Although the barriers to entry for
establishing many types of Internet-based businesses are low, we believe that certain key features of our marketing and
listing businesses, together with the complexity of China’s real estate and home-related markets, make it difficult for
competitors to grow quickly and compete successfully against us. Specifically, we believe our brand name in China’s
real estate and home related Internet industry, the size and growth of our average daily user traffic, our customized
marketing, listing, financial, e-commerce and value-added service offerings, our ownership of what we believe is one of the
largest online real estate listing databases in China in terms of geographical coverage, including content coverage of more
than 658 urban real estate markets in China as of December 31, 2018, and our relationships and in-depth knowledge of the
real estate and home furnishing and improvement sectors provide us with an advantage over our competitors.
We believe that we and other domestic operators
are likely to have a competitive advantage over international service providers who lack operational infrastructure and experience
in China. We cannot assure you, however, that this competitive advantage will continue to exist, particularly if international
operators establish joint ventures with, form alliances with or acquire domestic operators.
Separation of CIH
CIH operates a real estate information and analytics service
platform in China, providing (1) certain information and analytics services, currently operated as part of our value-added services,
and (2) certain marketplace services, currently operated as part of our listing services. CIH offers a wide spectrum of information
and analytics services primarily through a proprietary platform, based on its China Real Estate Index System, or CREIS, a comprehensive
set of benchmarks and databases widely adopted by industry participants to track, understand and analyze the real estate industry
in China. It covers a vast inventory of residential and commercial properties and land plots data across China. The core value
of CREIS lies with the underlying proprietary database CIH operates. The database delivers real estate information and research
reports regarding properties, land plots as well as real estate industrial regulations and policies in China. CIH employs various
advanced technologies to power the database, including geographic information system, artificial intelligence-based search, data
mining and cloud computing. CIH also offers certain marketplace services to clients as marketing tools to supplement the database
and its associated analytical tools, including promotion services based on influential industry reports on select key topics it
disseminates to China's real estate participants and consumers, and listing services to allow clients to list commercial properties
in China and utilize advanced marketing and search tools.
On May 2, 2019, our board of directors
approved our plan to separate CIH into an independent publicly traded company
,
whose business will comprise certain portions of our listing and value-added services.
On May 10, 2019, CIH publicly filed
a registration statement on Form F-1 with SEC to effect the proposed separation and distribution. The proposed separation and distribution
is expected to commence after the SEC completes its review process, subject to customary closing conditions. There can be
no assurance as to the commencement or completion of the proposed separation and distribution.
Separation and Distribution Related
Agreements
We will enter into a separation
and distribution agreement with CIH, which will set forth our agreements with CIH regarding the principal transactions necessary
to separate CIH from us. It will also set forth other agreements that govern certain aspects of our relationship with CIH after
the completion of the separation and distribution.
Delineation of business.
According
to the separation and distribution agreement, CIH will have the exclusive right to operate the spun-off business comprising certain
portions of Fang’s listing and value-added services, and we will have the exclusive right to operate the retained business.
In particular, the spun-off business will comprise (1) certain information and analytics services, initially operated as part
of Fang’s value-added services, and (2) certain marketplace services, initially operated as part of Fang’s listing
services. Following the separation and distribution, CIH will strategically focus on serving the commercial property sector in
China to capture the enormous market opportunity from its rapid development, while we will retain our business operating a real
estate Internet portal focusing primarily on serving the residential property sector.
Transfer of assets and assumption of liabilities.
The separation and distribution agreement will identify assets to be transferred, liabilities to be assumed and contracts
to be assigned to CIH as part of the separation of Fang into two independent companies, and will describe when and how these transfers,
assumptions and assignments will occur.
Except as expressly set forth in the separation
and distribution agreement or any ancillary agreement, neither we nor CIH will make any representation or warranty as to the assets,
business or liabilities transferred or assumed as part of the separation, as to any approvals or notifications required in connection
with the transfers, as to the value of or the freedom from any security interests of any of the assets transferred, as to the
absence or presence of any defenses or right of setoff or freedom from counterclaim with respect to any claim or other asset of
either us or CIH, or as to the legal sufficiency of any assignment, document or instrument delivered to convey title to any asset
or thing of value to be transferred in connection with the separation. All assets will be transferred on an “as is,”
“where is” basis and the respective transferees will bear the economic and legal risks that any conveyance will prove
to be insufficient to vest in the transferee good and marketable title, free and clear of all security interests, that any necessary
consents or governmental approval are not obtained or that any requirements of laws, agreements, security interests, or judgments
are not complied with.
To the extent that any transfers
contemplated by the separation and distribution agreement have not been consummated on or prior to the date of the separation,
the parties will agree to cooperate to affect such transfers as promptly as practicable following the date of the separation.
In addition, each of the parties will agree to cooperate with each other and use reasonable best efforts to take or to cause to
be taken all actions, and to do, or to cause to be done, all things reasonably necessary under applicable law or contractual obligations
to consummate and make effective the transactions contemplated by the separation and distribution agreement and the ancillary
agreements.
The distribution.
The
separation and distribution agreement will also govern the rights and obligations of the parties regarding the distribution. On
the distribution date, we will cause CIH’s share registrar and depositary to distribute to our equity holders that hold
our ordinary shares or ADSs as of the record date all of CIH’s issued and outstanding ordinary shares (including those represented
by ADSs) prior to the separation and distribution. No fractional ordinary shares will be distributed in the distribution. Our
ADSs holders will receive cash in lieu of any fractional ADSs. The separation and distribution agreement will provide that the
distribution is subject to satisfaction (or waiver by us) of certain conditions. We will have the sole and absolute discretion
to determine the terms of, and whether to proceed with, the distribution.
Business
Cooperation Agreement
CIH
and we will enter into a business cooperation agreement in respect of CIH’s cooperation on certain commercial property-related
business, particularly CIH’s listing services, operated through Fang’s website,
Fang.com
, after the separation
and distribution. The initial term of this agreement is 10 years commencing from the signing date and may be terminated by mutual
written agreement between Fang and us.
Business Cooperation.
CIH will have
the exclusive right to operate all the commercial property-related business, such as the online listing of commercial properties
and lands as well as the advertising and marketing services provided through our commercial property-related web pages, for which
we will be responsible for operating and maintaining at CIH’s expenses, which will include IT system upgrade, servers maintenance
and software upgrade. We will have the exclusive right to operate all the residential property-related business, except for those
provided by CIH to clients relating to residential property-related business, including the information and analytics services
as well as promotion services. CIH plans to cooperate with us to operate CIH’s commercial property-related business through
our web pages after the separation and distribution and ultimately migrate such business to CIH’s own website,
3fang.com
and 3fang mobile application after CIH obtains the ICP license required for standalone operation of such business.
Intellectual
Property Cooperation.
We agree to authorize CIH to use for free certain of our trademarks, copyrights, patents and other intellectual
properties in connection with the operation of CIH’s commercial property-related business.
Revenue and
Expenses Allocation.
During the term of our cooperation, we have the right to receive (1) 100% of the revenue generated by
residential property-related business on our residential property-related web pages, (2) 85% of the revenue generated by commercial
property-related business on our residential property-related web pages, and (3) 15% of the revenue generated by residential property-related
business on our commercial property-related web pages. CIH will have the right to receive (1) 100% of the revenue generated by
commercial property-related business on our commercial property-related web pages, for which CIH will bear the cost for operating
and maintaining the related web pages and servers, (2) 85% of the revenue generated by residential property-related business on
our commercial property-related web pages, and (3) 15% of the revenue generated by commercial property-related business on our
residential property-related web pages.
Data License
Agreement
We will enter
into a data license agreement with CIH, pursuant to which, we agree to license the right of using certain data to CIH for development
of CIH’s business, and CIH agrees to provide certain data to us, including property appraisal and transaction data. Each
of CIH and us will not pay any royalty fees. The term of the data license agreement is 10 years commencing from the signing date
and may be terminated by mutual agreement between CIH and us.
Software
License Agreement
We will enter into a software license agreement
with CIH, pursuant to which, We agree to license the right of using certain of our software, at annual royalty fee of RMB500,000,
subject to adjustment. The term of the software license agreement is 10 years commencing from the signing date and may be terminated
by mutual agreement between CIH and us.
Intellectual Property License Agreement
In connection with the separation,
we will enter into an intellectual property license agreement with CIH, pursuant to which CIH will be granted an non-exclusive
and royalty-free right to use certain of Fang’s intellectual properties in connection with the operation of CIH’s
business. The intellectual property license agreement will be valid for a term of 10 years commencing from the signing date and
may be terminated by mutual written agreement between CIH and us.
Lease Framework Agreement
We and CIH have entered into
a lease framework agreement, pursuant to which we agree to lease properties owned by us or our affiliates to CIH at market price.
The lessors and lessees have entered into detailed lease agreements in accordance with this framework agreement based on CIH’s
actual demands. The initial term of this agreement is 10 years commencing from the signing date and may be terminated by mutual
written agreement between CIH and us.
Intellectual Property
Our copyrights, trademarks, trade secrets,
domain names and other intellectual property are important to our business. We rely on intellectual property laws and contractual
arrangements with our key employees and certain of our customers, collaborators and others to protect our intellectual property
rights. Despite these measures, we cannot assure you that we will be able to prevent unauthorized use of our intellectual property,
which would adversely affect our business.
Our applications for the “SouFun”
trademark for certain industry categories in China conflict with existing registrations of or applications for similar trademarks,
which have resulted in litigations. In April 2014, the Higher People’s Court of Beijing Municipality reversed a lower
court’s judgment in favor of us and ordered the PRC Trademark Review and Adjudication Board of SAIC to reconsider another
PRC company’s trademark application for “SOFANG” that it had previously rejected. In April 2015, the Supreme
People’s Court of the PRC accepted our application for retrial over the judgment of the Higher People’s Court of Beijing
Municipality but ultimately denied our application. See “Item 3.D. Key Information—Risk Factors—Risks related
to our business—Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting
our intellectual property rights, may materially and adversely affect our business, financial condition, results of operations,
reputation and competitive advantage” and “—We may be subject to intellectual property infringement or misappropriation
claims by third parties, which may force us to incur substantial legal expenses and, if determined adversely against us, could
materially disrupt our business.” In 2015, we obtained new trademarks “Fang.com” in English and “房天下”
(“Fang Tian Xia” in Chinese) and began to market our services under these new brands in connection with the transformation
of our business model. We therefore do not currently expect our business would be materially and adversely affected even if we
lose the right to use the trademark relating to “SouFun” in certain limited industry categories.
As of December 31, 2018, we held 412 registered
copyrights and owned or licensed 613 registered trademarks in China. As of the same date, we had 737 trademark applications in
various industry categories, pending with the PRC Trademark Office.
We have also filed applications to register
certain trademarks in a number of other jurisdictions, including Hong Kong, Macao, Taiwan, Canada, Australia, France, Japan, Singapore,
Spain, the United Kingdom and the United States.
As of December 31, 2018, we owned or licensed
1,117 registered domain names, including our official website,
www.fang.com
, and domain names registered in connection
with
www.jiatx.com
,
www.landlist.cn
and
www.fangtx.com
.
As of December 31, 2018, we had four registered
patents and four patent applications relating to database maintenance and computer data backup under review by the State Intellectual
Property Office of the PRC.
Facilities
Our principal executive offices are located
at Tower A, No. 20 Guogongzhuang Middle Street, Fengtai District, Beijing 100070, the People’s Republic of China, with approximately
69,313 sq.m. of office space. As of December 31, 2018, we leased or owned properties with an aggregate gross floor area of
approximately 53,800 sq.m. for our local offices across China in addition to our principal executive offices in Beijing. Our leased
properties mainly consist of office premises, all of which are leased from independent third parties. We believe our existing leased
and owned premises are adequate for our current business operations and that additional space can be obtained on commercially reasonable
terms to meet our future requirements. See “Item 3.D. Key Information—Risk Factors—Risks related to our business—Certain
of our leased property interests may be defective and we may be forced to relocate operations affected by such defects, which could
cause significant disruption to our business.”
We own an office building with a total usable
office space of approximately 69,313 sq.m. in Beijing as our headquarters.
We own an office building with a gross floor
area of 325,000 square feet at 72 Wall Street, New York. It is currently under major refurnishment work.
We own certain commercial properties of approximately
3,111 sq.m and 22,064.8 sq.m, in Sanya, Hainan province and Wuhan, Hubei province, China, respectively. We also own office space
of 46,681 sq.m, together with 373 parking spaces, in an office building in Chengdu, Sichuan province, 1264.67 sq.m, in an office
building in Changzhou, Jiangsu province, as well as office space of 30,843 sq.m in an office building in Chongqing. We primarily
use these properties as our local offices.
We own certain Meilin lake villa properties
of 10,308 sq.m. in Changzhou, Jiangsu province, China.
In addition, we own a portion of a building
known as the BaoAn Building located at 800 Dongfang Road, Pudong, Shanghai. The property has usable space of approximately 42,000
sq.m. and is currently used for offices, retail space and a hotel. We acquired the property to support our expansion in Shanghai
and the East China region, which consists of 15 cities including Jiangsu provincial capital Nanjing and Zhejiang provincial capital
Hangzhou.
We also purchased a total net rentable area
of 264,964 square feet in an office building in San Francisco. Our San Francisco office is primarily used as our technology and
research center in the US.
Insurance
We maintain property insurance to cover potential
damages to a portion of our property. In addition, we provide medical, unemployment and other insurance to our employees in compliance
with applicable PRC laws, rules and regulations. We do not maintain insurance policies covering losses relating to our systems
and do not have business interruption insurance.
Legal Proceedings
In January 2018, we applied for an arbitration
at China International Economic and Trade Arbitration Commission as a claimant for the indebtedness owed to us and breach of contract
by a third party. The arbitration procedure is still ongoing.
In April and May 2018, we were involved
in suits as one of the defendants for trade mark infringement claimed by a third party, alleging RMB99.9 million, RMB300 million,
and RMB500 million, respectively. The suits are still ongoing and we are vigorously contesting
the allegations.
In February 2019, we were served with a subpoena
from a court in Beijing, in which a third party claimed that a contract we entered into was invalid. Pursuant to such contract,
we received certain assets from a debtor’s nominee to discharge its indebtedness. The debtor subsequently alleged that such
contract was invalid because the transfer price of such assets was below the fair market value. We intend to vigorously contest
the allegation.
Saved as disclosed above, we are currently
not involved in any material legal or arbitration proceedings. From time to time, we may be subject to claims and legal actions
arising in the ordinary course of business, such as intellectual property infringement claims against us for use of others’
articles or photographs and employment disputes. Such claims or legal actions, even if without merit, could result in the expenditure
of significant financial and management resources and potentially result in civil liability for damages.
Regulation
Our business is subject to substantial regulation
by the PRC government. This section sets forth a summary of certain significant PRC regulations that affect our business and the
industries within which we operate. See “Item 3.D. Key Information—Risk Factors” which discusses risks related
to regulation of our business and industry.
General
The telecommunications industry, including
Internet information services and Internet access services, is highly regulated by the PRC government. Regulations issued or implemented
by the State Council, MIIT and other relevant government authorities cover virtually every aspect of telecommunications network
operations, including entry into the telecommunications industry, the scope of permissible business activities, interconnection
and transmission line arrangements, tariff policy and foreign investment.
MIIT, under the leadership of the State Council,
is responsible for, among other things:
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formulating
and enforcing telecommunications industry policy, standards and regulations;
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granting
licenses to provide telecommunications and Internet services;
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formulating
tariff and service charge policies for telecommunications and Internet services;
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supervising
the operations of telecommunications and Internet service providers; and
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maintaining fair and orderly market competition among telecommunications
and Internet service providers.
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In addition to the regulations promulgated
by the central PRC government, some local governments have also promulgated local rules applicable to Internet companies operating
within their respective jurisdictions.
In 1994, the Standing Committee of the National
People’s Congress promulgated the PRC Advertising Law. In addition, SAIC and other ministries and agencies have issued regulations
that further regulate our advertising business, as discussed below.
Restrictions on Foreign Ownership in
the Online Advertising Industry
Internet Content Provision and Wireless
Value-Added Services
In September 2000, the State Council promulgated
the Telecommunications Regulations, which categorize all telecommunications businesses in China as either basic telecommunications
businesses or value-added telecommunications businesses. In February 2003, MIIT amended the original classification of telecommunications
business with Internet content provision services and wireless value-added services being classified as value-added telecommunications
businesses. In December 2015, MIIT further amended the classification of telecommunications business, which sets out in details
of the information service business classification under the category of value-added telecommunications businesses. The Telecommunications
Regulations also set forth extensive guidelines with respect to different aspects of telecommunications operations in China.
In order to comply with China’s commitments
with respect to its entry into the World Trade Organization, the State Council promulgated the Administrative Rules on Foreign-invested
Telecommunications Enterprises in December 2001, as amended in September 2008 and February 2016. The Administrative
Rules on Foreign-invested Telecommunications Enterprises set forth detailed requirements with respect to capitalization, investor
qualifications and application procedures in connection with the establishment of a foreign-invested telecommunications enterprise.
Pursuant to these administrative rules, the ultimate capital contribution ratio of the foreign investor or investors in a foreign-invested
telecommunications enterprise that aims to provide value-added telecommunications services may not exceed 50.0%. In addition,
pursuant to the Foreign Investment Industrial Guidance Catalog issued by the PRC government, the permitted foreign investment
in value-added telecommunications service providers may not be more than 50.0%. However, for a foreign investor to acquire any
equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent performance and operational
experience requirements, including demonstrating a track record and experience in operating a value-added telecommunications business
overseas. Moreover, foreign investors that meet these requirements must obtain approvals from MIIT and MOFCOM or their authorized
local counterparts, which retain considerable discretion in granting approvals.
In July 2006, MIIT publicly released
the Circular on Strengthening the Administration of Foreign Investment in Value-Added Telecommunications Services, or the MIIT
Notice. According to the MIIT Notice, if any foreign investor intends to invest in a PRC telecommunications business, a foreign-invested
telecommunications enterprise must be established and such enterprise must apply for the relevant telecommunications business
licenses. Under the MIIT Notice, domestic telecommunications enterprises may not rent, transfer or sell a telecommunications license
to foreign investors in any form, nor may they provide any resources, premises, facilities and other assistance in any form to
foreign investors for their illegal operation of any telecommunications business in China.
As a result of current PRC laws, rules and
regulations that impose substantial restrictions on foreign investment in the Internet business in China, we conduct this portion
of our operations through a series of contractual arrangements among our PRC subsidiaries and our consolidated controlled entities.
In the opinion of our PRC legal counsel:
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each
of the Structure Contracts is legal, valid and binding on the contracting parties under
applicable PRC laws, rules and regulations;
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the
execution, delivery, effectiveness, enforceability and performance of each of the Structure
Contracts do not violate any published PRC laws, rules and regulations currently in force
and effect;
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none
of our Structure Contracts contravenes any published PRC laws, rules and regulations
currently in force and effect; and
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no
filings, registrations, consents, approvals, permits, authorizations, certificates and
licenses of any PRC government authorities are currently required in connection with
the execution, delivery, effectiveness, performance and enforceability of each Structure
Contract, provided that the pledges of equity interests under the Structure Contracts
should be registered with competent PRC government authorities, and provided further
that the exercise of the call option in the future must be approved and registered by
competent PRC government authorities.
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However, there are substantial uncertainties
regarding the interpretation and application of current or future PRC laws, rules and regulations, including the laws and regulations
governing the enforcement and performance of our Structure Contracts in the event of any imposition of statutory liens, bankruptcy
and criminal proceedings. Accordingly, we cannot assure you that the PRC regulatory authorities will not ultimately take a contrary
view from that of our PRC legal counsel. See “Item 3.D. Key Information—Risk Factors—Risks related to our corporate
structure—If the PRC government determines that the structure contracts that establish the structure for our business operations
do not comply with applicable PRC laws, rules and regulations, we could be subject to severe penalties or be forced to restructure
our ownership structure” and “—Substantial uncertainties exist with respect to the adoption of new or revised
PRC laws relating to our corporate structure, corporate governance and business operations.”
Regulation Relating to Our Business
Internet Content Provision Services
The provision of real estate and home-related
and other content on Internet websites is subject to applicable PRC laws, rules and regulations relating to the telecommunications
industry and the Internet, and regulated by various government authorities, including MIIT and SAIC. The principal regulations
governing the telecommunications industry and the Internet include:
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The
Telecommunications Regulations (Revised in 2016);
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The Catalog of Classes of Telecommunications Business (2015);
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The
Administrative Measures for Telecommunications Business Operating Licenses (2017); and
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The Internet Information Services Administrative Measures (2011).
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Under these regulations, Internet content provision
services are classified as value-added telecommunications businesses, and a commercial operator must obtain a telecommunications
and information services operating license, or ICP license, from the appropriate telecommunications authority in order to carry
out commercial Internet content provision operations in China. If an Internet content provider is not engaged in commercial Internet
content operations, it is only required to file a record with the appropriate telecommunications authority. In addition, the regulations
also provide that operators involved in Internet content provision in sensitive and strategic sectors, including news, publishing,
education, health care, medicine and medical devices, must obtain additional approvals from the relevant authorities in relation
to those sectors.
Two of our consolidated controlled entities,
Beijing Technology and Beijing JTX Technology, each hold an ICP license issued by the Beijing Telecommunications Administration
Bureau, a municipal branch of MIIT.
On December 21, 2013, the State Council
promulgated the Decision of the State Council on Temporary Adjustments to the Administrative Approval Items or Special Administrative
Measures on Access Prescribed in the Relevant Administrative Regulations or State Council’s Documents in China (Shanghai)
Pilot Free Trade Zone, which provides that temporary adjustments shall be made to special administrative measures on access in
respect of qualification requirements and restrictions on shareholding proportion under the Administrative Rules on Foreign-invested
Telecommunications Enterprises.
Pursuant to the Opinions of the MIIT and the
People’s Government of Shanghai Municipality on Further Opening Up Value-added Telecommunications Business in China (Shanghai)
Pilot Free Trade Zone (“Pilot Opinions”), which were jointly issued by the MIIT and People’s Government of Shanghai
Municipality on January 6, 2014, foreign ownership in telecommunications service business (only include apps stores), which
China has committed to opening-up after its WTO entry, may exceed 50% on a pilot basis. Foreign ownership in online data processing
and transaction processing (operational electronic commerce) shall not exceed 55%. Except for the Internet connection service
business (provision of internet connection service for online users), the scope for other businesses services specified by the
Pilot Opinions can be nationwide. On April 15, 2014, MIIT promulgated the Circular on Printing and Distributing the Administrative
Measures of China (Shanghai) Pilot Free Trade Zone for the Pilot Operation of Value-added Telecommunications Business by Foreign
Investment, which further provides the requirements and procedures for foreign-invested enterprises to apply for and obtain the
approval to conduct value-added telecommunications business based in the China (Shanghai) Pilot Free Trade Zone.
On June 19, 2015, MIIT further issued
the Circular of the MIIT on Removing the Restrictions on Shareholding Ratio Held by Foreign Investors in Online Data Processing
and Transaction Processing (Operational E-commerce) Business, which liberalizes the foreign ownership restrictions in online data
processing and transaction processing (operational electronic commerce) business by expanding the business areas from the China
(Shanghai) Pilot Free Trade Zone to nationwide, and the foreign ownership may be up to 100%.
The MIIT Notice requires that a value-added
telecommunications business operator (or its shareholders) must own domain names and trademarks used by it in the value-added
telecommunications business, and have premises and facilities appropriate for such business. To comply with the MIIT Notice, all
of our related trademarks and domain names are owned directly by Beijing Technology and
Beijing JTX Technology.
Furthermore, according to the Administrative
Provisions on Online Publishing Services, jointly issued by the MIIT and the State General Administration of Press, Publication,
Radio, Film and Television in February 2016, all entities that are engaged in Internet publication services in China must
be approved by competent publication administrative department and acquire an Online Publishing Service License. The online publishing
services defined in the Administrative Provisions on Online Publishing Services refer to the provision of online publications
to the public through information networks while the Online Publications refer to digitized works with characteristics of publishing,
such as editing, production or processing provided to the public through information networks.
Advertising Services
SAIC is responsible for regulating advertising
activities in China. The principal regulations governing advertising in China, including online advertising, include:
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the
Advertising Law (Revised in 2018); and
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the
Administration of Advertising Regulations.
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These regulations stipulate that companies
that engage in advertising activities in China must obtain from SAIC or its local branches a business license which specifically
includes operating an advertising business within its business scope. Companies conducting advertising activities without such
a license may be subject to penalties, including fines, confiscation of illegal revenues and orders to cease advertising operations.
The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or
revoked due to a violation of any relevant law or regulation.
The business scope of each of Beijing Advertising,
Beijing Technology, Beijing JTX Technology, Shanghai Century JTX Network and Beijing Yi Ran Ju Ke includes operating an advertising
business, which allows them to engage in the advertising business.
Electronic Bulletin Board Services
In November 2000, MIIT adopted the
Administrative Regulations on Internet Electronic Bulletin Board Services, which required that an Internet content service provider
providing online bulletin board service register with, and obtain approval from, local telecommunications authorities. The Administrative
Regulations on Internet Electronic Bulletin Board Services was abolished by MIIT on September 23, 2014, and the management
of Internet electronic bulletin board services is currently governed by the Telecommunications Regulations, the Internet Information
Services Administrative Measures and the Administrative Measures for Telecommunications Business Operating Licenses, which provide
that an Internet content provider that intends to provide online bulletin board services shall fulfill the approval formalities.
On November 6, 2006, the Beijing Telecommunications Administration Bureau issued to Beijing Technology, respectively, an
approval for operating electronic bulletin board services on www.fang.com, respectively. Beijing JTX Technology also obtained
approval for operating electronic bulletin board services on www.jiatx.com on June 15, 2007. These approvals each have an
original validity which is keyed to the corresponding ICP license and their continued validity is subject to the fulfillment of
certain conditions and qualifications.
Regulations on the Real Estate Service Industry
The principal regulations governing the real
estate service industry in China include the Law on the Administration of the Urban Real Estate, as amended in August 2009,
the Real Estate Brokerage Administration Measures issued by the MOHURD, the NDRC, and the PRC Ministry of Human Resources and
Social Security on January 20, 2011, which became effective on April 1, 2011, and was further amended on March 1,
2016 and became effective on April 1, 2016.
Real Estate Service Companies
In accordance with the Law on the Administration
of the Urban Real Estate and the Real Estate Brokerage Administration Measures, real estate services refer to services of real
estate consultation, appraisal and brokerage. A real estate service company is required to meet certain financial and personnel
requirements and register with the SAIC or its local counterpart. To be qualified to engage in real estate services, a company
is required to file with the relevant local branch of SAIC. Pursuant to the Real Estate Brokerage Administration Measures, a real
estate brokerage company must have a certain number of real estate brokers and real estate broker assistants, and shall file with
the local real estate regulatory authority within thirty days following the issuance of its business license. Local authorities
have specific requirements on employing such brokers and the registration formalities.
On May 11, 2011, the MOHURD and the NDRC
jointly issued the Notice of Strengthening the Real Estate Brokerage Administration and Further Standardizing the Order of Real
Estate Transactions. On June 13, 2013, the MOHURD and the SAIC jointly issued the Notice of Focusing on Special Administration
on Market of Real Estate Agencies. According to these notices, a real estate brokerage company is forbidden to display any false
or unverified information. The real estate brokerage company and its brokers shall not conceal transaction price and other transaction
information from the transacting parties. Such entities are also prohibited from obtaining any gains by purchasing or renting
a property at a lower price and then selling or leasing such property at a higher price. The real estate brokerage company is
also required to establish a separate account for transaction settlement if the real estate brokerage company is responsible to
collect and pay the transaction amount on behalf of the transaction parties.
Real Estate Service Brokers
In accordance with the Real Estate Brokerage
Administration Measures, the PRC government implemented the occupational qualification system for real estate broker personnel.
Pursuant to the Interim Regulations on Professional
Qualification for Real Estate Brokerage Professionals and the Implementation Rules on the Examinations of Real Estate Brokerage
Professional Qualification issued by the PRC Ministry of Human Resources and Social Security and the MOHURD on December 18,
2001 and the relevant circulars, to practice as a qualified real estate broker, an individual was required to pass an exam and
obtain a qualification certificate for real estate brokers, However, the State Council issued the Decision of the State Council
on Cancelling and Adjusting a Batch of Administrative Examination and Approval Items on July 22, 2014, which eliminated the
qualification certificate requirement for real estate brokers. On June 25, 2015, the PRC Ministry of Human Resources and
Social Security and the MOHURD further jointly issued Interim Provisions on the Occupational Qualification System of Professional
Real Estate Brokers and the Implementing Measures for Occupational Qualification Exams of Professional Real Estate Brokers, which
provide that real estate brokerage professional qualifications are divided into three levels, namely associate real estate broker,
real estate broker and senior real estate broker. The associate real estate broker and real estate broker shall pass the examination
as a method to evaluate their professional skills.
Real Estate Service Charges
According to the Notice on Release of Management
of Real Estate Consultant and Brokerage Charges jointly issued by the NDRC and the MOHURD which became effective on July 1,
2014, a real estate service company must display its service charges, or commissions. The commissions for the real estate brokerage
services are subject to the regulation of the local branch of the MOHURD and the competent pricing department of people’s
government at the provincial level, the local authorities may decide to apply “government-guided” prices or “market-adjusted”
prices according to the local situation. The commissions for the real estate consulting services shall be based on “market-adjusted”
prices, and the real estate consulting service providers may negotiate and determine their commission rates with clients.
Regulations on Microfinance Companies
According to the Guiding Opinions on the Pilot
Operation of Microfinance Companies (the “Guiding Opinions”) jointly issued by the China Banking Regulatory Commission
and the PBOC on May 4, 2008, microfinance companies are limited liability companies or joint stock companies established
with the capital contribution from natural persons, legal persons and other organizations, which do not accept public deposits
and engage in the microfinance business. To set up a microfinance company, an applicant shall submit a formal application to the
competent administrative departments at the provincial level. Upon approval, the applicant shall apply to the local branch of
the SAIC to obtain a business license for the microfinance company. In addition, the applicant shall complete certain filings
with the local police department, the local office of the China Banking Regulatory Commission and the local branch of the PBOC.
According to the Guiding Opinions, the aggregate balance of the loans granted to any single borrower may not exceed 5% of the
net capital of the microfinance company. The PBOC is responsible for monitoring the interest rates and fund flows of microfinance
companies and record the relevant information into the PBOC’s credit information system. Microfinance companies are required
to provide information regarding their borrowers, loan amounts, guarantees for loans and loan repayment to the credit information
system.
According to the Guiding Opinions, a provincial
government may launch pilot programs for microfinance companies within prefectural regions of the province only after it designates
a department (finance office or other relevant institutions) to be in charge of supervision and administration of microfinance
companies and is willing to be responsible for risk management and disposals with respect to microfinance companies. Consequently,
microfinance companies are primarily regulated locally by provincial governments under rules and regulations promulgated by the
provincial governments.
Pursuant to Notice on Regulating the “Cash
Loan” Business, issued by Office of the Leading Group for the Special Campaign against Internet Financial Risks and the
Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks on December 1st, 2017 (“Notice
on Regulating Cash Loan”), internet microfinance businesses are strictly regulated. According to the Notice on Regulating
Cash Loan, among other requirements, microfinance companies are required to suspend distribution of internet microloans that are
not supported by specific scenarios and no specific purpose, gradually reduce the inventory business within a time limit and rectification
shall be completed within the prescribed time limit. Issuing “campus loans” and “down payment loans” are
also prohibited.
According to Notice on Regulating Cash Loan,
microfinance companies may not sell, transfer, and disguise the company’s credit assets through Internet platforms or local
trading venues. Providing real property financing and other debt financing matchmaking services in relation to the purchase of
real properties are also prohibited. Violation of these requirements may subject the relevant authorities to various penalties,
including restrictions on the entity conducting such activities’ business operations, or canceling business qualifications
and/or closing the entity.
Regulations on Entrusted Loans
The General Lending Code was promulgated by
the PBOC on June 28, 1996 and came into effect on August 1, 1996. The General Lending Code defines a “loan provider”
as a PRC owned financial institution established in China that engages in the provision of interest bearing loans. One type of
loan defined in and regulated in accordance with the General Lending Code is the entrusted loan. Entrusted loans are arrangements
whereby the capital for a loan is supplied by a government department, an enterprise or a natural person (the “capital provider”)
and entrusted to a financial institution as the loan provider. Entrusted loans are made by the loan provider to a specified borrower
for a particular purpose and in an amount, for a term and at an interest rate determined by the capital provider. The term “specified
borrower” describes the party specified by the capital provider as the person who will receive the amount of an entrusted
loan (the “loan recipient”). While the loan provider exercises supervision over and receives repayment from the loan
recipient, the loan provider does not assume any risk of default in repayment by the loan recipient. In accordance with the General
Lending Code and the relevant judicial interpretation from the Supreme People’s Court of the PRC, in an entrusted loan arrangement,
the relationship between the loan provider and the capital provider is that of trustee and trustor; and the relationship between
the loan provider and the loan recipient is that of lender and borrower. No creditor/debtor relationship exists between the capital
provider and the loan recipient. The General Lending Code requires that loan providers must be authorized by and have been granted
a financial institution license or a financial institution operation license from the PBOC; and must have registered with the
SAIC. The General Lending Code further stipulates that enterprises which are not authorized and registered as loan providers must
not breach the laws of the PRC by engaging in intercompany loan transactions or the provision of loans through unauthorized means.
An intercompany loan is a loan provided directly from one company to another where the loan provider is not authorized and registered
as a loan provider.
According to the Opinions of the Ministry of
Housing and Urban-Rural Development and other Authorities on Strengthening the Administration Over the Real Estate Agencies to
Promote the Healthy Development of the Industry issued by the MOHURD, the MIIT, the SAT, the SAIC, the PRC National Development
and Reform Commission, the CSRC and the PBOC on July 29, 2016, real estate service companies, which prepare the housing loan
applications on behalf of clients, shall not compel clients to choose financial institutions designated by them, nor shall they
associate the loan application services with other services. A real estate service company shall not, by itself or cooperating
with other entities, offer illegal financial products and services, or receive any commissions from financial institutions. In
addition, financial institutions are strictly prohibited from cooperating with real estate service companies which have not gone
through the filing formalities with competent real estate authorities.
Pursuant to Notice on Regulating the “Cash
Loan” Business, issued by Office of the Leading Group for the Special Campaign against Internet Financial Risks and the
Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks on December 1st, 2017 (“Notice
on Regulating Cash Loan”), internet microfinance businesses shall be under strictly regulated. According to the Notice on
Regulating Cash Loan, among other requirements, microfinance companies are required to suspend distribution of internet microloans
that are not supported by specific scenarios and no specific purpose, gradually reduce the outstanding loan balance within the
prescribed time limit and rectification shall be completed within the prescribed time limit. Issuing “campus loans”
and “down payment loans” are also prohibited.
Regulations on Online Peer-to-Peer Lending
Interim Measures for the Administration
of the Business Activities of Online Lending Information Intermediary Institutions issued by the PBOC, the MIIT and the Ministry
of Public Security on August 24, 2016, Guidelines for the Administration of Recordation and Registration of P2P Lending Information
Intermediary Institutions issued by the China Banking Regulatory Commission, the MIIT and the SAIC on October 28, 2016, Guidelines
for the Online Lending Fund Depository Business issued by the China Banking Regulatory Commission on February 22, 2017 and Guidelines
for the Disclosure of Information on the Business Activities of Online Lending Information Intermediary Institutions issued by
the China Banking Regulatory Commission on August 23, 2017 (collectively referred to as “One approach and Three Guidelines”),
provide a legal system basis for the standardized development and continuous prudent supervision of the online peer-to-peer lending
industry. According to “One approach and Three Guidelines”, peer-to-peer lending information intermediary institutions
should apply for recordation and registration to the local financial regulatory departments.
The Office of the Leading Group for the
Special Campaign against Peer-to-Peer Lending Risks has promulgated the Notice on Compliance Inspection of Peer-to-Peer Network
Lending Institutions and the List of Compliance Checking Questions of Online Lending Information Intermediaries on August 13,
2018, which includes several inspection procedures: self-inspection of online lending institutions, self-discipline inspection
by local internet finance associations or related institutions, administrative verification by the local office for the special
campaign against peer-to-peer lending risks. The Notice on Compliance Inspection of Peer-to-Peer Network Lending Institutions
requires that the local office for the special campaign against peer-to-peer lending risks should check the contents of the reports
submitted by the online lending institutions. If the contents are untrue, omitted or fraudulent, the office can pursue accountability
and exercise vote power for online lending institutions.
Regulations relating to Information Security
and Confidentiality of User Identity and Information
Internet content in China is also regulated
and restricted from a state security standpoint. Based on the Decision of the Standing Committee of the National People’s
Congress on Internet Security Protection enacted by the Standing Committee of the National People’s Congress, any effort
to undertake the following actions may be subject to criminal punishment in China:
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gain
improper entry into a computer or system of national strategic importance;
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disseminate
politically disruptive information;
|
|
·
|
leak
government secrets;
|
|
·
|
spread
false commercial information; or
|
|
·
|
infringe
intellectual property rights.
|
The Ministry of Public Security has also promulgated
measures that prohibit the use of the Internet in ways that, among other things, result in the leakage of government secrets or
the spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection powers in this regard,
and we may be subject to the jurisdiction of the local security bureaus. If an ICP license holder violates these measures, the
PRC government may revoke its license and shut down its website.
The security and confidentiality of information
on the identity of Internet users are also regulated in China. The Internet Information Service Administrative Measures promulgated
by the PRC State Council in September 2000 and revised in January 2011 require Internet content service providers to
maintain an adequate system that protects the security of user information. In January 2006, the Ministry of Public Security promulgated
the Regulations on Technical Measures of Internet Security Protection, requiring Internet service providers to utilize standard
technical measures for Internet security protection.
In addition, the Standing Committee of
the National People’s Congress promulgated the Cyber Security Law of the People’s Republic of China, or the Cyber
Security Law, effective June 2017, to protect cyberspace security and order. Pursuant to the Cyber Security Law, any individual
or organization using the network must comply with the constitution and the applicable laws, follow the public order and respect
social moralities, and must not endanger cyber security, or engage in activities by making use of the network that endanger the
national security, honor and interests, or infringe on the fame, privacy, intellectual property and other legitimate rights and
interests of others. The Cyber Security Law sets forth various security protection obligations for network operators, which are
defined as ‘‘owners and administrators of networks and network service providers,’’ including, among others,
complying with a series of requirements of tiered cyber protection systems, verifying users’ real identity, localizing the
personal information and important data gathered and produced by key information infrastructure operators during operations within
the PRC, and providing assistance and support to government authorities where necessary for protecting national security and investigating
crimes. Furthermore, MIIT’s Regulations on Protection of Personal Information of Telecommunications and Internet Users,
effective September 2013, contain detailed requirements on the use and collection of personal information as well as security
measures required to be taken by telecommunications business operators and internet information service providers.
Regulations relating to Trademarks
Both the PRC Trademark Law and the Implementation
Regulation of the PRC Trademark Law, as currently in effect, provide protection to the holders of registered trademarks and
trade names. The PRC Trademark Office handles trademark registrations and grants a renewable term of rights of 10 years to registered
trademarks. In addition, trademark license agreements must be filed with the Trademark Office.
After receiving a trademark registration application,
the PRC Trademark Office will make a public announcement with respect to the proposed trademark registration application if the
relevant trademark passes the preliminary examination. Any person may, within three months after such public announcement, object
to such trademark application. The PRC Trademark Office will then decide who is entitled to the trademark registration, and its
decisions may be appealed to the PRC Trademark Review and Adjudication Board, whose decision may be further appealed through judicial
proceedings. If no objection is filed within three months after the public announcement period or if the objection has been overruled,
the PRC Trademark Office will approve the registration and issue a registration certificate, upon which the trademark is registered
and will be effective for a renewable 10-year period, unless otherwise revoked.
Regulations relating to Employee Share
Options
Under the Stock Option Rule promulgated
by SAFE in February 2012, a PRC entity’s directors, supervisors, senior management officers, other staff or individuals
who have an employment or labor relationship with a Chinese entity and are granted stock options by an overseas publicly listed
company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and
complete certain other procedures. We and our PRC resident employees who have been granted stock options are subject to these
regulations. We have designated our PRC relevant subsidiaries to handle the registration and other procedures required by the
Stock Option Rule. If we or our PRC option holders fail to comply with these regulations in the future, we or our PRC option holders
may be subject to fines and legal sanctions.
Regulations relating to Employees
The principal PRC laws and regulations
that govern employment include:
|
·
|
the PRC Labor Law
which became effective on January 1, 1995 and was amended on August 27, 2009 and December
29, 2018; and
|
|
·
|
the PRC Labor Contract
Law which became effective on January 1, 2008, and its amendments which became effective
on July 1, 2013.
|
Pursuant to the PRC Labor Law and the PRC Labor
Contract Law, employers must execute written labor contracts with full-time employees. All employers must compensate their employees
with wages equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety
and sanitation, strictly abide by state rules and standards and provide employees with workplace safety training. Violations of
the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative liabilities. Criminal
liability may arise for serious violations.
In addition, employers in China are obliged
to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related
injury insurance, medical insurance and housing funds.
Regulations relating to Foreign
Investment
On March 15, 2019, the National People’s
Congress promulgated the Foreign Investment Law, which will come into effect on January 1, 2020 and replace the trio of existing
laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative
Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law. The existing foreign-invested enterprises established
prior to the effective of the Foreign Investment Law may keep their corporate forms within five years. The implementing rules
of the Foreign Investment Law will be stipulated separately by State Council. Pursuant to the Foreign Investment Law, ‘‘foreign
investors’’ means natural person, enterprise, or other organization of a foreign country; ‘‘foreign-invested
enterprises’’ means any enterprise established under PRC law that is wholly or partially invested by foreign investors
and ‘‘foreign investment’’ means any foreign investor’s direct or indirect investment in mainland
China, including: (1) establishing FIEs in mainland China either individually or jointly with other investors; (2) obtaining stock
shares, stock equity, property shares, other similar interests in Chinese domestic enterprises; (3) investing in new projects
in mainland China either individually or jointly with other investors; and (4) making investment through other means provided
by laws, administrative regulations, or State Council provisions.
The Foreign Investment Law stipulates that
China implements the management system of pre-establishment national treatment plus a negative list to foreign investment and
the government generally will not expropriate foreign investment, except under special circumstances, in which case it will provide
fair and reasonable compensation to foreign investors. Foreign investors are barred from investing in prohibited industries on
the negative list and must comply with the specified requirements when investing in restricted industries on that list. When a
license is required to enter a certain industry, the foreign investor must apply for one, and the government must treat the application
the same as one by a domestic enterprise, except where laws or regulations provide otherwise. In addition, foreign investors or
foreign-invested enterprises are required to file information reports and foreign investment which affects or is likely to have
effect on the national security shall be subject to the national security review.
Regulations relating to Foreign Investment
in Value-Added Telecommunications Industry
According to the Administrative Rules on Foreign-invested
Telecommunications Enterprises issued by the State Council effective in January 2002, as amended in September 2008 and
February 2016, a foreign investor may hold no more than a 50% equity interest in a value-added telecommunications services
provider in China and such foreign investor must have experience operating in such industry.
Pursuant to the Opinions of the MIIT and the
People’s Government of Shanghai Municipality on Further Opening Up Value-added Telecommunications Business in China (Shanghai)
Pilot Free Trade Zone (“Pilot Opinions”), which were jointly issued by the MIIT and People’s Government of Shanghai
Municipality on January 6, 2014, foreign ownership in telecommunications service business (only include apps stores), which
China has committed to opening-up after its WTO entry, may exceed 50% on a pilot basis. Foreign ownership in online data processing
and transaction processing (operational electronic commerce) shall not exceed 55%. Except for the Internet connection service
business (provision of internet connection service for online users), the scope for other businesses services specified by the
Pilot Opinions can be nationwide. On April 15, 2014, MIIT promulgated the Circular on Printing and Distributing the Administrative
Measures of China (Shanghai) Pilot Free Trade Zone for the Pilot Operation of Value-added Telecommunications Business by Foreign
Investment, which further provides the requirements and procedures for foreign-invested enterprises to apply for and obtain the
approval to conduct value-added telecommunications business based in the China (Shanghai) Pilot Free Trade Zone.
On June 19, 2015, MIIT further issued
the Circular of the MIIT on Removing the Restrictions on Shareholding Ratio Held by Foreign Investors in Online Data Processing
and Transaction Processing (Operational E-commerce) Business, which liberalizes the foreign ownership restrictions in online data
processing and transaction processing (operational electronic commerce) business by expanding the business areas from the China
(Shanghai) Pilot Free Trade Zone to nationwide, and the foreign ownership may be up to 100%.
The MIIT Notice requires that a value-added
telecommunications business operator (or its shareholders) must own domain names and trademarks used by it in the value-added
telecommunications business, and have premises and facilities appropriate for such business. To comply with the MIIT Notice, all
of our related trademarks and domain names are owned directly by Beijing Technology and
Beijing JTX Technology.
Regulations relating to the Establishment
of Offshore Special Vehicle by PRC Residents
Pursuant to the Circular 37 promulgated by
SAFE, which became effective on July 4, 2014, a PRC resident, including a PRC resident natural person or a PRC company, shall
register with the local SAFE branch before it contributes assets or its equity interests into an overseas SPV established or controlled
by the PRC resident for the purpose of investment and financing. When the overseas SPV that fulfilled the initial registration
formalities undergoes certain major changes, including but not limited to, the change in the PRC-resident shareholder of the overseas
SPV, name of the overseas SPV, term of operation, or any increase or reduction of the registered capital of the overseas SPV,
share transfer or swap, and merger or division, the PRC resident shall timely register such change with the local SAFE branch.
We have requested our beneficial owners
who are PRC residents to make the necessary applications, filings and amendments required by SAFE. However, we cannot provide
any assurances that all of our beneficial owners who are PRC residents will continue to make, obtain or amend any applicable registrations
or approvals required by these SAFE regulations. The failure or inability of our PRC resident beneficial owners to comply with
the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment
activities, or limit our ability to contribute additional capital into our PRC subsidiaries, or limit our PRC subsidiaries’
ability to pay dividends or make other distributions to our company or otherwise adversely affect our business. Moreover, failure
to comply with the SAFE registration requirements could result in liability under PRC laws for evasion of foreign exchange restrictions.
C. Organizational Structure
We conduct substantially all of our operations
in China through our PRC subsidiaries and consolidated controlled entities. For more information regarding the contractual arrangements
among our PRC subsidiaries and consolidated controlled entities, see “Item 7.B. Major Shareholders and Related Party Transactions—Related
Party Transactions—Structure Contracts.”
The following is a list of our principal subsidiaries
and consolidated controlled entities as of the date of this annual report:
Name
|
|
Place of Formation
|
|
Relationship
|
|
|
|
|
|
Beijing Cun Fang Real Estate Broking Co., Ltd. (“Beijing Cun Fang”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing Fang Chao Real Estate Broking Co., Ltd. (“Beijing Fang Chao”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing Fang Tian Xia Hong
An
Network Technology Ltd. (previously known as Beijing Fang Tian Xia Decorative Engineering Co., Ltd.)
(“Beijing Fang Tian
Xia Hong An Network Technology”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing Hong An Tu Sheng Network Technology Co., Ltd. (“Beijing Hong An”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing Li Man Wan Jia Network Technology Co., Ltd. (“Beijing Li Man Wan Jia”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing SouFun Network Technology Co., Ltd. (“Soufun Network”)
|
|
China
|
|
Wholly-owned subsidiary
|
Name
|
|
Place of Formation
|
|
Relationship
|
|
|
|
|
|
Beihai Tian Xia Dai Microfinance Co., Ltd. (“Beihai Tian
Xia Dai Microfinance”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing Tuo Shi Huan Yu Network Technology Co., Ltd. (“Beijing
Tuo Shi”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing Zhong Zhi Shi Zheng Information Technology Co., Ltd.
(“Beijing Zhong Zhi Shi Zheng”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing Zhong Zhi Xun Bo Information Technology Co., Ltd. (“Beijing
Zhong Zhi Xun Bo”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Xinjiang Zhong Zhi Shu Ju Information Technology Co., Ltd. (“Xinjiang
Zhong Zhi Shu Ju”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Best Work Holdings (New York) LLC
|
|
United States
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Best Fang Holdings LLC
|
|
United States
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
China Index Holdings Limited (“CIH”)
|
|
Cayman Islands
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
China Index Academy Limited
|
|
Hong Kong
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Chongqing Fang Tian Xia Real Estate Broking Co., Ltd. (“Chongqing
Fang Tian Xia”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Chongqing Tian Xia Dai Microfinance Co., Ltd. (“Chongqing
Tian Xia Dai Microfinance”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Guangzhou Fang Tian Xia Real Estate
Broking Co., Ltd. (“Guangzhou Fang Tian Xia”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Hangzhou Ji Ju Real Estate Agents
Co., Ltd. (“Hangzhou Ji Ju”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Hangzhou SouFun Network Technology
Co., Ltd. (“Hangzhou SouFun Network”)
|
|
China
|
|
Wholly-owned subsidiary
|
Name
|
|
Place of Formation
|
|
Relationship
|
|
|
|
|
|
Hong Kong Property Network Limited
|
|
Hong Kong
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Nanchang Cun Fang Real Estate Broking Co., Ltd. (“Nanchang Cun Fang”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Nanjing Cun Fang Real Estate Broking Co., Ltd. (“Nanjing Cun Fang”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Shanghai BaoAn Enterprise Co., Ltd. (“Shanghai BaoAn Enterprise”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Shanghai BaoAn Hotel Co., Ltd. (“Shanghai BaoAn Hotel”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Shanghai SouFun Microfinance Co., Ltd. (“Shanghai SouFun Microfinance”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Shanghai SouFun Fang Tian Xia Broking Co., Ltd.
(“Shanghai SouFun Fang Tian Xia”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
SouFun Media Technology (Beijing) Co., Ltd. (“SouFun Media”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Tianjin Jia Tian Xia Microfinance Co., Ltd. (“Tianjin Jia Tian Xia Microfinance”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Tianjin Jia Tian Xia Network Technology Co., Ltd. (“Jia Tian Xia Network Technology”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Tianjin Fang Tian Xia Real Estate Broking Co., Ltd. (“Tianjin Fang Tian Xia”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Tianjin SouFun Network Technology Co., Ltd. (“Tianjin SouFun Network”)
|
|
China
|
|
Wholly-owned subsidiary
|
|
|
|
|
|
Beijing Century Jia Tian Xia Technology Development Co., Ltd. (“Beijing JTX Technology”)
|
|
China
|
|
Consolidated controlled subsidiary
|
Name
|
|
Place of Formation
|
|
Relationship
|
|
|
|
|
|
Beijing Hua Ju Tian Xia Network Technology Co., Ltd. (“Beijing Hua Ju Tian Xia”)
|
|
China
|
|
Consolidated controlled subsidiary
|
|
|
|
|
|
Beijing Li Tian Rong Ze Yi Jia Technology Development Co., Ltd. (“Beijing Li Tian Rong Ze”)
|
|
China
|
|
Consolidated controlled subsidiary
|
|
|
|
|
|
Beijing SouFun Internet Information Service Co., Ltd. (“Beijing Internet”)
|
|
China
|
|
Consolidated controlled subsidiary
|
|
|
|
|
|
Beijing SouFun Science and Technology Development Co., Ltd. (“Beijing Technology”)
|
|
China
|
|
Consolidated controlled subsidiary
|
|
|
|
|
|
Fang
Tian Xia Financial Information Service (Beijing) Ltd. (previously known as Beijing Tianxia
Dai Information service Co., Ltd.)
(“Tianxia
Dai Information”)
|
|
China
|
|
Consolidated controlled
subsidiary
|
|
|
|
|
|
Beijing Yi Ran Ju
Ke Technology Development Co., Ltd. (“Beijing Yi Ran Ju Ke”)
|
|
China
|
|
Consolidated controlled
subsidiary
|
|
|
|
|
|
Beijing Zhong Zhi
Hong Yuan Data Information Technology Co., Ltd.
(“Beijing
Zhong Zhi Hong Yuan”)
|
|
China
|
|
Consolidated controlled
subsidiary
|
|
|
|
|
|
Shanghai Jia Biao
Tang Real Estate Broking Co., Ltd. (“Shanghai JBT Real Estate Broking”)
|
|
China
|
|
Consolidated controlled
subsidiary
|
|
|
|
|
|
Wuhan SouFun Yi Ran
Ju Ke Real Estate Agents Co., Ltd. (“Wuhan Yi Ran Ju Ke”)
|
|
China
|
|
Consolidated controlled
subsidiary
|
The following diagram illustrates our corporate
structure including our principal subsidiaries and consolidated controlled entities as of the date of this annual report:
|
*
|
The diagram above
omits the names of subsidiaries and consolidated controlled entities that are insignificant
individually and in the aggregate.
|
|
(1)
|
Each of Shanghai
BaoAn Enterprise and Shanghai BaoAn Hotel is owned as to 25.0% by Shanghai China Index,
one of our consolidated controlled entities.
|
|
(2)
|
Shanghai SouFun
Microfinance is owned as to 20.0% by Beijing Technology and as to 10.0% by Beijing JTX
Technology, both of which are our consolidated controlled entities.
|
|
(3)
|
Shanghai JBT Real
Estate Broking is owned as to 30.0% by Beijing Jia Tian Xia Advertising Co., Ltd. which
is our consolidated controlled entity.
|
|
(4)
|
On May 10, 2019, CIH publicly filed its registration
statement on Form F-1 with SEC to effect the proposed separation and distribution. For more details, see “Item 4. Information
on the Company— B. Business Overview— Separation of CIH.”
|
D. Property, Plant and Equipment
See “Item 4.B. Information on the Company
—
Business
Overview
—
Facilities.”
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
The following discussion of our financial condition
and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their
related notes included elsewhere in this annual report. This discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. See “Forward-Looking Statements.”
In evaluating our business, you should carefully consider the information provided under “Item 3.D. Key Information—Risk
Factors.” We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
A. OPERATING RESULTS
Overview
We believe we operate a leading real estate
Internet portal in China in terms of the number of page views and visitors to our websites in 2018. Our user-friendly websites
and mobile apps support active online communities and networks of users seeking information on, and services for, the real estate
and home-related sectors in China. Our service offerings include:
|
·
|
Marketing services
: We offer marketing services on our websites
and mobile apps, mainly through advertisements, to real estate developers in the marketing phase of new property developments,
as well as to real estate agencies and suppliers of home furnishing and improvement and other home-related products and services
who wish to promote their products and services.
|
|
·
|
Listing services
: We offer basic and special listing services
on our websites and mobile apps. Our basic listing services are primarily offered to real estate agents, brokers, developers,
property owners and managers and suppliers of home furnishing and improvement and other home-related products and services.
Our basic listing services allow our customers to post information of their products and services on our websites. Our special
listing services offer specialized marketing programs through both online channels and offline themed events.
|
|
·
|
Financial services
: We provide financial services primarily
though our offline micro loan subsidiaries. We provide primarily secured consumer loans to individuals that meet our credit
assessment requirements. We launched financial services in August 2014.
|
|
·
|
E-commerce services
: Our e-commerce services primarily include
Fang membership services, direct sales services for new homes and online sublease services. We provide both free and paid
Fang membership services to our registered members. Our free services include primarily regular updates regarding local property
developments, tours to visit property developments and other services relating to property purchases. Our paid services primarily
include offers to purchase properties at a discount from our partner developers and dedicated information and related services
to facilitate property purchases. We ceased entering into new contracts for our direct sales services for new homes, online
home-decorating services and online real estate brokerage services in 2018 due to the change in our business development
strategies.
|
|
·
|
Value-added
services
: We provide value-added services including subscription services for access
to our information database and consulting services for customized and industry-related
research reports and indices.
|
We have built a large and active community
of users who are attracted by the comprehensive real estate and home-related content available on our portal that forms the foundation
of our service offerings. According to our own records, in the fourth quarter of 2018, our website,
www.fang.com
, received
a monthly average of approximately 123 million unique visitors and generated a monthly average of approximately 805 million website
visits. We currently maintain approximately 65 offices to focus on local market needs.
Our revenues and net loss attributable
to our shareholders in 2018 was US$303.0 million and US$114.9 million, respectively. Marketing, listing, financial, e-commerce
and value-added services accounted for 39.5%, 37.5%, 6.0%, 5.0% and 12.0%, respectively, of our revenues in 2018.
Key Operating and Financial Performance Metrics
We monitor the key operating and financial
performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness
of our sales and marketing efforts and assess our operational efficiencies.
|
|
Year Ended December 31
|
|
Selected Metrics
|
|
2017
|
|
|
2018
|
|
Average monthly unique visitors (million)*
|
|
|
115
|
|
|
|
152
|
|
Average monthly mobile unique visitors (million)*
|
|
|
75
|
|
|
|
117
|
|
|
*
|
Source: Google Analytics for data in 2017; internal records for data in 2018
|
|
|
Year Ended December
31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands)
|
|
Total revenues
|
|
|
916,391
|
|
|
|
444,296
|
|
|
|
303,016
|
|
Net income (loss)
|
|
|
(169,635
|
)
|
|
|
21,704
|
|
|
|
(114,909
|
)
|
Non-GAAP net income (loss)
|
|
|
(173,212
|
)
|
|
|
25,057
|
|
|
|
20,604
|
|
Adjusted EBITDA
|
|
|
(118,941
|
)
|
|
|
76,316
|
|
|
|
81,397
|
|
In evaluating our financial performance, we
use non-GAAP net income and adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”),
which are not measures calculated in accordance with GAAP and should not be considered as an alternative to any measure of financial
performance calculated and presented in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to similarly
titled measures of other companies because other companies may not calculate them in the same manner that we do.
Non-GAAP net income measures GAAP net income,
excluding the impact of share-based compensation expense, change in fair value of securities, realized gain on available-for-sale
securities, other non-operating loss, investment income, impairment on investments and one-off tax impact.
Adjusted EBITDA is defined as non-GAAP
net income before income tax, excluding interest expenses, interest income, depreciation and amortization. Adjusted EBITDA, while
generally a measure of profitability, excludes certain non-cash expenses, interest and other income, income taxes, and certain
other items that management believes affect the comparability of operating results.
Non-GAAP net income and adjusted EBITDA
are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends.
In particular, we believe that the exclusion of the income and expenses in calculating non-GAAP net income and adjusted
EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that non-GAAP
net income and adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating
results in the same manner as our management and board of directors.
These non-GAAP measures have limitations as
analytical tools, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported
under GAAP. Some of these limitations are:
|
·
|
non-GAAP net
income does not reflect the potentially dilutive impact of equity-based compensation;
|
|
·
|
although depreciation
and amortization are non-cash charges, the assets being depreciated and amortized may
have to be replaced in the future, and adjusted EBITDA does not reflect cash capital
expenditure requirements for such replacements or for new capital expenditures;
|
|
·
|
adjusted EBITDA
does not reflect tax payments that historically have represented a reduction in cash
available to us or tax benefits that may arise as a result of generating net losses;
and
|
|
·
|
other companies,
including companies in our industry, may calculate adjusted EBITDA or similarly titled
measures differently, which reduces its usefulness as a comparative measure.
|
The following tables present reconciliations
of net income to non-GAAP net income and net income to adjusted EBITDA from continuing operations for each of the periods indicated:
|
|
Year Ended December 31,
|
|
Reconciliation of net income and non-GAAP net income
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands)
|
|
GAAP net income (loss)
|
|
|
(169,635
|
)
|
|
|
21,704
|
|
|
|
(114,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
9,477
|
|
|
|
7,218
|
|
|
|
14,082
|
|
Impairment on investments
|
|
|
2,232
|
|
|
|
2,768
|
|
|
|
—
|
|
Other non-operating loss
|
|
|
—
|
|
|
|
4,562
|
|
|
|
(30
|
)
|
Realized gain on available-for-sale securities
|
|
|
—
|
|
|
|
(2,736
|
)
|
|
|
(1,493
|
)
|
Investment income
|
|
|
(13,864
|
)
|
|
|
(6,692
|
)
|
|
|
(6,816
|
)
|
Change in fair value of securities
|
|
|
-
|
|
|
|
(518
|
)
|
|
|
167,402
|
|
Subtotal
|
|
|
(2,155
|
)
|
|
|
4,602
|
|
|
|
173,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact of reconciliation items
|
|
|
(1,422
|
)
|
|
|
(1,249
|
)
|
|
|
(37,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income (loss)
|
|
|
(173,212
|
)
|
|
|
25,057
|
|
|
|
20,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
Reconciliation of net income and adjusted EBITDA
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands)
|
|
GAAP net income (loss)
|
|
|
(169,635
|
)
|
|
|
21,704
|
|
|
|
(114,909
|
)
|
Add Back
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
9,477
|
|
|
|
7,218
|
|
|
|
14,082
|
|
Impairment on investments
|
|
|
2,232
|
|
|
|
2,768
|
|
|
|
-
|
|
Change in fair value of securities
|
|
|
-
|
|
|
|
(518
|
)
|
|
|
167,402
|
|
Interest expenses
|
|
|
20,791
|
|
|
|
16,153
|
|
|
|
21,174
|
|
Income tax expenses
|
|
|
24,983
|
|
|
|
21,442
|
|
|
|
-
|
|
Depreciation and amortization expenses
|
|
|
18,442
|
|
|
|
23,737
|
|
|
|
26,735
|
|
Subtract
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
(13,864
|
)
|
|
|
(6,692
|
)
|
|
|
(6,816
|
)
|
Realized gain on available-for-sale securities
|
|
|
-
|
|
|
|
(2,736
|
)
|
|
|
(1,493
|
)
|
Interest income
|
|
|
(11,367
|
)
|
|
|
(11,322
|
)
|
|
|
(10,302
|
)
|
Other non-operating loss
|
|
|
-
|
|
|
|
4,562
|
|
|
|
(30
|
)
|
Income tax benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,446
|
)
|
Adjusted EBITDA
|
|
|
(118,941
|
)
|
|
|
76,316
|
|
|
|
81,397
|
|
Re-election of Directors
On December 7, 2018, upon approval of our shareholders,
Mr. Shaohua Zhang was re-elected as an independent director of our board of directors and a member of the audit committee
of the board.
Factors Affecting Our Results of Operations
Economic growth in China and in the
PRC real estate market
We conduct substantially all of our business
and operations in China. Accordingly, our results of operations have been, and are expected to continue to be, affected by the
general performance of China’s economy. As a leading real estate Internet portal, our financial results have also been affected
by the performance of the real estate and home furnishing and improvement sectors in China.
Growth in China’s Internet and
online marketing sectors
We are an Internet portal company and a majority
of our revenues are generated from our marketing and listing services. As such, our results of operations are heavily
dependent on the successful and continued development of China’s Internet and online marketing sectors. The Internet has
emerged as an increasingly attractive and cost-effective advertising channel in China, especially as the number of Internet users,
disposable income of urban households and network infrastructure in China have increased.
Performance of certain geographic areas
and urban centers in China
A substantial portion of our revenues are
concentrated in China’s major urban centers including Beijing, Shanghai, Chengdu, Chongqing, Tianjin and Shenzhen. Although
our percentage of revenues from these six urban centers has decreased as we expanded our operations elsewhere in China, we expect
customers in these cities to continue to represent a significant portion of our revenues in the near term. We may also expand
into new geographic areas and sectors. As of December 31, 2018, we had established real estate-related content, search services,
marketing and listing coverage of more than 658 cities across China, and our Fang membership services, which were launched in
2011, were offered in 98 cities. The financial performance of newly penetrated cities will have a substantial impact on our results
of operations as we expand into new markets, as we may incur significant additional operating expenses, including hiring new sales
and other personnel, in order to expand our operations.
Competition in China’s online
real estate and home-related Internet services
We face competition from other companies in
each of our primary business activities. In particular, the online real estate and home-related Internet service market in China
has become increasingly competitive, and such competition may continue to intensify in future periods. As the barriers to entry
for establishing Internet-based businesses are typically low, it is possible for new entrants to emerge and rapidly scale up their
operations. We expect additional companies to enter the online real estate and home-related Internet service industry in China
and a wider range of online services in this area to be introduced.
We expect to face additional competition as
we develop and offer new services. For example, we began to offer direct sales services for new homes in August 2014, online
real estate brokerage services in January 2015, and online home-decorating services and online sublease services in the second
quarter of 2015. Some of our customers offer the same or similar services. Accordingly, we may face competition from these customers.
In addition, such competition may adversely affect our relationships with these customers and our business.
PRC regulations affecting the Internet,
online marketing, real estate and financing industries
The Internet, online marketing,
real estate and financing industries in China are heavily regulated. PRC laws, rules and regulations cover virtually every
aspect of these industries, including entry into the industry, the scope of permissible business activities and foreign
investment. The PRC government also exercises considerable direct and indirect influence over these industries by imposing
industry policies and other economic measures. Many of these regulations have recently been implemented and are expected to
be refined and adjusted over time. Moreover, the PRC government regulates interest rates, real estate transaction taxes and
the acquisition and ownership of real estate. It also regulates Internet access and the distribution of news, information
or other content, as well as products and services, through the Internet. The PRC government also levies business
taxes, value-added taxes, surcharges and cultural construction fees on advertising-related sales in China, such as sales of
our marketing, listing, financial, e-commerce and value-added services. In addition, because certain of our PRC subsidiaries
and consolidated controlled entities currently qualify as “high and new technology enterprises” or
“Software Enterprise,” they enjoy tax holidays or lower rates from the relevant PRC tax authorities or under
local governmental policies. If we were to lose such preferential tax treatment, we would be subject to a higher enterprise
income tax rate, which would have a material adverse effect on our financial condition, results of operations and
profitability. See “Item 4.B. Information on the Company—Business Overview—Regulation.” Political,
economic and social factors may also lead to further policy refinement and adjustments. The imposition of new laws and
regulations, or changes to current laws and regulations, could have a material impact on our business, financial condition
and results of operations.
Our ability to grow financial services
while maintaining effective risk management
We began to offer financial services in
the third quarter of 2014. We offer secured entrusted loans, mortgage loans as well as unsecured loans to real estate developers,
property buyers and other borrowers and charge interest, service fees and guarantee fees. In 2018, our financial services primarily
focused on secured consumer loans to individual borrowers. As of December 31, 2018, we had loans receivable with a principal
balance of US$127.7 million. The lending market has historically been dominated by commercial banks and other financial institutions.
Compared with these market participants, we have significant less experience in managing the lending business. The growth of our
financial services will depend on our ability to develop attractive loan products and services and manage related credit risk.
Demand for home furnishing and improvement
information and products
As China’s real estate market has expanded
and matured, the ancillary home furnishing and improvement industry has also been growing to meet rising consumer demand. Similarly,
we have expanded our marketing and listing services to suppliers of home furnishing and improvement products and services. By
adding this category of advertisers and clients, we have been able to expand our sources of marketing and listing service revenues
and, accordingly, expect the rate of increase in our revenues to continue to benefit from the continued growth of China’s
home furnishing and improvement sectors.
Our ability to grow the retained
business following the completion of the proposed separation of CIH from us
On May 2, 2019, our board of directors approved our plan to separate CIH into an independent publicly
traded company
, whose business will comprise certain
portions of our listing and value-added services. Following the completion of the proposed separation and distribution, we will
continue to retain our business operating a real estate Internet portal in China and will pursue our strategy of enhancing our
online operations and residential property-related business. We anticipate dedicating our managerial attention and resources to
developing the retained business in light of the distinct needs of China’s residential property market, and whether we can
continue to grow the retained business depends on our ability to manage and develop such business effectively.
Basis of Presentation
To comply with applicable PRC laws, rules and
regulations restricting foreign ownership of companies that operate Internet content provision and online advertising services,
we operate our websites and mobile apps and provide such services in China through contractual arrangements with our consolidated
controlled entities. Under the current regulatory regime, Internet content distribution is permitted to operators with less than
50.0% foreign investment and advertising is permitted to all qualified operators. We may consider further optimizing our corporate
structure in light of the evolving regulatory environment. The equity interests of the consolidated controlled entities are held
directly or indirectly by Mr. Mo, our founder, executive chairman and chief executive officer, together with Mr. Dai,
a former director and former chief executive officer, or Ms. Huang, the chief executive officer of CIH, but the effective control
of the consolidated controlled entities has been transferred to us through a series of Structure Contracts. We have funded these
consolidated controlled entities’ paid-in capital by extending loans to Mr. Mo, Mr. Dai and Ms. Huang. Pursuant
to the terms of the Structure Contracts, we are obligated to bear substantially all of the risk of losses from our consolidated
controlled entities’ activities and are entitled to receive substantially all of their profits, if any. See “Item
7.B. Major Shareholders and Related Party Transactions—Related Party Transactions—Structure Contracts” and our
consolidated financial statements included elsewhere in this annual report.
Based on these Structure Contracts, we believe
that, notwithstanding our lack of equity ownership, the arrangements provide us with effective control over our consolidated controlled
entities. Accordingly, the financial results of these entities are included in our consolidated financial statements.
We refer to our consolidated controlled entities
as PRC entities we control through contractual arrangements together with their subsidiaries, or the PRC Domestic Entities and
the PRC Domestic Entities’ subsidiaries in our consolidated financial statements and related notes included elsewhere in
this annual report.
Components of our Results of Operations
Revenues
We derive our revenues from marketing
services, listing services, financial services, e-commerce services, and value-added services.
Marketing Services
Our marketing service revenues consist of revenues
derived from the advertising services provided by our new home, secondary and rental properties and home furnishing and improvement
businesses. Our marketing services include the deployment on our websites and mobile apps of banners, links, logos and floating
signs.
Listing Services
Our listing service revenues consist of revenues
derived from both basic listing services and special listing services. Basic listing services are targeted at real estate agents,
brokers, developers, property owners, property managers and others seeking to sell or rent new and secondary properties and allow
visitors to our websites and mobile apps to search for product suppliers and service providers in China’s home furnishing
and improvement sector. Revenues from basic listing services are predominantly derived from our secondary and rental business.
Special listing services are specialized marketing campaigns primarily to promote brands of leading developers. Leveraging our
data analytical capabilities, we assess the strengths of the brands of companies in various real estate sectors and create a special
listing campaign to recognize the leading companies in those sectors. Once the special listing campaigns are determined, we establish
a marketing and promotional program consisting of various online and offline promotional activities, which together collectively
promote the special listings. The program includes online marketing platforms such as our websites and WeChat and offline themed
events such as conferences, discussion forums and banquets.
Financial Services
Our revenues from financial services consist
of interest income and service fees from primarily secured consumer loans to individuals that meet our credit assessment requirements.
E-commerce Services
Our e-commerce services, first launched
in 2011, primarily include Fang membership services, direct sales services for new homes and online sublease services. Our Fang
membership services enable paid members to purchase specified properties from our partner real-estate developers at a discount
significantly greater than the membership fees charged by us. We ceased entering into new contracts for our direct sales services
for new homes, online home-decorating services and online real estate brokerage services in early 2018 due to the change in our
business development strategies.
Value-added services
We provide value-added services including
subscription services for access to our information database and consulting services for customized and industry-related research
reports and indices.
Cost of Revenues
Our cost of revenues includes cost of
services. Cost of services primarily consists of staff costs, tax surcharges, operating lease expenses, network costs,
communication expenses, share-based compensation expenses and other costs directly related to the offering of our listing,
marketing, E-commerce, financial and value-added services. Prior to January 1, 2018, value-added taxes were also included in
cost of revenues. Staff costs include salary and benefits paid to members of our editorial staff, customer service personnel,
personnel dedicated to servicing and designing websites and mobile apps for our customers and personnel in the brokerage
function. E-commerce cost refers to the portion of proceeds to be remitted to real estate brokers under our Fang membership
services. Operating lease expenses consist primarily of rent for our various office facilities as allocated on the basis of
the space occupied by our editorial staff and customer service personnel. Network costs consist of server hosting fees,
bandwidth fees and related charges. Communication costs consist of telephone expenses relating to our operations. Cost of
revenues also includes share-based compensation expenses in connection with share options and other share-based compensation
granted to our editorial and production staff. In 2016, 2017 and 2018, our cost of revenues represented 75.0%, 39.3% and
19.3% of our revenues, respectively. We have adopted the new revenue recognition standards, ASC 606, effective January 1,
2018, which relate to the change in the presentation of value-added tax from gross basis to net basis. For the impact of
adopting ASC 606 on our cost of revenues, see “—Recent Accounting Pronouncements.”
Operating Expenses
Our operating expenses consist of selling expenses
and general and administrative expenses.
Selling Expenses
Our selling expenses primarily consist of staff
costs, such as salaries and benefits paid to personnel in our sales and distribution department, costs for promoting our Fang
membership services, operating lease expenses, which include rental expenses related to our selling and distribution department,
traveling and communication expenses, office expenses and advertising and promotion expenses, including fees we pay to other Internet
portals for the purpose of promoting and increasing traffic to our websites and mobile apps. Selling expenses also include other
expenses incurred in relation to our selling and distribution activities and share-based compensation costs in connection with
share options and other share-based compensation granted to our sales and marketing personnel.
General and Administrative Expenses
General and administrative expenses primarily
consist of staff costs, such as salaries and benefits paid to our management and general administrative, product and development
personnel, bad debt expense relating to uncollectible accounts and loans receivable, office expenses, communication expenses,
professional service fees and other expenses for general and administrative purposes, as well as maintenance expenses. Our general
and administrative expenses also include share-based compensation costs in connection with share options and other share-based
compensation granted to our general administrative, technical and research personnel.
Taxation
We are subject to income tax on an entity basis
on profits arising in or derived from the jurisdictions where we, our subsidiaries or our consolidated controlled entities are
domiciled or have operations.
Cayman Islands
Under the current laws of the Cayman Islands,
the company and subsidiaries incorporated in the Cayman Islands are not subject to tax on income or capital gains. In addition,
upon payments of dividends by us to our shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
Under the current laws of the British
Virgin Islands, or BVI, subsidiaries incorporated in the BVI are not subject to tax on income or capital gains. In
addition, upon payments of dividends by these companies to their shareholders, no BVI withholding tax will be imposed.
Hong Kong
Under the Hong Kong tax laws, subsidiaries
in Hong Kong are subject to the Hong Kong profits tax rate at 16.5% and they are exempted from income tax on their foreign-derived
income and there are no withholding taxes in Hong Kong on remittance of dividends. A two-tiered profits tax rates regime was introduced
in 2018 where the first HK$2 million of assessable profits earned by a company will be taxed at half of the current tax rate (8.25%)
while the remaining profits will continue to be taxed at 16.5%. There is an anti-fragmentation measure where each group will
have to nominate only one company in the group to benefit from the progressive rates. No provision for Hong Kong profits tax has
been made in the financial statements as the subsidiaries in Hong Kong have no assessable profits for the three years ended December 31,
2018.
United States
On December 22, 2017, the Tax Act was enacted
and contains significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from
35% to 21% and creates new taxes focused on foreign-sourced earnings and related-party payments, including the creation of the
base erosion anti-abuse tax and a new tax on global intangible low-taxed income, or GILTI.
The SEC staff issued SAB 118 on December 22,
2017, which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment
date.
The Tax Act reduces the U.S. statutory tax
rate from 35% to 21% for years after 2017. Accordingly, we re-measured our deferred taxes as of December 31, 2017, to reflect
the reduced rate that will apply in future periods when these deferred taxes are settled or realized. As Best Work Holdings (New
York) LLC is loss making since incorporated, therefore we recognized a deferred tax asset of US$13,834 to reflect the reduced
U.S. tax rate and full valuation allowance is provided and corresponding remeasurement were made to unrecognized tax benefit and
valuation allowance.
Singapore
Our Singapore-incorporated subsidiary does
not conduct any substantive operations of its own. No provision for Singapore profits tax has been made in the financial statements
as this entity has no assessable profits for the three years ended December 31, 2018.
China
In March 2007, a new enterprise
income tax law in China was enacted and then amended in February 2017 and December 2018. The New EIT Law applies a
unified 25% enterprise income tax, or EIT, rate to both foreign invested enterprises and domestic enterprises, unless
a preferential EIT rate is otherwise stipulated. On April 14, 2008, relevant governmental regulatory authorities issued
the Administrative Measures for Certification of High and New Technology Enterprises which was amended in January 2016.
High and New Technology Enterprise, or HNTE, status under the New EIT Law would entitle qualified and approved
entities to a favorable EIT tax rate of 15%. The SAT issued Circular No. 203 in April 2009 and Circular 24 in
June 2017 stipulating that entities which qualified for the HNTE status should apply with competent tax authorities to
enjoy the reduced EIT rate of 15% provided under the New EIT Law starting from the year when the new HNTE certificate becomes
effective. The HNTE certificate is effective for a period of three years and can be renewed for another three years.
Subsequently, an entity needs to re-apply for the HNTE status in order to enjoy the preferential tax rate of 15%.
We obtained HNTE certificates for SouFun Media,
Beijing Zhong Zhi Shi Zheng, SouFun Network, Beijing Technology, Beijing JTX Technology and Beijing Hong An Tu Sheng in November
2015 and have subsequently renewed such HNTE certificates in September and October 2018. Therefore, these six subsidiaries can
enjoy the preferential tax rate of 15% from 2015 to 2020. We newly applied for the HNTE status for Beijing Tuoshi in 2016 and
received the HNTE certificate in December 2016. Beijing Tuoshi can enjoy the preferential tax rate of 15% for 2016, 2017 and 2018.
We newly applied for the HNTE status for Beijing Li Man Wan Jia, Beijing Hua Ju Tian Xia and Beijing Zhong Zhi Xun Bo in 2018
and received the HNTE certificates in September and October 2018. Beijing Li Man Wan Jia, Beijing Zhong Zhi Xun Bo and Beijing
Hua Ju Tian Xia can enjoy the preferential tax rate of 15% for 2018, 2019 and 2020. We newly applied for the Xinjiang Huoerguosi
Economic and Technological Development Zone tax preference status for Xinjiang Zhongzhi in 2017 and received the certificates
in September 2017. Xinjiang Zhongzhi can enjoy the preferential tax rate of 0% for 2017, 2018, 2019 and 2020.
If any entities fail to maintain the HNTE qualification
under the New EIT Law, they will no longer qualify for the preferential tax rate of 15%, which could have a material and adverse
effect on our results of operations and financial position provided that they do not qualify for any other preferential tax treatment.
Historically, the abovementioned PRC subsidiaries have successfully obtained or renewed their HNTE certificates when the previous
certificates had expired.
Subsequent to government approval in May 2014,
Beijing Li Man Wan Jia, Beijing Zhong Zhi Xun Bo and Beijing Hua Ju Tian Xia obtained the Software Enterprise status with effect
from January 1, 2013. Accordingly, these three subsidiaries are entitled to the two-year EIT exemption for years 2013 and 2014
and a reduced EIT rate of 12.5% for years 2015, 2016 and 2017.
Dividends paid by our PRC subsidiaries out
of the profits earned after December 31, 2007 to non-PRC tax resident investors are subject to PRC withholding tax. The withholding
tax on dividends is 10%, unless a foreign investor’s tax jurisdiction has a tax treaty with the PRC that provides a lower
withholding tax rate and the foreign investor is recognized as the beneficial owner of the income under the relevant tax rules.
Moreover, the New EIT Law treats enterprises
established outside of China with “effective management and control” located in China as PRC resident enterprises
for tax purposes. The term “effective management and control” is generally defined as exercising overall management
and control over the business, personnel, accounting, properties, etc. of an enterprise. Our company, if considered a PRC resident
enterprise for tax purposes, would be subject to the PRC EIT at the rate of 25% on our worldwide income for the period after January 1,
2008. As of December 31, 2017 and 2018, we accrued nil and US$50 for PRC tax on such basis.
Critical Accounting Policies
We prepare our financial statements in conformity
with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets
and liabilities, disclosure of contingent assets and liabilities on the date of each set of financial statements and the reported
amounts of revenues and expenses during each financial reporting period. We continually evaluate these estimates and assumptions
based on the most recently available information, our own historical experience and various other assumptions that we believe
to be reasonable under the circumstances. Since the use of estimates and assumptions is an integral component of the financial
reporting process, actual results could differ from those estimates and assumptions.
An accounting policy is considered to be critical
if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such
estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates
that are reasonably likely to occur periodically could materially impact the consolidated financial statements. We believe the
following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated
financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction
with our consolidated financial statements and other disclosures included elsewhere in this annual report.
Revenue Recognition
Periods prior to January 1,
2018
Revenue recognition for multiple-element arrangements
requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting,
and if so, the fair value for each of the elements.
We enter into arrangements that can include
various combinations of services. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP,
revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and
revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue
to elements: (1) vendor-specific objective evidence of fair value, or VSOE, (2) third-party evidence, and (3) best estimate of
selling price, or ESP. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by
management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace.
ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone
basis. The process of determining ESPs requires our judgment and consideration of multiple factors that may vary over time depending
upon the unique facts and circumstances related to each deliverable.
Adoption of ASC 606, Revenue
from Contracts with Customers
We adopted the new revenue recognition standards,
or ASC 606, effective January 1, 2018 using the modified retrospective method for contracts which were not completed at the date
of initial adoption.
Our policy before the adoption of ASC 606 was
to require written signed contracts by both us and our customers as persuasive evidence of our revenue arrangements. In certain
cases where services are being delivered prior to the receipt of the written signed contracts by both parties, revenue had been
deferred until such time the written signed contracts are collected. Under the new revenue standard, revenues may be recognized
prior to the receipt of the written signed contracts by both parties (assuming all other revenue recognition criteria are satisfied),
as long as the revenue arrangements between us and our customers are legally enforceable. As a result, we made an adjustment to
increase the opening balance of retained earnings as of January 1, 2018 by US$2.8 million.
Before the adoption of ASC 606, we assessed
whether collectability is reasonably assured at the outset of the arrangement, and subsequently reassessed if there was a substantive
change in facts and circumstances. If the collectability of all or a portion of the fee is not reasonably assured, all revenue
recognition were deferred until payment was received (assuming all of the other revenue recognition criteria have been met). Upon
the adoption of ASC 606, if it is not probable that we will collect substantially all of the consideration to which we will be
entitled in exchange for the goods or services that will be transferred to the customer, consideration received from the customer
is initially recorded as a liability. We will recognize nonrefundable consideration received as revenue only when one of the following
events has occurred:
|
·
|
we have no
remaining obligations to transfer goods or services to the customer and all, or substantially
all of the consideration has been received;
|
|
·
|
the contract
has been terminated; or
|
|
·
|
we have transferred
control of the goods or services to which the consideration that has been received relates,
and has stopped transferring (and have no obligation under the contract to transfer)
additional goods or services to the customer, if applicable.
|
As a result, we made an adjustment to decrease the
opening balance of retained earnings as of January 1, 2018 by US$0.5 million.
In addition, our revenues are presented net
of value-added tax collected on behalf of governments starting from January 1, 2018. Prior to January 1, 2018, value-added tax
collected on behalf of governments was presented as gross in both revenues and cost of revenues. We have elected to adopt the
practical expedient for incremental costs to obtain a contract with a customer, with amortization periods of one year or less
to be recorded in selling and marketing expenses when incurred. We have elected the practical expedient not to disclose the information
about remaining performance obligations which are part of the contracts that have an original expected duration of one year or
less.
The disclosure of the impact of adoption on
the consolidated balance sheets was as follows:
|
|
As of
December 31,
2018
|
|
|
Adjustments
|
|
|
Amounts
without
adoption of
ASC 606
|
|
|
|
(US$ in thousands)
|
|
Accounts receivable
|
|
|
60,950
|
|
|
|
379
|
|
|
|
61,329
|
|
Deferred revenue
|
|
|
(163,346
|
)
|
|
|
(11,633
|
)
|
|
|
(174,979
|
)
|
Accrued expenses and other liabilities
|
|
|
(131,268
|
)
|
|
|
9,701
|
|
|
|
(121,567
|
)
|
Other non-current liabilities
|
|
|
(153,095
|
)
|
|
|
555
|
|
|
|
(152,540
|
)
|
The impact for adoption of ASC 606 to our consolidated
statement of comprehensive income (loss) for the year ended December 31, 2018 is as follows:
|
|
Year ended
December 31,
2018
|
|
Adjustments
|
|
Amounts
without
adoption
of
ASC 606
|
|
|
(US$ in thousands)
|
|
E-commerce services
|
|
|
15,384
|
|
|
|
928
|
|
|
|
16,312
|
|
Marketing services
|
|
|
119,680
|
|
|
|
8,740
|
|
|
|
128,420
|
|
Listing services
|
|
|
113,534
|
|
|
|
5,717
|
|
|
|
119,251
|
|
Financial services
|
|
|
18,060
|
|
|
|
1,068
|
|
|
|
19,128
|
|
Value-added services
|
|
|
36,358
|
|
|
|
2,893
|
|
|
|
39,251
|
|
Total revenues
|
|
|
303,016
|
|
|
|
19,346
|
|
|
|
322,362
|
|
Cost of services
|
|
|
(58,570
|
)
|
|
|
(18,117
|
)
|
|
|
(76,687
|
)
|
Operating income
|
|
|
39,803
|
|
|
|
1,229
|
|
|
|
41,032
|
|
Net loss
|
|
|
(114,909
|
)
|
|
|
1,229
|
|
|
|
(113,680
|
)
|
Loss per share for Class A and Class B ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
(1.29
|
)
|
|
|
0.01
|
|
|
|
(1.28
|
)
|
Since the adoption of ASC 606 starting from
January 1, 2018, we recognize revenues upon the satisfaction of its performance obligation in an amount that reflects the consideration to which we expect to be entitled to in exchange
for those goods or services, excluding amounts collected on behalf of third parties, such as value-added taxes. For each
performance obligation satisfied over time, we recognize revenue over time by measuring the progress toward complete satisfaction
of that performance obligation. If we do not satisfy a performance obligation over time, the performance obligation is satisfied
at a point in time.
Our contracts with customers often include
promises to transfer multiple products and services. For these contracts, we account for individual performance obligations separately
if they are capable of being distinct and distinct within the context of the contract. Determining whether products and services
are considered distinct performance obligations may require significant judgment. Judgment is also required to determine the stand-alone
selling price, or SSP, for each distinct performance obligation. In instances where SSP is not directly observable, such as when
we do not sell the product or service separately, we determine the SSP using information that may include market conditions and
other observable inputs.
Accounts Receivable and Allowance
for Doubtful Accounts
We review the accounts receivable on a periodic
basis and makes general and specific allowances when there is doubt as to the collectability of individual balances.
We consider many factors in assessing the collectability
of its receivables, such as, the age of the amounts due, the customer’s payment history and credit-worthiness. An allowance
for doubtful accounts is recorded in the period in which a loss is determined to be probable. Accounts receivable balances are
written off after all collection efforts have been exhausted.
Loans Receivable
Loans receivable consists primarily of secured
consumer loans to individuals that have passed our credit assessment. Such amounts are recorded at the principal amount less impairment
as of the balance sheet date. The loan periods extended by us to the borrowers generally range from one to thirty-six months.
An allowance for credit loss is recorded when,
based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual
terms of the loan agreement. We assess the allowance for credit loss related to loans receivable on a quarterly basis, either
on an individual or collective basis. We consider various factors in evaluating loans receivable for possible impairment on an
individual basis. These factors include the amount of the loan, historical experience, value of collateral, if any, credit quality
and age of the receivables balances. Impairment is measured on an individual loan basis using either the present value of expected
future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is secured.
We evaluate the remainder of our loans receivables portfolio for impairment on a collective basis in accordance with ASC 450-20,
“Loss Contingencies” and record an allowance for credit loss at the portfolio segment level.
Loan principal and interest receivables are
charged-off when the loan principal and interest receivables are deemed to be uncollectible, which is generally identified if
any of the following conditions are met : (1) the borrower is dead, missing or incapacitate and there is no legal heir and presentee
or the legal heir and presentee refuse to abide the contract; (2) identification of fraud, and the fraud is officially reported
to and filed with relevant law enforcement departments; (3) outstanding amount following 180 days past due after all collection
efforts based on management’s judgment.
Income Taxes
We follow the liability method of accounting
for income taxes, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable
to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases, and attributable to operating loss and tax credit carryforwards, if any. We reduce carrying amounts of deferred tax
assets by a valuation allowance, if, based on the available evidence, it is “more-likely-than-not” that such assets
will not be realized. Accordingly, we assess the need to establish valuation allowances for deferred tax assets at each reporting
period based on a “more-likely-than-not” realization threshold. This assessment considers, among other matters, the
nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory
carryforward periods, our experience with operating loss and tax credit carryforwards, if any, not expiring.
We apply ASC 740, “Income Taxes”
to account for uncertainties in income taxes. In accordance with the provisions of ASC 740, we recognize in our financial statements
the impact of a tax position if a tax return position or future tax position is “more-likely-than-not” to prevail
based on the facts and technical merits of the position. Tax positions that meet the “more-likely-than-not” recognition
threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized
upon settlement.
Our estimated liability for unrecognized tax
benefits, which is included in “other non-current liabilities,” is periodically assessed for adequacy and may be affected
by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits and expiration
of the statutes of limitation. The outcome for a particular audit cannot be determined with certainty prior to the conclusion
of the audit and, in some cases, the appeal or litigation process. The actual benefits ultimately realized may differ from our
estimates. As each audit is concluded, adjustments, if any, are recorded in our financial statements. Additionally, in future
periods, changes in facts, circumstances and new information may require us to adjust the recognition and measurement estimates
with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which
the changes occur.
Interest and penalties arising from underpayment
of income taxes are computed in accordance with the relevant tax laws. The amount of interest expense is computed by applying
the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken
or expected to be taken in a tax return. Interest and penalties recognized in accordance with ASC 740 are classified in our consolidated
statements of comprehensive income (loss) as income tax expense.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting
Standards Board, or FASB, established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize leases
on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01,
Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases;
and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model, or ROU, that requires a lessee
to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will
be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in
the income statement.
The new standard is effective for public business
entities for annual periods beginning after December 15, 2018, and interim periods therein. For all other entities, the standard
is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December
15, 2020. Early adoption is permitted. A modified retrospective transition approach is required, applying the new standard to
all leases existing at the date of initial application. We adopted the new standard on January 1, 2019 and used the effective
date as the date of initial application. Consequently, financial information will not be updated and the disclosures required
under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional
practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess
under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
Leases currently classified as operating leases
in Note 21 of our consolidated financial statements will be reported on the consolidated balance sheets upon adoption at their
net present value, which will increase total assets and liabilities. We expect to recognize the right-of-use assets and lease
liability in the amount of approximately US$5.7 million respectively as of January 1, 2019. We used our estimated incremental
borrowing rate based on information available at the date of adoption in calculating the present value of our existing lease payments.
The adoption of ASC 842 is not expected to have a material impact to our consolidated statements of comprehensive income (loss)
or net cash provided by operating activities.
The adoption of ASC 842 is not expected to
have a material impact to the accounting and disclosure of sublease services in which we are the lessor.
In June 2016, the FASB issued ASU No. 2016-13,
or ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. The standard will
replace “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost.
For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount,
as they do today under the other-than-temporary impairment model. The standard is effective for public business entities for annual
periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. We are currently evaluating
the impact of adopting this standard on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.
ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. The amendments applicable
to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively
for only the most recent interim or annual period presented in the initial year of adoption. This ASU is effective for all entities
for fiscal years beginning after December 15, 2019, including interim periods therein. All other amendments should be applied
retrospectively to all periods presented upon their effective date. Early adoption is permitted, and an entity is also permitted
to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date.
We are in the process of evaluating the impact on our consolidated financial statements upon adoption.
Results of Operations
The following table sets forth selected financial
data from our consolidated statements of comprehensive income for the periods indicated:
|
|
Year Ended December
31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
Percentage
of revenue
|
|
|
Amount
|
|
|
Percentage
of revenue
|
|
|
Amount
|
|
|
Percentage
of revenue
|
|
|
|
(US$ in thousands, except percentage)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-commerce services
|
|
|
577,684
|
|
|
|
63.0
|
%
|
|
|
87,809
|
|
|
|
19.8
|
%
|
|
|
15,384
|
|
|
|
5.0
|
%
|
Marketing services
|
|
|
165,437
|
|
|
|
18.1
|
%
|
|
|
149,267
|
|
|
|
33.6
|
%
|
|
|
119,680
|
|
|
|
39.5
|
%
|
Listing services
|
|
|
118,109
|
|
|
|
12.9
|
%
|
|
|
165,374
|
|
|
|
37.2
|
%
|
|
|
113,534
|
|
|
|
37.5
|
%
|
Financial services
|
|
|
29,602
|
|
|
|
3.2
|
%
|
|
|
12,055
|
|
|
|
2.7
|
%
|
|
|
18,060
|
|
|
|
6.0
|
%
|
Value-added services
|
|
|
25,559
|
|
|
|
2.8
|
%
|
|
|
29,791
|
|
|
|
6.7
|
%
|
|
|
36,358
|
|
|
|
12.0
|
%
|
Total
revenues
|
|
|
916,391
|
|
|
|
100.0
|
%
|
|
|
444,296
|
|
|
|
100.0
|
%
|
|
|
303,016
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
(687,184
|
)
|
|
|
(75.0
|
)%
|
|
|
(174,599
|
)
|
|
|
(39.3
|
)%
|
|
|
(58,570
|
)
|
|
|
(19.3
|
)%
|
Total
cost of revenues
|
|
|
(687,184
|
)
|
|
|
(75.0
|
)%
|
|
|
(174,599
|
)
|
|
|
(39.3
|
)%
|
|
|
(58,570
|
)
|
|
|
(19.3
|
)%
|
Gross
profit
|
|
|
229,207
|
|
|
|
25.0
|
%
|
|
|
269,697
|
|
|
|
60.7
|
%
|
|
|
244,446
|
|
|
|
80.7
|
%
|
Operating income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(229,817
|
)
|
|
|
(25.1
|
)%
|
|
|
(91,250
|
)
|
|
|
(20.5
|
)%
|
|
|
(69,532
|
)
|
|
|
(22.9
|
)%
|
General and administrative expenses
|
|
|
(151,251
|
)
|
|
|
(16.5
|
)%
|
|
|
(135,688
|
)
|
|
|
(30.5
|
)%
|
|
|
(138,386
|
)
|
|
|
(45.7
|
)%
|
Other income (loss)
|
|
|
415
|
|
|
|
-
|
|
|
|
(567
|
)
|
|
|
(0.1
|
)%
|
|
|
3,275
|
|
|
|
1.1
|
%
|
Operating income (loss)
|
|
|
(151,446
|
)
|
|
|
(16.5
|
)%
|
|
|
42,192
|
|
|
|
9.5
|
%
|
|
|
39,803
|
|
|
|
13.1
|
%
|
Foreign exchange gain (loss)
|
|
|
(1,882
|
)
|
|
|
0
|
%
|
|
|
15
|
|
|
|
-
|
|
|
|
(598
|
)
|
|
|
(0.2
|
)%
|
Interest income
|
|
|
11,367
|
|
|
|
1.2
|
%
|
|
|
11,322
|
|
|
|
2.5
|
%
|
|
|
10,302
|
|
|
|
3.4
|
%
|
Interest expenses
|
|
|
(20,791
|
)
|
|
|
(2.3
|
)%
|
|
|
(16,153
|
)
|
|
|
(3.6
|
)%
|
|
|
(21,174
|
)
|
|
|
(7.0
|
)%
|
Change in fair value of securities
|
|
|
-
|
|
|
|
-
|
|
|
|
518
|
|
|
|
0.1
|
%
|
|
|
167,402
|
|
|
|
(55.2
|
)%
|
Realized gain on available-for-sale securities (including
accumulated other comprehensive income reclassifications for unrealized gain on available-for-sale securities of US$10,583,
US$2,736 and US$1,493 for the years ended December 31, 2016, 2017 and 2018, respectively)
|
|
|
10,583
|
|
|
|
1.2
|
%
|
|
|
2,736
|
|
|
|
0.6
|
%
|
|
|
1,493
|
|
|
|
0.5
|
%
|
Government grants
|
|
|
6,469
|
|
|
|
0.7
|
%
|
|
|
3,154
|
|
|
|
0.7
|
%
|
|
|
1,435
|
|
|
|
0.5
|
%
|
Investment income
|
|
|
3,281
|
|
|
|
0.4
|
%
|
|
|
6,692
|
|
|
|
1.5
|
%
|
|
|
6,816
|
|
|
|
2.2
|
%
|
Impairment on investments
|
|
|
(2,232
|
)
|
|
|
(0.2
|
)%
|
|
|
(2,768
|
)
|
|
|
(0.6
|
)%
|
|
|
-
|
|
|
|
-
|
|
Other non-operating income
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,562
|
)
|
|
|
(1.0
|
)%
|
|
|
(30
|
)
|
|
|
0.0
|
%
|
Income (loss) before income
taxes and noncontrolling interests
|
|
|
(144,651
|
)
|
|
|
(15.8
|
)%
|
|
|
43,146
|
|
|
|
9.7
|
%
|
|
|
(129,355
|
)
|
|
|
(42.7
|
)%
|
Income tax (expenses) benefit
|
|
|
(24,984
|
)
|
|
|
(2.7
|
)%
|
|
|
(21,442
|
)
|
|
|
(4.8
|
)%
|
|
|
14,446
|
|
|
|
4.8
|
%
|
Net income
(loss)
|
|
|
(169,635
|
)
|
|
|
(18.5
|
)%
|
|
|
21,704
|
|
|
|
4.9
|
%
|
|
|
(114,909
|
)
|
|
|
(37.9
|
)%
|
Net income (loss) attributable to noncontrolling
interests
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
0.0
|
%
|
|
|
Year Ended December
31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
Percentage
of revenue
|
|
|
Amount
|
|
|
Percentage
of revenue
|
|
|
Amount
|
|
|
Percentage
of revenue
|
|
|
|
(US$ in thousands, except percentage)
|
|
Net income (loss)
attributable to Fang Holdings Limited’s shareholders
|
|
|
(169,635
|
)
|
|
|
(18.5
|
)%
|
|
|
21,707
|
|
|
|
4.9
|
%
|
|
|
(114,911
|
)
|
|
|
(37.9
|
)%
|
Revenues
Our revenue decreased 31.8% year-over-year in 2018, primarily due to decline in revenue from e-commerce
and listing service. Our revenues decreased 51.5% year-over-year in 2017, primarily due to a significant decline in revenues from
e-commerce services as a result of changes in our business strategy.
Marketing Services
.
Our marketing service revenues consist of revenues derived from the advertising services provided by our new home, secondary
and rental properties and home furnishing and improvement businesses. Our marketing services include the deployment on
our websites respectively, and mobile apps of banners, links, logos and floating signs. Revenues from marketing
services decreased 19.8% and 9.8% year-over-year in 2018 and 2017, respectively, primarily due to (1) the revenues are
presented net of value-added tax collected on behalf of government due to the adoption of ASC 606 from January 1, 2018, and
(2) a slowdown in the real estate market and the increased competition for similar services in China. In 2016, 2017 and 2018,
revenues generated from our marketing services represented 18.1%, 33.6% and 39.5% of our revenues, respectively.
The following table presents our marketing
service revenues for each of our businesses by amount and percentage of total marketing service revenues for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
Percentage
of marketing
service
revenues
|
|
|
Amount
|
|
|
Percentage
of marketing
service
revenues
|
|
|
Amount
|
|
|
Percentage
of marketing
service
revenues
|
|
|
|
(US$ in thousands, except percentage)
|
|
New home
|
|
|
144,631
|
|
|
|
87.4
|
%
|
|
|
121,497
|
|
|
|
81.4
|
%
|
|
|
119,352
|
|
|
|
99.7
|
%
|
Home furnishing and improvement
|
|
|
19,171
|
|
|
|
11.6
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
328
|
|
|
|
0.3
|
%
|
Secondary and rental
|
|
|
1,635
|
|
|
|
1.0
|
%
|
|
|
27,770
|
|
|
|
18.6
|
%
|
|
|
-
|
|
|
|
-
|
|
Total marketing
service revenues
|
|
|
165,437
|
|
|
|
100.0
|
%
|
|
|
149,267
|
|
|
|
100.0
|
%
|
|
|
119,680
|
|
|
|
100.0
|
%
|
New home business accounted for 87.4%, 81.4%
and 99.7% of our marketing service revenues in 2016, 2017 and 2018, respectively. New home business primarily consists of marketing
services for newly developed properties for sale. Our new home customers are largely real estate developers and their sales agents
who are promoting newly developed properties for sale.
Listing Services
. Revenues from
our listing services decreased 31.3% in 2018, primarily due to (1) the presentation on a net basis of value-added tax following
the adoption of ASC 606 from January 1, 2018, and (2) the decrease in number of paying subscribers. Revenue from our listing services
increased 40.0% year-over-year in 2017, primarily due to an increase in the number of customers, in particular those from lower-tier
cities, who paid for our services. In 2016, 2017 and 2018, revenues from our listing services represented 12.9%, 37.2% and 37.5%
of our revenues, respectively. We believe that listing service revenues will continue to remain a significant source of revenue.
However, regulatory efforts to require additional down payments and other actions to dampen the growing market for secondary homes
have impacted and may continue to impact our revenues.
The following table sets forth our listing
service revenues by amount and percentage of our listing service revenues for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
Percentage
of listing
service
revenues
|
|
|
Amount
|
|
|
Percentage
of listing
service
revenues
|
|
|
Amount
|
|
|
Percentage
of listing
service
revenues
|
|
|
|
(US$ in thousands, except percentage)
|
|
Basic listing
|
|
|
91,742
|
|
|
|
77.7
|
%
|
|
|
140,517
|
|
|
|
85.0
|
%
|
|
|
84,482
|
|
|
|
74.4
%
|
|
Special listing
|
|
|
26,367
|
|
|
|
22.3
|
%
|
|
|
24,857
|
|
|
|
15.0
|
%
|
|
|
29,052
|
|
|
|
25.6%
|
|
Total listing
service revenues
|
|
|
118,109
|
|
|
|
100.0
|
%
|
|
|
165,374
|
|
|
|
100.0
|
%
|
|
|
113,534
|
|
|
|
100.0
|
%
|
The average revenue per paying subscriber
was US$567, US$623 and US$400 for 2016, 2017 and 2018, respectively.
The following table presents our listing service
revenues for each of our businesses by amount and percentage of total listing service revenues for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
Percentage
of listing
service
revenues
|
|
|
Amount
|
|
|
Percentage
of listing
service
revenues
|
|
|
Amount
|
|
|
Percentage
of listing
service
revenues
|
|
|
|
(US$ in thousands, except percentage)
|
|
Secondary and rental properties
|
|
|
94,507
|
|
|
|
80.0
|
%
|
|
|
140,492
|
|
|
|
85.0
|
%
|
|
|
84,773
|
|
|
|
74.7
|
%
|
Research
|
|
|
22,959
|
|
|
|
19.4
|
%
|
|
|
24,522
|
|
|
|
14.8
|
%
|
|
|
28,748
|
|
|
|
25.3
|
%
|
Other
|
|
|
643
|
|
|
|
0.5
|
%
|
|
|
360
|
|
|
|
0.2
|
%
|
|
|
13
|
|
|
|
0.0
|
%
|
Total listing
service revenues
|
|
|
118,109
|
|
|
|
100.0
|
%
|
|
|
165,374
|
|
|
|
100.0
|
%
|
|
|
113,534
|
|
|
|
100.0
|
%
|
Secondary and rental properties business accounted
for 80.0%, 85.0% and 74.7% of our listing service revenues in 2016, 2017 and 2018, respectively.
Financial Services.
Revenues from
financial services increased 49.8% year-over year in 2018, primarily due to (1) increased average balance of loans receivable,
partially offset by the presentation on a net basis of value-added tax following the adoption of ASC 606 from January 1, 2018.
Revenues from financial services decreased 59.3% year-over year in 2017, primarily due to the decreased transaction volumes of
secondary homes. In 2016, 2017 and 2018, revenues from financial services represented 3.2%, 2.7% and 6.0% of our revenues, respectively.
E-commerce Services
. Revenues from
e-commerce services decreased 82.5% year-over-year in 2018, primarily due to (1) our business transformation from a transaction-oriented
platform back to a technology-driven open platform, and (2) the presentation on a net basis of value-added tax following the adoption
of ASC 606 from January 1, 2018. Revenues from e-commerce services decreased 84.8% year-over-year in 2017, primarily due to our
business transformation from a transaction-oriented platform back to a technology-driven open platform. Revenues from e-commerce
services represented 63.0%, 19.8% and 5.0% of our revenues in 2016, 2017 and 2018, respectively.
The following table presents our e-commerce
service revenues for each of our businesses by amount and percentage of total e-commerce service revenues for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
Percentage of
e-commerce
service
revenues
|
|
|
Amount
|
|
|
Percentage of
e-commerce
service
revenues
|
|
|
Amount
|
|
|
Percentage of
e-commerce
service
revenues
|
|
|
|
(US$ in thousands, except percentage)
|
|
New home
|
|
|
265,583
|
|
|
|
46.0
|
%
|
|
|
36,672
|
|
|
|
41.8
|
%
|
|
|
7,391
|
|
|
|
48.0
|
%
|
Other
|
|
|
312,101
|
|
|
|
54.0
|
%
|
|
|
51,137
|
|
|
|
58.2
|
%
|
|
|
7,993
|
|
|
|
52.0
|
%
|
Total e-commerce service revenues
|
|
|
577,684
|
|
|
|
100.0
|
%
|
|
|
87,809
|
|
|
|
100.0
|
%
|
|
|
15,384
|
|
|
|
100.0
|
%
|
Other product groups accounted for an increasing
portion of our e-commerce services revenues in 2016 and 2017 as a result of the continued development of our online real estate
brokerage services, and decreased in 2018 as we discontinued our online real estate brokerage services.
Value-Added Services
.
Revenues from value-added services increased 22.0% and 16.6% year-over-year in 2018 and 2017, respectively, primarily due to a
rising demand for our database and research services, partially offset by the presentation on a net basis of value-added tax following
the adoption of ASC 606 from January 1, 2018. In 2016, 2017 and 2018, revenues from value-added services represented 2.8%, 6.7%
and 12.0% of our revenues, respectively.
Cost of Revenues
Our cost of revenues consists primarily of
staff costs, operating lease and sublease costs, and commission fees. Our cost of revenues as a percentage of our revenues was
75.0%, 39.3% and 19.3% in 2016, 2017 and 2018, respectively. Prior to January 1, 2018, cost of revenues also included value-added
taxes.
Our cost of revenues decreased significantly
year-over-year in 2017 and 2018, primarily due to a decline in staff costs from US$419.3 million in 2016 to US$61.7 million in
2017 and further to US$19.7 million in 2018 as a result of the reduction in staff headcount of our brokerage team for secondary
properties and the optimization in our cost structure under the technology-driven open platform model.
Gross Profit and Gross Margin
As a result of the foregoing, our gross profit
decreased 9.4% year-over-year in 2018 and increased 17.7% year-over-year in 2017. Our gross margin was 25.0%, 60.7% and 80.7%
in 2016, 2017 and 2018, respectively.
Operating Expenses
Our operating expenses decreased 8.4% year-over-year
in 2018, primarily due to the decrease in advertising expenses, management staff costs and bad debt expenses. Our operating expenses
decreased 40.4% year-over-year in 2017, primarily due to a significant decrease in our selling expenses. In 2016, 2017 and 2018,
our operating expenses represented 41.6%, 51.1% and 68.6% of our revenues, respectively.
The following table sets forth our operating
expenses by amount and percentage of our total operating expenses for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
Percentage
of operating
expenses
|
|
|
Amount
|
|
|
Percentage
of operating
expenses
|
|
|
Amount
|
|
|
Percentage
of operating
expenses
|
|
|
|
(US$ in thousands, except percentage)
|
|
Selling expenses
|
|
|
229,817
|
|
|
|
60.3
|
%
|
|
|
91,250
|
|
|
|
40.2
|
%
|
|
|
69,532
|
|
|
|
33.4
|
%
|
General and administrative expenses
|
|
|
151,251
|
|
|
|
39.7
|
%
|
|
|
135,688
|
|
|
|
59.8
|
%
|
|
|
138,386
|
|
|
|
66.6
|
%
|
Total
|
|
|
381,068
|
|
|
|
100.0
|
%
|
|
|
226,938
|
|
|
|
100.0
|
%
|
|
|
207,918
|
|
|
|
100.0
|
%
|
Selling Expenses
. Our selling expenses
decreased 23.8% and 60.3% year-over-year in 2018 and 2017, respectively, primarily due to the decrease in selling expenses associated
with our e-commerce services and advertising and promotional expenses. Advertising and promotional related expense decreased from
US$24.2 million in 2017 to US$7.1 million in 2018, generally consistent with the decrease in our revenues from e-commerce service.
Selling expenses associated with our e-commerce services decreased from US$72.4 million in 2016 to US$0.4 million in 2017, which
was in line with the decrease in our revenues from e-commerce services. Advertising and promotional expenses decreased from US$61.9
million in 2016 to US$16.8 million in 2017, primarily due to the decrease of promotions for our Fang membership services, our website,
new domain name and the Fang mobile applications.
General and Administrative Expenses
.
Our general and administrative expenses increased 2.0% year-over-year in 2018, primarily due to the increase in share-based compensation,
operating lease and professional service fee, partially offset by the decrease in bad debt expense. Our general and administrative
expenses decreased 10.3 % year-over-year in 2017, primarily due to a decline in staff cost from US$76.8 million in 2016 to US$63.9
million in 2017.
Other
Income (Loss).
Other income in 2018 consisted of rental income of US$2.6 million, income from litigation of US$1.4
million and loss from hotel operation of US$0.7 million. Other loss in 2017 consisted of other revenue of US$12.2 million and
other expenses of US$12.8 million of our subsidiaries that operate the hotel and office leasing businesses.
Operating Income (Loss)
and Operating Margin
As a result
of the foregoing, we generated operating income of US$
39.8 million in 2018 and generated operating income of US$42.2 million
in 2017. Our operating margin was negative 16.5%, 9.5% and 13.1% in 2016, 2017 and 2018, respectively.
Interest Income
Our interest
income, consisting primarily of interest income from cash and cash equivalent,
restricted cash as well as fixed rate time
deposits, remained relatively stable at US$11.3 million and US$10.3 million in 2017 and 2018, respectively.
Interest Expenses
Our interest
expenses consist primarily of interest incurred as a result of our bank borrowings and convertible senior notes. Our interest
expenses increased
31.1% year-over-year in 2018, primarily due to additional bank borrowings amounted to US$76.3 million.
Our interest expenses decreased 22.3% year-over-year in 2017, primarily due to our repurchase of a total of US$394,300 of
the notes.
Change in Fair Value
of Securities
Our change in fair value of
securities increased significantly to US$167.4 million in 2018, compared to US$0.6 million in 2017, primarily due to the
decrease in fair value of our equity investments.
Investment Income
,
Net
Our investment
income, which primarily consisted of dividends from the respective long-term investments in companies including Color Life, Hopefluent,
and World Union totaled US$3.3 million, US$6.7 million and US$
6.8 million in 2016, 2017 and 2018, respectively.
Impairment on Investments
We had US$2.2 million, US$2.8 million and
nil impairment on investments in 2016, 2017 and 2018, respectively. The impairment resulted from the deteriorating financial condition
of Sindeo, of which company we held 11.03% equity interest, while Sindeo completed its wind-down procedure in 2017.
Income Tax (Expenses)
Benefit
Our effective tax rate was 17.3%, 56.8% and 11.2% in 2016, 2017 and 2018, respectively. The effective tax
rate of 11.2% in 2018 was lower than the statutory income tax rate of 25% primarily because of (1) the effect of international
tax rate differences in the amount of US$6.9 million, (2) non-deductible expenses in the amount of US$19.4 million, and (3) provision
of withholding tax of PRC subsidiaries in the amount of US$11.7 million based on the dividend tax rate applied to the profits generated
by these subsidiaries and expected to be distributed, partially offset by the effect of (1) preferential tax rates of certain PRC
entities in the amount of US$6.6 million, and (2) reversal of previously recorded ASC740 (FIN48) income tax and interest liabilities
in the amount of US$8.9 million, due to expiration of statutory limitation. In 2016 and 2017, we recorded changes in valuation
allowances of US$30.9 million and US$8.8 million, respectively, primarily attributable to operating losses arising from entities
operating online real estate brokerage service and not anticipating sufficient taxable income in foreseeable future.
B. Liquidity and Capital Resources
Historically, we have financed our liquidity
requirements primarily through cash generated from operations, bank borrowings, convertible senior notes and equity financings.
As of December 31, 2018, we had US$195.1 million in cash and cash equivalents, US$245.5 million in current portion of restricted
cash and US$16.0 million in short-term investments with maturity dates greater than three months but less than one year, compared
to US$228.3 million, US$223.0 million and US$55.8 million as of December 31, 2017, respectively. Of our cash and cash equivalents
as of December 31, 2018, US$184.3 million was held inside the PRC and US$10.8 million was held outside of the PRC. See “Item
3.D. Key Information—Risk Factors—Risks related to doing business in China—We rely primarily on dividends and
other distributions on equity paid by our subsidiaries, and any limitation on the ability of our subsidiaries to make payments
to us could have a material adverse effect on our ability to conduct our business as well as our liquidity” and “—Government
control of currency conversion may limit our ability to utilize our revenues effectively” for additional discussion. All
of our investments with original stated maturities of 90 days or less are classified as cash and cash equivalents. All of our
investments with original stated maturities of greater than 90 days and less than 365 days are classified as short-term investments.
As of December 31, 2016, 2017 and 2018, we had short-term investments of US$42.9 million, US$55.8 million and US$16.0 million,
respectively.
As of December 31,
2018, we had U.S. dollar-denominated short-term borrowings of US$220.0 million and RMB denominated short-term borrowings of US$77.8
million obtained from financial institutions in the United States and the PRC. These bank borrowings are secured by bank deposits
of approximately US$245.5 million, placed with financial institutions in China. The cash deposits pledged for these bank borrowings
could be released after we repay the bank borrowings in full. These pledged deposits are classified as restricted cash on our
consolidated balance sheets. Certain of these bank borrowings included cross default provisions.
As of December 31,
2018, we had U.S.-dollar denominated long-term bank borrowings of US$65.4 million and RMB denominated long-term bank borrowings
of US$57.8 million obtained from financial institutions in the United States and PRC, respectively.
These bank
borrowings, which initially totaled US$421.0 million, were incurred to satisfy the operating needs of our company and our offshore
subsidiaries outside of the PRC, including repurchase of convertible notes, property acquisitions, leasehold improvement and construction.
In December 2013
and January 2014, we sold an aggregate principal amount of US$350.0 million and US$50.0 million, respectively, of convertible
senior notes due 2018 (the “2018 Notes”). The 2018 Notes were offered to qualified institutional buyers pursuant to
Rule 144A under the Securities Act and certain non-U.S. persons in compliance with Regulation S under the Securities
Act. The 2018 Notes may be converted, under certain circumstances, based on the current conversion rate of 50.9709 ADSs per US$1,000
principal amount of 2018 Notes (after the five-for-one ADS ratio change effected in April 2014 and dividend distributions
in August 2014 and March 2015, respectively), which is equivalent to a conversion price of approximately US$19.62 per
ADS. The net proceeds to us from the issuance of the 2018 Notes were US$390.5 million. We are required to pay cash interest at
an annual rate of 2.00% on the 2018 Notes. Interest is payable semiannually in arrears on June 15 and December 15 of
each year, beginning on June 15, 2014. We incurred debt issuance costs of US$9.5 million, which are being amortized to interest
expense to the first put date of the 2018 Notes. On November 15, 2016, our company delivered a notice of repurchase right
at the option of the holder to the holders of the 2018 Notes. Upon completion of the repurchase on December 15, 2016, an
aggregate principal amount of US$394.3 million of the notes was tendered for repurchase, representing approximately 98.6% of the
outstanding principal amount of the 2018 Notes prior to such repurchase.
The 2018 Notes matured in December 2018.
In September and November 2015,
we sold an aggregate principal amount of U$100.0 million and US$200.0 million, respectively, of convertible notes due 2022 (the
“2022 Notes”). The 2022 Notes were offered to certain non-U.S. persons in compliance with Regulation S under
the Securities Act. The 2022 Notes may be converted, under certain circumstances, based on the current conversion rate of 27.9086
Class A ordinary shares per US$1,000 principal amount of the 2022 Notes, which is equivalent to a conversion price of approximately
US$35.83 per Class A ordinary share or approximately US$7.166 per ADS. The net proceeds to us from the issuance of the 2022 Notes
were US$300.0 million. We are required to pay cash interest at an annual rate of 1.5% on the 2022 Notes. Interest is payable semiannually
in arrears on March 31 and September 30 of each year, beginning on March 31, 2016. We incurred debt issuance costs
of US$1.1 million, which are being amortized to interest expense to the first put date of the 2022 Notes. In October 2018, we
repurchased a total of US$50 million of the 2022 Notes, representing approximately 25% of the outstanding principal amount of
the 2022 Notes prior to such repurchase, for a consideration of US$38.9 million, and the difference was recorded in convertible
notes as unamortized premium.
The notes are senior unsecured obligations
and rank (1) senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the relevant
notes, (2) equal in right of payment to any of our unsecured indebtedness that is not so subordinated, (3) effectively junior
in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and
(4) structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries and consolidated
controlled entities.
We believe that our working capital is
sufficient for our present requirements. We may, however, seek additional cash resources due to changed business conditions or
other future developments, including selling debt securities or additional equity securities or obtaining credit facilities to
meet our cash needs. See “Item 3.D. Key Information—Risks Factors— Risks related to our ADSs, ordinary shares
and notes—We may need additional capital, and the sale of additional ADSs, notes or other equity securities could result
in additional dilution to our shareholders, while the incurrence of debt may impose restrictions on our operations.”
Cash Flows
The following table sets forth information
regarding our cash flows for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(US$ in thousands)
|
|
Consolidated statements of cash flows data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from operating activities
|
|
|
131,240
|
|
|
|
126,889
|
|
|
|
55,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(127,946
|
)
|
|
|
(284,512
|
)
|
|
|
(106,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from (used in) financing activities
|
|
|
(347,334
|
)
|
|
|
71,969
|
|
|
|
34,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash, cash equivalents and restricted cash
|
|
|
(373,488
|
)
|
|
|
(56,352
|
)
|
|
|
(43,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at beginning of year
|
|
|
921,000
|
|
|
|
547,612
|
|
|
|
491,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of year
|
|
|
547,612
|
|
|
|
491,260
|
|
|
|
447,572
|
|
*The Accounting Standards Update (“ASU”)
2016-18 Statement of Cash Flows (Topic 230) required that restricted cash should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance was effective
as of January 1, 2018 and we applied it using a retrospective transition method to each period presented. The adoption of this
guidance changed the presentation and classification of restricted cash in our consolidated statements of cash flows. For the years
ended December 31, 2016 and 2017, substantially all of the changes in restricted cash of US$107.9 million and US$51.9 million,
respectively, were previously reported as part of financing activities in the statement of cash flows.
Net Cash Generated from
Operating Activities
We had
net cash generated from operating activities of US$
55.0 million in 2018, which was primarily attributable to non-cash
adjustments of (1) change in fair value of securities in amount of US$165.9 million, (2) the depreciation and amortization
expense of US$26.7 million and (3) allowance for doubtful accounts of US$24.6 million, partially offset by (1) net loss of
US$114.9 million, and (2) a decrease of US$42.9 million in accrued expenses and other liabilities primarily due to a decrease
in the amount payable to sales and marketing agents and payroll payables.
We had net cash generated from operating
activities of US$126.9 million in 2017, which was primarily attributable to (1) our net income of US$16.3 million during this
period, (2) a decrease in loans receivable of US$45.7 million provided to property buyers, real estate developers and other borrowers
primarily as a result of bank loans deposited at relevant banks to secure our loans and (3) an increase of deferred revenue of
US$30.3 million primarily as a result of an increase in advance from customers, partially offset by (1) a decrease of US$39.3
million in accrued expenses and other liabilities primarily due to a decrease in accrued unrecognized tax benefits and (2) a decrease
in customers’ refundable fees of US$22.7 million.
We had net cash generated from operating
activities of US$131.2 million in 2016, which was primarily attributable to a decrease in loans receivable of US$251.0 million
provided to property buyers, real estate developers and other borrowers primarily as a result of bank loans deposited at relevant
banks to secure our loans, partially offset by (1) our net loss of US$169.6 million, (2) a decrease in customers’ refundable
fees of US$27.6 million and (3) a decrease in accrued expenses and other liabilities of US$17.6 million.
Net Cash Used in Investing
Activities
Our net cash used in investing activities
was US$106.7 million in 2018, primarily attributable to (1) acquisition of short -term investment of US$721.7 million, (2) origination
of loans receivable of US$134.8 million, (3) acquisition of property and equipment of US$96.1 million and (4) acquisition of long-term
investments of US$84.5 million, partially offset by (1) proceeds from short-term investments of US$759.7 million, (2) repayment
of loans receivable of US$149.5 million and (3) proceeds from government in connection with the purchase of land use right of US$14.4
million.
Our net cash used in investing activities
was US$284.5 million in 2017, primarily attributable to (1) acquisition of short -term investment of US$383.6 million, (2) origination
of loans receivable of US$212.8 million, (3) deposits for non- current assets of US$55.5 million, partially offset by (1) proceeds
from maturity of fixed-rate time deposits of US$373.4 million and (2) repayment of loans receivable of US$86.9 million.
Our net cash used in investing activities
was US$127.9 million in 2016, primarily attributable to (1) deposits for non-current assets of US$128.6 million, (2) acquisition
of fixed-rate time deposits of US$73.8 million and (3) acquisition of property and equipment of US$24.6 million, partially offset
by (1) proceeds from maturity of fixed-rate time deposits of US$90.0 million and (2) proceeds from disposal of an available-for-sale
security of US$13.1 million.
Net Cash Generated from
(Used in) Financing Activities
Our net cash
generated from financing activities was US$
34.7 million in 2018, primarily due to (1) proceeds of US$36.3 million from
short term loans and (2) proceeds of US$66.8 million from long term loans, partially offset by (1) redemption of convertible senior
notes in amount of US$44.6 million and (2) repayment of US$26.9 million loans.
Our net cash generated from financing activities
was US$72.0 million in 2017, primarily due to proceeds from long-term loans of US$111.5 million, partially offset by repayment
of loans of US$44.0 million.
Our net cash used in financing
activities was US$347.3 million in 2016, primarily due to (1) redemption of US$394.3 convertible senior notes million 2018
Notes, (2) repayment of US$182.4 million short-term loans and (3) repurchase of US$136.6 million ordinary shares, partially
offset by (1) proceeds of US$296.6 million from short-term loans and (2) proceeds of US$67.7 million from long-term
loans.
Capital Expenditures
Our
capital expenditures were US$104.6 million, US$100.1 million and US$
96.1 million in 2016, 2017 and 2018,
respectively. There are also constructions as well as development and renovation needs. We bought more land and
properties. We expect our capital expenditures to increase in the future as our business continues to develop and expand as
we make further improvements to our websites and our services.
Inflation
According to the National Bureau of Statistics
of China, the change in the consumer price index in China was 2.1%, 1.6% and 2.1% in 2016, 2017 and 2018, respectively. Recent
inflation has not had a material impact on our results of operations. However, we cannot assure you that we will not be adversely
affected by inflation or deflation in China in the future.
C. Research and Development, Patents and Licenses,
etc.
We have a
team of experienced engineers who are primarily based at our headquarters in Beijing. We recruit most of our engineers locally
and have established various recruiting and training programs with leading universities in China. We compete aggressively for
engineering talent to help us address challenges such as Chinese language processing, information retrieval and high performance
computing. In each of 2016, 2017 and 2018, our research and development expenditures, including share-based compensation expenses
for research and development staff, were US$45.8 million, US$39.0 million and US$
32.0 million, respectively, representing
5.0%, 8.8% and 10.6% of our total revenues for the same periods.
D. Trend Information
See “—A. Operating Results”
of this Item 5 and “Item 3.D. Key Information—Risk Factors” of this annual report.
E. Off-Balance Sheet Arrangements
We do not currently have any material outstanding
off-balance sheet arrangements or commitments. We have no plans to enter into transactions involving, or otherwise form relationships
with, unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet arrangements
or commitments.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual
obligations as of December 31, 2018:
|
|
Payment due by period*
|
|
|
|
Total
|
|
|
Less
than
one year
|
|
|
One to three
years
|
|
|
Three to five
years
|
|
|
More than
five years
|
|
|
|
(US$ in thousands)
|
|
Convertible senior notes with principal
and interest
|
|
|
265,019
|
|
|
|
3,563
|
|
|
|
261,456
|
|
|
|
-
|
|
|
|
-
|
|
Operating lease commitments
|
|
|
6,802
|
|
|
|
4,368
|
|
|
|
2,379
|
|
|
|
55
|
|
|
|
-
|
|
Capital commitment
|
|
|
10,665
|
|
|
|
10,665
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loan principal and interest expense obligation
|
|
|
466,303
|
|
|
|
312,395
|
|
|
|
34,719
|
|
|
|
28,429
|
|
|
|
90,760
|
|
|
*
|
Our
estimated liability for unrecognized tax benefits is included in other non-current liabilities.
As of December 31, 2018, we had gross accrued unrecognized tax benefits and related interest
and penalties of US$137.9
million. As we are currently unable to make a reasonably
reliable estimate of the possible change and the timing of payments in individual years
in connection with these tax liabilities, such amounts were not included in the contractual
obligation table.
|
Our 2022 Notes will mature in September and
November 2022, respectively, unless earlier repurchased or converted into our ADSs based on the current conversion rate of
27.9086 Class A ordinary shares per US$1,000 principal amount of the 2022 Notes, which is equivalent to a conversion price of
approximately US$35.83 per Class A ordinary share or approximately US$7.166 per ADS. The conversion rate is subject to certain
corporate events. The interest is payable semiannually in arrears on March 31 and September 30 of each year, beginning
on March 31, 2016.
Our payments
under operating leases are expensed on a straight-line basis over the periods of the respective leases. Our lease arrangements
have no renewal options, rent escalation clauses, restrictions or contingent rents and are all conducted with third parties, except
for the building leased from a related party as disclosed in Note 19 to our consolidated financial statements included elsewhere
in this annual report. In 2016, 2017 and 2018, total rental expenses for all operating leases were US$66.3 million, US$22.6 million
and US$
9.7 million, respectively.
Our sublease
rental income for 2018 was US$
6,402. Future minimum sublease receipts payments expected to be received under non-cancellable
sublease agreements as of December 31, 2018 was US$1,222.
Our loan
principal and interest expense obligations relate to our U.S.-dollar denominated bank borrowings of US$307,917
and RMB
denominated bank borrowings of US$158,386 obtained from financial institutions in the United States and PRC. US$285,427 of bank
borrowings are secured by bank deposits of approximately US$252,464 placed with financial institutions in China. These pledged
deposits are classified as restricted cash on our consolidated balance sheets.
US$
204,218
of bank borrowings were secured by building and construction in progress as of December 31, 2018.
Our capital commitments relate primarily
to the construction project of a building in Hangzhou and Tianjin, respectively. These properties will be used as our new branch
offices.
G. Safe Harbor
See “Forward-Looking Statements.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT
AND EMPLOYEES
A. Directors and Executive Officers
The following
table sets forth certain information relating to our directors and executive officers as of the date of this annual report. The
business address of each of our directors and executive officers is Tower A, No. 20 Guogongzhuang Middle Street, Fengtai District,
Beijing 100070, the People’s Republic of China
.
Name
|
|
Age
|
|
|
Position
|
Vincent Tianquan Mo
|
|
|
55
|
|
|
Executive chairman of the board of directors
|
Jian Liu
|
|
|
43
|
|
|
Chief executive officer
|
Qian Zhao
|
|
|
50
|
|
|
Independent director
|
Sam Hanhui Sun
|
|
|
46
|
|
|
Independent director
|
Shaohua Zhang
|
|
|
55
|
|
|
Independent director
|
Zhizhi Gong
|
|
|
39
|
|
|
Director
|
Frank Hua Lei
|
|
|
39
|
|
|
Chief investment officer
|
Zijin Li
|
|
|
34
|
|
|
Acting chief financial officer and board secretary
|
Zhihong Zhang
|
|
|
48
|
|
|
Chief operations officer
|
Vincent
Tianquan Mo
is our founder and has served as our executive chairman of our board of directors since 1999. Mr. Mo had
served as our chief executive officer from August 2014 to January 2019. Prior to founding our company, Mr. Mo served
as an executive vice president at Asia Development and Finance Corporation from 1996 to 1998 and a general manager for Asia at
Teleres, a venture of Dow Jones &Co. and AEGON USA to provide online commercial real estate information services, from
1994 to 1996. He currently serves as a director on the board of directors of Hopefluent Group Holdings Limited, a Hong Kong-listed
company, and is the secretary general of the China Real Estate Index System, a real estate research publication operated by us.
Mr. Mo holds a bachelor’s degree in engineering from South China University of Technology, a master of science degree
in business administration from Tsinghua University and a master of arts degree in economics from Indiana University. Mr. Mo
is the uncle of Mr. Richard Jiangong Dai, who is a director of our company (until February 2016 when he resigned) and
our former president and chief executive officer.
Jian Liu
has served as our chief executive officer since January 2019. Mr. Liu joined us in April 2000 and was appointed
from our chief operations officer to our president on July 1, 2016. Mr. Liu was also our first chief information officer. Prior
to joining us, Mr. Liu worked at the information center of Ningbo Economic Committee in Zhejiang Province. Mr. Liu holds
a bachelor’s degree in computer science from Ningbo University.
Qian Zhao
has served as an independent director of our company and chairman of our nominating and corporate governance committee
since September 2010. Mr. Zhao is a founding partner of CXC China Sustainable Growth Fund, a private equity fund that
makes investments in China-based companies. Mr. Zhao was a lawyer by training and is admitted to practice law in both China
and New York. Mr. Zhao co-founded Haiwen & Partners in 1992, a preeminent China corporate finance law firm in Beijing.
He worked in Sullivan & Cromwell’s New York office from 1998 to 2000 and Skadden, Arps, Slate, Meagher &
Flom LLP and Affiliates’ Beijing office from 2000 to 2003. Mr. Zhao is currently an independent director of Trina Solar
Limited, a New York Stock Exchange-listed company. Mr. Zhao was a managing director of CXC Capital, Inc., which was the management
company of CXC China Sustainable Growth Fund form 2008 to 2011, and president of Camelot Information Systems Inc., a company listed
on NASDAQ, from 2011 to 2013. Mr. Zhao was the general counsel and chief investment officer of BGI Shenzhen from 2014 to
2015. Mr. Zhao received a J.D. degree from the New York University School of Law in 1998 and an LL.B degree from University
of International Business & Economics, Beijing, in 1990.
Sam Hanhui
Sun
has served as an independent director of our company and chairman of our audit committee since September 2010.
Mr. Sun currently serves as an independent director and audit committee chair of Yirendai Ltd., a New York Stock Exchange-listed
company, and an independent director and audit committee chair of CAR Inc., a Hong Kong Stock Exchange-listed company. From January 2010
to September 2015, Mr. Sun assumed a couple of positions at Qunar Cayman Islands Limited, a company listed on NASDAQ,
including serving as Qunar’s president from May 2015 to September 2015 and its chief financial officer from January 2010
to April 2015. He was chief financial officer of Beijing Ruifeng Co. Ltd. from May 2009 to September 2009 and KongZhong
Corporation, a Nasdaq-listed company, from February 2007 to April 2009. Mr. Sun was also an independent director
and audit committee member of KongZhong Corporation from July 2005 through January 2007. From 2004 to 2007, Mr. Sun
took various financial controller roles at Microsoft China R&D Group, Maersk China Co. Ltd. and our company. From 1995 to
2004, Mr. Sun worked in KPMG’s auditing practice, including eight years at KPMG in Beijing where he was an audit senior
manager, and two years at KPMG in Los Angeles, California. Mr. Sun earned a bachelor’s degree in business administration
from the Beijing Institute of Technology in 1993. He is a Certified Public Accountant in China.
Shaohua
Zhang
has served as an independent director of our company and a member of our audit committee since August 2018. Mr.
Zhang served as an executive director and the general manager of Shun Cheong Holdings Ltd. (currently known as IDG Energy Investment
Limited), a company listed on the Hong Kong Stock Exchange (stock code: 0650), from March 2008 to August 2016. He was an independent
non-executive director of Shun Cheong Holdings Ltd. from September 2006 to March 2008. Mr. Zhang is an entrepreneur with over
20 years of experience in starting up, developing and managing businesses in various industries. Mr. Zhang founded Beijing Beyondal
Electric Co., Ltd. and has been the managing director since 2003, a company with a good market share in setting up internet data
centers in China. He also served as the general manager of GE Digital Energy (China). Mr. Zhang received a bachelor’s degree
in science from China University of Technology in 1985 and a master’s degree in economics (majoring in business administration)
from the Capital University of Economics and Business in 1988.
Zhizhi
Gong
has served as a director of our company since May 2016. Ms. Gong is a managing director of the Carlyle
Group where she focuses on Asia private equity investment and buyout opportunities. She joined the Carlyle Group in 2010 and is
based in Beijing. Ms. Gong also serves as chairwoman of the supervisory board of Focus Media Information Technology Co.,
Ltd., a company listed on the Shenzhen Stock Exchange. In 2015, Ms. Gong was also a member of the board of directors of Natural
Beauty BioTechnology Limited, a company listed on the Hong Kong Stock Exchange. Prior to joining the Carlyle Group, Ms. Gong
was a principal at Apax Partners, where she was a founding member of the Greater China team. Prior to that, Ms. Gong worked
at the investment banking department at China International Capital Corporate Limited. Ms. Gong received her M.B.A. from
Harvard Business School and B.A. in economics from Peking University.
Frank
Hua Lei
has served as our chief investment officer since January 2019. Mr. Lei had served as the acting chief financial
officer of our company since September 2016 and as our chief financial officer from November 2016 to January 2019. He
joined us in 2009 and has accumulated extensive experience across multiple functions in our company. Prior to the recent appointments,
Mr. Lei had been the managing director of our company’s investment management division and the deputy chief financial
officer in 2015 and 2014, respectively. Mr. Lei holds a Ph.D. in finance from University of the West of England in the United
Kingdom, a Master degree in banking and finance from Loughborough University in the United Kingdom and a Bachelor degree in economics
from Beijing Forestry University in China.
Zijin
Li
has served as our acting chief financial officer and board secretary since January 2019. Mr. Li joined us in 2018
as a senior director in charge of reporting and internal control, and then served as our deputy chief financial officer. Prior
to joining us, Mr. Li worked for Aofan International Group in Australia for 10 years in financial management positions and worked
for Fenghui Leasing Ltd. in China for 3 years as its General Manager of Finance Department. Mr. Li holds a master’s degree
and a bachelor’s degree from Sydney University of Technology.
Zhihong
Zhang
has served as our chief operations officer since July 2016. Ms. Zhang served as senior vice president of
our company from April 2016 to July 2016 and was in charge of the financial and operation optimization. Prior to that,
she served as the financial director, vice president of the resale group and vice president of the sales department of our company.
She holds an MBA degree from China Foreign Economic and Trade University.
B. Compensation
Compensation of Directors and Executive Officers
Our executive directors and executive officers
receive compensation in the form of salaries, annual bonuses and share options. Our independent directors receive annual compensation
in connection with the performance of their duties. All directors receive reimbursements from us for expenses necessarily and
reasonably incurred by them for providing services to us or in the performance of their duties. We have entered into service contracts
with our executive officers. None of these service contracts provide benefits to our directors and executive officers upon termination.
In 2018, we paid aggregate cash
compensation of approximately US$0.8 million to our directors and executive officers as a group. We do not pay or set aside
any amounts for pension, retirement or other similar benefits for our officers and directors.
Share Options
1999 Stock Incentive Plan
At a meeting
held on September 1, 1999, our board of directors reserved a total of 12.0% of our fully diluted share capital for issuance
upon the exercise of options to be granted to our executive directors, officers and employees or their affiliated entities from
time to time. On September 1, 1999, our shareholders approved the stock-related award incentive plan (the “1999 Stock
Incentive Plan”). The number of options awarded to a person was based on the person’s potential ability to contribute
to our success, the person’s position with us and other factors deemed relevant and necessary by our board of directors.
Under the 1999 Stock Incentive Plan, we awarded to several of our employees and directors options to purchase
10,226,275
ordinary shares of our company. As of December 31, 2018, options to purchase 2,868,681 ordinary shares remained outstanding.
Options generally do not vest unless the grantee remains under our employment or in service with us on the given vesting date.
However, the 1999 Stock Incentive Plan provides that in circumstances where there is a change in the control of our company, if
no substitution or assumption is provided by the successor corporation, the outstanding options will automatically vest and become
exercisable for a period of 30 days, after which such options will terminate. The termination date for the options granted is
10 years after the date of grant.
a. Standard Stock Options
From September 1, 1999 to September 30,
2006, we awarded standard stock options exercisable to acquire Class A or Class B ordinary shares of our company. All standard
stock options were granted to employees and directors and vested over the requisite service periods of three to four years using
a graded vesting. The maturity life of the standard stock options was 10 years originally. On April 20, 2010, our board of
directors resolved to extend the maturity life of the standard stock option 10 years to 15 years.
From 2001 to 2003, we awarded 1,739,500
standard stock options, classified as liability awards, with exercise prices ranging from HK$1.00 to HK$5.00. In April 2010,
we agreed with the grantees to modify the Hong Kong dollar exercise currency to U.S. dollars. The modified exercise prices of
these options range from US$0.13 to US$0.64.
b. Special Stock Options
We have awarded 16,229,375 special stock
options to our employees and directors, with exercise prices ranging from US$2.50 to US$5.31, since December 31, 2006. Terms
for special stock options are the same as standard stock options, except that two special stock options are exercisable into one
Class A ordinary share. These special stock options vest 10.0% after the first year of service, 20% after the second year of service,
40.0% after the third year of service and 30.0% after the fourth year of service, except for special stock options granted in
September 2010, which vest 20.0% after the first year of service, 20.0% after the second year of service, 30.0% after the
third year of service and 30.0% after the fourth year of service. The maturity life of the special stock options is 10 years.
In 2018, we approved to extend the expiration date of an aggregate number of 518,175 share options granted
under the 1999 Stock Incentive Plan to certain employees for a term of period ranging from two days to nine years. These stock
options had expired prior to December 31, 2017. The awards granted were fully vested as of the extension date. These transactions
were accounted for as new grant. The total incremental share-based compensation of US$2.8 million resulting from such new grant
is fully recognized in 2018.
Our board of directors may amend, alter,
suspend or terminate the 1999 Stock Incentive Plan at any time, provided, however, that our board of directors must first seek
the approval of our shareholders and, if such amendment, alteration, suspension or termination would adversely affect the rights
of an optionee under any option granted prior to that date, the approval of such optionee. Without further action by our board
of directors, our 1999 Stock Incentive Plan has no specified termination date.
2010 Stock Incentive Plan
We adopted our 2010 stock incentive plan
(the “2010 Stock Incentive Plan”) on August 4, 2010. The purpose of our 2010 Stock Incentive Plan is to recognize
and acknowledge the contributions made to our company by eligible participants and to promote the success of our business. By
providing an opportunity to have a personal stake in our company, our 2010 Stock Incentive Plan aims to:
|
·
|
attract
and retain the best available personnel;
|
|
·
|
to
provide an additional incentive to our employees, directors and consultants; and
|
|
·
|
to
promote the success of our business.
|
As of March 31,
2019, we had awarded options to purchase
8,969,792 of our ordinary shares under the 2010 Stock Incentive Plan, with an
exercise price per share ranging from US$10.63 to US$30.00.
a. Eligible Participants
Under the 2010 Stock Incentive Plan, our
board of directors or its designated committee may, at its discretion, offer to grant an option to subscribe for such number of
our ordinary shares at an exercise price as our directors may determine to the following parties:
|
·
|
any
full-time or part-time employees, executives or officers of us, our parent or any of
our subsidiaries;
|
|
·
|
any
directors, including non-executive directors and independent non-executive directors,
of us, our parent or any of our subsidiaries;
|
|
·
|
any
advisers, consultants and agents to us or any of our subsidiaries; and
|
|
·
|
such
other persons who, in the sole opinion of our board of directors or its designated committee,
has made contributions to the business or other development of us.
|
b. Maximum Number of Ordinary
Shares
The maximum number of ordinary shares in
respect of which options may be granted (including ordinary shares in respect of which options, whether exercised or still outstanding,
have already been granted) under the 2010 Stock Incentive Plan may not in the aggregate exceed 10.0% of the total number of ordinary
shares in issue from time to time, including ordinary shares issuable upon conversion of any preferred shares in issue from time
to time. As of March 31, 2019, there were outstanding options to purchase 2,813,851 of our ordinary shares under the 2010
Stock Incentive Plan, of which options to purchase 2,141,786 ordinary shares were exercisable.
c. Price of Ordinary Shares
The determination by our board of directors,
or its designated committee, of the exercise price will be by reference to the fair market value of the ordinary shares, and the
exercise price may be the same as, higher, or lower than the fair market value, except for options or awards which are incentive
stock options or subject to Rule 409A of the Internal Revenue Code. If there exists a public market for our ordinary shares,
including our ADSs, the fair market value of our ordinary shares will be (1) the closing price for the last market trading day
prior to the time of the determination (or, if no closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by our board of directors, or its designated committee, to be the
primary market for our ordinary shares or ADSs, or (2) if the ordinary shares are not traded on any such exchange or national
market system, the average of the closing bid and asked prices of an ordinary shares on the New York Stock Exchange for the day
prior to the time of the determination (or, if not such prices were reported on that date, on the last date on which such prices
were reported), in each case, as reported in The Wall Street Journal or such other source as the board of directors or its designated
committee deems reliable. If there is no established market for our ordinary shares, our board of directors, or its designated
committee, will determine the fair market value of our ordinary shares in good faith by reference to the placing price of the
latest private placement of our ordinary shares and the development of our business operations since such latest private placement.
d. Performance Criteria
The 2010 Stock Incentive Plan allows our
board of directors, or its designated committee, to establish the performance criteria when granting stock options on the basis
of any one of, or combination of, increase in our share price, earnings per share, total shareholder return, return on equity,
return on assets, return on investment, net operating income, cash flow, revenue, economic value-added, personal management objectives,
or other measures of performance selected by our board of directors, or its designated committee. Partial achievement of the specified
criteria may result in a vesting corresponding to the degree of achievement as specified in the award agreement with the relevant
optionee.
e. Time of Exercise of Options
The time and conditions under which an
option may be exercised will be determined by the board of directors, or its designated committee, under the terms of the 2010
Stock Incentive Plan and as specified in the award agreement with a grantee. Notwithstanding the foregoing, in the case of any
options granted to an officer, director or consultant that may become exercisable, the award agreement governing such grant may
provide that the options may become exercisable, subject to reasonable conditions such as the officer, director or consultant’s
continuous service at any time or during any period established in the award agreement governing such grant.
f. Administration
Our board of directors has established
a stock option committee, comprised of a single member, Mr. Mo, to administer the 2010 Stock Incentive Plan with respect
to option grants to non-officer/director employees as well as consultants. Our compensation committee has the authority under
the 2010 Stock Incentive Plan to determine stock option grants to our officers and directors.
g. Termination
Unless terminated earlier, the 2010 Stock
Incentive Plan will continue for a term of 10 years. Our board of directors has the authority to amend or terminate the 2010 Stock
Incentive Plan subject to shareholder approval with respect to certain amendments. However, no such action may impair the rights
of any grantee of any options unless agreed by the grantee.
2015 Stock Incentive Plan
We adopted our 2015 stock incentive plan
(the “2015 Stock Incentive Plan”) on July 3, 2015. The purpose of our 2015 Stock Incentive Plan is to recognize
and acknowledge the contributions made to our company by eligible participants and to promote the success of our business. By
providing an opportunity to have a personal stake in our company, our 2015 Stock Incentive Plan aims to:
|
·
|
attract
and retain the best available personnel;
|
|
·
|
to
provide an additional incentive to our employees, directors and consultants; and
|
|
·
|
to
promote the success of our business.
|
As of March 31, 2019, we had awarded
options to purchase 1,570,200 of our ordinary shares under the 2015 Stock Incentive Plan, with an exercise price per share ranging
from US$18.1 to US$27.2, and granted 1,675,570 restricted shares.
a. Eligible Participants
Under our 2015 Stock Incentive Plan, our
board of directors or its designated committee may, at its discretion, offer to grant an option to subscribe for such number of
our ordinary shares at an exercise price as our directors may determine to the following parties:
|
·
|
any
full-time or part-time employees, executives or officers of us, our parent or any of
our subsidiaries;
|
|
·
|
any
directors, including non-executive directors and independent non-executive directors,
of us, our parent or any of our subsidiaries;
|
|
·
|
any
advisers, consultants and agents to us or any of our subsidiaries; and
|
|
·
|
such
other persons who, in the sole opinion of our board of directors or its designated committee,
has made contributions to the business or other development of us.
|
b. Maximum Number of Ordinary
Shares
The maximum
number of ordinary shares in respect of which options may be granted for each fiscal year during which the 2015 Stock Incentive
Plan is effective may be up to 1.5% of our outstanding ordinary shares as of the last day of the previous fiscal year. As of March 31,
2019, there were outstanding options to purchase 396,200 of our ordinary shares under the 2015 Stock Incentive Plan, of which
options to purchase 146,380 ordinary shares were exercisable.
c. Price of Ordinary Shares
The determination by our board of directors,
or its designated committee, of the exercise price will be by reference to the fair market value of the ordinary shares, and the
exercise price may be the same as, higher, or lower than the fair market value, except for options or awards which are incentive
stock options or subject to Rule 409A of the Internal Revenue Code. If there exists a public market for our ordinary shares,
including our ADSs, the fair market value of our ordinary shares will be (1) the closing price for the last market trading day
prior to the time of the determination (or, if no closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by our board of directors, or its designated committee, to be the
primary market for our ordinary shares or the New York Stock Exchange, whichever is applicable, or (2) if the Ordinary Shares
are not traded on any such exchange or national market system, the average of the closing bid and asked prices of an ordinary
share on the New York Stock Exchange for the day prior to the time of the determination (or, if no such prices were reported on
that date, on the last date on which such prices were reported), in each case, as reported in The Wall Street Journal or such
other source as the board of directors or its designated committee deems reliable. If there is no established market for our ordinary
shares, our board of directors, or its designated committee, will determine the fair market value of our ordinary shares in good
faith by reference to the placing price of the latest private placement of our ordinary shares and the development of our business
operations since such latest private placement.
d. Performance Criteria
The 2015 Stock Incentive Plan allows our
board of directors, or its designated committee, to establish the performance criteria when granting stock options on the basis
of any one of, or combination of, increase in our share price, earnings per share, total shareholder return, return on equity,
return on assets, return on investment, net operating income, cash flow, revenue, economic value-added, personal management objectives,
or other measures of performance selected by our board of directors, or its designated committee. Partial achievement of the specified
criteria may result in a vesting corresponding to the degree of achievement as specified in the award agreement with the relevant
optionee.
e. Time of Exercise of Options
The time and conditions under which an
option may be exercised will be determined by the board of directors, or its designated committee, under the terms of the 2015
Stock Incentive Plan and as specified in the award agreement with a grantee. Notwithstanding the foregoing, in the case of any
options granted to an officer, director or consultant that may become exercisable, the award agreement governing such grant may
provide that the options may become exercisable, subject to reasonable conditions such as the officer, director or consultant’s
continuous service at any time or during any period established in the award agreement governing such grant.
f. Dissolution, Liquidation
or Change in Control
In the event of the proposed dissolution
or liquidation of our company, our board of directors, or its designated committee, will notify the grantee as soon as practicable
prior to the effective date of such proposed transaction. Any options will terminate immediately prior to the consummation of
such proposed action. In the event of a change in control or a merger of our company, each option may be assumed or an equivalent
stock option or right may be substituted by the successor corporation. In the event that no such substitution or assumption occurs,
the outstanding options will automatically vest and become exercisable for a limited period of time as determined by our board
of directors, or its designated committee, and such options will terminate upon the expiration of such period.
g. Termination
Unless terminated earlier, the 2015 Stock
Incentive Plan will continue for a term of five years. Our board of directors has the authority to amend or terminate the 2015
Stock Incentive Plan subject to shareholder approval with respect to certain amendments. However, no such action may impair the
rights of any grantee of any options unless agreed by the grantee.
The following table summarizes, as of the
date of this annual report, the outstanding options and restricted shares that we granted to our current directors and executive
officers:
Share options
Name
|
|
Number of Class
A
ordinary
shares to be
issued upon
exercise of
options
|
|
|
Number of Class
B
ordinary
shares to be
issued upon
exercise of
options
|
|
|
Exercise price
per
ordinary
share (US$)
|
|
|
Date of grant
|
|
Date of expiration
|
Media Partner / Mr. Mo(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,500
|
|
|
|
—
|
|
|
|
5.00
|
|
|
December 30, 2018
|
|
December 30, 2026
|
|
|
|
112,500
|
|
|
|
—
|
|
|
|
5.00
|
|
|
December 30, 2018
|
|
December 30, 2027
|
|
|
|
112,500
|
|
|
|
—
|
|
|
|
5.00
|
|
|
December 30, 2018
|
|
December 30, 2028
|
|
|
|
112,500
|
|
|
|
—
|
|
|
|
10.00
|
|
|
December 31, 2009
|
|
December 30, 2019
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
10.625
|
|
|
September 17, 2010
|
|
September 16, 2020
|
|
|
|
75,000
|
|
|
|
—
|
|
|
|
12.80
|
|
|
August 15, 2012
|
|
August 14, 2022
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
14.65
|
|
|
December 1, 2016
|
|
December 1, 2026
|
Next Decade / Mr. Mo(1)
|
|
|
—
|
|
|
|
1,754,500
|
|
|
|
5.00
|
|
|
September 30, 2006
|
|
September 29, 2021
|
|
|
|
112,500
|
|
|
|
—
|
|
|
|
5.00
|
|
|
December 30, 2018
|
|
December 30, 2026
|
|
|
|
112,500
|
|
|
|
—
|
|
|
|
5.00
|
|
|
December 30, 2018
|
|
December 30, 2027
|
|
|
|
112,500
|
|
|
|
—
|
|
|
|
5.00
|
|
|
December 31, 2008
|
|
December 30, 2028
|
|
|
|
112,500
|
|
|
|
—
|
|
|
|
5.00
|
|
|
December 31, 2009
|
|
December 30, 2019
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
10.625
|
|
|
September 17, 2010
|
|
September 17, 2020
|
|
|
|
75,000
|
|
|
|
—
|
|
|
|
12.80
|
|
|
August 15, 2012
|
|
August 14, 2022
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
14.65
|
|
|
December 1, 2016
|
|
December 1, 2026
|
Qian Zhao
|
|
|
*
|
|
|
|
—
|
|
|
|
30.00
|
|
|
March 31, 2015
|
|
March 31, 2025
|
|
|
|
*
|
|
|
|
—
|
|
|
|
27.2
|
|
|
February 25, 2016
|
|
February 24, 2026
|
Sam Hanhui Sun
|
|
|
*
|
|
|
|
—
|
|
|
|
30.00
|
|
|
March 31, 2015
|
|
March 31, 2025
|
|
|
|
*
|
|
|
|
—
|
|
|
|
27.2
|
|
|
February 25, 2016
|
|
February 24, 2026
|
Name
|
|
Number of Class
A
ordinary
shares to be
issued upon
exercise of
options
|
|
|
Number of Class
B
ordinary
shares to be
issued upon
exercise of
options
|
|
|
Exercise price
per
ordinary
share (US$)
|
|
|
Date of grant
|
|
Date of expiration
|
Jian Liu
|
|
|
*
|
|
|
|
—
|
|
|
|
10.625
|
|
|
September 17, 2010
|
|
September 16, 2020
|
|
|
|
*
|
|
|
|
—
|
|
|
|
12.80
|
|
|
July 26, 2012
|
|
August 14, 2022
|
|
|
|
*
|
|
|
|
—
|
|
|
|
27.2
|
|
|
February 25, 2016
|
|
February 24, 2026
|
Frank Hua Lei
|
|
|
*
|
|
|
|
—
|
|
|
|
10.00
|
|
|
December 31, 2009
|
|
December 30, 2019
|
|
|
|
*
|
|
|
|
—
|
|
|
|
10.625
|
|
|
September 17, 2010
|
|
September 16, 2020
|
|
|
|
*
|
|
|
|
—
|
|
|
|
12.8
|
|
|
July 26, 2012
|
|
July 25, 2022
|
|
|
|
*
|
|
|
|
—
|
|
|
|
14.65
|
|
|
December 1, 2016
|
|
December 1, 2026
|
Zhihong Zhang
|
|
|
*
|
|
|
|
—
|
|
|
|
10.625
|
|
|
September 17, 2010
|
|
September 16, 2020
|
|
|
|
*
|
|
|
|
—
|
|
|
|
12.80
|
|
|
July 26, 2012
|
|
July 25, 2022
|
|
|
|
*
|
|
|
|
—
|
|
|
|
14.65
|
|
|
December 1, 2016
|
|
December 1, 2026
|
|
*
|
Upon exercise of
all options granted, would beneficially own less than 1.0% of our outstanding ordinary
shares.
|
|
(1)
|
Represents options granted to Mr. Mo in his capacity as
our executive chairman. Pursuant to resolutions passed by our board of directors on August 4,
2010, our board of directors resolved that such options be assigned and allocated to
Media Partner and Next Decade.
|
Restricted shares
Name
|
|
Restricted
Shares
|
|
|
Date of grant
|
|
Date of expiration
|
Media Partner / Mr. Mo
(1)
|
|
|
138,188
|
|
|
August 29, 2017
|
|
August 28, 2027
|
Next Decade / Mr. Mo
(1)
|
|
|
138,188
|
|
|
August 29, 2017
|
|
August 28, 2027
|
Jian Liu
|
|
|
61,253
|
|
|
August 29, 2017
|
|
August 28, 2027
|
Frank Hua Lei
|
|
|
22,500
|
|
|
August 29, 2017
|
|
August 28, 2027
|
Zhihong Zhang
|
|
|
30,000
|
|
|
August 29, 2017
|
|
August 28, 2027
|
(1) Represents restricted shares granted to Mr. Mo
in his capacity as our executive chairman.
C. Board Practices
Board of Directors
Our board
of directors currently consists of
five members. A director is not required to hold any shares in our company by way of
qualification. A director may vote with respect to any contract or transaction in which he or she is materially interested provided
the nature of the interest is disclosed prior to its consideration and any vote on such contract or transaction. Our board of
directors may exercise all the powers of the Company to borrow money, mortgage its business, property and uncalled capital, and
issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third
party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of employment.
Duties of Directors
Under Cayman Islands law, our directors
have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise
the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their
duty of care to us, our directors must ensure compliance with our fifth amended and restated memorandum and articles of association.
We have, in certain circumstances, the right to seek damages against our directors if a duty owed by our directors is breached.
Our board of directors has overall responsibility
for managing our operations. The functions and powers of our board of directors include, among others:
|
·
|
convening
shareholders’ meetings and reporting its work to shareholders at such meetings;
|
|
·
|
implementing
shareholders’ resolutions;
|
|
·
|
determining
our business plans and investment proposals;
|
|
·
|
formulating
our profit distribution plans and loss recovery plans;
|
|
·
|
determining
our debt and finance policies and proposals for the increase or decrease in our registered
capital and the issuance of debentures;
|
|
·
|
formulating
our major acquisition and disposition plans, and plans for merger, division or dissolution;
|
|
·
|
proposing
amendments to our fifth amended and restated memorandum and articles of association;
and
|
|
·
|
exercising
any other powers conferred by the shareholders’ meetings or under our fifth amended
and restated memorandum and articles of association.
|
Board Committees
Audit
Committee
. Our audit committee consists of Sam Hanhui Sun, who chairs our audit committee, Qian Zhao and Shaohua Zhang.
Our board of directors has determined that all of our audit committee members are “independent directors” within the
meaning of Section 303A of the New York Stock Exchange Listed Company Manual and meet the criteria for independence set forth
in Section 10A of the Exchange Act. In addition, our board of directors has determined that Sam Hanhui Sun is qualified as
an audit committee financial expert within the meaning of the SEC rules and regulations.
Our audit committee is responsible for,
among other things:
|
·
|
Appointing,
retaining, terminating, overseeing and determining compensation of the independent auditor.
The independent auditor shall report directly to the Committee. The Committee has the
sole authority to approve the hiring and discharging of the independent auditors, all
engagement fees and terms thereof and, to the extent permissible under applicable regulatory
guidelines, all non-audit engagements of the independent auditors.
|
|
·
|
Reviewing
the scope and results of the annual audit with the independent auditor.
|
|
·
|
Reviewing
and discussing, with the internal auditors or the person(s) in the financial department
acting as internal auditor(s), the overall scope and plans for their audits and determine
whether the internal audit function has the appropriate resources and expertise.
|
|
·
|
Reviewing
and discussing with management and the independent auditors, the adequacy and effectiveness
of our disclosure controls, internal accounting and financial controls, the quality of
the financial and accounting personnel, and any relevant recommendations.
|
|
·
|
Discussing
our guidelines and policies with respect to risk assessment and risk management, reviewing
contingent liabilities and risks that may be material to us, and reviewing major legislative,
regulatory and accounting developments which could materially impact our contingent liabilities
and risks.
|
|
·
|
Reviewing
and discussing with management and the independent auditors the annual audited financial
statements and unaudited quarterly financial statements and proposed filings with the
SEC, including reviewing our specific disclosures under “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and among others,
discussing the following matter with the independent accountants: (1) the quality as
well as acceptability of the accounting principles applied in the financial statements,
(2) new or changed regulatory or accounting policies (including an analysis of the effect
of alternative GAAP methods); off-balance sheet structures; significant estimates, judgments,
uncertainties or unusual transactions; and accounting policies relating to significant
financial statement items, and (3) financial statement presentations.
|
|
·
|
Reviewing
the reports prepared by management and by our independent auditors, assessing the adequacy
and effectiveness of our internal controls and procedures, prior to the inclusion of
such reports in our periodic filings as required under SEC rules. The Committee reviews
disclosures regarding our internal controls that are required to be included in SEC reports.
|
|
·
|
Reviewing
on a regular basis management’s assessment (and the basis therefore) of the adequacy
and effectiveness of our system of disclosure controls and procedures, including by meeting
periodically with our management, independent auditors and legal counsel to review their
assessment of such disclosure controls and procedures and to review, before its release,
the disclosure regarding such system of disclosure controls and procedures required under
SEC rules to be contained in our periodic filings.
|
|
·
|
Recommending
to our board of directors whether the audited financial statements are satisfactory to
be included in our annual or other reports to the SEC.
|
|
·
|
At
least annually, reviewing any management letters or internal control reports prepared
by the independent auditors or our internal auditors and responses to prior management
letters, and reviewing with the independent auditors our internal quality control and
financial controls, including the budget, staffing and responsibilities of our financial
and accounting staff.
|
|
·
|
Reviewing
and discussing our earnings press releases, as well as financial information and earnings
guidance provided to analysts and rating agencies, including the type and presentation
of information to be included in earnings press releases.
|
|
·
|
Periodically
meeting in separate sessions with management, with internal auditors (or other personnel
responsible for the internal audit function) and with independent auditors.
|
|
·
|
Reviewing
with the independent auditor any audit problems or difficulties the independent auditor
encountered in the course of audit work (e.g., restrictions on the scope of the independent
auditor’s activities or access to requested information and any significant disagreements
with management) and the management’s response. The audit committee shall also
be responsible for the resolution of disagreements between management and the independent
auditors regarding financial reporting.
|
|
·
|
Setting
clear hiring policies for employees or former employees of the independent auditors.
|
|
·
|
Reviewing
and approving or prohibiting all proposed related-party transactions in accordance with
our related party transaction policy and procedures.
|
|
·
|
Monitoring
compliance with and reviewing, and approving or prohibiting, actual and potential conflicts
with our code of business conduct and ethics, including reviewing the adequacy and effectiveness
of our procedures to ensure proper compliance.
|
|
·
|
Establishing
procedures for (1) the receipt, retention and treatment of complaints received by us
regarding accounting, internal accounting controls, or auditing matters, and (2) the
confidential, anonymous submission by employees of concerns regarding questionable accounting
or auditing matters. Review periodically with management and our internal accounting
department these procedures and any significant complaints received.
|
|
·
|
Pre-approving
all audit services and permissible non-audit services by the independent auditors, as
set forth in Section 10A of the Exchange Act and the rules and regulations promulgated
thereunder by the SEC. The audit committee may establish pre-approval policies and procedures,
as permitted by Section 10A of the Exchange Act and the rules and regulations promulgated
thereunder by the SEC, for the engagement of independent auditors to render services
to us, including but not limited to policies that would allow the delegation of pre-approval
authority to one or more members of the audit committee, provided that any pre-approvals
delegated to one or more members of the audit committee are reported to the audit committee
at its next scheduled meeting.
|
|
·
|
Evaluating
at least annually, the independent auditors’ qualifications, performance and independence,
which evaluation shall include a review and evaluation of the lead partner of the independent
auditor and consideration whether there should be a rotation of the lead partner or independent
auditing firm, and take appropriate action to oversee the independence of the independent
auditors.
|
|
·
|
At
least annually, obtaining and reviewing a report by the independent auditors describing:
(1) the audit firm’s internal quality-control procedures, (2) any material issues
raised by the most recent internal quality-control review, or peer review, of the audit
firm, or by any inquiry or investigation by governmental or professional authorities,
within the preceding five years, respecting one or more independent audits carried out
by the audit firm, and any steps taken to deal with any such issues, (3) all relationships
between the independent auditors and us to enable the audit committee to assess the auditors’
independence, and (4) any other matters required to be included in a letter from the
independent auditors pursuant to applicable requirements of the Public Company Accounting
Oversight Board regarding independent auditor’s communications with the audit committee
concerning independence.
|
|
·
|
Reviewing
and reassessing, at least annually, the audit committee’s performance and the adequacy
of its charter and report its conclusion and any recommendations to our board of directors.
|
|
·
|
Reporting
regularly to the full board of directors.
|
|
·
|
Investigating
matters came to its attention at the company’s expenses.
|
Nominating
and Corporate Governance Committee
. We have established a nominating and corporate governance committee, which is responsible
for identifying individuals qualified to become directors and recommends director nominees to be approved by our board of directors.
The members of our nominating and corporate governance committee include Qian Zhao, who chairs our nominating and corporate governance
committee, and Mr. Mo, our executive chairman.
Compensation
Committee
. Our compensation committee consists of Mr. Mo, who chairs our compensation committee, and Qian Zhao.
Our compensation committee is responsible
for:
|
·
|
Establishing
our general compensation philosophy, and, in consultation with senior management, overseeing
the development and implementation of compensation programs.
|
|
·
|
At
least annually, reviewing and evaluating and, if necessary, revising our compensation
plans, policies and programs adopted by the management.
|
|
·
|
At
least annually, reviewing and approving corporate goals and objectives relevant to compensation
of the CEO and evaluate the CEO’s performance in light of those goals and objectives.
|
|
·
|
At
least annually, either as a committee or together with the other independent directors
(as directed by our board of directors), determining and approving, based on the evaluation
described above, all compensation arrangements with the CEO including, without limitation:
(1) the annual base salary level, (2) the annual incentive opportunity level, (3) the
long-term incentive opportunity level, (4) employment agreements, severance arrangements
and change-in-control agreements/provisions, in each case as, when and if appropriate,
and (5) any special or supplemental benefits. In determining the long-term incentive
component of the CEO’s compensation, the compensation committee shall consider
our performance and relative stockholder return, the value of similar incentive awards
to chief executive officers at comparable companies, and the awards given to the CEO
in past years. The compensation committee may choose to discuss the CEO’s compensation
with the board of directors.
|
|
·
|
Reviewing
and approving, or making recommendations to our board of directors with respect to our
non-CEO executive officer compensation, incentive-compensation plans and equity-based
plans. The compensation committee shall attempt to ensure that our compensation scheme
is effective in retaining and attracting key employees, implements business strategies
and objectives for enhanced shareholder value, and is administered in a fair and equitable
manner consistent with our compensation philosophy. The compensation committee shall
also seek the input of the Chief Executive Officer with respect to the performance evaluation
and compensation of executives other than the Chief Executive Officer.
|
|
·
|
Periodically
reviewing the compensation of our directors and approving changes or making recommendations
to our board of directors with respect thereto.
|
|
·
|
Evaluating
periodically the internal equity and external competitiveness of compensation of the
CEO, the other executive officers, and key management personnel and initiating actions
or recommending changes to our board of directors, as appropriate.
|
|
·
|
Advising
on the setting of compensation for officers whose compensation is not subject to the
approval of the compensation committee.
|
|
·
|
Managing
and reviewing annually and approving any long-term incentive compensation or equity or
stock option plans, programs or similar arrangements, annual bonuses, employee pension
and welfare benefit plans. With respect to each plan the compensation committee shall
have responsibility for:
|
|
·
|
setting
performance targets under all annual bonus and long-term incentive compensation plans
as appropriate;
|
|
·
|
certifying
that any and all performance targets used for any performance-based equity compensation
plans have been met before payment of any executive bonus or compensation;
|
|
·
|
approving
all amendments to, and terminations of, all compensation plans and any awards under such
plans or any inducement grant of options made to a person not previously an employee
or director;
|
|
·
|
granting
any awards under any performance-based annual bonus, long-term incentive compensation
and equity compensation plans to executive officers or current employees with the potential
to become the CEO or an executive officer, including stock options and other equity rights
(e.g., restricted stock or stock purchase rights);
|
|
·
|
approving
which executive officers are entitled to awards under our stock option plan(s);
|
|
·
|
repurchasing
securities from terminated employees; and
|
|
·
|
conducting
an annual review of all compensation plans, including reviewing each plan’s administrative
costs, reviewing current plan features relative to any proposed new features, and assessing
the performance of each plan’s internal and external administrators if any duties
have been delegated.
|
|
·
|
Reviewing
and approving officer and director indemnification and insurance matters.
|
|
·
|
Reviewing
and approving any employee loan in an amount equal to or greater than US$250,000 unless
such transaction is subject to the approval of the audit committee as a related-party
transaction.
|
|
·
|
Reviewing
and considering on an annual basis whether the compensation policies and practices for
all employees are reasonably likely to have a material adverse effect on us in accordance
with SEC rules.
|
|
·
|
Providing
the compensation committee reports on executive compensation to our board of directors.
|
|
·
|
Receiving,
reviewing and conferring with the audit committee with respect to any concerns raised
by any parties directly or indirectly to the compensation committee and take action in
response to such concerns as may be deemed appropriate by the compensation committee.
|
|
·
|
Reviewing
and approving the annual report on executive compensation for inclusion in our annual
report on Form 20-F filed with the SEC.
|
|
·
|
Administering,
interpreting and taking all other actions necessary or appropriate as granted to the
compensation committee under our executive compensation and other plans.
|
|
·
|
Directing
any officer or employee or request any employee of our advisors, consultants or counsel
or such other individual as it may deem appropriate to attend a compensation committee
meeting or meet with any compensation committee members.
|
|
·
|
Reviewing
the compensation committee’s charter on an annual basis and recommend changes,
as appropriate, to our board of directors.
|
|
·
|
Evaluating
the performance of the compensation committee on an annual basis. In conducting such
self-evaluation, the compensation committee shall evaluate whether its charter appropriately
addresses the matters that are or should be within its scope and shall recommend such
changes as it deems necessary or appropriate to the board for consideration. The compensation
committee shall address all matters that it considers relevant to its performance, including
at least, the adequacy, appropriateness and quality of the information and recommendations
presented by it to the board of directors, the manner in which they were discussed or
debated, and whether the number and length of meetings of the compensation committee
were adequate for it to complete its work in a thorough and thoughtful manner.
|
Our board of directors has established
a stock option committee, comprised of a single member, Mr. Mo, to administer the 2010 Stock Incentive Plan with respect
to option grants to our non-officer/director employees as well as consultants. Our compensation committee is responsible for administering
the 2010 Stock Incentive Plan and the 2015 Stock Incentive Plan with respect to option grants to our executive officers and directors.
No director or officer may be directly
involved in decisions regarding his or her own compensation.
Pursuant to the subscription agreement
by and among our company, Safari Group Holdings Limited, Safari Group CB Holdings Limited, and Safari Parent Limited, dated September 17,
2015, Safari Parent Limited, an affiliate of the Carlyle Group, is entitled to nominate one director to our board of directors
so long as the Carlyle Group beneficially owns at least 1.0% of our total outstanding share capital calculated on a fully diluted
basis.
Terms of Directors and Executive Officers
Each of our directors holds office until
a successor has been duly elected and qualified unless the director was appointed by our board of directors, in which case such
director holds office until the following annual meeting of shareholders, at which time such director is eligible for reelection.
Officers are elected by and serve at the discretion of our board of directors.
D. Employees
We had 18,106,
5,795 and
4,367 employees as of December 31, 2016, 2017 and 2018, respectively. The following table sets forth the
number of our employees categorized by function as of December 31, 2018:
Editorial and production
|
|
|
922
|
|
Sales and marketing
|
|
|
2,463
|
|
Management and general administrative
|
|
|
324
|
|
Technical and research
|
|
|
658
|
|
Total
|
|
|
4,367
|
|
We began to downsize our workforce in the
fourth quarter of 2016 to transform our online real estate brokerage business to a model of a mix of franchisees and self-owned
agencies.
Our employees receive a base salary and
are eligible for performance-based bonuses. We have granted share options to certain of our employees. For more information, see
“Item 6.B. Directors, Senior Management and Employees—Compensation—Share Options.”
As required by PRC regulations, we participate
in various employee benefit plans that are organized by municipal and provincial governments, including housing, pension, medical
and unemployment benefit plans. We make monthly payments to these plans for each of our employees based on the employee’s
compensation.
We believe we maintain a good working relationship
with our employees and we have not experienced any significant labor disputes. We believe this is primarily attributable to our
well-established reputation and brand name within the PRC real estate industry, our strong corporate culture, as well as the positive
career development opportunities we provide to our employees. Our employees have not entered into any collective bargaining agreements,
and no labor union has been established by our employees.
E. Share Ownership
As of March 31, 2019, we had 89,388,643
ordinary shares, consisting of 65,051,993 Class A ordinary shares and 24,336,650 Class B ordinary shares issued and outstanding.
The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 of
the Exchange Act. Except as specifically noted, the beneficial ownership was as of March 31, 2019:
|
|
Ordinary shares
beneficially owned
(1)
|
|
|
|
Class A No.
|
|
|
Percent
|
|
|
Class B No.
|
|
|
Percent
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Partner Technology
Limited
(2)
|
|
|
1,555,995
|
|
|
|
2.6
|
%
|
|
|
11,355,645
|
|
|
|
46.7
|
%
|
Next Decade Investments Limited
(3)
|
|
|
2,183,132
|
|
|
|
3.3
|
%
|
|
|
11,985,145
|
|
|
|
45.9
|
%
|
Digital Link Investments Limited
(4)
|
|
|
*
|
|
|
|
*
|
|
|
|
2,750,360
|
|
|
|
11.3
|
%
|
General Atlantic Singapore Fund Pte.
Ltd.
(5)
|
|
|
6,860,040
|
|
|
|
10.5
|
%
|
|
|
—
|
|
|
|
—
|
|
Safari Group Holdings Limited
(6)
|
|
|
3,418,803
|
|
|
|
5.3
|
%
|
|
|
—
|
|
|
|
—
|
|
IDG and its affiliated entities
(7)
|
|
|
11,539,873
|
|
|
|
16.8
|
%
|
|
|
—
|
|
|
|
—
|
|
FIL Limited
(8)
|
|
|
3,396,655
|
|
|
|
5.2
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
(9):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Mo
(10)
|
|
|
9,409,889
|
|
|
|
13.5
|
%
|
|
|
23,340,790
|
|
|
|
89.5
|
%
|
Qian Zhao
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
Sam Hanhui Sun
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
Jian Liu
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Ordinary shares beneficially
owned
(1)
|
|
|
|
Class A No.
|
|
|
Percent
|
|
|
Class B No.
|
|
|
Percent
|
|
Zhihong Zhang
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
Frank Hua Lei
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
Zhizhi Gong
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
All directors and executive officers
as a group
|
|
|
9,917,482
|
|
|
|
14.3%
|
|
|
|
23,340,790
|
|
|
|
89.5
|
%
|
|
*
|
Less than 1.0% of
total outstanding shares.
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules
and regulations of the SEC and includes voting or investment power with respect to our
ordinary shares. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, we have included shares that the person has
the right to acquire within 60 days, including through the exercise of any option, warrant
or other right or the conversion of any other security. These shares, however, are not
included in the computation of the percentage ownership of any other person.
|
|
(2)
|
Includes
510,995 Class A ordinary shares, 11,355,645 Class B ordinary shares and options to purchase
1,045,000 Class A ordinary shares within 60 days of March 31, 201
9.] All of the
shares of Media Partner, a British Virgin Islands company, are held in irrevocable discretionary
family trusts established by Mr. Mo, our founder and executive chairman. The address
of Media Partner is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola,
British Virgin Islands.
|
|
(3)
|
Includes
1,138,132 Class A ordinary shares, 10,230,645 Class B ordinary shares and options to
purchase 1,045,000 Class A ordinary shares and 1,754,500 Class B ordinary shares within
60 days of March 31, 201
9.] All of the shares of Next Decade, a British Virgin
Islands company, are held in irrevocable discretionary family trusts established by Mr.
Mo. The address of Next Decade is P.O. Box 957, Offshore Incorporations Centre, Road
Town, Tortola, British Virgin Islands.
|
|
(4)
|
The address of Digital Link Investments Limited, a British Virgin
Islands company, is Apt 3B, Taggart Tower, 109 Repulse Bay Road, Hong Kong. Shan Li (our
director until May 2017 when he resigned) is the sole shareholder of Digital Link Investments
Limited.
|
|
(
5)
|
Represents
Class A ordinary shares (as represented by 34,300,200 ADSs) beneficially owned by General
Atlantic Singapore Fund Pte. Ltd. as reported in a Schedule 13D/A filed by it and its
affiliates on November 14, 2016. General Atlantic Singapore Fund Pte. Ltd. is a Singapore
company and its principal address is Asia Square Tower 1, 8 Marina View, #41-04, Singapore
018960.
|
|
(
6)
|
Represents
3,418,803 Class A ordinary shares beneficially owned by Safari Group Holdings Limited.
Safari Group Holdings Limited is owned as to 72.0% by Safari Parent Limited, a Cayman
Islands company, and as to 28.0% by Ateefa Limited, a British Virgin Islands company.
Safari Parent Limited is affiliated with the Carlyle Group. Mr. Mo is the sole shareholder
of Ateefa Limited. The address of Safari Group Holdings Limited is the offices of Intertrust
Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman KY1-9005,
Cayman Islands.
|
(7)
|
Represents Class A ordinary shares beneficially owned by IDG and
its affiliates as reported in a Schedule 13D/A filed by it and its affiliates on December 18, 2018, including 11,539,873
Class A ordinary shares held by IDG-Accel China Capital L.P., IDG-Accel China Capital Investors L.P., IDG Alternative
Global Limited, Chuang Xi Capital Holdings Limited, Quartz Fortune Limited, IDG Ultimate Global Limited, Velda Power
Limited and Clever Sight Limited, including 3,488,696 Class A ordinary shares issuable pursuant to convertible notes
beneficially owned by IDG and its affiliated entities. IDG-Accel China Capital L.P. and IDG-Accel China
Capital Investors L.P. have the same ultimate general partner, IDG-Accel China Capital GP Associates Ltd., of
which Quan Zhou and Chi Sing Ho are directors. Chi Sing Ho is also a director of IDG Alternative Global Limited,
Chuang Xi Capital Holdings Limited, Quartz Fortune Limited, IDG Ultimate Global Limited, Velda Power Limited and
Clever Sight Limited.
|
|
(
8)
|
Represents
Class A ordinary shares (as represented by 16,983,275 ADSs) beneficially owned by FIL
Limited and its affiliates as reported in a Schedule 13G filed by it on February 13,
2019. The address of FIL Limited is Pembroke Hall, 42 Crow Lane, Hamilton, Bermuda, HM19.
|
|
(
9)
|
The
address of our current directors and executive officers is c/o Tower A, No. 20 Guogongzhuang
Middle Street, Fengtai District, Beijing 100070, the People’s Republic of China.
|
|
(
10)
|
Represents
ordinary shares beneficially owned by Media Partner, Next Decade, Ateefa Limited, Deanhale
Limited, a British Virgin Islands company, and Karistone Limited, a British Virgin Islands company. All of the shares of
Media Partner and Next Decade, including 1,649,127 Class A ordinary shares represented
by 8,245,635 ADSs, 21,586,290 Class B ordinary shares and options to purchase 2,090,000
Class A ordinary shares and 1,754,500 Class B ordinary shares within 60 days of March
31, 2019, are held in two irrevocable discretionary family trusts established by Mr.
Mo for the benefit of his designated family members. Mr. Mo acts as a protector of these
family trusts, and Deutsche Bank International Trust Co. (Cayman) Limited and Credit
Suisse Trust Limited act as the trustee of these trusts, respectively. In addition, Mr.
Mo, through Ateefa Limited, is deemed to have beneficial ownership of an aggregate of
1,738,706 Class A ordinary shares owned by Safari Group Holdings Limited and Safari Group
CB Holdings Limited, and, through Deanhale Limited, is deemed to have beneficial ownership
of 3,005,596 Class A ordinary shares owned by IDG Alternative. Furthermore, Mr. Mo, through
Karistone Limited, beneficially owns 926,461 Class A ordinary shares.
|
JPMorgan Chase Bank, N.A., the depositary
of our ADSs, has advised us that as of March 31, 2019, of the 89,388,643 issued and outstanding ordinary shares, including
both Class A ordinary shares and Class B ordinary shares, approximately 81.1% of our outstanding Class A ordinary shares, were
in the form of ADSs. None of our outstanding Class B ordinary shares was held by any record holder with an address in the United
States.
Our ordinary shares are divided into Class
A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders
of Class B ordinary shares are entitled to 10 votes per share. We intend to maintain the dual-class ordinary share structure.
Each Class B ordinary share is convertible into one Class A ordinary share at any time by its holder and Class A ordinary shares
are not convertible into Class B ordinary shares under any circumstances. Upon transfer of any Class B ordinary share by its holder
to any person or entity that is not a majority-owned and majority-controlled subsidiary of certain of our shareholders as set
forth in our amended and restated articles of association, such Class B ordinary share will be automatically and immediately converted
into a Class A ordinary share.
On March 18, 2014, we announced the
change of the ratio of our American Depositary Receipts representing Class A ordinary shares from one ADS for one Class A ordinary
shares to five ADSs for one Class A ordinary share. The record date for the ratio change was March 28, 2014. For our ADS
holders, this ratio change had the same effect as a five-for-one ADS split. There was no change to our Class A ordinary shares
or Class B ordinary shares. The effect of the ratio change on the ADS trading price on New York Stock Exchange occurred on April 7,
2014.
Subject to any contractual restrictions
and applicable law, we and our subsidiaries, affiliates or significant shareholders may from time to time, in their sole discretion,
purchase, repay, redeem or retire any of our outstanding debt or equity securities (including any publicly issued debt or equity
securities), in privately negotiated or open market transactions, by tender offer or otherwise.
ITEM 7. MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS
A. Major Shareholders
See “Item 6.E. Directors, Senior
Management and Employees—Share Ownership.”
B. Related Party Transactions
Structure Contracts
PRC laws and regulations restrict and impose
conditions on foreign investment in certain industries in China. We used to operate under a tighter regulatory regime which was
restrictive of foreign investment in Internet content distribution and advertising businesses and adopted a series of Structure
Contracts with our consolidated controlled entities (excluding their subsidiaries) and their nominee shareholders to operate our
businesses. Under the current regulatory regime, Internet content distribution is permitted to operators with less than 50.0%
foreign investment and advertising is permitted to all qualified operators. We may consider further optimizing our corporate structure
in light of the evolving regulatory environment.
In anticipation of our originally proposed
acquisition of a controlling stake in Wanli and the sale of a portion of our equity interest in our subsidiaries to Wanli (which
was terminated in February 2017), in December 2015, we underwent an internal restructuring, whereby we terminated all
of our previous structure contracts and caused Beijing Zhong Zhi Shi Zheng and Jia Tian Xia Network, our wholly-owned PRC subsidiaries,
to enter into the 2016 Structure Contracts with our consolidated controlled entities, with terms and conditions substantially
similar to those of our previous structure contracts. Under the 2016 Structure Contracts, the equity interests of our consolidated
controlled entities were held by our nominee shareholders, i.e., Vincent Tianquan Mo, executive chairman of our board of directors
and chief executive officer, Richard Jiangong Dai, our director (until February 2016 when Mr. Dai resigned) and former
chief executive officer, and certain wholly-owned subsidiaries of theirs, and we exercised effective control over our consolidated
controlled entities through Beijing Zhong Zhi Shi Zheng and Jia Tian Xia Network.
Among the
2016 Structure Contracts, Beijing Zhong Zhi Shi Zheng
entered into a series of contractual arrangements with Shanghai China
Index Investment Consulting Co., Ltd., Beijing Yi Ran Ju Ke Technology Development Co., Ltd., Beijing SouFun Technology Development
Co., Ltd., Beijing Century Jiatianxia Technology Development Co., Ltd., Shanghai Century Jiatianxia Internet Technology Development
Co., Ltd. and their nominee shareholders. In anticipation of the separation and distribution in relation to CIH, we terminated
the foregoing contractual arrangements between our group and these entities on May 15, 2018, and subsequently caused Beijing TuoShi, our wholly-owned PRC subsidiary, to enter into a new
series of contractual arrangements with these consolidated controlled entities in 2018, with terms and conditions substantially
similar to the 2016 Structure Contracts. CIH, through its wholly-owned subsidiary, Beijing Zhong Zhi Shi Zheng, has entered into
new contractual arrangements with Beijing Zhong Zhi Hong Yuan, which is held by our nominee shareholders, i.e., Vincent Tianquan
Mo and Ms. Yu Huang, the chief executive officer of CIH, with terms and conditions substantially similar to those of our previous
structure contracts.
For a detailed description of the regulatory
environment that necessitates the adoption of our corporate structure, see “Item 4.B. Information on the Company—Business
Overview—Regulation.” For a detailed description of the risks associated with our corporate structure, see “Item
3.D. Key Information—Risk Factors—Risks related to our corporate structure.”
The Structure Contracts enable us to:
|
·
|
receive
substantially all of the economic benefits from our consolidated controlled entities
in consideration of the services provided by our subsidiaries;
|
|
·
|
exercise
effective control over our consolidated controlled entities; and
|
|
·
|
hold
an exclusive option to purchase all or part of the equity interests in our consolidated
controlled entities when and to the extent permitted by PRC laws.
|
We did not separately enter into any Structure
Contracts with the subsidiaries of the consolidated controlled entities with which we entered into the Structure Contracts. The
following is a summary of the material terms under our Structure Contracts among our wholly-owned PRC subsidiaries, our consolidated
controlled entities and the nominee shareholders of these consolidated controlled entities.
Exclusive Technical Consultancy and Services Agreements
Under the exclusive technical consultancy
and service agreements, our wholly-owned PRC subsidiary has the exclusive right to provide our consolidated controlled entities
with relevant technical services relating to their business, such as information technology system operations and maintenance
services, or technology supporting services for their advertising products. In exchange for these services, each of the consolidated
controlled entities has agreed to make monthly payments to the service provider for such services. The original term of each agreement
is 10 years, and our wholly-owned PRC subsidiary can unilaterally extend the term of the exclusive technical consultancy and services
agreements and such request will be unconditionally agreed to by the consolidated controlled entities.
Equity Pledge Agreements
In order to secure the payment obligations
of the consolidated controlled entities under the exclusive technical consultancy and services agreements, except as disclosed
below, the nominee shareholders have pledged to our wholly-owned PRC subsidiary their entire equity interests in the consolidated
controlled entities. Under these agreements, the nominee shareholders may not transfer the pledged equity interest without the
prior written consent of our wholly-owned PRC subsidiary. Our wholly-owned PRC subsidiary also has the right to collect dividends
of the consolidated controlled entities from their nominee shareholders. These agreements will remain valid for 10 years and can
be extended at the sole discretion of our wholly-owned PRC subsidiary.
Operating Agreements
Under the operating agreements, our wholly-owned
PRC subsidiary has undertaken to enter into guarantee contracts with third parties, as required by third parties, to guarantee
the performance of the consolidated controlled entities under their business contracts with third parties. In return, the consolidated
controlled entities are required to pledge their accounts receivable and mortgage all of their assets as counter-security to our
wholly-owned PRC subsidiary. Each of the consolidated controlled entities and the nominee shareholders has agreed not to enter
into any transaction that would substantially affect the assets, rights, obligations or operations of the consolidated controlled
entities without the prior written consent of our wholly-owned PRC subsidiary. The original term of each agreement is 10 years.
These agreements can be extended prior to expiration with written confirmation from our wholly-owned PRC subsidiary, or can be
terminated by our wholly-owned PRC subsidiary, upon 30 days’ advance notice.
Shareholders’ Proxy Agreements
Under the shareholders’ proxy agreements,
the nominee shareholders agreed to irrevocably entrust our wholly-owned PRC subsidiary to exercise their rights as the registered
shareholders of the consolidated controlled entities to attend shareholders’ meetings and cast votes. Our wholly-owned PRC
subsidiary may assign part or all of these proxy rights to its designated employees, and will be indemnified for any loss under
these agreements. These agreements will also be binding upon successors of the parties or transferees of the parties’ equity
interests. These agreements will remain in effect until terminated upon written consent by all the parties to the agreements or
by their successors.
Loan Agreements
Under the loan agreements and the related
transfer agreements, the nominee shareholders received loans from us to make contributions to the registered capital of the consolidated
controlled entities between 2004 and 2015, and agreed to repay the loans, upon request, by transferring their entire equity interests
in the consolidated controlled entities to our wholly-owned PRC subsidiary or its respective designees, when permitted by applicable
PRC laws, rules and regulations.
Exclusive Call Option Agreements
Under the exclusive call option agreements,
our wholly-owned PRC subsidiary or any third party designated by it has the right to acquire from the nominee shareholders of
the consolidated controlled entities their entire equity interests in such consolidated controlled entities when permitted by
applicable PRC laws, rules and regulations. The proceeds from the exercise of the call option will be applied to repay the loans
under the loan agreements described above. These agreements each has an original term of 10 years and may be extended for another
10 years at our sole discretion.
Telstra Private Placement
In connection with the private placement
by Telstra International in September 2010, on August 13, 2010, we entered into an investor’s rights agreement
with General Atlantic, Apax, Next Decade, Media Partner and Digital Link and a registration rights agreement with General Atlantic
and Apax. We terminated these agreements on September 23, 2015.
2015 Registration Rights Agreements
On September 24, 2015, we entered
into a registration rights agreement with Safari and Safari CB, under which each of Safari and Safari CB has demand registration
rights pursuant to which we will be required to effect the registration of all or a portion of its Class A ordinary shares (issuable
pursuant to the 2022 Notes in the case of Safari CB), subject to terms and conditions substantially similar to those of the 2014
Registration Rights Agreement. See “—2014 Registration Rights Agreement” above.
On November 4, 2015, we entered into
a registration rights agreement with IDG Alternative and China Merchants Bank Co., Ltd. Tianjin Pilot Free Trade Zone Branch (“CMB”),
under which we are required to file a registration statement on Form F-3 within 45 days after the closing of the private placement
transactions in November 2015, in order to effect the registration of all or a portion of the Class A ordinary shares held
by IDG Alternative or CMB in the case it enforces its security interest on the Class A ordinary shares held by IDG Alternative.
In addition, promptly after the offering and sale of any of their Class A ordinary shares, we will be required to file a prospectus
to be used for such offering and sale in accordance with the Securities Act.
On November 9, 2015, we and Karistone
Limited entered into a registration rights agreement with each of IDG-Accel, IDG-Accel Investors, Winning Star Global Limited,
Rainbow Zone Enterprise Inc., Chuang Xi Capital Holdings Limited and Wealth Harvest Global Limited, respectively, under which
we are required to file a registration statement on Form F-3 within 45 days after the closing of the private placement transactions
in November 2015, in order to effect the registration of all or a portion of Class A ordinary shares held by each of Karistone
Limited, IDG-Accel, IDG-Accel Investors, Winning Star Global Limited, Rainbow Zone Enterprise Inc., Chuang Xi Capital Holdings
Limited and Wealth Harvest Global Limited (collectively, the “Right Holders”). In addition, promptly after the offering
and sale of any of their Class A ordinary shares, we will be required to file a prospectus to be used for such offering and sale
in accordance with the Securities Act. Each of the Right Holders also has the right to request that its Class A ordinary shares
be included in any registration of our Class A ordinary shares, other than registrations on Form F-4 or S-8 or in compensation
or acquisition-related registrations. In addition, the underwriters may, for marketing reasons, cut back all or a part of the
shares that any of the Right Holders has requested to be registered in any incidental registration and we will have the right
to terminate any registration we initiated prior to its effectiveness regardless of any request for inclusion by any of the Right
Holders.
Other Related Party Transactions
We had relationships
with the following related parties in 2018:
Name
of Related Party
|
|
Relationship
with Fang
|
|
|
|
Vincent Tianquan Mo
|
|
Executive chairman of the board
of directors and chief executive officer
|
Richard Jiangong Dai
|
|
Former director and former chief
executive officer of our company
|
Beihai Silver Beach 1 Hotel
and Property Management Company, Ltd.(“Beihai Silver Beach”)
|
|
A company under the control
of Vincent Tianquan Mo
|
Che Tian Xia Company Ltd. (“Che
Tian Xia”)
|
|
A company under the control
of Vincent Tianquan Mo and Richard Jiangong Dai
|
Guangxi Wharton International Hotel (“Guangxi Wharton”)
|
|
A company under the control of Vincent Tianquan Mo
|
Research Center on Natural Conservation
(“Research Center”)
|
|
A company under the control
of Vincent Tianquan Mo
|
Upsky San Francisco Airport
Hotel LLC (formerly known as "Crowne Plaza San Francisco-International Airport") (“Upsky San Francisco”)
|
|
A company under the control
of Vincent Tianquan Mo
|
Upsky Lighthouse Hotel LLC (“Upsky
Lighthouse”)
|
|
A company under the control
of Vincent Tianquan Mo
|
Upsky Long Island Hotel LLC
(“Upsky Long Island”)
|
|
A company under the control
of Vincent Tianquan Mo
|
Nanning Xuyin Business Co.,
Ltd. (“Nanning Xuyin”)
|
|
A company under the control
of Vincent Tianquan Mo
|
New York Military Academy (“Military
Academy”)
|
|
A company of which Vincent Tianquan
Mo is a director
|
Wall Street Global Training
Center, Inc. (“Training Center”)
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A company under the control
of Vincent Tianquan Mo and two other independent directors
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We had the
following expenses from related party transactions during 2018:
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2018
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(US$
in
thousands)
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Office building leased from:
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- Vincent Tianquan Mo
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162
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Management fee incurred:
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- Beihai Silver Beach
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523
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Hotel service fee incurred:
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- Upsky San Francisco
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- Upsky Long Island
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-Upsky Lighthouse
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- Beihai Silver Beach
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Training fee incurred:
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- Military Academy
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In 2011, we entered into an agreement with
Training Center to lease to it office space of approximately 220 square feet in a building owned by us located in New York City,
free of charge.
In February 2012, we entered into
an agreement with Mr. Mo, our executive chairman, to lease a building owned by him for a 10-year period from March 1,
2012. The deemed rental expense of US$ 0.2 million and the corresponding shareholder contribution were included in our consolidated
financial statements for 2017.
In April 2013, we and Beihai Silver
Beach entered into an agreement, pursuant to which Beihai Silver Beach was engaged to manage the hotel and office leasing operations
owned by the BaoAn Entities for 10 years. The management fees incurred for 2017 were US$ 0.5 million.
In April 2013, we entered into an
agreement with Che Tian Xia to use its domain name for six years free of charge.
In 2016, Upsky San Francisco, Upsky Long
Island and Beihai Silver Beach provided hotel accommodations to our employees that amounted to US$17,000, US$81,000 and US$113,000.
In 2016, Military Academy provided training
services to us for training fees amounting to US$111,000.
Nanning Xuyin held 73,430,061 shares in
Guilin Bank Co., Ltd. on behalf of us, through a nominee arrangement, in 2015, and transferred 30,595,859 shares of Guilin Bank
to us in 2016.
On September 25, 2017, additional 42,834,202
shares of Guilin Bank were transferred by the third-party in full satisfaction of its remaining overdue receivables of US$24,695
to us. The total investment constituted a 1.98% and 1.79% ownership in Guilin Bank as of December 31, 2017 and 2018, respectively.
In October 2017, we received 7,343,006 shares of Guilin Bank as a stock dividend and our shareholding increased from 73,430,061
to 80,773,067. No impairment on the investment in Guilin Bank was recognized for the year ended December 31, 2018.
For more
details of our related party transactions in 2018, see Note
19 to our consolidated financial statements included elsewhere
in this annual report.
Stock Incentive Plans
See “Item 6.B. Directors, Senior
Management and Employees—Compensation—Share Options.”
C. Interests of Experts and Counsels
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial
Information
We have appended consolidated financial
statements filed as part of this annual report.
Legal Proceedings
See “Item 4.B. Information on the
Company—Business Overview—Legal Proceedings.”
Dividend Policy
Our board of directors has the discretion
over whether to pay dividends on our ordinary shares. If our board of directors decides to pay dividends on our ordinary shares,
the form, frequency and amount will be based upon our future operations and earnings, capital requirements and surplus, general
financial condition, shareholders’ interests, contractual restrictions and such other factors as our board of directors
may deem relevant. For a description of our corporate structure and its potential impact upon our ability to pay dividends, see
“Item 3.D. Key Information—Risk Factors—Risks related to doing business in China—We rely primarily on
dividends and other distributions on equity paid by our subsidiaries, and any limitation on the ability of our subsidiaries to
make payments to us could have a material adverse effect on our ability to conduct our business as well as our liquidity.”
Holders of ADSs are entitled to receiving
dividends, subject to the terms of the deposit agreement, to the same extent as the holders of our ordinary shares. Cash dividends,
if any, will be paid to the depositary in U.S. dollars and paid to holders of ADSs according to the terms of the deposit agreement.
Other distributions, if any, will be paid by the depositary to holders of ADSs in any means it deems legal, fair and practical.
Under the deposit agreement, the depositary is required to distribute dividends to holders of ADSs unless such distribution is
prohibited by law. The amounts distributed to holders will be net of fees, expenses, taxes and other governmental charges payable
by holders under the deposit agreement.
In August 2014, we declared a cash
dividend of US$1.00 per share on our ordinary shares (US$0.20 per ADS), or an aggregate of US$82.4 million to holders of our ordinary
shares and ADSs, payable to shareholders of record on August 18, 2014. As of December 31, 2014, all the declared dividends
had been paid.
In March 2015, we declared a cash
dividend of US$1.00 per share on our ordinary shares (US$0.20 per ADS), or an aggregate of US$82.8 million to holders of our ordinary
shares and ADSs, payable to shareholders of record on March 13, 2015. As of the date of this annual report, all the declared
dividends had been paid.
In May 2019, we declared a stock dividend
to holders of our ordinary shares and ADSs to separate CIH into an independent publicly traded company. For details, see “Item
4. Information on the Company—B. Business Overview—Separation of CIH.”
B. Significant Changes
Except as disclosed elsewhere in this annual
report, we have not experienced any significant changes since the date of our audited consolidated financial statements included
in this annual report.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our ADSs have been listed for trading on
the New York Stock Exchange under the symbol “SFUN” since September 17, 2010.
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs have been listed for trading on
the New York Stock Exchange under the symbol “SFUN” since September 17, 2010.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporated by reference into this
annual report the description of our fifth amended and restated memorandum and articles of association contained in our current
report on Form 6-K originally filed with the SEC on August 3, 2012. Our shareholders adopted our fifth amended and restated
memorandum and articles of association by a special resolution on August 1, 2012.
C. Material Contracts
Material contracts other than in the ordinary
course of business are described in “Item 4. Information on the Company” and in “Item 7. Major Shareholders
and Related Party Transactions” and elsewhere in this annual report.
D. Exchange Controls
Regulations relating to Foreign Exchange, Taxation
and Dividend Distribution
Foreign Exchange
The principal regulation governing foreign
exchange in China is the Foreign Currency Administration Regulations issued by the State Council in January, 1996 and as amended
in August, 2008 and the Regulations of Settlement, Sale and Payment of Foreign Exchange, which were promulgated by the PBOC on
June 20, 1996, and became effective on July 1, 1996. The Renminbi is freely convertible for current account transactions,
such as trade and service-related foreign exchange transactions, but not for capital account transactions, such as direct investments,
loans or investments in securities outside China, without the prior approval of the relevant government authorities. Pursuant
to the Foreign Currency Administration Regulations, foreign-invested enterprises in China may purchase foreign exchange at authorized
commercial banks without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial
documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy
foreign exchange liabilities or to pay dividends. However, the relevant PRC government authorities may limit or eliminate the
ability of foreign-invested enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange
transactions for capital accounts are still subject to limitations and require approval from or registration with relevant government
authorities.
Taxation and Dividend Distribution
We are incorporated in the Cayman Islands.
Under the current laws of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments
are not subject to withholding tax in the Cayman Islands.
In March 2007, the National People’s
Congress of China enacted the New EIT Law, which took effect on January 1, 2008, as amended in February, 2017 and December
2018. Under the New EIT Law, foreign-invested enterprises, such as our subsidiaries and consolidated controlled entities, are
subject to enterprise income tax at a uniform rate of 25.0% if no tax preferential policy is applicable. In addition, under the
New EIT Law, enterprises organized under the laws of jurisdictions outside China may be classified as either “non-resident
enterprises” or “resident enterprises.” Non-resident enterprises without an establishment or place of business
in China are subject to withholding tax at the rate of 10.0% with respect to their PRC-sourced dividend income, which rate can
be reduced under applicable double tax treaties or arrangements. As we are incorporated in the Caymans Islands, we may be regarded
as a “non-resident enterprise.” We hold equity interests in several of our major PRC subsidiaries indirectly through
subsidiaries incorporated in Hong Kong. According to the Avoidance of Double Taxation Arrangement between Mainland China and Hong
Kong, dividends declared by a resident enterprise in mainland China to a Hong Kong resident enterprise should be subject to withholding
tax at a rate of 5.0%, provided, however, that such Hong Kong resident enterprise directly owns at least 25.0% of the equity interest
in the PRC resident enterprise. In September 2013, SouFun Media and SouFun Network were granted a reduced withholding tax
rate of 5% on earnings to be distributed to their Hong Kong parent entities between 2013 and 2015.
In August 2009, SAT issued Circular
124. Pursuant to Circular 124, non-tax residents of China who wish to enjoy a treaty benefit on their China-sourced income under
a Sino-foreign double tax agreement have to go through either an “approval application” procedure (for passive income—dividends,
interest, royalties and capital gains) or “record filing” procedure (for active income—business profits of a
permanent establishment, service fees and personal employment income) in which specific forms attached to Circular 124 have to
be submitted to the relevant Chinese tax authorities together with the relevant supporting documentation. On November 1,
2015, Circular 124 was repealed by the Administrative Measures for Tax Convention Treatment for Non-resident Taxpayers issued
by SAT (“Circular 60”). Circular 60 abolishes the “approval application” procedure and provides that any
non-resident taxpayer filing a tax return shall determine whether such taxpayer is entitled to the treaty benefit, and shall submit
the relevant statements and materials to the competent tax authority for the tax return filing. In the case of withholding at
source and designated withholding, where a non-resident taxpayer who considers it meets the conditions for enjoying the convention
treatment needs to be entitled to the convention treatment, the taxpayer shall take the initiative to propose the same to the
withholding agent, and provide the withholding agent with the relevant statements and materials for the withholding declaration.
The withholding agent shall withhold tax in accordance with the conventions, and forward the relevant statements and materials
to the competent tax authority when making the withholding declaration.
In addition, SAT released Circular 9 in
February 2018. Circular 9 provides guidance for the determination of “beneficial ownership” for the purpose of
claiming benefits under double taxation arrangements by treaty residents in respect of articles of dividends, royalties and interest
under double taxation arrangements. Under Circular 9, a “beneficial owner” shall generally engage in “substantive
business activities” which is further referred to as manufacturing, trading and management activities under Article 2 of
Circular 9. Circular 9 also sets forth several factors, the existence of which generally does not provide support that the treaty
resident is a “beneficial owner.” According to Circular9, non-resident enterprises which could not provide valid supporting
documents as “beneficiary owners” could not be approved to enjoy treaty benefits. Therefore, dividends from our PRC
subsidiaries paid to us through our Hong Kong subsidiaries may be subject to a withholding tax rate of 10.0% if our Hong Kong
subsidiaries cannot be considered as a “beneficial owner” under Circular 9.
Despite the above, the New EIT Law also
provides that an enterprise incorporated outside China with its “de facto management bodies” located within mainland
China should be considered a PRC resident enterprise and therefore be subject to enterprise income tax on its worldwide income
at the rate of 25.0%.
The implementing rules for the New EIT
Law defines “de facto management organization” as the body that exercises substantial and comprehensive control over
the production, operation, personnel, accounting, property and other factors of an enterprise. SAT issued Circular 82 in April 2009.
Circular 82 provides certain specific criteria for determining whether the “de facto management bodies” of a Chinese-controlled
offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by
PRC enterprises, not those controlled by PRC individuals or foreigners in China, like us, the determining criteria set forth in
Circular 82 may reflect SAT’s general position on how the “de facto management bodies” test should be applied
in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises,
individuals or foreigners.
Substantially all members of our management
are currently located in China and we expect them to continue to be located in China for the foreseeable future. Therefore, if
we are deemed to be a PRC tax resident enterprise, we will be subject to an enterprise income tax rate of 25.0% on our worldwide
income if no preferential tax treatment is applicable. According to the New EIT Law and its implementing rules, dividends are
exempted from income tax if such dividends are received by a resident enterprise on an equity interest it directly owns in another
resident enterprise. Therefore, it is possible that dividends we derive through our Hong Kong subsidiaries from our PRC subsidiaries
would be tax exempt income under the New EIT Law if our Hong Kong subsidiaries are also deemed to be “resident enterprises.”
If we are deemed to be a PRC tax resident
enterprise, we would then be obliged to withhold PRC withholding income tax on the gross amount of dividends declared to shareholders
who are non-PRC tax residents. The withholding income tax rate is 10.0% for non-resident enterprises and 20.0% for non-resident
individuals, unless otherwise provided under the applicable double tax treaties between China and governments of other jurisdictions.
Significant uncertainties still exist with
respect to the interpretation of the New EIT Law and its implementing rules. Any increase in the enterprise income tax rate applicable
to us, the imposition of PRC income tax on our global income or the imposition of withholding tax on dividends declared by our
subsidiaries to us could have a material adverse effect on our business, financial condition and results of operations.
Regulations relating to Foreign Exchange in Certain
Onshore and Offshore Transactions
Pursuant to SAFE Circular 37, a PRC resident
must register with the local SAFE branch before such PRC resident contributes assets or equity interests in an Overseas SPV that
is established or controlled by the PRC resident for the purpose of conducting investment or financing, and following the initial
registration, the PRC resident is required to register with the local SAFE branch for any major change in respect of the Overseas
SPV, including, among other things, a change in the PRC resident shareholder of the Overseas SPV, the name of the Overseas SPV,
its term of operation, or any increase or reduction in the registered capital of the Overseas SPV, any share transfer or swap,
and any merger or division. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration
of Direct Investment released on February 13, 2015 by SAFE, local banks will examine and handle foreign exchange registration
for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular
37 from June 1, 2015. Any failure to comply with these registration procedures may result in penalties, including the imposition
of fines, criminal liability, and restrictions on the ability of the PRC subsidiary of the Overseas SPV to distribute dividends
to its overseas shareholders.
E. Taxation
Cayman Islands taxation
The Cayman Islands currently levies no
taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature
of inheritance tax or estate duty and there are no other taxes likely to be material to us levied by the Government of the Cayman
Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction
of, the Cayman Islands. Although it is unlikely that we will be subject to material taxes, there is no assurance that the Cayman
Islands government will not impose taxes in the future, which could be material to us. In addition, there may be tax consequences
if we are, for example, involved in any transfer or conveyance of immovable property in the Cayman Islands. The Cayman Islands
is not party to any double tax treaties that are applicable to any payments made to or by us and there are no exchange control
regulations or currency restrictions in the Cayman Islands.
Under existing Cayman Islands laws, payments
of interest and principal on the notes and dividends and capital in respect of our shares will not be subject to taxation in the
Cayman Islands and no withholding will be required on the payment of interest and principal or a dividend or capital to any holder
of the notes or our shares, as the case may be, nor will gains derived from the disposal of the notes or our shares be subject
to Cayman Islands income or corporation tax.
No stamp duty is payable in respect of
the issue or conversion of the notes. The notes themselves will be stamp able if they are executed in or brought into the Cayman
Islands.
People’s Republic of China
taxation
The PRC enterprise income tax is calculated
based on the taxable income determined under the PRC laws and accounting standards. Under the New EIT Law, all domestic and foreign-
invested companies in China are subject to a uniform enterprise income tax at the rate of 25% and dividends from a PRC subsidiary
to its foreign parent company are subject to a withholding tax at the rate of 10%, unless such foreign parent company’s
jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax, or the tax is otherwise
exempted or reduced pursuant to the PRC tax laws. Our subsidiaries in China are considered foreign investment entities (“FIEs”),
and certain of these subsidiaries are directly held by our subsidiaries in Hong Kong. According to the currently effective tax
treaty between China and Hong Kong, dividends payable by an FIE in China to a company in Hong Kong which directly holds at least
25% of the equity interests in the FIE will be subject to a withholding tax of 5%. In February 2009, SAT issued Circular
No. 81. According to Circular No. 81, in order to enjoy the preferential treatment on dividend withholding tax rates, an enterprise
must be the “beneficial owner” of the relevant dividend income, and no enterprise is entitled to enjoy preferential
treatment pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or
arrangement, the major purpose of which is to obtain such preferential tax treatment. The tax authority in charge has the right
to make adjustments to the applicable tax rates, if it determines that any taxpayer has enjoyed preferential treatment under tax
treaties as a result of such transaction or arrangement. In February 2018, SAT issued Circular No. 9 to provide guidance
on the criteria to determine whether an enterprise qualifies as the “beneficial owner” of the PRC sourced income for
the purpose of obtaining preferential treatment under tax treaties. Pursuant to Circular No. 9, the PRC tax authorities will review
and grant tax preferential treatment on a case-by-case basis and adopt the “substance over form” principle in the
review. Circular 9 specifies that a beneficial owner should generally carry out substantial business activities and own and have
control over the income, the assets or other rights generating the income. Therefore, an agent or a conduit company will not be
regarded as a beneficial owner of such income. Circular 9 provides that the tax authorities shall make the decision based on a
comprehensive consideration of all determining factors provided in Circular 9 rather than the status of a single determining factor.
Since the two circulars were issued, it has remained unclear how the PRC tax authorities will implement them in practice and to
what extent they will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in China to our
Hong Kong subsidiary. If the relevant tax authority determines that any of our Hong Kong subsidiaries is a conduit company and
does not qualify as the “beneficial owner” of the dividend income it receives from our PRC subsidiaries, the higher
10% withholding tax rate may apply to such dividends.
Under the New EIT Law, an enterprise established
outside of China with its “de facto management body” within China is considered a resident enterprise and will be
subject to enterprise income tax at the rate of 25% on its worldwide income. The “de facto management body” is defined
as the organizational body that effectively exercises overall management and control over production and business operations,
personnel, finance and accounting, and properties of the enterprise. It remains unclear how the PRC tax authorities will interpret
such a broad definition. If the PRC tax authorities determine that we should be classified as a resident enterprise, our global
income will be subject to income tax at a uniform rate of 25%, which may have a material adverse effect on our financial condition
and results of operations. Notwithstanding the foregoing provision, the New EIT Law also provides that, if a resident enterprise
directly invests in another resident enterprise, the dividends received by the investing resident enterprise from the invested
enterprise are exempted from income tax, subject to certain conditions. However, it remains unclear how the PRC tax authorities
will interpret the PRC tax resident treatment of an offshore company, like us, having indirect ownership interests in PRC enterprises
through intermediary holding vehicles.
If we were treated as a PRC resident enterprise,
any interest payable to non-resident enterprise holders of the notes and dividends payable to non-resident enterprise holders
of our ordinary shares or ADSs may be treated as income derived from sources within PRC and therefore subject to a 10% withholding
tax (or 20% in the case of non-resident individual holders) unless an applicable income tax treaty provides otherwise. In addition,
capital gains realized by non-resident enterprise holders upon the disposition of the notes, our ordinary shares or ADSs may be
treated as income derived from sources within China and therefore subject to 10% income tax (or 20% in the case of non-resident
individual holders) unless an applicable income tax treaty provides otherwise.
U.S. federal income taxation
The following discussion describes the
material U.S. federal income tax consequences of the ownership and disposition of our ADSs or ordinary shares under currently
applicable law. This discussion does not address any U.S. federal consequences other than U.S. federal income tax consequences
(such as the gift or estate tax). This discussion also does not address any state, local or non-U.S. tax consequences of an investment
in our ordinary shares or ADSs. This discussion applies to you only if you are a U.S. holder (as defined below) and beneficially
own our ordinary shares or ADSs as capital assets for U.S. federal income tax purposes. This discussion does not apply to you
if you are a member of a class of holders subject to special rules, such as:
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dealers
in securities or currencies;
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traders
in securities that elect to use a mark-to-market method of accounting for securities
holdings;
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banks
or other financial institutions;
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tax-exempt
organizations;
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partnerships
and other entities treated as partnerships for U.S. federal income tax purposes or persons
holding ordinary shares or ADSs through any such entities;
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real
estate investment trusts;
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regulated
investment companies;
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persons
that hold ordinary shares or ADSs as part of a hedge, straddle, constructive sale, conversion
transaction or other integrated investment;
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U.S.
holders (as defined below) whose functional currency for tax purposes is not the U.S.
dollar;
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certain
former citizens or long-term residents of the United States;
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persons subject
to special tax accounting rules as a result of any item of gross income with respect
to our ordinary shares or ADSs being taken into account in an “applicable financial
statement” as defined in Section 451(b) of the Code (as defined below);
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persons
liable for alternative minimum tax; or
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persons
who actually or constructively own 10.0% or more of the total combined voting power of
all classes of our shares (including ADSs) entitled to vote or 10.0% or more of the total
value of our shares (including ADSs.
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This discussion is based on the U.S. Internal
Revenue Code of 1986, as amended, or the Code, its legislative history, existing and proposed regulations promulgated thereunder,
published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive
basis. In addition, this discussion relies in part on our assumptions regarding the projected value of our shares and the nature
of our business. Finally, this discussion is based in part upon the representations of the depositary and the assumption that
each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.
You should consult your own tax advisor
concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of our ordinary
shares or ADSs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income
tax discussion below, you are a “U.S. holder” if you beneficially own our ordinary shares or ADSs and are:
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a
citizen or resident of the United States for U.S. federal income tax purposes;
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a
corporation, or other entity taxable as a corporation, that was created or organized
in or under the laws of the United States or any political subdivision of the United
States;
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an
estate the income of which is subject to U.S. federal income tax regardless of its source;
or
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a
trust, if (1) a court within the United States is able to exercise primary supervision
over its administration and one or more U.S. persons have the authority to control all
substantial decisions of the trust, or (2) the trust has a valid election in effect to
be treated as a U.S. person.
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If a partnership or other flow-through
entity holds ordinary shares or ADSs, the tax treatment of a partner or other owner will generally depend on the status of the
partner or other owner and the activities of the partnership or other flow-through entity. A holder of ordinary shares or ADSs
that is a partnership or a partner in such partnership should consult its own tax advisor regarding the U.S. federal income tax
consequences of the purchase, ownership and disposition of the ordinary shares or ADSs.
ADSs.
If you hold ADSs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying
ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be
subject to U.S. federal income tax.
Dividends
on Ordinary Shares or ADSs.
Subject to the passive foreign investment company, or PFIC, discussion below, the gross
amount of any distributions (including amounts withheld to reflect PRC withholding taxes, if any) you receive on your ordinary
shares or ADSs are generally treated as dividend income if the distributions are made from our current or accumulated earnings
and profits, calculated according to U.S. federal income tax principles. Such income (including any withheld taxes) will be includable
in your gross income on the day actually or constructively received by you, in the case of ordinary shares, or by the depositary
in the case of ADSs. Distributions in excess of current and accumulated earnings and profits will be treated first as a non-taxable
return of capital to the extent of your basis in the ordinary shares or ADSs and thereafter as a capital gain. If you are a non-corporate
U.S. holder, including an individual, and have held your ADSs for a sufficient period of time, dividend distributions paid on
our ADSs (but not our ordinary shares) will generally constitute qualified dividend income taxed at a preferential rate as long
as our ADSs continue to be readily tradable on the New York Stock Exchange. Based on existing guidance, it is not clear whether
a dividend on an ordinary share will be treated as a qualified dividend, because the ordinary shares are not themselves listed
on a U.S. exchange. If, however, we are treated as a PRC “resident enterprise” under PRC law, we may be eligible for
the benefits of the income tax treaty between the United States and the PRC, in which case dividends paid on our ordinary shares
and ADSs would both be treated as qualified dividends (subject to the relevant holding period requirements). You should consult
your own tax advisor as to the rate of tax that will apply to you with respect to dividend distributions, if any, you receive
from us.
We do not intend to calculate our earnings
and profits according to U.S. tax accounting principles. Accordingly, notwithstanding the discussion in the preceding paragraph,
distributions on our ordinary shares or ADSs, if any, will generally be taxed to you as dividend distributions for U.S. tax purposes.
If you are a corporation, you will not be entitled to claim a dividends-received deduction with respect to distributions you receive
from us. In the event we are treated as a PRC “resident enterprise” under PRC law, we may be required to withhold
PRC income tax on dividends paid to you under the New EIT Law. See “Item 3.D. Key Information—Risk Factors—Risks
related to our ADSs, ordinary shares and notes—We may be required to withhold PRC income tax on any dividend we pay you,
and any gain you realize on the transfer of our ordinary shares and/or ADSs may also be subject to PRC withholding tax.”
Subject to generally applicable limitations, you may be eligible to claim a deduction or a foreign tax credit for PRC tax withheld
at the appropriate rate. Dividends generally will be categorized as “passive category income” or, in the case of some
U.S. holders, as “general category income” for foreign tax credit limitation purposes. The rules governing the use
of foreign tax credits are very complex, and you are urged to consult your own tax advisor as to your ability, and the various
limitations on your ability, to claim foreign tax credits in connection with the receipt of dividends.
Sales
and Other Dispositions of Ordinary Shares or ADSs.
Subject to the PFIC discussion below, when you sell or otherwise
dispose of ordinary shares or ADSs in a taxable transaction, you will generally recognize capital gain or loss in an amount equal
to the difference between the amount realized on the sale or other taxable disposition and your adjusted tax basis in the ordinary
shares or ADSs, both as determined in U.S. dollars. Any gain or loss you recognize will be long-term capital gain or loss if you
have held the ordinary shares or ADSs for more than one year at the time of disposition. If you are an individual, long-term capital
gain will be taxed at preferential rates. Your ability to deduct capital losses will be subject to various limitations.
The gain or loss you recognize on a sale
or disposition of our ordinary shares or ADSs generally will be treated as arising from sources within the United States for foreign
tax credit limitation purposes. However, if gains from the disposition of ordinary shares or ADSs are taxed under the New EIT
Law, see “Item 3.D. Key Information—Risk Factors—Risks related to our ADSs, ordinary shares and notes—We
may be required to withhold PRC income tax on any dividend we pay you, and any gain you realize on the transfer of our ordinary
shares and/or ADSs may also be subject to PRC withholding tax,” the income tax treaty between the United States and the
PRC may apply, in which case you may elect to treat such gains as arising from sources within China for foreign tax credit limitation
purposes. You are urged to consult your own tax advisors regarding the tax consequences to you under your particular circumstances
if any PRC withholding tax is imposed on the disposition of ordinary shares or ADSs, including the availability of the foreign
tax credit.
Status
as a PFIC.
If we are a PFIC in any taxable year in which you hold ordinary shares or ADSs, you will generally be subject
to additional taxes and interest charges on certain “excess distributions” we make and on any gain realized on the
disposition or deemed disposition of your ordinary shares or ADSs, regardless of whether we continue to be a PFIC in the year
in which you receive an “excess distribution” or dispose of or are deemed to dispose of your ordinary shares or ADSs.
Distributions in respect of your ordinary shares or ADSs during a taxable year will generally constitute “excess distributions”
if, in the aggregate, they exceed 125% of the average amount of distributions in respect of your ordinary shares or ADSs over
the three preceding taxable years or, if shorter, the portion of your holding period before such taxable year.
To compute the tax on excess distributions
or any gain, (1) the excess distribution or the gain will be allocated ratably to each day in your holding period, (2) the amount
allocated to the current year and any tax year before we first became a PFIC will be taxed as ordinary income in the current year,
(3) the amount allocated to other taxable years will be taxable at the highest applicable marginal rate in effect for that year,
and (4) an interest charge at the rate for underpayment of taxes for any period described under (3) above will be imposed with
respect to any portion of the excess distribution or gain that is allocated to such period. In addition, if we are a PFIC or were
in the year prior to a distribution, no distribution that you receive from us will qualify for taxation at the preferential rate
discussed in the “—U.S. Federal Income Taxation—Dividends on Ordinary Shares or ADSs” section above.
We will be classified as a PFIC in any
taxable year if, after the application of certain look-through rules, either: (1) 75.0% or more of our gross income for the taxable
year is passive income (such as certain dividends, interest, rents or royalties), or (2) the average percentage value (determined
on a quarterly basis) of our gross assets during the taxable year that produce passive income or are held for the production of
passive income is at least 50.0% of the value of our total assets. For purposes of the asset test, any cash, cash equivalents,
cash invested in short-term, interest bearing, debt instruments, or bank deposits, and any other current asset that is readily
convertible into cash, will generally count as a passive asset.
We operate an active online real estate
Internet portal in China and do not believe we were a PFIC for our 2018 taxable year. We have no current intention to change the
general manner in which we organize or conduct our business in later taxable years, not taking into account transactions outside
of the ordinary course of business. Our expectations are based on assumptions as to our projections of the value of our outstanding
shares and of the other cash that we will hold and generate in the ordinary course of our business. We have not conducted a separate
appraisal of the values of our assets for this purpose. Although the law in this regard is not entirely clear, we treat our consolidated
controlled entities as being owned by us for U.S. federal income tax purposes. Despite our expectations, there can be no assurance
that we will not be a PFIC in the current or any future taxable years, as PFIC status is re-tested each year and depends on the
actual facts in such year. We could be a PFIC, for example, if our market capitalization (i.e., our share price multiplied by
the total number of our outstanding ordinary shares) at any time in the future is lower than projected, if it is determined that
we are not the owner of our consolidated controlled entities for U.S. federal income tax purposes, or if our business and assets
evolve in ways that are different from what we currently anticipate. In addition, though we believe that our assets and the income
derived from our assets do not generally constitute passive assets and income under the PFIC rules, there is no assurance that
the Internal Revenue Service, or IRS, will agree with us.
If we are a PFIC in any year, as a U.S.
holder, you will generally be required to file a return on IRS Form 8621 regarding your ordinary shares or ADSs on an annual basis.
You should consult your own tax adviser regarding reporting requirements with regard to your ordinary shares or ADSs.
If we are a PFIC in any year, so long as
the ADSs are and remain “marketable,” you will be able to avoid the excess distribution rules described above by making
a timely so-called “mark-to-market” election with respect to such U.S. holder’s ADSs. The ADSs will be “marketable”
as long as they remain regularly traded on a national securities exchange, such as The New York Stock Exchange. If you make this
election in a timely fashion, you will generally recognize as ordinary income or ordinary loss (limited to the amount of prior
ordinary gain) the difference between the adjusted tax basis of your ADSs on the first day of any taxable year and their value
on the last day of that taxable year. Your basis in the ADSs will be adjusted to reflect any such income or loss. A mark-to-market
election will be effective for the taxable year for which the election is made and for all subsequent taxable years, unless the
ADSs are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. However, because
a mark-to-market election cannot be made for any lower-tier PFICs that we may own, you may continue to be subject to the PFIC
rules with respect to any indirect interest in any investments held by us that are treated as an equity interest in a PFIC for
U.S. federal income tax purposes, including our subsidiaries. In addition, because our ordinary shares are not regularly traded
on a national securities exchange, you will not be able to make a mark-to-market election with respect to any ordinary shares
held by such U.S. holder. You should consult your own tax advisors with respect to making a mark-to-market election.
In addition, if we are a PFIC in any year,
you might be able to avoid the excess distribution rules described above by making a timely so-called “qualified electing
fund,” or QEF, election to be taxed currently on your pro rata portion of our income and gain. However, we do not intend
to provide the information that would be necessary for you to make a QEF election. Accordingly, you will not be able to make or
maintain a QEF election with respect to your ADSs or ordinary shares.
You should consult with your tax advisors
regarding the U.S. federal income tax consequences of holding ADSs or ordinary shares if we are considered to be a PFIC in any
taxable year as well as your eligibility for a “mark-to-market” election and whether making such an election would
be advisable to you in your particular circumstances.
Additional Tax on Net Investment Income
If you are an individual, estate or trust
whose income exceeds certain thresholds, you will be subject to a 3.8% Medicare contribution tax on net investment income, including,
among other things, dividends on, and capital gains from, the sale or other taxable disposition of, your ordinary shares or ADSs,
subject to certain limitations and exceptions.
U.S. Information Reporting and Backup Withholding
Rules
In general, dividend payments with respect
to the ordinary shares or ADSs and the proceeds received on the sale or other disposition of those ordinary shares or ADSs may
be subject to information reporting to the IRS, and to backup withholding (currently imposed at a rate of 24.0%). Backup withholding
will not apply, however, if you (1) are a corporation or come within certain other exempt categories and, when required, can demonstrate
that fact or (2) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise
comply with the applicable backup withholding rules. To establish your status as an exempt person, you will generally be required
to provide certification on IRS Form W-9. Any amounts withheld from payments to you under the backup withholding rules will generally
be allowed as a refund or a credit against your U.S. federal income tax liability, provided that you timely furnish the required
information to the IRS.
You may be required to report information
with respect to your ordinary shares or ADSs not held through a custodial account with a U.S. financial institution to the IRS.
In general, if you hold specified “foreign financial assets” (which generally would include ordinary shares or ADSs)
with an aggregate value exceeding $50,000, you will be required to report information about those assets on IRS Form 8938, which
must be attached to your annual income tax return. Higher asset thresholds apply if you file a joint tax return or reside abroad.
If you fail to report required information, you could become subject to substantial penalties. You should consult your own tax
advisor regarding your obligation to file IRS Form 8938.
You should consult your own tax advisor
regarding the application of the U.S. federal income tax laws to their particular situations as well as any additional tax consequences
resulting from purchasing, holding or disposing of ordinary shares or ADSs, including the applicability and effect of the tax
laws of any state, local or foreign jurisdiction and any estate, gift, and inheritance laws.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on display
We have previously filed with the SEC our
registration statement on Form F-1 (File Number 333-169170), as amended, and a prospectus under the Securities Act with respect
to our ordinary shares represented by our ADSs, and a related registration statement on Form F-6 (File Number 333-169176) with
respect to our ADSs, as amended. We have also filed with the SEC registration statements on Form S-8 (File Numbers 333-173157
and 333-207182) with respect to our ADSs, as amended. In addition, we have filed with the SEC an automatic shelf registration
statement on Form F-3 (File Number 333-208628), as amended, and a prospectus under the Securities Act with respect to our ordinary
shares and ADSs.
We are subject to the periodic reporting
and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information
with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year
for fiscal years ending on or after December 15, 2011. Copies of reports and other information, when so filed, may be inspected
without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at
www.sec.gov
that contains reports, proxy and
information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR
system.
As a foreign private issuer, we are exempt
from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive
officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained
in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial
statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
We
will
furnish JPMorgan Chase Bank, N.A., the depositary, with our annual reports, which include a review of operations and annual audited
consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of
America (“U.S. GAAP” or “GAAP”), and all notices of shareholders’ meeting and other reports and
communications that are made generally available to our shareholders. The depositary makes such notices, reports and communications
available to holders of ADSs and, upon our request, mails to all record holders of ADSs the information contained in any notice
of a shareholders’ meeting received by the depositary from us.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure is interest
rate risk associated with short and long-term borrowings bearing variable interest rates. We are also exposed to foreign currency
risk, which can adversely affect our operating profits.
The following discussion should be read
in conjunction with the notes to our audited consolidated financial statements contained in this annual report, which provide
further information on our debt and derivative instruments contained in this annual report.
Liquidity Risk
The principal method we use to manage liquidity
risk arising from liabilities is maintaining an adequate level of cash and cash equivalents with different banks. In 2016, 2017
and 2018, we monitored our liquidity risks by considering the maturity of our financial assets and projected cash flows from operations.
Our objective is to maintain a balance between a continuity of funding and flexibility through settlement from customers and subsequent
payment to vendors to meet our working capital requirements.
Interest Rate Risk
Our earnings are affected by changes in
interest rates due to the impact of such changes on interest income and expense from interest-bearing financial assets and liabilities.
Our interest-bearing financial assets and liabilities are predominately denominated in Renminbi and U.S. dollars. Our financial
assets consist primarily of cash deposits with fixed interest rates and receivables.
Foreign Currency Risk
Substantially all of our revenues, cash
and cash equivalent assets, costs and expenses, are denominated in Renminbi, and the functional currency of our principal operating
subsidiaries and consolidated controlled entities is the Renminbi. On the other hand, a portion of our expenditures are denominated
in foreign currencies, primarily the U.S. dollar, and we use the U.S. dollar as our functional and reporting currency. The ADSs
are also traded in U.S. dollars. As a result, the value of your investment in our ADSs will be affected by fluctuations in exchange
rates, particularly appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar and other foreign currencies,
without giving effect to any underlying change in our business or results of operations. For example, if the Renminbi had weakened
5.0% against the U.S. dollar with all other variables held constant, our loss for 2016 would have been US$4.1 million lower, our
profit for 2017 would have been US$0.8 million lower, and our loss for 2018 would have been US$2.8 million lower. See “Item
3.D. Key Information—Risk Factors—Risks related to doing business in China—Fluctuations in the exchange rates
of the Renminbi could materially and adversely affect the value of our shares or ADSs and result in foreign currency exchange
losses.”
From time to time we manage to convert
Renminbi into foreign currencies for purchases of equipment from overseas suppliers and for certain expenses. The Renminbi is
not freely convertible into foreign currencies. In July 2005, the PRC government discontinued pegging the Renminbi to the
U.S. dollar. However, the PBOC, regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations
in the exchange rate. Nevertheless, under China’s current exchange rate regime, the Renminbi may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions to reduce
our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability
and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all.
In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert
Renminbi into other currencies.
Credit Risk
Assets that
potentially subject us to significant concentration of credit risk primarily consist of cash and cash equivalents, restricted
cash, fixed-rate time deposits classified as short-term investments, accounts receivable, funds receivable, loans receivable and
commitment deposits. As of December 31, 2018, we had US$
463.6 million in cash and cash equivalents, restricted cash and short-term investments, 96.2% and 3.8% of which were held by financial institutions in the PRC and financial institutions
outside of the PRC, respectively. Under PRC law, it is generally required that a commercial bank in the PRC that holds third-party
cash deposits protect the depositors’ rights and interests over their deposited money; PRC banks are subject to a series
of risk control regulatory standards; and PRC bank regulatory authorities are empowered to take over the operation and management
of any PRC bank that faces a material credit crisis. In the event of bankruptcy of one of the financial institutions in which
we have deposits or investments, it may be unlikely to claim our deposits or investments back in full. We selected reputable financial
institutions with high credit ratings to deposit its assets. We regularly monitor the ratings of the financial institutions in
case of any defaults. There has been no recent history of default in relation to these financial institutions.
Accounts receivable are typically unsecured
and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable is mitigated by credit
evaluations we perform on our customers and our ongoing monitoring of outstanding balances. We regularly review the creditworthiness
of our customers and require collateral from our customers in certain circumstances when accounts receivables become long overdue.
Funds receivable represent amounts due
from third-party payment service providers. We carefully consider and monitor the credit worthiness of the third-party payment
service providers to mitigate any risks associated with funds receivable.
We are also exposed to default risk on
our loans receivable. We assess the allowance for credit loss related to loans receivable on a quarterly basis, either on an individual
or collective basis. As of December 31, 2018, no single borrower comprised a significant portion of our loan portfolio.
We regularly review the creditworthiness
of real estate developers and require collateral from real estate developers in certain circumstances when commitment deposits
become overdue.
ITEM 12. DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
On March 18, 2014, we announced the
change of the ratio of our American Depositary Receipts representing Class A ordinary shares from one ADS for one Class A ordinary
shares to five ADSs for one Class A ordinary share. The record date for the ratio change was March 28, 2014. For our ADS
holders, this ratio change had the same effect as a five-for-one ADS split. There was no change to our Class A ordinary shares
or Class B ordinary shares. The effect of the ratio change on the ADS trading price on New York Stock Exchange occurred on April 7,
2014.
JPMorgan Chase Bank, N.A., our depositary,
may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances
in respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared
by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited
securities, and each person surrendering ADSs for withdrawal of deposited securities in any manner permitted by the deposit agreement
or whose ADRs are cancelled or reduced for any other reason, $5.00 for each 100 ADSs (or any portion thereof) issued, delivered,
reduced, cancelled or surrendered, the case may be. The depositary may sell (by public or private sale) sufficient securities
and property received in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge.
The following additional charges shall
be incurred by the ADR holders, by any party depositing or withdrawing ordinary shares or by any party surrendering ADSs or to
whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an
exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:
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·
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a
fee of $1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
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|
·
|
a
fee of up to $0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
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|
·
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a
fee of up to $0.05 per ADS per calendar year (or portion thereof) for services performed
by the depositary in administering the ADRs (which fee may be charged on a periodic basis
during each calendar year and shall be assessed against holders of ADRs as of the record
date or record dates set by the depositary during each calendar year and shall be payable
in the manner described in the next succeeding provision);
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·
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reimbursement
of such fees, charges and expenses as are incurred by the depositary and/or any of the
depositary’s agents (including, without limitation, the custodian and expenses
incurred on behalf of holders in connection with compliance with foreign exchange control
regulations or any law or regulation relating to foreign investment) in connection with
the servicing of the ordinary shares or other deposited securities, the delivery of deposited
securities or otherwise in connection with the depositary’s or its custodian’s
compliance with applicable law, rule or regulation (which charge shall be assessed on
a proportionate basis against holders as of the record date or dates set by the depositary
and shall be payable at the sole discretion of the depositary by billing such holders
or by deducting such charge from one or more cash dividends or other cash distributions);
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·
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a
fee for the distribution of securities (or the sale of securities in connection with
a distribution), such fee being in an amount equal to the fee for the execution and delivery
of ADSs which would have been charged as a result of the deposit of such securities (treating
all such securities as if they were ordinary shares) but which securities or the net
cash proceeds from the sale thereof are instead distributed by the depositary to those
holders entitled thereto;
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|
·
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stock
transfer or other taxes and other governmental charges;
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|
·
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cable,
telex and facsimile transmission and delivery charges incurred at your request in connection
with the deposit or delivery of ordinary shares;
|
|
·
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transfer
or registration fees for the registration of transfer of deposited securities on any
applicable register in connection with the deposit or withdrawal of deposited securities;
and
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|
·
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expenses
of the depositary in connection with the conversion of foreign currency into U.S. dollars.
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We will pay all other charges and expenses
of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and
the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Our depositary has agreed to reimburse
us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations
expenses and exchange application and listing fees. Neither the depositary nor we can determine the exact amount to be made available
to us because (1) the number of ADSs that will be issued and outstanding, (2) the level of fees to be charged to holders of ADSs,
and (3) our reimbursable expenses related to the ADR program are not known at this time. The depositary collects its fees for
issuance and cancellation of ADSs directly from investors depositing ordinary shares or surrendering ADSs for the purpose of withdrawal
or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those
fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect
its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging
the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide services to any
holder until the fees and expenses owing by such holder for those services or otherwise are paid.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying
notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The following table provides a reconciliation of cash, cash equivalents and restricted
cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated
statements of cash flows.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
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1.
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ORGANIZATION AND BASIS OF PRESENTATION
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The Company was incorporated
on June 18, 1999 as Fly High Holdings Limited under the laws of the British Virgin Islands (“BVI”). In June 2004,
the Company changed its name to SouFun Holdings Limited and its corporate domicile to the Cayman Islands and became a Cayman Islands
company with limited liability under the Companies Law of the Cayman Islands. In 2016, the Company changed its name to Fang Holdings
Limited (formerly known as SouFun Holdings Limited). The accompanying consolidated financial statements include the financial
statements of (i) Fang Holdings Limited (the “Company”), (ii) its subsidiaries located outside of the People’s
Republic of China (the “PRC”) (the “non-PRC subsidiaries”), (iii) wholly foreign owned entities in the
PRC (the “WOFEs”) and their subsidiaries, (iv) entities controlled through contractual arrangements (the “PRC
Domestic Entities”) and (v) the PRC Domestic Entities’ subsidiaries. The Company, and where appropriate, the term
“Company” also refers to its non-PRC subsidiaries, WOFEs, PRC Domestic Entities and the PRC Domestic Entities’
subsidiaries as a whole.
The Company is principally engaged
in the provision of marketing services, listing services, financial services, E-commerce services and value-added services to
the real estate and home furnishing industries in the PRC. Details of the Company’s major subsidiaries, PRC Domestic Entities
and the PRC Domestic Entities’ subsidiaries as of December 31, 2018 were as follows:
Company
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Date of
Establishment
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|
Place of
Establishment
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Principal Activities
|
|
|
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|
|
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Beijing SouFun Internet Information Service
Co., Ltd. ("Beijing Internet")
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December 17, 2003
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PRC
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Provision of marketing services and listing services
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|
|
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|
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SouFun Media Technology (Beijing) Co.,
Ltd. ("SouFun Media")
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|
November 28, 2002
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PRC
|
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Provision of technology and information consultancy services
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|
|
|
|
|
|
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Beijing SouFun Network Technology Co.,
Ltd. ("SouFun Network")
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|
March 16, 2006
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PRC
|
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Provision of technology and information consultancy services
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|
|
|
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|
|
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Beijing SouFun Science and Technology Development
Co., Ltd. ("Beijing Technology")
|
|
March 14, 2006
|
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PRC
|
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Provision of marketing services and listing services
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|
|
|
|
|
|
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Beijing Century Jia Tian Xia Technology
Development Co., Ltd. ("Beijing JTX Technology")
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|
December 21, 2006
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|
PRC
|
|
Provision of marketing services and listing services
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|
|
|
|
|
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Beijing Zhong Zhi Shi Zheng Information
Technology Co. Ltd., ("Beijing Zhongzhi")
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|
June 5, 2007
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|
PRC
|
|
Provision of technology and information consultancy services
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|
|
|
|
|
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Xinjiang Zhong Zhi Shu Ju Information Technology
Co., Ltd. (“Xinjiang Zhong Zhi Shu Ju”)
|
|
August 10, 2017
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PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
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Beijing Hong An Tu Sheng Network Technology
Co., Ltd. ("Beijing Hong An")
|
|
November 15, 2010
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Beijing Tuo Shi Huan Yu Network Technology
Co., Ltd. ("Beijing TuoShi")
|
|
November 19, 2010
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Beijing Yi Ran Ju Ke Technology Development
Co., Ltd. ("Beijing Yi Ran Ju Ke")
|
|
July 8, 2011
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|
PRC
|
|
Provision of marketing services, rental services and real estate agency services
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|
|
|
|
|
|
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Beijing Hua Ju Tian Xia Network Technology
Co., Ltd. ("Beijing Hua Ju Tian Xia")
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July 25, 2012
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PRC
|
|
Provision of technology and information consultancy services
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION (continued)
|
Company
|
|
Date of
Establishment
|
|
Place of
Establishment
|
|
Principal Activities
|
|
|
|
|
|
|
|
Beijing Zhong Zhi Hong Yuan Data Information Technology Co., Ltd. (“Beijing Zhong
Zhi Hong Yuan”)
|
|
June 11, 2018
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Beijing Li Man Wan Jia Network Technology
Co., Ltd. ("Beijing Li Man Wan Jia")
|
|
July 25, 2012
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Shanghai Jia Biao Tang Real Estate Broking Co.,
Ltd. ("Shanghai JBT Real Estate Broking")
|
|
July 7, 2005
|
|
PRC
|
|
Provision of real estate agency services, marketing services and listing services
|
|
|
|
|
|
|
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Beijing Zhong Zhi Xun Bo Information Technology
Co. Ltd., ("Zhongzhi Xun Bo")
|
|
January 6, 2012
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Tianjin SouFun Network Technology Co.,
Ltd.("Tianjin SouFun Network")
|
|
March 8, 2012
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Tianjin Jia Tian Xia Network Technology
Co., Ltd. (“Jia Tian Xia Network Technology”)
|
|
April 15, 2014
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Hangzhou SouFun Network Technology Co.,
Ltd., ("Hangzhou SouFun Network")
|
|
August 27, 2013
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Wuhan SouFun Yi Ran Ju Ke Real Estate Agents
Co., Ltd. ("Wuhan Yi Ran Ju Ke")
|
|
December 13, 2013
|
|
PRC
|
|
Provision of real estate agency services and real estate information services
|
|
|
|
|
|
|
|
Hangzhou Ji Ju Real Estate Agents Co.,
Ltd. ("Hanzhou Ji Ju")
|
|
December 23, 2013
|
|
PRC
|
|
Provision of real estate agency services and real estate information services
|
|
|
|
|
|
|
|
Fang Tian Xia Financial Information Service
(Beijing) Ltd. (previously known as Beijing Tianxia Dai Information service Co., Ltd.)
|
|
April 9, 2014
|
|
PRC
|
|
Provision of finance information services
|
|
|
|
|
|
|
|
Shanghai SouFun Microfinance Co.,Ltd.("Shanghai
SouFun Microfinance")
|
|
January 19, 2015
|
|
PRC
|
|
Provision of Microfinance services
|
|
|
|
|
|
|
|
Beihai Tian Xia Dai Microfinance Co., Ltd.("Beihai
Tian Xia Dai Microfinance")
|
|
September 12, 2014
|
|
PRC
|
|
Provision of microfinance services
|
|
|
|
|
|
|
|
Shanghai BaoAn Enterprise Co., Ltd. (“Shanghai
BaoAn Enterprise”)
|
|
March 31, 2013
|
|
PRC
|
|
Lease, resale and management of property
|
|
|
|
|
|
|
|
Shanghai BaoAn Hotel Co., Ltd. (“Shanghai
BaoAn Hotel”)
|
|
March 31, 2013
|
|
PRC
|
|
Operation and management of hotel, restaurant and other catering business
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION (continued)
|
Company
|
|
Date of
Establishment
|
|
Place of
Establishment
|
|
Principal Activities
|
|
|
|
|
|
|
|
Beijing Fang Tian Xia Hong An Network
Technology Ltd. (previously known as Beijing Fang Tian Xia Decorative Engineering Co., Ltd.)
|
|
October 15, 2014
|
|
PRC
|
|
Provision of decorative engineering services
|
|
|
|
|
|
|
|
Chongqing Tian Xia Dai Microfinance Co.,
Ltd ("Chongqing Tian Xia Dai Microfinance")
|
|
December 11, 2014
|
|
PRC
|
|
Provision of microfinance services
|
|
|
|
|
|
|
|
Tianjin Jia Tian Xia Microfinance Co. ,Ltd.
("Tianjin Jia Tian Xia Microfinance")
|
|
December 5, 2014
|
|
PRC
|
|
Provision of microfinance services
|
|
|
|
|
|
|
|
Beijing Fang Chao Real Estate Broking Co.,
Ltd. (“Beijing Fang Chao”)
|
|
March 6, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
|
|
|
|
|
|
|
Guangzhou Fang Tian Xia Real Estate Broking
Co., Ltd. (“Guangzhou Fang Tian Xia”)
|
|
March 9, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
|
|
|
|
|
|
|
Beijing Cun Fang Real Estate Broking Co.,
Ltd. (“Beijing Cun Fang”)
|
|
April 7, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
|
|
|
|
|
|
|
Shenzhen Fang Tian Xia Real Estate Broking
Co., Ltd. (“Shenzhen Fang Tian Xia”)
|
|
April 13, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
|
|
|
|
|
|
|
Tianjin Fang Tian Xia Real Estate Broking
Co., Ltd. (“Tianjin Fang Tian Xia”)
|
|
May 21, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
|
|
|
|
|
|
|
Nanjing Cun Fang Real Estate Broking Co.,
Ltd. (“Nanjing Cun Fang”)
|
|
April 30, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION (continued)
|
Company
|
|
Date of
Establishment
|
|
Place of
Establishment
|
|
Principal Activities
|
|
|
|
|
|
|
|
Nanchang Cun Fang
Real Estate Broking Co., Ltd. (“Nanchang Cun Fang”)
|
|
June 3, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
|
|
|
|
|
|
|
Chongqing Fang Tian
Xia Real Estate Broking Co., Ltd. (“Chongqing Fang Tian Xia”)
|
|
May 27, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
|
|
|
|
|
|
|
Shanghai SouFun Fang
Tian Xia Broking Co., Ltd. (“Shanghai Fang Tian Xia”)
|
|
April 16, 2015
|
|
PRC
|
|
Provision of real estate agency services
|
|
|
|
|
|
|
|
Beijing Li Tian Rong
Ze Yi Jia Technology Development Co., Ltd. (“Beijing Li Tian Rong Ze”)
|
|
September 4, 2015
|
|
PRC
|
|
Provision of technology and information consultancy services
|
|
|
|
|
|
|
|
Hong Kong Property
Network Limited ("HK Property")
|
|
May 19, 2011
|
|
Hong Kong
|
|
Investment holding
|
|
|
|
|
|
|
|
Best Fang Holdings LLC
|
|
Aug 30, 2017
|
|
United States of America
|
|
Investment holding
|
|
|
|
|
|
|
|
Best Work Holdings
(New York) LLC ("Best Work")
|
|
March 14, 2011
|
|
United States of America
|
|
Investment holding
|
|
|
|
|
|
|
|
China Index Holdings
Limited
|
|
July 26, 2018
|
|
Cayman
|
|
Investment holding
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION (continued)
|
In order to comply with PRC
laws and regulations which restrict foreign control of companies involved in internet content provision (“ICP”) and
advertising businesses, the Company operates its websites and provides online marketing advertising services in the PRC through
its PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries.
The equity interests of
the PRC Domestic Entities are legally held directly by Vincent Tianquan Mo, executive chairman of the board of directors, Yu
Huang, chief executive officer of China Index Holdings Limited (“CIH”), a wholly owned subsidiary of the Company, or Richard
Jiangong Dai, a director of the board who resigned from the board effective February 25, 2016. The effective control of the
PRC Domestic Entities is held by the Company through three of its WOFEs, namely, SouFun Network, Beijing Zhongzhi and Jia
Tian Xia Network Technology as a result of a series of contractual arrangements and their supplementary agreements signed
with each of the PRC Domestic Entities which arrangements and agreements contain similar provisions regarding obligations and
rights of the Company and the PRC Domestic Entities (hereinafter, together the “Contractual Agreements”). As a
result of the Contractual Agreements, the Company maintains the ability to approve decisions made by the PRC Domestic
Entities, is entitled to substantially all of the economic benefits from the PRC Domestic Entities and is obligated to absorb
all of the PRC Domestic Entities’ expected losses.
Therefore, the Company consolidates
the PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries in accordance with the United States of America Securities
and Exchange Commission (“SEC”) Regulation S-X Article 3A-02 and Accounting Standards Codification (“ASC”)
810,
Consolidation
(“ASC 810”).
The following is a summary of
the Contractual Agreements:
Exclusive Technical Consultancy
and Service Agreements
The WOFEs provide the following
exclusive technical services to the PRC Domestic Entities: (i) access to information assembled by the WOFEs concerning the
real estate industry and companies in this sector to enable the PRC Domestic Entities to target potential customers and provide
research services; and (ii) technical information technology system support to enable the PRC Domestic Entities to service
the needs of its customers. The agreements can be extended indefinitely at the sole discretion of the WOFEs.
Operating Agreements
Pursuant to the operating agreements,
each PRC Domestic Entity and its legal shareholders have agreed not to enter into any transaction that would substantially affect
the assets, rights, obligations or operations of the PRC Domestic Entity without prior written consent from the WOFEs. In addition,
the PRC Domestic Entities will appoint or remove their directors and executive officers based on instruction from the WOFEs. The
agreements can be extended indefinitely at the sole discretion of the WOFEs.
Equity Pledge Agreements,
Shareholders Proxy Agreements and Exclusive Call Option Agreements
In order to secure the payment
obligations of each PRC Domestic Entity under the exclusive technical consultancy and service agreements, the legal shareholders
have pledged their entire respective ownership interests in each Domestic PRC Entity to the WOFEs. The legal shareholders shall
not transfer the pledged ownership interests without the prior written consent from the WOFEs. The WOFEs are entitled to dividends
and funds obtained through conversion, auction or sale of the ownership interests that the legal shareholders pledged to the WOFEs.
The agreements can be extended at the sole discretion of the WOFEs.
The legal shareholders irrevocably
appoint the WOFEs to act as proxy for the legal shareholders to exercise their respective rights as shareholders of the PRC Domestic
Entities to attend shareholders' meetings and cast votes. The agreements will remain valid until terminated upon written consent
by the WOFEs, the PRC Domestic Entities and their legal shareholders or by their successors.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION (continued)
|
The legal shareholders granted
the Company or any third party designated by the Company the exclusive right to acquire from the legal shareholders the whole
or part of the respective equity interests in each PRC Domestic Entity at a price equivalent to the historical cost when permitted
by applicable PRC laws and regulations. The legal shareholders shall not sell, transfer or dispose of the equity interests in
the PRC Domestic Entities without the prior written consent of the Company or any third party designated by the Company. The proceeds
from the exercise of the call option will be applied to repay the loans under the loan agreements. The Company does not have to
make any additional payment to the legal shareholders. The PRC Domestic Entities will not distribute any dividend without the
prior written consent from the WOFEs. The agreements can be extended indefinitely at the sole discretion of the Company.
Loan Agreements
The WOFEs provided loans to
the legal shareholders to enable them to contribute the registered capital of the PRC Domestic Entities. Under the terms of the
loan agreements, the legal shareholders will repay the loans by transferring their legal ownership in the PRC Domestic Entities
to the WOFEs when permitted by applicable PRC laws and regulations. Any gains from the transfer shall be paid back to the WOFEs
or any third party designated by the WOFEs. The legal shareholders shall repay the loan by means of transferring their respective
equity interests in the PRC Domestic Entities to the WOFEs or any other person designated by the WOFEs.
Supplementary Agreements
In addition to the above contractual
agreements, the Company, the WOFEs, the PRC Domestic Entities and their legal shareholders entered into supplementary agreements
in March 2010 to memorialize certain terms previously agreed amongst the Company, the WOFEs, the PRC Domestic Entities and their
legal shareholders. While these supplementary agreements were signed in 2010, the terms, intent and substance of all the agreements
above remained unchanged. Pursuant to the supplementary agreements:
|
·
|
the WOFEs have unilateral discretion in setting the technical service fees charged to the
PRC Domestic Entities;
|
|
·
|
the WOFEs are obligated to provide financial support to the PRC Domestic Entities in the
event the PRC Domestic Entities incur losses;
|
|
·
|
the annual budget of the PRC Domestic Entities should be assessed and approved by the WOFEs;
|
|
·
|
the legal shareholders agree to remit any profits distributed from the PRC Domestic Entities
to the Company upon request by the Company; and
|
|
·
|
the PRC Domestic Entities are obligated to transfer their entire retained earnings, after
deduction of PRC income tax, to the WOFEs in the form of a donation upon the WOFEs’ request.
|
All of these provisions have
been incorporated into the Contractual Agreements signed subsequent to March 2010.
Furthermore, the WOFEs and the
PRC Domestic Entities entered into supplementary agreements in March 2013 to memorialize the following terms previously agreed
between the WOFEs and the PRC Domestic Entities when the Exclusive Call Option Agreements were entered into:
|
·
|
the legal shareholders agreed to remit the purchase consideration received from the exercise of the exclusive right to acquire the equity interests in the PRC Domestic Entities to the WOFEs or any entity designated by the WOFEs.
|
This provision has been incorporated
into the Contractual Agreements signed subsequent to March 2013.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION (continued)
|
Through the design of the aforementioned
agreements, the legal shareholders of the PRC Domestic Entities effectively assigned their full voting rights to the WOFEs, which
give the WOFEs the power to direct the activities that most significantly impact the PRC Domestic Entities’ economic performance.
The WOFEs obtained the ability to approve decisions made by the PRC Domestic Entities and the ability to acquire the equity interests
in the PRC Domestic Entities when permitted by PRC law. The WOFEs are obligated to absorb a majority of the expected losses from
the PRC Domestic Entities’ activities through providing unlimited financial support to the PRC Domestic Entities and are
entitled to receive a majority of profits from the PRC Domestic Entities through the exclusive technical consultancy and service
fees. As a result, the Company, through the WOFEs, is the primary beneficiary of the PRC Domestic Entities. Accordingly, in accordance
with SEC Regulation S-X Article 3A-02 and ASC 810, the Company, through the WOFEs, has consolidated the operating results of the
PRC Domestic Entities in the Company’s financial statements. Business taxes (“BT”) and value added taxes (“VAT”)
relating to service fees charged by the WOFEs are recorded as cost of services.
The carrying amounts of the
assets, liabilities, the results of operations and cash flows of the PRC Domestic Entities and the PRC Domestic Entities’
subsidiaries included in the Company’s consolidated balance sheets, consolidated statements of comprehensive income (loss)
and consolidated statements of cash flows were as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
50,948
|
|
|
|
34,004
|
|
Restricted cash, current
|
|
|
223,002
|
|
|
|
214,876
|
|
Short-term investments
|
|
|
19,838
|
|
|
|
5,586
|
|
Accounts receivable (net of allowance of US$13,691
and US$12,913 as of December 31, 2017 and 2018, respectively)
|
|
|
22,119
|
|
|
|
25,910
|
|
Funds receivable
|
|
|
2,824
|
|
|
|
5,124
|
|
Prepayments and other current assets
|
|
|
16,856
|
|
|
|
25,384
|
|
Commitment deposits (net of allowance of US$206
and nil as of December 31, 2017 and 2018, respectively)
|
|
|
5,876
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
341,463
|
|
|
|
311,075
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
275,601
|
|
|
|
358,432
|
|
Land use rights
|
|
|
34,951
|
|
|
|
32,428
|
|
Deferred tax assets, non-current
|
|
|
2
|
|
|
|
2
|
|
Deposits for non-current assets
|
|
|
41,428
|
|
|
|
95
|
|
Long-term investments
|
|
|
433,894
|
|
|
|
291,808
|
|
Other non-current assets
|
|
|
204
|
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
786,080
|
|
|
|
684,580
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,127,543
|
|
|
|
995,655
|
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION (continued)
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
|
59,820
|
|
|
|
76,267
|
|
Deferred revenue
|
|
|
27,095
|
|
|
|
32,816
|
|
Accrued expenses and other liabilities
|
|
|
54,516
|
|
|
|
36,266
|
|
Customer’s refundable fees
|
|
|
10,986
|
|
|
|
3,274
|
|
Income tax payable
|
|
|
1,325
|
|
|
|
1,982
|
|
Intercompany payable to the non PRC Domestic Entities
|
|
|
431,770
|
|
|
|
445,556
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
585,512
|
|
|
|
596,161
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term loans
|
|
|
55,958
|
|
|
|
44,891
|
|
Deferred tax liabilities
|
|
|
51,227
|
|
|
|
10,488
|
|
Other non-current liabilities
|
|
|
37,936
|
|
|
|
51,144
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
145,121
|
|
|
|
106,523
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
730,633
|
|
|
|
702,684
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
396,910
|
|
|
|
292,971
|
|
Intercompany payable to the
non PRC Domestic Entities represents the amounts due to the WOFE and its wholly-owned subsidiaries, which are eliminated upon
consolidation.
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Total revenues
|
|
|
287,475
|
|
|
|
91,087
|
|
|
|
89,111
|
|
Net loss
|
|
|
(24,135
|
)
|
|
|
(6,484
|
)
|
|
|
(79,229
|
)
|
|
|
For
the Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net cash generated from (used in) operating activities
|
|
|
(790
|
)
|
|
|
122,327
|
|
|
|
26,241
|
|
Net cash used in investing activities
|
|
|
(3,763
|
)
|
|
|
(99,946
|
)
|
|
|
(9,851
|
)
|
Net cash (used in) generated from financing activities
|
|
|
90,828
|
|
|
|
8,565
|
|
|
|
(25,220
|
)
|
The PRC Domestic Entities had
no intercompany amounts payable to the WOFEs for accrued service fees as of December 31, 2017 and 2018. The WOFEs did not charge
the PRC Domestic Entities, technology consultancy service fees during the years ended December 31, 2016, 2017 and 2018.
As of December 31, 2018, except
for the current restricted cash of US$214,876, accounts receivable of US$2,988 and property and equipment of US$324,564 pledged
to secure bank borrowings (Note 12), there was no other pledge or collateralization of the assets of the PRC Domestic Entities
and the PRC Domestic Entities’ subsidiaries.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
1.
|
ORGANIZATION AND BASIS OF PRESENTATION (continued)
|
Creditors of the PRC Domestic
Entities and the PRC Domestic Entities’ subsidiaries have no recourse to the general credit of their respective primary
beneficiary. The amounts of liabilities of the PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries have been
parenthetically presented on the consolidated balance sheets. The PRC Domestic Entities held certain registered copyrights, trademarks
and registered domain names, which are used for the Company’s business operations. All of these revenue-producing assets
were internally developed, for which the Company did not incur significant development costs. There were no other assets of the
PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries that can only be used to settle their own obligations
except for restricted cash of US$214,876, accounts receivable of US$2,988 and property and equipment of US$324,564 pledged to
secure bank borrowings. The WOFEs have not provided any financial support that they were not previously contractually required
to provide to the PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries during the years presented.
Basis of Presentation
The accompanying consolidated
financial statements have been prepared in accordance with the United States generally accepted accounting principles (“U.S. GAAP”).
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of Estimates
The preparation of the consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported
amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the Company’s
financial statements include, but are not limited to, estimated stand-alone selling prices of performance obligations, customer
refunds, allowance for doubtful accounts, allowance for credit losses, useful lives of property and equipment, realization of
deferred tax assets, impairment of long-lived assets, share-based compensation expense, uncertain income tax positions, fair value
of the embedded derivatives in the convertible senior notes and fair value of long term investments. Changes in facts and circumstances
may result in revised estimates. Actual results could materially differ from those estimates.
Principles of Consolidation
The consolidated financial statements
include the financial statements of the Company, its non-PRC subsidiaries, WOFEs, the PRC Domestic Entities in which the Company,
through its WOFEs, has a controlling financial interest, and the PRC Domestic Entities’ subsidiaries. The Company has determined
that it has a controlling financial interest, even though it does not hold a majority of the voting equity interest in an entity,
because the Company has the ability to control the PRC Domestic Entities through the WOFEs’ rights to all the residual benefits
of the PRC Domestic Entities and the WOFEs’ obligation to fund losses of the PRC Domestic Entities. As a result, the PRC
Domestic Entities are included in the consolidated financial statements. All significant intercompany balances and transactions
between the Company, its subsidiaries, the PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries have been eliminated
in consolidation.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Foreign Currency Translation
and Transactions
The functional currency of the
Company and its non-PRC subsidiaries is the United States dollars (“US$”). The WOFEs, PRC Domestic Entities and PRC
Domestic Entities’ subsidiaries determine their functional currency to be the Chinese Renminbi (“RMB”) based
on the criteria of ASC 830,
Foreign Currency Matters
. The Company uses US$ as its reporting currency. The Company uses
the monthly average exchange rate for the year and the exchange rate at the balance sheet date to translate the operating results
and financial position, respectively. Translation differences are recorded in accumulated other comprehensive income (loss), a
component of shareholders’ equity.
Transactions denominated in
foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign
currency denominated financial assets and liabilities are remeasured at the exchange rates prevailing at the balance sheet date.
Exchange gains and losses are included in the consolidated statements of comprehensive income (loss).
The assets and liabilities of
the Company’s PRC subsidiaries, PRC Domestic Entities and PRC Domestic Entities’ subsidiaries are translated into
US$ at the exchange rates prevailing at the balance sheet date. The consolidated statements of comprehensive income (loss) of
these entities are translated into US$ at the weighted average exchange rates for the year. The resulting translation gains (losses)
are recorded in accumulated other comprehensive income (loss) as a component of shareholders’ equity.
For the purpose of the consolidated
statements of cash flows, cash flows of the Company’s PRC subsidiaries, PRC Domestic Entities and PRC Domestic Entities’
subsidiaries are translated into US$ at the exchange rates prevailing on the dates of the cash flows. Frequently recurring cash
flows of these entities which arise throughout the year are translated into US$ at the weighted average exchange rates for the
year.
Transaction gains and losses
are recognized in the consolidated statements of operations. Gains and losses on intra-entity foreign currency transactions that
are of a long-term-investment nature (that is, settlement is not planned or anticipated in the foreseeable future) between consolidated
entities are not recognized in earnings, but are included as a component of other comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents represent
cash on hand and demand deposits placed with banks or other financial institutions with original maturity of 90 days or less at
the date of purchase which are unrestricted as to withdrawal and use. In addition, all highly liquid investments with original
stated maturity of 90 days or less are classified as cash equivalents.
Restricted Cash
Restricted cash represents cash
pledged to financial institutions as collateral for the Company’s bank loans. The restricted cash is not available for withdrawal
or the Company’s general use until after the corresponding bank loans are repaid.
The Accounting Standards Update
(“ASU”) 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
required that restricted cash should be included with cash
and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements
of cash flows. The guidance was effective as of January 1, 2018 and the Company applied it using a retrospective transition method
to each period presented. The adoption of this guidance changed the presentation and classification of restricted cash in the
Company’s consolidated statements of cash flows. For the years ended December 31, 2016 and 2017, substantially all of the
changes in restricted cash of US$107,905 and US$51,900, respectively, were previously reported as part of financing activities
in the consolidated statements of cash flows.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Investments
Periods prior
to January 1, 2018
All highly liquid investments
with original maturities of greater than 90 days but less than 365 days are classified as short-term investments which are stated
at their approximate fair value.
The Company accounts for its
investments in accordance with ASC 320,
Investments-Debt and Equity Securities
(“ASC 320”). The Company classifies
the investments in debt and equity securities as “held-to-maturity”, “trading” or “available-for-sale”,
whose classification determines the respective accounting methods stipulated by ASC 320. Dividend and interest income, including
amortization of the premium and discount arising at acquisition, for all categories of investments in securities are included
in earnings. Any realized gains or losses on the sale of the investments are determined on a specific identification method, and
such gains and losses are reflected in the consolidated statements of comprehensive income (loss).
The securities that the Company
has positive intent and ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost.
For individual securities classified as held-to-maturity securities, the Company evaluates whether a decline in fair value below
the amortized cost basis is other-than-temporary in accordance with the Company’s policy and ASC 320. If the Company concludes
that it does not intend or is not required to sell an impaired debt security before the recovery of its amortized cost basis,
the impairment is considered temporary and the held-to-maturity securities continue to be recognized at the amortized costs. When
the Company intends to sell an impaired debt security or it is more likely than not that it will be required to sell prior to
recovery of its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. In these instances, the other-than-temporary
impairment loss is recognized in the consolidated statements of comprehensive income (loss) equal to the entire excess of the
debt security’s amortized cost basis over its fair value at the balance sheet date of the reporting period for which the
assessment is made.
The securities that are bought
and held principally for the purpose of selling them in the near term are classified as trading securities. Unrealized holding
gains and losses for trading securities are included in earnings.
Investments not classified as
trading or as held-to-maturity are classified as available-for-sale securities. Available-for-sale securities are reported at
fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss) in shareholders’
equity. Realized gains or losses are charged to earnings during the period in which the gain or loss is realized. An impairment
loss on the available-for-sale securities are recognized in the consolidated statements of comprehensive income (loss) when the
decline in value is determined to be other-than-temporary. No impairment loss was recognized for the year ended December 31, 2017.
In accordance with ASC 325
Investments-Other
,
for investments in an investee over which the Company does not have significant influence and which do not have readily determinable
fair value, the Company carries the investment at cost and only adjusted for other-than-temporary declines in fair value and distributions
of earnings that exceed the Company’s share of earnings since its investment. Management regularly evaluates the impairment
of the cost method investments based on performance and financial position of the investee as well as other evidence of market
value. Such evaluation included, but is not limited to, reviewing the investee’s cash position, recent financing, projected
and historical financial performance, cash flow forecasts and financing needs. An impairment loss is recognized in earnings equal
to the excess of the investment’s cost over its fair value at the balance sheet date of the reporting period for which the
assessment is made. The fair value would then become the new cost basis of investment. An impairment loss of US$2,232 and US$2,768
was recognized for the years ended December 31, 2016 and 2017, respectively.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Period commencing January 1, 2018
The Company adopted ASU 2016-01,
Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Liabilities
from January 1, 2018, which requires all equity securities with readily determinable fair values, other than those accounted for
under equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes
in the fair value recognized through net income. Change in fair value of available-for-sale equity securities are reported in
earnings. Upon the adoption of ASU 2016-01, accumulated unrealized gain, net of income taxes, of US$163,785 was reclassified from
accumulated other comprehensive income to retained earnings as of January 1, 2018.
The Company accounts for its
debt investments in accordance with ASC 320,
Investments-Debt Securities
(“ASC 320”). The Company classifies
the debt investments as “held-to-maturity”, “trading” or “available-for-sale”, whose classification
determines the respective accounting methods stipulated by ASC 320. Interest income, including amortization of the premium and
discount arising at acquisition, for all categories of debt investments are included in earnings. Any realized gains or losses
on the sale of the debt investments are determined on a specific identification method, and such gains and losses are reflected
in the consolidated statements of comprehensive income (loss).
The debt securities that the
Company has positive intent and ability to hold to maturity are classified as held-to-maturity securities and stated at amortized
cost. For individual securities classified as held-to-maturity securities, the Company evaluates whether a decline in fair value
below the amortized cost basis is other-than-temporary in accordance with the Company’s policy and ASC 320. If the Company
concludes that it does not intend or is not required to sell an impaired debt security before the recovery of its amortized cost
basis, the impairment is considered temporary and the held-to-maturity securities continue to be recognized at the amortized costs.
When the Company intends to sell an impaired debt security or it is more likely than not that it will be required to sell prior
to recovery of its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. In these instances, the
other-than-temporary impairment loss is recognized in the consolidated statements of comprehensive income (loss) equal to the
entire excess of the debt security’s amortized cost basis over its fair value at the balance sheet date of the reporting
period for which the assessment is made.
The debt securities that are
bought and held principally for the purpose of selling them in the near term are classified as trading securities. Unrealized
holding gains and losses for trading securities are included in earnings. All highly liquid investments with original maturities
of greater than 90 days but less than 365 days are classified as short-term investments which are stated at their approximate
fair value.
Investments not classified as
trading or as held-to-maturity are classified as available-for-sale securities. Available-for-sale debt securities are reported
at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss) in shareholders’
equity. Realized gains or losses are charged to earnings during the period in which the gain or loss is realized. An impairment
loss on the available-for-sale securities are recognized in the consolidated statements of comprehensive income (loss) when the
decline in value is determined to be other-than-temporary. No impairment loss was recognized for the year ended December 31, 2018.
All equity investments with
readily determinable fair values, other than those accounted for under equity method of accounting or those that result in consolidation
of the investee, are measured at fair value with changes in the fair value recognized through net income.
Equity investments without readily
determinable fair values which do not qualify for net asset value per share (or its equivalent) practical expedient and over which
the Company does not have the ability to exercise significant influence through the investments in common stock, are accounted
for under the measurement alternative. The carrying values of equity investments without readily determinable fair values are
measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for
identical or similar investments of the same issuer. All gains and losses on these investments, realized and unrealized, are recognized
in the consolidated statements of comprehensive income (loss). The Company makes assessment of whether an investment is impaired
at each reporting date, and recognizes an impairment loss equal to the difference between the carrying value and fair value in
earnings. No impairment loss was recognized for the year ended December 31, 2018. As a result of adoption of ASU 2016-01, the
Company is not required to disclose the fair value for equity investments without readily determinable fair value.
|
(3)
|
Equity method
investments
|
In accordance with ASC 323
Investments-Equity
Method and Joint Ventures
, the Company applies the equity method of accounting to equity investments in common stock over
which it has significant influence but does not own a majority equity interests or otherwise control. Under the equity method,
the Company initially records its investment in the common stock of an investee at cost. The excess of the carrying amount of
the investment over the underlying equity in net assets of the equity investee represents goodwill and intangible assets acquired.
The Company adjusts the carrying amount of an investment for its share of the earnings or losses of the investee after the date
of investment and reports the recognized earnings or losses in the consolidated statements of comprehensive income (loss). When
the Company’s share of losses in the equity investee equals or exceeds its interest in the equity investee, the Company
does not recognize further losses, unless the Company has incurred obligations or made payments or guarantees on behalf of the
equity investee, or the Company holds other investments in the equity investee.
The equity method investments
are subject to periodic testing for other-than-temporary impairment, by considering factors including, but not limited to, stock
prices of public companies in which the Company has an equity investment, current economic and market conditions, operating performance
of the investees such as current earnings trends and undiscounted cash flows, and other company-specific information, such as
recent financing rounds. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments
and the determination of whether any identified impairment is other-than-temporary. If any impairment is considered other-than-temporary,
the Company will write down the asset to its fair value and take the corresponding charge to the consolidated statements of comprehensive
income (loss). No impairment was recorded for equity method investments for the year ended December 31 2018.
Funds Receivable
Funds receivable represents
cash collection through third-party payment service providers. The Company carefully considers and monitors the credit worthiness
of the third-party payment service providers used. An allowance for doubtful accounts is recorded in the period in which a loss
is determined to be probable. Funds receivable balances are written off after all collection efforts have been exhausted.
Commitment deposits
Commitment deposits represent
cash paid to real estate developers for the right to provide sales agency services for their real estate projects. The commitment
deposits are refundable at specified dates and are classified accordingly.
In accordance with relevant
contract terms, in the event of default, the Company is normally entitled to collateral or other forms of security from the real
estate developers, which it can then resell to recover its original commitment deposit. The Company’s recovery of its original
commitment deposit is dependent on market conditions.
The Company considers many factors
in assessing the collectability of commitment deposits, such as the age of the amounts due, the market value of collaterals, as
well as the real estate developer’s payment history and credit-worthiness. An allowance for doubtful accounts is recorded
in the period in which a loss is determined to be probable. Commitment deposits are written off after all collection efforts have
been exhausted.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Loans receivable
Loans receivable consists primarily
of secured loans in the form of mortgage loans and unsecured loans to borrowers that have passed the Company’s credit assessment.
Such amounts are recorded at the principal amount less impairment as of the balance sheet date. The loan periods extended by the
Company to the borrowers generally range from 1 to 36 months.
An allowance for credit loss
is recorded when, based on current information and events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The Company assesses the allowance for credit loss related to loans
receivable on a quarterly basis, either on an individual or collective basis. The Company considers various factors in evaluating
loans receivable for possible impairment on an individual basis. These factors include the amount of the loan, historical experience,
value of collateral, if any, credit quality and age of the receivables balances. Impairment is measured on an individual loan
basis using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the
fair value of the collateral if the loan is secured. The Company evaluates the remainder of its loans receivables portfolio for
impairment on a collective basis in accordance with ASC 450-20,
Loss Contingencies
and records an allowance for credit
loss at the portfolio segment level.
Loan principal and interest
receivables are charged-off when the loan principal and interest receivables are deemed to be uncollectible. In general, loan
principal and interest receivables are identified as uncollectible if any of the following conditions are met : 1) the borrower
is dead, missing or incapacitate and there is no legal heir and presentee or the legal heir and presentee refuse to abide the
contract; 2) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments;
3) outstanding amount following 180 days past due after all collection efforts based on management’s judgment.
Property and Equipment,
Net
Property and equipment are stated
at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, as follows:
Category
|
|
Estimated Useful Life
|
|
|
|
Office equipment
|
|
3 - 5 years
|
Motor vehicles
|
|
5 - 10 years
|
Leasehold improvement
|
|
shorter of lease term or economic lives
|
Buildings
|
|
12 -45 years
|
Land is stated at cost and is
not depreciated.
Construction in progress represents
buildings and related premises under construction, which is stated at actual construction cost less any impairment loss. Construction
in progress is transferred to the respective category of property and equipment when completed and ready for its intended use.
Interest associated with major
development and construction projects is capitalized and included in the cost of the project. The capitalization of interest cease
when the project is substantially completed or the development activity is suspended for more than a brief period. The amount
to be capitalized is determined by applying the capitalization rate to the average amount of accumulated qualifying capital expenditures
for assets under construction during the year.
Repair and maintenance costs
are charged to expense as incurred, whereas the cost of renewals and betterments that extend the useful lives of property and
equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing
the cost and accumulated depreciation from the asset and accumulated depreciation accounts, respectively, with any resulting gain
or loss reflected in the consolidated statements of comprehensive income (loss).
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Land Use Rights
Land use rights are recorded
at cost less accumulated amortization. Amortization is provided on a straight-line basis over the estimated terms of the land
use rights which are 40-50 years.
Impairment of Long-Lived
Assets
The Company evaluates its long-lived
assets or asset group with finite lives for impairment whenever events or changes in circumstances, such as a significant adverse
change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset group
may not be fully recoverable. When these events occur, the Company evaluates the impairment by comparing the carrying amount of
the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If
the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an impairment
loss based on the excess of the carrying amount of the asset group over its fair value, but not below the fair values of the individual
long-lived assets within the asset group. No impairment charge was recognized for any of the years presented. Asset groups to
be disposed of would be reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated.
The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset
and liability sections of the consolidated balance sheets.
Fair Value of Financial
Instruments
Financial instruments of the
Company primarily include cash and cash equivalents, restricted cash, accounts receivable, commitment deposits, funds receivable,
short-term and long-term investments, loans receivable, short-term and long-term loans, convertible senior notes (Note 15) and
related derivative liabilities. As of December 31, 2017 and 2018, the carrying values of these financial instruments, other than
long-term investments, long-term loans, convertible senior notes and related derivative liabilities, approximate their fair values
due to the short-term maturity of these instruments. The fair value method investments and trading securities were recorded at
fair value based on the quoted price in active markets as of December 31, 2017 and 2018. The carrying values of the long-term
loans approximate their fair values, as the loans bear interest at rates determined based on the prevailing interest rates in
the market. The convertible senior notes were recognized based on residual proceeds after allocation to the derivative liabilities
at fair market value. The estimated fair values of the convertible senior notes based on a market approach were approximately
US$301,036 and US$199,172 as of December 31, 2017 and 2018, respectively, and represents a Level 3 valuation in accordance with
ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”). When determining the estimated fair value of
the convertible senior notes, the Company used a commonly accepted valuation methodology and market-based risk measurements that
are indirectly observable, such as credit risk. The fair value of the bifurcated derivative liabilities was insignificant for
the years ended December 31, 2016, 2017 and 2018. Prior to January 1, 2018, the Company determined that it was not practicable
to estimate the fair value of its cost method investments as of December 31, 2017 and measures the cost method investment at fair
value on a nonrecurring basis only if an impairment charge were to be recognized.
The Company applies ASC 820
in measuring fair value. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements.
ASC 820 establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable
inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include
other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable
inputs which are supported by little or no market activity.
ASC 820 describes three main
approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost
approach. The market approach uses prices and other relevant information generated from market transactions involving identical
or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present
value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost
approach is based on the amount that would currently be required to replace an asset.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Assets measured at fair value
on a recurring basis as of December 31, 2017 and 2018 are summarized below.
|
|
Fair Value Measurement
as of December 31, 2017
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
Fair Value at
December 31,
2017
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
52,283
|
|
|
|
318,065
|
|
|
|
-
|
|
|
|
370,348
|
|
Trading securities
|
|
|
15,833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,833
|
|
|
|
Fair Value Measurement
as of December 31, 2018
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
Fair Value at
December 31,
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments
|
|
|
181,483
|
|
|
|
-
|
|
|
|
-
|
|
|
|
181,483
|
|
Trading securities
|
|
|
1,773
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,773
|
|
Revenue Recognition
Revenues are derived from marketing
services, listing services, E-commerce services, value-added services and financial services.
Periods prior to January 1, 2018
Revenues for each type of
service sales were recognized only when the following criteria are met: (a) persuasive evidence of an arrangement exists; (b)
price is fixed or determinable; (c) delivery of services has occurred; and (d) collectability is reasonably assured.
Listing Services
Listing services revenues consist
of revenues derived from both basic listing services and special listing services.
The Company’s basic and
special listing services are provided to agents, brokers, property developers, property owners, property managers and others seeking
to sell or rent new or secondary residential and commercial properties.
|
(1)
|
Basic listing services
|
Basic listing services entitle
customers to post and make changes to information for properties, home furnishings and other related products and services in
a particular area on the website and mobile apps for a specified period of time, which typically range from 1 to 36 months,
in exchange for a fixed fee. Written contracts, containing all significant terms, signed by the Company and its customers provide
persuasive evidence of the arrangement. The amount of fee to be paid is not subject to change once the contract has been signed.
The contracts generally do not contain any specific performance target or refund guarantee. Delivery of services occurs by making
access to the websites and mobile apps available for posting by the customers over the specified listing period. The Company performs
credit assessments of its customers prior to signing the written contract to ensure collectability is reasonably assured. In accordance
with ASC 605, revenues were recognized ratably over the duration of the service period as the basic listing services were being
delivered.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
|
(2)
|
Special listing services
|
Special listing services consist
of promotional activities associated with themed marketing campaigns, each generally over a one year duration and designed to
recognize the leading companies within a specific real estate sector. For each special listing campaign, targeted leading companies
participate in a collective marketing and promotional program for a specified fee, consisting of various online and offline promotional
activities tied to the specialized theme of the campaign. Each revenue arrangement may include one or multiple special listing
campaigns.
The Company evaluated its special
listing revenue arrangements in accordance with ASC 605-25,
Revenue recognition–Multiple-element arrangements
. The
promotional services within a special listing program were accounted for as one combined unit of accounting, as each promotional
deliverable did not have standalone value to the customer since all the deliverables were tied to the specialized theme of the
campaign, and were not sold separately. For contractual arrangements that contain multiple special listing campaigns, the program
for each campaign was accounted for as a separate unit of accounting. ASC 605-25 required revenues to be allocated to each unit
of accounting on a relative fair value basis based on a selling price hierarchy. The selling price for a deliverable was based
on vendor-specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE was
not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE was available. The Company allocated
total arrangement consideration to each unit of accounting based on its relative selling price, which was determined based on
its BESP for that deliverable since neither VSOE nor TPE exist. In determining the BESP for each deliverable, the Company considered
its overall pricing model and objectives when sold separately, as well as market or competitive conditions that may impact the
price at which the Company would transact if the deliverable were sold regularly on a standalone basis. The Company monitored
the conditions that affect its determination of selling price for each deliverable and reassess such estimates periodically. In
accordance with ASC 250, “Accounting Changes and Error Corrections,” changes in the determination of the BESP were
considered a change in accounting estimate and were accounted for on a prospective basis. The effect of changes in the BESP on
the allocation of arrangement consideration was insignificant for all periods presented.
Written contracts, containing
all significant terms, signed by the Company and its customers provide persuasive evidence of the arrangement. The amount of fee
to be paid is not subject to change once the contract has been signed. The contracts do not contain any specific performance,
cancellation, termination or refund provisions. The Company performs credit assessments of its customers prior to signing the
written contract to ensure collectability is reasonably assured. In accordance with ASC 605, “Revenue Recognition,”
revenues were recognized ratably over the duration of the campaign period as the special listing services were being delivered.
Marketing Services
The Company offers marketing
services on the Company’s websites and mobile apps, primarily through banner advertisements, floating links, logos and other
media insertions. These marketing services are offered to real estate developers and to a lesser extent provider of products and
services for home decoration and improvement. Marketing services allow customers to place advertisements on particular areas of
the Company’s websites and mobile apps, in particular formats and over particular periods of time. Written contracts, containing
all significant terms, signed by the Company and its customers provide persuasive evidence of the arrangement. The contracts generally
do not contain any specific performance target or refund guarantee.
The service fee is negotiated
between the customer and the Company but once a price is agreed to and the written contract is signed by both parties, the price
is fixed and not subject to change. The service fee is due and payable in installments over the service period. The marketing
services typically last from several days to one year. Delivery of the service occurs upon displaying the agreed forms of services
on the Company’s websites and mobile apps over the specified service period. The Company performs credit assessments on
its customers prior to signing the written contract to ensure collectability is reasonably assured. Revenues were recognized ratably
over the contract period, as there was persuasive evidence of an arrangement, the fee is fixed or determinable and collection
was reasonably assured, as prescribed by ASC 605.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Beginning in 2015, the Group
began to enter into marketing service agreements with certain real estate developers, where the Company may elect to collect the
contractually stated marketing service fee in the form of (i) a designated real estate property, if transferred to the Company
or sold to a third-party buyer designated by the Company prior to a pre-determined date, which typically falls at the end of the
marketing service period, or (ii) cash, if the Company elects not to take the designated real estate property as settlement consideration
by the pre-determined date. The Company determines the contractually stated marketing service fee under the new payment arrangements
with reference to the cash price of the comparable services offered by the Company under the sole cash payment arrangements. The
designated real estate property is typically a specifically identified residential unit within a residential community developed
by the real estate developer and its fair value is generally commensurate with the contractually stated marketing service fee
as of the date of the marketing service agreement. If the Company elects settlement through the sale of the designated real estate
property to a third-party buyer, the Company is entitled to retain the entire sales proceeds. In this scenario, the Company has
the sole discretion in setting the sales price of the designated real estate property to the third-party buyer but has no incentive
to permit such real estate property to be sold at a price lower than the contractually stated marketing service fee, which serves
as a de-facto minimal selling price, because the Company would instead accept the cash payment of the stated marketing service
fee. Prior to the pre-determined date, the real estate developer is obligated not to sell, encumber or otherwise dispose of the
designated real estate property without the consent of the Company.
Under these arrangements, the
Company initially recognizes the marketing service revenue up to the amount of the contractually stated marketing service fee.
Any excess is contingent upon the sale of the designated real estate properties and is accounted for as contingent marketing service
revenues, if and when the sale is consummated and all other revenue recognition criteria are met. For the years ended December
31, 2016 and 2017, the Company recognized marketing service revenue of US$9,730 and nil under such arrangement. Since 2016, the
Company ceased entering into these arrangements with real estate developers and collected all the marketing service fees in the
form of (i) cash, or (ii) a designated real estate property transferred to the Company, from real estate developers.
Instead, the Company began to
provide marketing services whereby the sole consideration for the services is in the form of a specifically identified unit of
a development. The Company accounts for these arrangements pursuant to ASC 845,
Nonmonetary transactions
, and have determined
that the fair value of consideration received, i.e. the specifically identified real estate property, is more readily determinable
than the marketing services surrendered. Accordingly, the fair value of property is used for measurement and revenues are recognized
ratably over the service period. Revenue recognized under such arrangement was US$728 and US$1,361 for the years ended December
31, 2016 and 2017.
For certain arrangements, the
Company provides marketing services that contain multiple deliverables, that is, different forms of services to be delivered over
different periods of time.
The Company accounted for each
deliverable in the arrangement as separate unit of accounting. Revenues were allocated to each unit of accounting on a relative
fair value basis based on a selling price hierarchy and was recognized ratably over the duration of the service period. The selling
price for a deliverable was based on its vendor-specific objective evidence (“VSOE”) if available, third party evidence
(“TPE”) if VSOE is not available, or BESP if neither VSOE nor TPE is available. The total arrangement consideration
was allocated to each unit of accounting based on its relative selling price which is determined based on the Company’s
BESP for that deliverable because neither VSOE nor TPE exist. In determining its BESP for each deliverable, the Company considered
its overall pricing model and objectives, as well as market or competitive conditions that may impact the price at which the Company
would transact if the deliverable were sold regularly on a standalone basis. The Company monitored the conditions that affect
its determination of selling price for each deliverable and reassesses such estimates periodically
E-commerce
service
E-commerce service revenues
consist of revenues derived from:
|
(1)
|
Fang membership
services
|
The Company enters into arrangements
with real-estate developers, pursuant to which the Company charges its customers RMB5,000 to RMB20,000 in order for them to purchase
specified properties from the real estate developers at a discount significantly greater than the face value of the fees charged
by the Company. The discount is either a fixed amount off or a fixed percentage to the price of the specified property. The fees
paid by the customers to the Company are refundable before a purchase of the specified properties at a discount is made by the
customers or if after the purchase, only if the customers can fulfil certain requirements under the refund policy. The Company
chose to analogize to rights of return guidance in ASC 605-15 when accounting for refundable fees as reliable estimates of refunds
can be made based on company-specific historical evidence. Revenues were recognized by the Company when cash consideration of
the fees was received and the discount has been applied by the customers to pay for the purchase price of the specified properties,
net of estimated refunds. Cash received in advance of the purchase of specified properties and provision for refunds were recorded
as “customers’ refundable fees” (Note 14). The provision of refunds was insignificant for the years ended December
31, 2016 and 2017.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Additionally, the Company, real-estate
developers and marketing agencies entered into tri-party cooperation arrangements for certain Fang membership services. When customers
use their Fang membership cards to purchase specified properties in selected advertisements published by the marketing agents,
a portion of the proceeds from the Fang membership services is remitted to the marketing agents. The Company recognized revenues
from this type of Fang membership services on a net basis, representing the portion of proceeds received from customers that is
ultimately retained by the Company as it is an agent in the arrangement. Commencing in 2014, the Company also entered into cooperation
arrangements directly with real-estate developers for Fang membership services. The Company either engages third-party real estate
agents or places advertisements with marketing agents to promote the real-estate projects. The Company recognized revenues from
this type of Fang membership services on a gross basis, representing the proceeds received from the real-estate developers, as
the Company is the primary obligor in the arrangement. Payments to third-party real estate agents are recorded as cost of sales,
while payments to marketing agents are recorded as selling expenses. The portion to be remitted to third-party real estate agents
and marketing agents was recorded as amounts payable to sales and marketing agents in “accrued expenses and other liabilities”
on the consolidated balance sheets (Note 13).
|
(2)
|
Direct sales
services
|
The Company promotes property
developments of its developer clients primarily through its websites and mobile applications (“mobile apps”). Potential
buyers can register with the Company free of charge if they are interested in any real estate properties covered by its direct
sales services. After the registration, the Company provides the buyers with additional information about the properties and related
services, such as tours to visit the property developments and other services to facilitate property purchases. By using the direct
sales services, individual buyers can enjoy discounted prices for properties that the Company offers from its developer clients.
The Company charges its developer clients a fee for each property it sold through its direct sales services at a predetermined
percentage of the value of the individual transaction. Thereafter, the real estate developers can request for refund only if they
can fulfil certain requirements under the refund policy. The Company chose to analogize to rights of return guidance in ASC 605-15
when accounting for refundable fees as reliable estimates of refunds can be made based on company-specific historical evidence.
Revenues were recognized by the Company based on total of successful purchase transactions made, net of estimated refunds. The
provision of refunds was insignificant for the years ended December 31, 2016 and 2017.
Beginning in 2015, the Company
began to provide sublease service through its websites. The Company identifies suitable properties and initially enters into lease
agreements with the property owners. The lease agreements allow the Company to sublease the properties. Regardless whether the
leased property is subsequently sub-leased by the Company, the lease agreement between the Company and the property owner remains
in effect, including the Company’s obligation to make fixed rental payments over the non-cancellable lease term. The property
owner is not a party to, and therefore not entitled to, any rights or obligations under the sublease agreement. Sublease rental
income was recorded as revenue from subleasing services and recognized on a gross basis as the Company is the principal to the
sublease arrangements. The sublease income was recognized on a straight-line basis over the lease term. Sublease rental income
for the years ended December 31, 2016 and 2017 was US$31,929 and US$15,085, respectively.
|
(4)
|
Real estate
online brokerage services
|
Commencing in 2015, the Company
provided brokerage services for sellers and buyers of secondary properties. Brokerage services may include property listing services,
advisory services, transaction negotiation services and administration services. In addition to secondary property sales, the
Company also assists property owners and potential tenants with leasing transactions. Commission revenues derived from brokerage
services is recognized upon the execution, fulfillment of all performance obligations specified on the tri-party transaction agreement
that is entered into between the seller, buyer and the Company in its capacity as broker, and cash receipt.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
|
(5)
|
Online
decoration services
|
Beginning in 2015, the Company
launched online decoration services, which includes interior design, remodeling, renovation, furnishing and other home improvement
services. The Company generally charges the customers a fixed fee. The Company recognized revenues based on the percentage-of-completion
method and measures progress using input measures, i.e., cost-to-cost, in accordance with ASC 605-35,
Revenue Recognition Construction-Type
and Production-Type Contracts.
Estimated losses, if any, were recognized during the period in which the loss becomes probable
and reasonably estimable.
Financial Services
Financial
services are provided through the Company’s online financial platform
www.fangtx.com
and offline micro loan subsidiaries.
The Company provides secured loans in the form of entrusted loans, mortgage loans and unsecured loans, primarily to borrowers
that meet the Company’s credit assessment requirements. The Company ceased to provide entrusted loans since 2017. Revenues
derived from loan interest income and annual service fees are recognized using the effective interest rate method. The Company
does not accrue interest on loans receivable that are considered impaired or more than 90 days past due unless either the receivable
has not been collected due to administrative reasons or the receivable is well secured and in the process of collection. Unsecured
loans stop accruing interest when 60 days past due and are classified as impaired loan.
Value-added Services
The Company generates revenues
from value-added services including subscription services for access to the Company’s information database and consulting
services for customized and industry-related research reports and indices. Revenues derived from subscription services for access
to the Company’s information database are recognized ratably over the subscription period. Revenues derived from consulting
services for customized and industry-related research reports and indices were recognized when the relevant services were completed.
The Company’s business
was subject to VAT, surcharges or cultural construction fees levied on advertising-related sales in the PRC. In accordance with
ASC 605-45,
Revenue Recognition-Principal Agent Considerations
, all such VAT, surcharges and cultural construction fees
were presented as cost of revenues in the consolidated statements of comprehensive income (loss). VAT, surcharges and cultural
construction fees for the years ended December 31, 2016 and 2017 were US$68,007 and US$33,320, respectively.
All service fees received
in advance of the provision of services were initially recorded as deferred revenues and subsequently recognized as revenues when
the related services were performed by the Company.
Period commencing January 1, 2018
The Company adopted ASC 606,
Revenue from Contracts with Customers
(“ASC 606”), from January 1, 2018, applying the modified retrospective
method to those contracts which were not completed as of January 1, 2018. Accordingly, revenues for the year ended December 31,
2018 were presented under ASC 606, while revenues for the years ended December 31, 2016 and 2017 were not adjusted and continued
to be reported under ASC 605. Upon the adoption of the ASC 606, the Company recognized the cumulative effect of US$2.3 million,
net of income taxes, as an increase to the opening retained earnings as of January 1, 2018. The cumulative effect of adoption
is primarily related to the following reasons:
|
(1)
|
Before the adoption of ASC 606, the Company
assessed whether collectability is reasonably assured at the outset of the arrangement, and subsequently reassessed if there
was a substantive change in facts and circumstances. If the collectability of all or a portion of the fee is not reasonably
assured, all revenue recognition were deferred until payment was received (assuming all of the other revenue recognition
criteria have been met). Upon the adoption of ASC 606, if it is not probable that the Company will collect substantially
all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to
the customer, consideration received from the customer is initially recorded as a liability. The Company will recognize
nonrefundable consideration received as revenue only when one of the following events has occurred:
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
|
·
|
the
Company has no remaining obligations to transfer goods or services to the customer and
all, or substantially all of the consideration has been received;
|
|
·
|
the contract
has been terminated; or
|
|
·
|
the
Company have transferred control of the goods or services to which the consideration
that has been received relates, and has stopped transferring (and has no obligation under
the contract to transfer) additional goods or services to the customer, if applicable.
|
As a result, the Company made an adjustment to decrease
the opening balance of retained earnings as of January 1, 2018 by US$ 0.5 million.
|
(2)
|
The Company’s policy
before the adoption of ASC 606 was to require written signed contracts by both the Company
and its customers as persuasive evidence of its revenue arrangements. In certain cases
where services are being delivered prior to the receipt of the written signed contracts
by both parties, revenue had been deferred until such time the written signed contracts
are collected. Under the new revenue standard, revenues may be recognized prior to the
receipt of the written signed contracts by both parties (assuming all other revenue recognition
criteria are satisfied), as long as the revenue arrangements between the Company and
its customers are legally enforceable. As a result, the Company made an adjustment to
increase the opening balance of retained earnings as of January 1, 2018 by USD 2.8 million.
|
In addition, the Company’s
revenues are presented net of value-added tax collected on behalf of governments starting from January 1, 2018. Prior to January
1, 2018, value-added tax collected on behalf of governments were presented as gross in both revenues and cost of revenues. The
Company has elected to adopt the practical expedient for incremental costs to obtain a contract with a customer, i.e. sales commissions,
with amortization periods of one year or less to be recorded in selling expenses when incurred. The Company has elected the practical
expedient not to disclose the information about remaining performance obligations which are part of the contracts that have an
original expected duration of one year or less.
The disclosure of the impact
of adoption on the consolidated balance sheets was as follows:
|
|
As of
December 31,
2018
|
|
|
Adjustments
|
|
|
Amounts
without
adoption of
ASC 606
|
|
|
|
USD’000
|
|
|
USD’000
|
|
|
USD’000
|
|
Accounts receivable
|
|
|
60,950
|
|
|
|
379
|
|
|
|
61,329
|
|
Deferred revenue
|
|
|
(163,346
|
)
|
|
|
(11,633
|
)
|
|
|
(174,979
|
)
|
Accrued expenses and other liabilities
|
|
|
(131,268
|
)
|
|
|
9,701
|
|
|
|
(121,567
|
)
|
Other non-current liabilities
|
|
|
(153,095
|
)
|
|
|
555
|
|
|
|
(152,540
|
)
|
The impact for adoption of ASC
606 to the Company’s consolidated statement of comprehensive income (loss) for the year ended December 31, 2018 is as follows:
|
|
Year ended
December 31,
2018
|
|
|
Adjustments
|
|
|
Amounts
without
adoption of
ASC 606
|
|
|
|
USD’000
|
|
|
USD’000
|
|
|
USD’000
|
|
E-commerce services
|
|
|
15,384
|
|
|
|
928
|
|
|
|
16,312
|
|
Marketing services
|
|
|
119,680
|
|
|
|
8,740
|
|
|
|
128,420
|
|
Listing services
|
|
|
113,534
|
|
|
|
5,717
|
|
|
|
119,251
|
|
Financial services
|
|
|
18,060
|
|
|
|
1,068
|
|
|
|
19,128
|
|
Value-added services
|
|
|
36,358
|
|
|
|
2,893
|
|
|
|
39,251
|
|
Total revenues
|
|
|
303,016
|
|
|
|
19,346
|
|
|
|
322,362
|
|
Cost of services
|
|
|
(58,570
|
)
|
|
|
(18,117
|
)
|
|
|
(76,687
|
)
|
Operating income
|
|
|
39,803
|
|
|
|
1,229
|
|
|
|
41,032
|
|
Net loss
|
|
|
(114,909
|
)
|
|
|
1,229
|
|
|
|
(113,680
|
)
|
Loss per share for Class A and Class B ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
(1.29
|
)
|
|
|
0.01
|
|
|
|
(1.28
|
)
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Since the adoption of ASC 606
starting from January 1, 2018, the Company recognizes revenues upon the satisfaction of its performance obligation (upon transfer
of control of promised goods or services to customers) in an amount that reflects the consideration to which the Company expects
to be entitled to in exchange for those goods or services, excluding amounts collected on behalf of third parties (for example,
value-added taxes). For each performance obligation satisfied over time, the Company recognizes revenue over time by measuring
the progress toward complete satisfaction of that performance obligation. If the Company does not satisfy a performance obligation
over time, the performance obligation is satisfied at a point in time.
The Company’s contracts
with customers often include promises to transfer multiple products and services. For these contracts, the Company accounts for
individual performance obligations separately if they are capable of being distinct and distinct within the context of the contract.
Determining whether products and services are considered distinct performance obligations may require significant judgment. Judgment
is also required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. In instances
where SSP is not directly observable, such as when the Company does not sell the product or service separately, the Company determines
the SSP using information that may include market conditions and other observable inputs.
Marketing Services
The Company offers marketing
services on the Company’s websites and mobile apps, primarily through banner advertisements, floating links, logos and other
media insertions. These marketing services are offered to real estate developers and to a lesser extent provider of products and
services for home decoration and improvement. Marketing services allow customers to place advertisements on particular areas of
the Company’s websites and mobile apps, in particular formats and over particular periods of time. The marketing services
typically last from several days to one year. The Company determines that the customer simultaneously receives and consumes benefits
provided by the Company’s performance as the Company performs during the term of the contract. Revenues from marketing services
are recognized ratably over the service period.
Listing Services
Listing services revenues consist
of revenues derived from both basic listing services and special listing services.
|
(1)
|
Basic listing services
|
Basic listing services entitle
customers to post and make changes to information for properties, home furnishings and other related products and services in
a particular area on the website and mobile apps for a specified period of time, which typically range from one to 12 months,
in exchange for a fixed fee. Revenues are recognized on a straight line basis over the service period. The Company determines
that its performance pattern to be straight line since the customer simultaneously receives and consumes the benefits provided
by the Company as the Company performs during the term of the contract and the earning process is straight line.
|
(2)
|
Special listing services
|
The Company offers special listing
services, consisting of a number of online and offline themed events, including industry forums, periodic updates and online promotions
to its customers to promote their brands. The special listing services contain a number of defined but not identical or similar
activities to be performed over the period of one year. These activities are to fulfill the special listing service and are not
separate promises in the contract. The Company determines that each day of the promotion service is distinct because the customer
can benefit from each increment of service on its own (that is, it is capable of being distinct) and each increment of service
is separately identifiable because no day of service significantly modifies or customizes another and no day of service significantly
affects either the Company’s ability to fulfill another day of service or the benefit to the customer of another day of
service. The Company determines that it is providing a series of distinct goods or services because the services provided each
day are substantially the same, the customer simultaneously receives and consumes the benefits provided by the Company as the
Company performs, and the same measure of progress would be used to measure the Company’s progress toward satisfying its
promise to provide the promotion services. Revenues of special listing services are recognized on a straight-line basis over the
period of one year.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Value-added Services
Value-added services consist
of revenues derived from:
The Company derives revenues
by providing access and analytics tools, including appraisal and rating modules, and city maps, based on its proprietary database
of commercial real estate information, typically through a fixed monthly fee for its data services. The Company determines that
the customer simultaneously receives and consumes benefits provided by the Company’s performance as the Company performs
during the term of the contract and the earning process is straight-line. Revenues from data services are recognized on a straight-line
basis over the subscription period.
The Company derives revenues
by providing customized research reports to customers. There are no contractual customer acceptance provisions. Revenues from
customized research reports are recognized when the Company delivers the reports to customers, which is when the control over
the report has been transferred to customers.
The Company provides data monitoring
and survey services over a period of time, generally less than one year. Revenues are recognized on a straight-line basis over
the term of the agreement since the customer simultaneously receives and consumes benefits provided by the Company’s performance
as the Company performs during the term of the contract and the earning process is straight-line.
Financial Services
The Company provides secured
loans in the form of mortgage loans and unsecured loans, primarily to borrowers that meet the Company’s credit assessment
requirements. Revenues derived from loan interest income and annual service fees are recognized using the effective interest rate
method. The Company does not accrue interest on loans receivable that are considered impaired or more than 90 days past due unless
either the receivable has not been collected due to administrative reasons or the receivable is well secured and in the process
of collection. Unsecured loans stop accruing interest when 60 days past due and are classified as impaired loan.
E-Commerce Services
E-commerce service revenues
consist of revenues derived from:
(1) Fang membership services
For the year ended December
31, 2018, the Company enters into arrangements with real-estate developers, pursuant to which the Company charges individual buyers
who are interested to purchase specified properties from the real estate developers at a discount significantly greater than the
face value of the fees charged by the Company. The discount is either a fixed amount or a fixed percentage to the price of the
specified property. The fees paid by the individual buyers to the Company are refundable before a purchase of the specified properties
is consummated by the individual buyers. Upon the successful purchase of the specified properties by the individual buyers, a
portion of the proceeds from the Fang membership services is remitted to the real-estate developers or its designated marketing
agents.
The Company determines real-estate
developers as its customers and identifies one single performance obligation as the referral service. The Company determined the
referral service to be satisfied at a point in time only when the purchase of the specified properties have been consummated by
the individual buyers. Consideration payable to the real-estate developers or its designated marketing agents are accounted for
as a reduction of the transaction price.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
(2) Direct sales
services
The Company promotes properties
of its property developer customers primarily through its websites and mobile applications by providing the potential individual
buyers with additional information about the properties and related services, such as tours to visit the properties and other
services to facilitate property purchases. In return, the Company charges its property developer customers a fee for each property
it sells at a predetermined percentage of the value of the individual transaction. The Company determines real-estate developers
as its customers and identifies one single performance obligation as the referral service. The Company determined the referral
service to be satisfied at a point in time only when the purchase of the specified properties have been consummated by the individual
buyers. Revenues were recognized by the Company based on total of successful purchase transactions made.
(3) Sublease services
The Company identifies suitable
properties and initially enters into lease agreements with the property owners. The lease agreements allow the Company to sublease
the properties. Regardless whether the leased property is subsequently sub-leased by the Company, the lease agreement between
the Company and the property owner remains in effect, including the Company’s obligation to make fixed rental payments over
the non-cancellable lease term. The property owner is not a party to, and therefore not entitled to, any rights or obligations
under the sublease agreement. Sublease rental income is recorded as revenue from subleasing services and recognized on a gross
basis. The sublease income is recognized on a straight-line basis over the lease term.
Sublease rental income for the
year ended December 31, 2018 was US$6,402. Future minimum sublease rental incomes expected to be received under noncancellable
sublease agreements as of December 31, 2018 are as follows:
|
|
US$
|
|
|
|
|
|
2019
|
|
|
1,125
|
|
2020
|
|
|
97
|
|
2021 and thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
|
1,222
|
|
Contract Balances
The timing of revenue recognition,
billings and cash collections result in accounts receivable and contract liabilities (i.e. deferred revenue). Accounts receivable
are recognized in the period when the Company has provided services to its customers and when its right to consideration is unconditional.
The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt
as to the collectability of individual balances.
The Company considers many factors
in assessing the collectability of its receivables, such as the age of the amounts due, the customer’s payment history and
credit-worthiness. An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable.
Accounts receivable balances are written off after all collection efforts have been exhausted.
Amounts collected on accounts
receivable are included in net cash provided by operating activities in the consolidated statements of cash flows.
Deferred revenue (a contract
liability) is recognized when the Company has an obligation to transfer goods or services to a customer for which the Company
has received consideration from the customer, or for which an amount of consideration is due from the customer. The majority of
the balance as of January 1, 2018 were recognized as revenue during the year ended December 31, 2018.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Cost of Revenues
Cost of revenues consists of
employee costs, tax surcharges, rental costs incurred in relation to sublease services, server and bandwidth leasing fees, payments
to third-party real estate agents and other direct costs incurred in providing the related services. Prior to January 1, 2018,
VAT was also included in cost of revenues. These costs are expensed when incurred.
Advertising Expenses
Advertising expenses are expensed
when incurred and are included in selling expenses in the consolidated statements of comprehensive income (loss). For the years
ended December 31, 2016, 2017 and 2018, the advertising expenses were US$61,762, US$16,869 and US$7,110, respectively.
Leases
Leases are classified at the
inception date as either a capital lease or an operating lease. A lease is a capital lease if any of the following conditions
exists: (a) ownership is transferred to the lessee by the end of the lease term, (b) there is a bargain purchase option,
(c) the lease term is at least 75% of the property’s estimated remaining economic life or (d) the present value
of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the
lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of
an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are
expensed as incurred. The Company had no capital leases for any of the years presented.
Income Taxes
The Company follows the liability
method of accounting for income taxes, whereby deferred tax assets and liabilities are recognized based on the future tax consequences
attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and attributable to operating loss and tax credit carryforwards, if any. The Company reduces the carrying
amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is “more-likely-than-not”
that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed
at each reporting period based on a “more-likely-than-not” realization threshold. This assessment considers, among
other matters, the nature, frequency and severity of current and cumulative losses, forecasts of futures profitability, the duration
of statutory carryforward periods, the Company’s experience with operating loss and tax credit carryforwards, if any, not
expiring.
The Company applies ASC 740,
Income taxes
(“ASC 740”), to account for uncertainties in income taxes. In accordance with the provisions of
ASC 740, the Company recognizes in its financial statements the impact of a tax position if a tax return position or future
tax position is “more-likely-than-not” to prevail based on the facts and technical merits of the position. Tax positions
that meet the “more-likely-than-not” recognition threshold are measured at the largest amount of tax benefit that
has a greater than fifty percent likelihood of being realized upon settlement.
The Company’s estimated
liability for unrecognized tax benefits, which is included in “other non-current liabilities”, is periodically assessed
for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments
with respect to tax audits, and expiration of the statutes of limitation. The outcome for a particular audit cannot be determined
with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately
realized may differ from the Company’s estimates. As each audit is concluded, adjustments, if any, are recorded in the Company’s
financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require the Company
to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement
estimates are recognized in the period in which the changes occur.
Interest and penalties arising
from underpayment of income taxes are computed in accordance with the related PRC tax law. The amount of interest expense is computed
by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously
taken or expected to be taken in a tax return. Interest and penalties recognized in accordance with ASC 740 are classified
in the consolidated statements of comprehensive income (loss) as income tax expense.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Government Grants
Government grants primarily
consist of financial subsidies received from provincial and local governments for operating a business in their jurisdictions
and compliance with specific policies promoted by the local governments. For certain government grants, there are no defined rules
and regulations to govern the criteria necessary for companies to receive such benefits, and the amount of financial subsidy is
determined at the discretion of the relevant government authorities. The government grants of non-operating nature with no further
conditions to be met are recorded as non-operating income in “Other income, net” when received. The government grants
with certain operating conditions are recorded as liabilities when received and will be recorded as operating income when the
conditions are met. Government grants related to the acquisition of property and equipment and land use rights are recorded as
other non-current liabilities on the consolidated balance sheets when the grants become receivable, and recognized as other income
in the consolidated statements of comprehensive income (loss) on a straight-line basis over the estimated useful lives of those
assets. For the years ended December 31, 2016, 2017 and 2018, US$6,469 and US$3,154, US$1,435 respectively, of government grants
were recognized in the consolidated statements of comprehensive income (loss).
Share-based Compensation
The Company’s employees
and directors participate in the Company’s share-based award incentive plan which is more fully discussed in Note 18.
The Company applies ASC 718,
Compensation-Stock Compensation
(“ASC 718”), to account for its employee
share-based payments. There were no share-based payments made to non-employees for any of the years presented.
In accordance with ASC 718,
the Company determines whether a share option should be classified and accounted for as a liability award or an equity award.
All grants of share-based awards to employees classified as equity awards are recognized in the financial statements based on
their grant date fair values which are calculated using an option pricing model. All grants of share-based awards to employees
and directors classified as liabilities are remeasured at the end of each reporting period with an adjustment for fair value recorded
to the current period expense in order to properly reflect the cumulative expense based on the current fair value of the vested
rewards over the vesting periods. The Company has elected to recognize compensation expense using the straight-line method for
all employee equity awards granted with graded vesting based on service conditions, which were not subject to performance vesting
conditions.
Meanwhile, the Company uses
the accelerated attribution method for equity awards with performance conditions on a tranche-by-tranche basis based on the probable
outcome of the performance conditions. To the extent the required vesting conditions are not met resulting in the forfeiture of
the share-based awards, previously recognized compensation expense relating to those awards is reversed.
Cancellation of an award accompanied
by the concurrent grant of a replacement award is accounted for as a modification of the terms of the cancelled award (“modified
awards”). The compensation costs associated with the modified awards are recognized if the new vesting condition is achieved.
Total recognized compensation cost for the awards is at least equal to the fair value of the awards at the grant date unless at
the date of the modification the performance or service conditions of the original awards are not expected to be satisfied. The
incremental compensation cost is measured as the excess of the fair value of the replacement award over the fair value of the
cancelled award at the cancellation date. Therefore, in relation to the modified awards, the Company recognizes share-based compensation
over the vesting periods of the replacement award, which comprises, (i) the amortization of the incremental portion of share-based
compensation over the remaining vesting term and (ii) any unrecognized compensation cost of the original award over the original
term.
In March 2016, the Financial
Accounting Standards Board (“FASB”) issued a new accounting standard update on simplifying the accounting for share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The new guidance also allows an entity to account for forfeitures when they occur. This guidance
became effective for reporting periods beginning after December 15, 2016. The Company adopted this new guidance on January 1,
2017. In prior years, excess tax benefits were recognized in additional paid-in capital; tax deficiencies were recognized either
as an offset to accumulated excess tax benefits, if any, or in the consolidated statement of comprehensive income (loss). Excess
tax benefits were not recognized until the deduction reduces taxes payable. Upon adoption, all excess tax benefits and tax deficiencies
are recognized as income tax expense or benefit in the consolidated statement of comprehensive income (loss). This change was
adopted prospectively and did not have a material impact on the Company’s consolidated financial statements. The Company
elected to account for forfeitures as they occur, rather than estimate expected forfeitures. These changes were adopted on a modified
retrospective basis, and resulted in no material cumulative effect adjustment to retained earnings.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
Earnings per Share
The Company computes earnings
per Class A and Class B ordinary shares in accordance with ASC 260,
Earnings Per Share
(“ASC 260”), using the
two class method. Under the provisions of ASC 260, basic net income per share is computed using the weighted average number of
ordinary shares outstanding during the period except that it does not include unvested ordinary shares subject to repurchase or
cancellation. Diluted net income per share is computed using the weighted average number of ordinary shares and, if dilutive,
potential ordinary shares outstanding during the period. Potentially dilutive securities have been excluded from the computation
of diluted net income per share if their inclusion is anti-dilutive. Potential ordinary shares consist of the incremental ordinary
shares issuable upon the exercise of stock options, contracts that may be settled in the Company’s stock or cash and the
conversion of the convertible senior notes. The dilutive effect of outstanding stock options and convertible senior notes is reflected
in diluted earnings per share by application of the treasury stock method and the if-converted method, respectively. The computation
of the diluted net income per share of Class A ordinary shares assumes the conversion of Class B ordinary shares, while the diluted
net income per share of Class B ordinary shares does not assume the conversion of those shares.
The liquidation and dividend
rights of the holders of the Company’s Class A and Class B ordinary shares are identical, except with respect to voting.
The Class B ordinary shareholders do not have the legal ability to cause the Company’s board of directors to declare unequal
dividends to the holders of Class A and Class B ordinary shares. As a result, and in accordance with ASC 260, the undistributed
earnings for each year are allocated based on the contractual participation rights of the Class A and Class B ordinary shares
as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed
earnings are allocated on a proportionate basis. Further, as the conversion of Class B ordinary shares is assumed in the computation
of the diluted net income per share of Class A ordinary shares, the undistributed earnings are equal to net income for that computation.
For the purposes of calculating the Company’s basic and diluted earnings per Class A and Class B ordinary shares, the
ordinary shares relating to the options that were exercised are assumed to have been outstanding from the date of exercise of
such options.
Derivative Instruments
ASC 815,
Derivatives and
Hedging
, requires all contracts which meet the definition of a derivative to be recognized on the balance sheet as either
assets or liabilities and recorded at fair value. Changes in the fair value of derivative financial instruments are either recognized
periodically in earnings or in other comprehensive income (loss) depending on the use of the derivative and whether it qualifies
for hedge accounting. Changes in fair values of derivatives not qualified as hedges are reported in earnings. The estimated fair
values of derivative instruments are determined at discrete points in time based on the relevant market information. These estimates
are calculated with reference to the market rates using industry standard valuation techniques. The fair value of the derivative
instruments held by the Company was insignificant for all of the years presented.
Comprehensive Income (Loss)
Comprehensive income (loss)
is defined as the change in equity of the Company during a period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income (loss),
as presented on the consolidated balance sheets, includes (i) the cumulative foreign currency translation adjustments, and (ii)
gains and losses on intra-entity foreign currency transactions that are of a long-term-investment nature (that is, settlement
is not planned or anticipated in the foreseeable future) between consolidated entities. Comprehensive income (loss) also included
changes in unrealized gains (losses) on available-for-sale equity securities for the years ended December 31, 2016 and 2017, before
the adoption of ASU 2016-01.
Contingencies
The Company records accruals
for certain of its outstanding legal proceedings or claims when it is probable that a liability will be incurred and the amount
of loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings or claims
that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and
reasonably estimable. The Company discloses the amount of the accrual if it is material.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
When a loss contingency is not
both probable and estimable, the Company does not record an accrued liability but discloses the nature and the amount of the claim,
if material. However, if the loss (or an additional loss in excess of the accrual) is at least reasonably possible, then the Company
discloses an estimate of the loss or range of loss, if such estimate can be made and material, or states that such estimate is
immaterial if it can be estimated but immaterial, or discloses that an estimate cannot be made. The assessments of whether a loss
is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involve complex judgments about
future events. Management is often unable to estimate the loss or a range of loss, particularly where (i) the damages sought are
indeterminate, (ii) the proceedings are in the early stages, or (iii) there is a lack of clear or consistent interpretation of
laws specific to the industry-specific complaints among different jurisdictions. In such cases, there is considerable uncertainty
regarding the timing or ultimate resolution of such matters, including eventual loss, fine, penalty or business impact, if any.
Recent accounting pronouncements
In February 2016, the FASB
established Topic 842,
Leases,
by issuing ASU No. 2016-02, which requires lessees to recognize leases on balance sheet
and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01,
Land
Easement Practical Expedient for Transition to Topic 842
; ASU No. 2018-10,
Codification Improvements to Topic 842,
Leases
; and ASU No. 2018-11,
Targeted Improvements
. The new standard establishes a right-of-use model (ROU) that
requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12
months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of
expense recognition in the income statement.
The new standard is effective
for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. For all other
entities, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted. A modified retrospective transition approach is required, applying
the new standard to all leases existing at the date of initial application. The Company adopted the new standard on January 1,
2019 and used the effective date as the date of initial application. Consequently, financial information will not be updated and
the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a
number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’,
which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification
and initial direct costs.
Leases currently classified
as operating leases in note 21 will be reported on the consolidated balance sheets upon adoption at their net present value, which
will increase total assets and liabilities. The Company expects to recognize the right-of-use assets and lease liability in amount
of approximately US$5.7 million respectively as of January 1, 2019. The Company used its estimated incremental borrowing rate
based on information available at the date of adoption in calculating the present value of its existing lease payments. The adoption
of ASC 842 is not expected to have a material impact to the Company’s consolidated statements of comprehensive income (loss)
or net cash provided by operating activities.
The adoption of ASC 842 is not
expected to have a material impact to the accounting and disclosure of sublease services in which the Company is the lessor.
In June 2016, the FASB issued
ASU No. 2016-13 (“ASU 2016-13”),
Financial Instruments – Credit Losses (Topic 326), Measurement of Credit
Losses on Financial Instruments.
ASU 2016-13 changes the impairment model for most financial assets and certain other instruments.
The standard will replace “incurred loss” approach with an “expected loss” model for instruments measured
at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the
carrying amount, as they do today under the other-than-temporary impairment model. The standard is effective for public business
entities for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Company
is currently evaluating the impact of adopting this standard on its consolidated financial statements.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|
In August 2018, the FASB issued
ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for
Fair Value Measureme
nt. ASU No. 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements.
The amendments applicable to the disclosures of changes in unrealized gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty
should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. This
ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. All other
amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted,
and an entity is also permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures
until their effective date. The Company is in the process of evaluating the impact on its consolidated financial statements upon
adoption.
|
3.
|
CONCENTRATION OF RISKS
|
Concentration of Credit
Risk
Assets that potentially subject
the Company to significant concentration of credit risk primarily consist of cash and cash equivalents, restricted cash, fixed-rate
time deposits classified as short-term investments, accounts receivable, funds receivable, loans receivable and commitment deposits.
As of December 31, 2018, the Company had US$463,615 in cash and cash equivalents, restricted cash and short-term investments,
96.2% and 3.8% of which were held by financial institutions in the PRC and financial institutions outside of the PRC, respectively.
Under PRC law, it is generally required that a commercial bank in the PRC that holds third-party cash deposits protect the depositors’
rights and interests over their deposited money; PRC banks are subject to a series of risk control regulatory standards; and PRC
bank regulatory authorities are empowered to take over the operation and management of any PRC bank that faces a material credit
crisis. In the event of bankruptcy of one of the financial institutions in which the Company has deposits or investments, it may
be unlikely to claim its deposits or investments back in full. The Company selected reputable financial institutions with high
credit ratings to deposit its assets. The Company regularly monitors the ratings of the financial institutions in case of any
defaults. There has been no recent history of default in relation to these financial institutions.
Accounts receivable are typically
unsecured and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable is mitigated
by credit evaluations the Company performs on its customers and its ongoing monitoring of outstanding balances. The Company regularly
reviews the creditworthiness of its customers, and requires collateral from its customers in certain circumstances when accounts
receivables become long overdue.
Funds receivable represent amounts
due from third-party payment service providers. The Company carefully considers and monitors the credit worthiness of the third-party
payment service providers to mitigate any risks associated with funds receivable.
The Company is exposed to default
risk on its loans receivable. The Company assesses the allowance for credit loss related to loans receivable on a quarterly basis,
either on an individual or collective basis. As of December 31, 2018, no single borrower comprised a significant portion of the
Company’s loan portfolio.
The Company regularly reviews
the creditworthiness of real estate developers, and requires collateral from real estate developers in certain circumstances when
commitment deposits become overdue.
Concentration of Customers
There were no revenues from
customers which individually represented greater than 10% of the total revenues for any of the years ended December 31, 2016,
2017 and 2018.
Current Vulnerability
Due to Certain Other Concentrations
The Company’s operations
may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government
has been pursuing economic reform policies for more than 30 years, no assurance can be given that the PRC government will
continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in
leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social
conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.
The Company almost transacts
all of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government
abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the
“PBOC”). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into
United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the
PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
3.
|
CONCENTRATION OF RISKS (continued)
|
Approval of foreign currency
payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices,
shipping documents and signed contracts. Additionally, the value of the RMB is subject to changes in central government policies
and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.
Internet and advertising related
businesses are subject to significant restrictions under current PRC laws and regulations. Specifically, foreign investors are
not allowed to own more than a 50% equity interest in any ICP business. In 2016, a foreign invested entity mainly owned and ultimately
controlled by our WFOE obtained the ICP to operate
www.fang.com
.
The Company conducts its operations
in the PRC through contractual arrangements entered into between the WOFEs and the PRC Domestic Entities. The relevant regulatory
authorities may find the current contractual arrangements and businesses to be in violation of any existing or future PRC laws
or regulations. If the Company or any of its current or future PRC Domestic Entities or subsidiaries are found in violation of
any existing or future laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant
regulatory authorities would have broad discretion in dealing with such violations, including levying fines, confiscating the
income of WOFEs, PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries, revoking the business licenses or operating
licenses of WOFEs, PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries, shutting down the Company’s
servers or blocking the Company’s websites, discontinuing or placing restrictions or onerous conditions on the Company’s
operations, requiring the Company to undergo a costly and disruptive restructuring, or enforcement actions that could be harmful
to the Company’s business. Any of these actions could cause significant disruption to the Company’s business operations
and severely damage the Company’s reputation, which would in turn materially and adversely affect the Company’s business
and results of operations. In addition, if the imposition of any of these penalties causes the Company to lose the rights to direct
the actives of PRC Domestic Entities or the Company’s right to receive their economic benefits, the Company would no longer
be able to consolidate the PRC Domestic Entities.
In addition, if the WOFEs, PRC
Domestic Entities and the PRC Domestic Entities’ subsidiaries or their shareholders fail to perform their obligations under
the Contractual Agreements, the Company may have to incur substantial costs and expend resources to enforce the Company’s
rights under the contracts. The Company may have to rely on legal remedies under PRC law, including seeking specific performance
or injunctive relief and claiming damages, which may not be effective. All of these Contractual Agreements are governed by PRC
law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted
in accordance with PRC law and any disputes would be resolved in accordance with the PRC legal procedures. The legal system in
the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal
system could limit the Company’s ability to enforce these Contractual Agreements. Under PRC law, rulings by arbitrators
are final, parties cannot appeal the arbitration results in courts, and prevailing parties may only enforce the arbitration awards
in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event
the Company is unable to enforce these Contractual Agreements, the Company may not be able to exert effective control over its
PRC Domestic Entities, and the Company’s ability to conduct its business may be negatively affected.
The Company believes that its
corporate structure and Contractual Agreements of the Company’s PRC Domestic Entities and WFOEs in China are in compliance
with all existing PRC laws and regulations. Therefore, in the opinion of management, (i) the ownership structure of the Company
and the PRC Domestic Entities are in compliance with existing PRC laws and regulations; (ii) the Contractual Agreements with PRC
Domestic Entities and their nominee shareholder are valid and binding, and will not result in any violation of PRC laws or regulations
currently in effect; and (iii) the Company’s business operations are in compliance with existing PRC law and regulations
in all material respects.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
The following table presents
revenue disaggregated by nature of services:
|
|
For
the Year
Ended
December
31, 2018
|
|
E-commerce services
|
|
|
|
|
- Fang
membership services
|
|
|
2,752
|
|
- Direct
sales services
|
|
|
5,294
|
|
- Sub
lease services
|
|
|
6,402
|
|
- Other
|
|
|
936
|
|
Subtotal
|
|
|
15,384
|
|
|
|
|
|
|
Marketing services
|
|
|
119,680
|
|
|
|
|
|
|
Listing services
|
|
|
|
|
- Basic
listing services
|
|
|
84,482
|
|
- Special
listing services
|
|
|
29,052
|
|
Subtotal
|
|
|
113,534
|
|
|
|
|
|
|
Financial services
|
|
|
18,060
|
|
|
|
|
|
|
Value-added services
|
|
|
|
|
- Data
services
|
|
|
18,905
|
|
- Analytics
services
|
|
|
12,220
|
|
- Other
|
|
|
5,233
|
|
Subtotal
|
|
|
36,358
|
|
Total revenues
|
|
|
303,016
|
|
The following table presents
revenue disaggregated by categories of customers:
|
|
For
the Year
Ended
December
31, 2018
|
|
E-commerce
services
|
|
|
|
|
- New
home (a)
|
|
|
7,391
|
|
- Other
|
|
|
7,993
|
|
Subtotal
|
|
|
15,384
|
|
|
|
|
|
|
Marketing
services
|
|
|
|
|
- New
home (a)
|
|
|
119,352
|
|
- Home
furnishing and improvement
|
|
|
328
|
|
Subtotal
|
|
|
119,680
|
|
|
|
|
|
|
Listing
services
|
|
|
|
|
- Secondary
and rental (b)
|
|
|
84,773
|
|
- Research
(c)
|
|
|
28,748
|
|
- Other
|
|
|
13
|
|
Subtotal
|
|
|
113,534
|
|
|
|
|
|
|
Financial
services
|
|
|
18,060
|
|
|
|
|
|
|
Value-added
services
|
|
|
36,358
|
|
|
|
|
|
|
Total
revenues
|
|
|
303,016
|
|
|
(a)
|
New home business primarily consists
of sales to residential property developers and their sales agents who are promoting
newly developed properties for sale.
|
|
(b)
|
Secondary and rental business
primarily consists of sales to real estate agents who are promoting secondary properties
for sale or rental.
|
|
(c)
|
Research primarily consists of
online and offline themed marketing campaigns provided to customers.
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
Short-term investments and long-term
investments consisted of the following:
|
|
|
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
15,833
|
|
|
|
1,773
|
|
Fixed-rate time deposits
|
|
|
39,968
|
|
|
|
14,270
|
|
|
|
|
55,801
|
|
|
|
16,043
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Equity Investments with Readily Determinable Fair Values:
|
|
|
|
|
|
|
|
|
- Color Life Service Company ("Color Life")
|
|
|
4,554
|
|
|
|
-
|
|
- Hopefluent Company Holdings Limited ("Hopefluent")
|
|
|
47,729
|
|
|
|
30,733
|
|
- Shenzhen World Union Properties Consultancy Co., Ltd. ("World
Union")
|
|
|
318,065
|
|
|
|
150,750
|
|
|
|
|
370,348
|
|
|
|
181,483
|
|
Equity Investments without Readily Determinable Fair Values:
|
|
|
|
|
|
|
|
|
- Guilin Bank
|
|
|
38,817
|
|
|
|
47,664
|
|
- Xian Chuangdian Quancheng Real Estate Consultant Limited (“Chuangdian”)
|
|
|
3,498
|
|
|
|
3,330
|
|
- Tospur Real Estate Consulting Co., Ltd. ("Tospur")
|
|
|
58,301
|
|
|
|
55,507
|
|
-Foshan Nature Lvke Science
|
|
|
-
|
|
|
|
729
|
|
|
|
|
100,616
|
|
|
|
107,230
|
|
Equity method investments
|
|
|
|
|
|
|
|
|
- Chongqing Wanli New Energy Co., Ltd. (“Wanli”)
|
|
|
-
|
|
|
|
84,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
470,964
|
|
|
|
373,233
|
|
As of December 31, 2017 and
2018, the Company held fixed-rate time deposits purchased from commercial banks and financial institutions with maturities of
less than one year.
In October 2017, the Company
invested US$15,299 in PRC mutual funds, which were classified as trading securities as they were held principally for the purpose
of selling in the near term. As of December 31, 2017, the market price increases to US$15,833 and an unrealized gains of US$518
was included in earnings. In 2018, the Company sold majority of such trading securities in the amount of US$11,705, and recognized
a loss of US$2,091 in the consolidated statements of change in fair value of trading securities.
Interest income on the fixed-rate
time deposits and cash and cash equivalents and restricted cash of US$11,367, US$11,322 and US$10,302 were recognized for the
years ended December 31, 2016, 2017 and 2018, respectively.
Dividends from the long-term
investments of US$3,281, US$6,692 and US$6,838 were recognized as investment income in the consolidated statements of comprehensive
income (loss) for the years ended December 31, 2016, 2017 and 2018, respectively.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
5.
|
INVESTMENTS (continued)
|
On June 27, 2014, the Company
acquired 27,551,733 shares of Color Life, a Hong Kong listed company, for US$13,583. The investment constituted a 2.76% ownership
in Color Life and was classified as an available-for-sale security. As of December 31, 2016, the market price further declined
to US$20,606 and an unrealized loss of US$3,097 was recorded in other comprehensive income (loss). In 2017, the Company sold 20,705,000
shares for a total consideration of US$12,317, and recognized a gain of US$ 2,110 in the consolidated statements of comprehensive
income (loss). As of December 31, 2017, the market price of the remaining shares declined to US$4,554. Total fair value decrease
of US$3,735 was recorded in other comprehensive income (loss) and US$2,110 gain related to the sale was reclassified out of accumulated
other comprehensive income for the year ended December 31, 2017. In 2018, the Company sold 6,846,733 shares for a total consideration
of US$6,645, and recognized a gain of US$2,091 in the consolidated statements of comprehensive income (loss). The Company received
cash dividends in the amount of US$440 distributed by Color Life in 2018.
In November 2014, the Company
acquired an aggregate of 111,935,037 shares of Hopefluent, a Hong Kong listed company, for US$43,361. The investment constituted
a 17.26% ownership in Hopefluent and was classified as an available-for-sale security. As of December 31, 2016, an unrealized
loss of US$306 was recorded in other comprehensive income (loss) for the year ended December 31, 2016. In 2017, the Company sold
3,164,000 shares for a total consideration of US$1,614, and recognized a gain of US$626 in the consolidated statements of comprehensive
income (loss). As of December 31, 2017, the market price of the remaining shares increased to US$47,729. Total fair value increase
of US$18,309 was recorded in other comprehensive income and US$626 gain related to the sale was reclassified out of accumulated
other comprehensive income for the year ended December 31, 2017. In 2018, the Company received cash dividends in the amount of
US$1,711 distributed by Hopefluent. As of December 31, 2018, the market price of the shares declined to US$30,733. Total fair
value decrease of US$16,996 was recorded in change in fair value of securities for the year ended December 31, 2018
On May 29, 2015, the Company
acquired an aggregate of 145,376,744 shares of World Union, a PRC listed company, at a total consideration of US$121,393. The
investment constituted a 10.06% ownership in World Union. The investment in World Union was classified as a cost method investment
upon acquisition, as the Company could not freely sell the shares due to a lock-up provision of 36 months. On April 8, 2016, World
Union declared a stock dividend whereby four shares were distributed to shareholders for every ten shares held. As a result, the
Company’s shareholding increased from 145,376,744 shares to 203,527,442 shares. As of December 31, 2017, as the lock-up
restriction will terminate within one year, the classification of the investment changed from a cost method to an available for
sale security, and the fair value of the investment was measured based on the market price, adjusted for the effect of the remaining
restriction, in accordance with ASC 820. As of December 31, 2017, the fair value of World Union was US$318,065 and the related
tax effect of US$49,566 were recorded in other comprehensive income for the year ended December 31, 2017. As of December 31, 2017
and 2018, the investment constituted a 9.96% ownership in World Union. The Company received cash dividends distributed by World
Union in amount of US$2,417 and US$2,445 in 2017 and 2018 respectively. As of December 31, 2018, the fair value of World Union
was US$150,750, total fair value decrease of US$161,039 was recorded in change in fair value of securities for the year ended
December 31, 2018.
On October 29, 2015, the Company
acquired 11.03% of the share capital of Sindeo, a non-listed company, for US$5,000. The investment in Sindeo was classified as
a cost method investment, as the Company does not have significant influence over Sindeo and because there is no readily determinable
fair value. During the year ended December 31, 2016 and 2017, the impairment loss of US$2,232 and US$2,768, respectively, was
recorded in the statement of comprehensive income (loss) as Sindeo’s financial condition had deteriorated as evidenced by
significant operating losses.
On July 12, 2016, 30,595,859
shares of Guilin Bank, a PRC non-listed company, was transferred by a third-party to repay a portion of its overdue receivables
of US$12,173 owed to the Company. The investment constituted a 1.02% ownership in Guilin Bank. The investment was classified as
equity securities without readily determinable fair values, as the Company does not have significant influence over Guilin Bank
and because there is no readily determinable fair value. On September 25, 2017, additional 42,834,202 shares of Guilin Bank was
transferred by the third-party in full satisfaction of its remaining overdue receivables of US$24,695 to the Company. In October
2017, the Company received 7,343,006 shares of Guilin Bank as a stock dividend and the Company’s shareholding increased
from 73,430,061 to 80,773,067. The total investment constituted a 1.98% and 1.79% ownership in Guilin Bank as of December 31,
2017 and 2018 respectively. No impairment on the investment in Guilin Bank was recognized for the year ended December 31, 2017
and 2018. The Company received cash dividends distributed by Guilin Bank in amount of US$1,308 and US$1,402 in 2017 and 2018 respectively.
In 2018, Guilin Bank entered into a new financing agreement with a group of new investors. The new financing provided the observable
price for the Company’s investment. The Company evaluated this investment’s carrying amount based on the observable
price, and recognized a gain of US$10,633 in change in fair value of securities. The Company accounts for the investment in Guilin
Bank at cost adjusted for observable price changes for the years ended December 31, 2018.
On January 21, 2016, the Company
acquired an aggregate of 4,411,765 shares of Chuangdian, which is listed on the National Equities Exchange and Quotations (“NEEQ”)
in the PRC, for a total consideration of US$3,294. The investment constituted a 15% ownership in Chuangdian and was classified
as equity securities without readily determinable fair values, as the Company does not have significant influence and because
there is no readily determinable fair value, as the breadth and scope of NEEQ is not comparable to equivalent U.S markets. The
Company received 2,766,177 and 1,378,165 shares as dividends in 2016 and 2017, respectively. The Company received cash dividends
in the amount of US$96 and US$113 in 2017 and 2018 respectively. No impairment on the investment in Chuangdian was recognized
for the year ended December 31, 2017 and 2018.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
5.
|
INVESTMENTS (continued)
|
On December 10, 2014, the Company
acquired 16% of the share capital of Tospur, a non-listed company, for US$62,257. The investment in Tospur was classified as equity
securities without readily determinable fair values, as the Company does not have significant influence over Tospur and because
there is no readily determinable fair value. No impairment on the investment in Tospur was recognized for the year ended December
31, 2018. The Company received US$649 and US$619 cash dividends in 2017 and 2018 respectively.
In July 2018, the Company has
entered into definitive agreements (the Agreement) to acquire a 10% equity interest in Chongqing Wanli New Energy Co., Ltd. (“Wanli”),
a company listed on the Shanghai Stock Exchange, from its controlling shareholder for a cash consideration of US$72,852, of which
US$29,141 will compensate the seller in connection with the Business Disposal (defined below). The difference between the cash
consideration of the investment and the amount of underlying equity in net assets of Wanli was US$60,980 as of August 10, 2018, the
closing date of the acquisition. In connection with the acquisition, the seller agrees (1) to enter into an irrevocable acting-in-concert
agreement with a term of three years to adhere to the Company’s action in Wanli’s future meetings of shareholders
and board of directors, (2) to purchase from Wanli its battery business for a price of no less than US$99,758 within three years
after the consummation of the proposed acquisition, and (3) to ensure the profitability of Wanli measured by the lower of net
profit or net profit excluding extraordinary items in three years subsequent to the Agreement. Following the consummation of the
acquisition, the Company became the largest shareholder of Wanli.
During September to December
in 2018, the Company acquired additional 4.67% equity interest in Wanli through daily transactions in the secondary market with
total consideration of US$11,667. As at December 31, 2018, the Company holds 14.67% equity interest in Wanli.
The investment is accounted
for under equity method as the Company can exercise significant influence over operating and financial policies of Wanli.
The following is a summary of
the available-for-sale securities as of December 31, 2017. Due to the adoption of ASU 2016-01, change in fair value of available-for-sale
equity securities are recorded in change in fair value of securities in the consolidated financial statement of comprehensive
income (loss).
|
|
Original
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
(Net
Carrying
Amount)
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Color Life
|
|
|
3,376
|
|
|
|
1,178
|
|
|
|
-
|
|
|
|
4,554
|
|
- Hopefluent
|
|
|
33,956
|
|
|
|
13,773
|
|
|
|
-
|
|
|
|
47,729
|
|
- World Union
|
|
|
121,393
|
|
|
|
196,672
|
|
|
|
-
|
|
|
|
318,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,725
|
|
|
|
211,623
|
|
|
|
-
|
|
|
|
370,348
|
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
Accounts receivable and the
related allowance for doubtful accounts were summarized as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
98,011
|
|
|
|
94,226
|
|
Allowance for doubtful accounts
|
|
|
(31,127
|
)
|
|
|
(33,276
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
66,884
|
|
|
|
60,950
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Movement in allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
31,064
|
|
|
|
34,336
|
|
|
|
31,127
|
|
Additional provision charged to expenses
|
|
|
30,025
|
|
|
|
31,695
|
|
|
|
28,050
|
|
Write-offs
|
|
|
(24,250
|
)
|
|
|
(38,351
|
)
|
|
|
(23,442
|
)
|
Foreign currency translation adjustments
|
|
|
(2,473
|
)
|
|
|
3,417
|
|
|
|
(2,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
34,366
|
|
|
|
31,127
|
|
|
|
33,276
|
|
The
recoveries of amounts previously charged off were US$2,568 in 2018.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
7.
|
PREPAYMENTS AND OTHER CURRENT ASSETS
|
Prepayments and other current
assets consisted of the following:
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
5,845
|
|
|
|
5,999
|
|
Advance to employees
|
|
|
903
|
|
|
|
603
|
|
Receivable from a broker for exercise of employee stock options
|
|
|
808
|
|
|
|
65
|
|
Rental deposits and others
|
|
|
4,876
|
|
|
|
2,325
|
|
Interest receivable
|
|
|
2,902
|
|
|
|
3,801
|
|
Rent paid to original lessors for sublease services
|
|
|
5,590
|
|
|
|
346
|
|
Properties held for sale
|
|
|
5,429
|
|
|
|
9,906
|
|
Others
|
|
|
6,351
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,704
|
|
|
|
27,995
|
|
Beginning in August 2014, the
Company initially provided secured and unsecured loans to both individuals and businesses, but ceased to provide loans to businesses
by end of 2015. Loans made to individuals consist of loans secured by pledged properties for consumption and property renovations
use, as well as unsecured loans.
Secured loans
As of December 31, 2017 and
2018, the duration of secured loans ranged from 3 to 36 months, and had interest rates ranging from 6% to 21.6% per annum and
7.8% to 18% per annum, respectively. As of December 31, 2017 and 2018, the total outstanding balance is US$132,841 and US$123,673.
Unsecured loans
As of December 31, 2017 and
2018, the duration of unsecured loans ranged from 1 to 36 months, and had interest rates ranging from 1% to 28% per annum and
5.4% to 18% per annum. As of December 31, 2017 and 2018, the total outstanding balance is US$16,187 and US$4,007.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
8.
|
LOANS RECEIVABLE (continued)
|
The Company assesses the allowance
for credit loss related to loans receivable on a quarterly basis, either on an individual or collective basis. The Company considers
various factors in evaluating loans receivable for possible impairment on an individual basis. These factors include the amount
of the loan, historical experience, value of collateral, if any, credit quality and age of the receivables balances. This evaluation
is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information
becomes available. When the evaluation indicates that it is probable that the scheduled interest and principal payments due per
the loan agreement are unlikely to be collected, such loan receivable is considered impaired. Impairment is measured on an individual
loan basis using either the present value of expected future cash flows discounted at the loan’s effective interest rate
or the fair value of the collateral if the loan is secured. The Company evaluates the remainder of its loans receivables portfolio
for impairment on a collective basis in accordance with ASC 450-20,
Loss Contingencies
, and records an allowance for credit
loss at the portfolio level. When evaluating the loans receivable on a collective basis, the Company applies a formula-based percentage
utilizing historical loss data to calculate the collective allowance.
The Company’s internal
credit risk ratings are categorized into three categories: pass, special attention and non-performing. A “pass” rating
represents the highest quality loans receivable. Typically, the Company considers loans receivable with a risk rating of non-performing
to be fully impaired, or up to the fair value of collateral, if any.
The Company derives internal
credit risk rating by taking into consideration various customer-specific factors, such as the Company’s specific historical
experience with the borrower. Such credit risk rating is updated when facts or circumstances change. Loans receivable are written
off at the point when they are considered uncollectible, and all outstanding balances, including any previously earned but uncollected
interest income, will be reversed and charged against the allowance for credit loss.
The internal credit risk rating
considerations are as follows:
• Pass: Loans for
which borrowers are expected to honor the terms of the contracts. There are no indicators to question the borrowers’ ability
to repay the principal and accrued interest in full and on a timely basis.
• Special attention:
Loans for which borrowers are currently able to repay the principal and no interests are accrued when considered impaired or overdue
more than 90 days, the repayment of loans might be adversely affected by some factors.
• Non-performing:
Loans for which borrowers may not able to repay the principal and accrued interest in full. These loans are fully provided for
unless secured by collateral
The Company does not accrue
interest on loans receivable that are considered impaired or more than 90 days past due unless either the receivable has not been
collected due to administrative reasons or the receivable is well secured and in the process of collection. After an impaired
loans receivable has been placed on nonaccrual status, interest will be recognized when cash is received on a cash basis method-cost
recovery. A loan receivable may be returned to accrual status after all of the borrower’s delinquent balances of principal
and interest have been settled, and the borrower remains current for an appropriate period. The outstanding balance of nonaccrual
loans as of December 31, 2017 and 2018 were US$3,996 and US$5,749.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
8.
|
LOANS RECEIVABLE (continued)
|
A summary of the Company’s
loans receivables is presented as follows:
|
|
As of December 31, 2017
|
|
|
As of December 31, 2018
|
|
|
|
US$’000
|
|
|
US$’000
|
|
Personal loans
|
|
|
149,028
|
|
|
|
127,680
|
|
Total Loans receivable
|
|
|
149,028
|
|
|
|
127,680
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
Individually assessed
|
|
|
574
|
|
|
|
546
|
|
Collectively assessed
|
|
|
4,342
|
|
|
|
3,283
|
|
Loans receivable, net
|
|
|
144,112
|
|
|
|
123,851
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
129,438
|
|
|
|
117,602
|
|
Non-current portion
|
|
|
14,674
|
|
|
|
6,249
|
|
For the years ended December
31, 2016, 2017 and 2018, a provision of US$80 and US$1,180, and a reversal of provision of US$884, were recorded to the consolidated
statements of comprehensive income (loss) respectively, while no charge-offs against provisions occurred.
Analysis of loans by credit
quality indicator
The following table summarizes
the Company’s loan portfolio by credit quality indicator as of December 31, 2018 and 2017, respectively:
Internal credit risk rating
|
|
As
of December 31,
2017
|
|
|
%
|
|
|
As
of December 31,
2018
|
|
|
%
|
|
|
|
US$
|
|
|
|
|
|
US$
|
|
|
|
|
Pass
|
|
|
144,908
|
|
|
|
97.2
|
|
|
|
121,931
|
|
|
|
96.0
|
|
Special attention
|
|
|
763
|
|
|
|
0.5
|
|
|
|
1,383
|
|
|
|
1.0
|
|
Non-performing
|
|
|
3,357
|
|
|
|
2.3
|
|
|
|
4,366
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
149,028
|
|
|
|
100
|
|
|
|
127,680
|
|
|
|
100
|
|
The following tables represent
the aging of loans by portfolio segment as of December 31, 2017 and 2018, respectively:
As of December 31,2018
|
|
90-179
days
past
due
|
|
|
180-365
days
past
due
|
|
|
Over
1 year
past
due
|
|
|
Total
|
|
|
Current
|
|
|
Total loans
|
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
Personal loans
|
|
|
1,717
|
|
|
|
164
|
|
|
|
3,345
|
|
|
|
5,226
|
|
|
|
122,454
|
|
|
|
127,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,717
|
|
|
|
164
|
|
|
|
3,345
|
|
|
|
5,226
|
|
|
|
122,454
|
|
|
|
127,680
|
|
As of December 31,2017
|
|
90-179
days
past
due
|
|
|
180-365
days
past
due
|
|
|
Over
1 year
past
due
|
|
|
Total
|
|
|
Current
|
|
|
Total loans
|
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
|
US$’000
|
|
Personal loans
|
|
|
245
|
|
|
|
180
|
|
|
|
3,445
|
|
|
|
3,870
|
|
|
|
145,158
|
|
|
|
149,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
245
|
|
|
|
180
|
|
|
|
3,445
|
|
|
|
3,870
|
|
|
|
145,158
|
|
|
|
149,028
|
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
8.
|
LOANS RECEIVABLE (continued)
|
Allowance for loan losses
The following tables present
the activity in the allowance for loan losses in loans receivable by loan portfolio as of and for the year ended December 31,
2017 and 2018, respectively:
For the year ended December 31, 2018
|
|
Personal
loans
|
|
Beginning balance
|
|
|
4,916
|
|
Provision
|
|
|
2,776
|
|
Reversal
|
|
|
(3,660
|
)
|
Foreign currency translation adjustments
|
|
|
(203
|
)
|
|
|
|
|
|
Ending balance
|
|
|
3,829
|
|
Ending balance: individually evaluated for impairment
|
|
|
546
|
|
Ending balance: collectively evaluated for impairment
|
|
|
3,283
|
|
Loans
|
|
|
|
|
Of which individually evaluated for impairment
|
|
|
546
|
|
Of which collectively evaluated for impairment
|
|
|
127,134
|
|
For the year ended December 31, 2017
|
|
Personal
|
|
Beginning balance
|
|
|
3,736
|
|
Provision
|
|
|
1,180
|
|
Write offs
|
|
|
-
|
|
Ending balance
|
|
|
4,916
|
|
Ending balance: individually evaluated for impairment
|
|
|
574
|
|
Ending balance: collectively evaluated for impairment
|
|
|
4,342
|
|
Loans
|
|
|
|
|
Of which individually evaluated for impairment
|
|
|
4,477
|
|
Of which collectively evaluated for impairment
|
|
|
144,551
|
|
|
9.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consisted
of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
576,467
|
|
|
|
701,413
|
|
Office equipment
|
|
|
24,892
|
|
|
|
21,358
|
|
Motor vehicles
|
|
|
1,408
|
|
|
|
1,427
|
|
Leasehold improvement
|
|
|
16,244
|
|
|
|
18,152
|
|
Land
|
|
|
50,731
|
|
|
|
50,731
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
669,742
|
|
|
|
793,081
|
|
Less: Accumulated depreciation
|
|
|
(78,187
|
)
|
|
|
(99,340
|
)
|
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
30,590
|
|
|
|
34,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
622,145
|
|
|
|
728,312
|
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
9.
|
PROPERTY AND EQUIPMENT, NET (continued)
|
Depreciation
of property and equipment and amortization of land use rights were US$25,004, US$27,961 and US$26,735 for the years ended December 31,
2016, 2017 and 2018, respectively.
As of December 31, 2018, the
Company is still in the process of obtaining the property ownership certificates for certain buildings with aggregate net carrying
values of US$14,796. As the transfer of ownership of the buildings have been legally registered with the applicable government
authority and the purchase consideration has been fully paid by the Company, the Company has the ability to obtain and control
the future economic benefits of the buildings. As a result, these buildings were recognized as assets in the consolidated balance
sheets as of December 31, 2017 and 2018.
As of December 31, 2018, certain
buildings with aggregate net carrying value of US$406,738 were pledged for bank borrowings.
The Company capitalized interest
cost as a component of the cost of construction in progress as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Interest cost capitalized
|
|
|
756
|
|
|
|
-
|
|
Interest cost charged against income
|
|
|
16,153
|
|
|
|
21,174
|
|
Total interest cost incurred
|
|
|
16,909
|
|
|
|
21,174
|
|
|
10.
|
DEPOSIT FOR NON-CURRENT ASSETS
|
Deposit for non-current assets
consisted of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
55,364
|
|
|
|
-
|
|
Others
|
|
|
3,358
|
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58,722
|
|
|
|
902
|
|
As of December 2017, deposits
for buildings represent interest-free non-refundable deposits for the purchases of certain office buildings: (i) an office building
in Wuhan in the PRC for US$41,107; (ii) two floors of an office building in Chongqing, Sichuan province in the PRC for US$13,758;
and (iii) one floor of an office building in Changzhou, Jiangsu province in the PRC for US$499. In 2018, deposits for buildings
were reclassified to property and equipment as the Company obtained the control of these buildings. As of December 31, 2018, deposits
for others represent deposits for the purchase of office equipment.
As of December 31, 2017, US$41,107
of deposits for non-current assets have been pledged for US$18,403 bank borrowings from financial institutions in China. No deposits
for non-current assets have been pledged in 2018.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
11.
|
OTHER NON-CURRENT ASSETS
|
Other non-current assets consisted
of the following:
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Rental and other deposits
|
|
|
852
|
|
|
|
1,861
|
|
Rental deposits paid to lessors for sublease services
|
|
|
409
|
|
|
|
85
|
|
Others
|
|
|
765
|
|
|
|
2,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,026
|
|
|
|
4,558
|
|
|
12.
|
SHORT-TERM AND LONG-TERM LOANS
|
Short-term and long-term loans
consisted of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
|
236,985
|
|
|
|
297,811
|
|
|
|
|
|
|
|
|
|
|
Long-term loans
|
|
|
114,109
|
|
|
|
123,215
|
|
Short-term loans as of December
31, 2017 and 2018 represents US$ denominated bank borrowings of US$190,000 and US$190,000, respectively obtained from financial
institutions in the United States and the current-portion of long-term loans of US$46,985 and US$107,811, respectively. The short-term
loan of US$190,000 are repayable on demand and bear interest rates of three month London Interbank Offered Rate (“LIBOR”)
plus 1.25% (2017: 3-month LIBOR plus 1.25%). The short-term bank borrowings were secured by RMB denominated bank deposits placed
with financial institutions in the PRC of US$223,002 and US$245,474 as of December 31, 2017 and 2018, respectively, and were classified
as restricted cash, current on the consolidated balance sheets. The weighted average interest rate for the short-term borrowings
for the years ended December 31, 2017 and 2018 was approximately 2.32% and 3.64%, respectively.
The long-term loan of US$26,808
as of December 31, 2017 represents US$ denominated bank borrowing obtained from financial institutions in China. The long-term
loan is repayable on demand and bear interest rates of three month LIBOR plus 2.8%. The bank borrowing was secured by RMB denominated
bank deposits placed with financial institutions in the PRC of US$32,139 as of December 31, 2017, and was classified as “restricted
cash, non-current” on the consolidated balance sheets. US$26,808 of the bank loan was re-classified to short term loans
because it was repayable within twelve months. The bank deposits placed with financial institutions in the PRC to secure the loan
were re-classified as “restricted cash, current”.
The long-term loan of US$31,353
as of December 31, 2018 represents US$ denominated bank borrowing obtained from financial institutions in the United States. The
long-term loan is repayable by installments from October 6, 2017 to November 11, 2027 and bears interest rate of 4.1% for the
first 3 years; thereafter the interest rate will be floating at Industrial and Commercial Bank of China (USA) NA Prime plus 1.0%.
US$3,218 of the bank loan was re-classified to short term loans because it was repayable within twelve months. The loan is secured
by land and building in the United States with carrying value of US$43,230 as of December 31, 2018. Certain bank account was funded
from the loan proceeds and was restricted for use to pay for the tenant improvements of the collateral property and the loan payments.
As of December 31, 2018, the balance of the account of US$5,989 was classified as restricted cash (non-current) on the consolidated
balance sheets.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
12.
|
SHORT-TERM AND LONG-TERM LOANS (continued)
|
The long-term loans of US$83,771
and US$70,640 as of December 31, 2017 and 2018 represent RMB denominated bank borrowings from financial institutions in China
for the purchase of buildings in Beijing, PRC. The long-term loans are repayable by installments from September 23, 2016 to September
22, 2026 and bear interest rate of 4.9%. As of December 31, 2018, US$70,640 of the bank loans were classified as short term loans
because the Company did not meet certain loan covenants. Even though the Company obtained a waiver from the lender indicating
that the lender permanently gave up its right to demand payment as a result of the violation as of December 31, 2018, the loan
was classified as current because without the waiver, the Company would be in default at the December 31, 2018 balance sheet date
and it is probable that the Company will be unable to comply with all provisions of the debt agreement for a period of one year
from the balance sheet date. The loans were secured by building in the PRC with carrying value of US$214,798 as of December 31,
2018. As of December 31, 2017, US$43,333 of the bank loans were re-classified to short term loans because i) US$31,904 was repayable
on demand as the Company did not meet certain loan covenants, and ii) US$11,429 was repayable within twelve months. The loans
were secured by building and construction in progress in the PRC with carrying value of US$237,055 as of December 31, 2017.
The long-term loan of US$19,644
as of December 31, 2018 represents RMB denominated bank borrowings from financial institutions in China for the purchase of buildings
in Wuhan, PRC. The long-term loan is repayable by installments from March 21, 2017 to March 21, 2027 and bears interest rate of
4.9%. US$2,381 of the bank loan was re-classified to short term loans because it was repayable within twelve months. The loan
was secured by accounts receivable with carrying amount of US$2,988 and building in the PRC with carrying value of US$45,398 as
of December 31, 2018.
The long-term loan of US$45,315
as of December 31, 2018 represents RMB denominated bank borrowings from financial institutions in China for the purchase of buildings
in Chongqing, PRC. The long-term loan is repayable by installments from August 2, 2018 to August 1, 2028 and bears interest rate
of 6.86%. US$4,764 of the bank loan was re-classified to short term loans because it was repayable within twelve months. The loan
was secured by buildings in the PRC with carrying value of US$94,077 as of December 31, 2018.
The long-term loan of US$37,266
as of December 31, 2018 represents US$ denominated bank borrowing obtained from financial institutions in Taiwan. The principal
of the long-term loan, in the amount of US$40,000, is repayable by 10% on October 23, 2020 and by 90% on October 23, 2021. The
loan bears an annual interest rate of 2.35% plus LIBOR of three months. US$2,820 was paid to the bank as service charges and accounted
for as reduction of the long-term loan. The loan was secured by building in the United States with carrying value of US$9,235.
Certain bank account was restricted for use to pay for interest payments. As of December 31, 2018, the balance of the account
of US$1,001 was classified as restricted cash (non-current) on the consolidated balance sheets. The Company met certain covenants
in the loan agreement.
|
13.
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
Accrued expenses and other liabilities consisted
of the following:
|
|
|
|
As of December 31,
|
|
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
Payroll and welfare benefit
|
|
|
|
|
19,152
|
|
|
|
14,265
|
|
Other taxes and surcharges payable
|
|
(1)
|
|
|
38,669
|
|
|
|
40,676
|
|
Amounts payable to employees
|
|
|
|
|
2,794
|
|
|
|
2,269
|
|
Amounts payable to sales and marketing agents
|
|
|
|
|
46,529
|
|
|
|
38,304
|
|
Amounts due to foremen and suppliers of decoration services
|
|
|
|
|
3,693
|
|
|
|
2,562
|
|
Amounts due to Tianxiajin investors
|
|
|
|
|
357
|
|
|
|
860
|
|
Down payments collected on behalf of secondary home sellers
|
|
|
|
|
1,806
|
|
|
|
1,202
|
|
Cash incentives payable to home buyers
|
|
(2)
|
|
|
12,018
|
|
|
|
5,893
|
|
Others
|
|
|
|
|
33,781
|
|
|
|
25,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,799
|
|
|
|
131,268
|
|
|
(1)
|
Other taxes and surcharges payable
consist of VAT, cultural construction fee (“CCF”), city construction tax
(“CCT”) and withholding individual income tax (“IIT”).
|
|
(2)
|
Cash incentives payable to home
buyers, are payable when home buyers successfully purchase new properties through the
Company’s platform and successfully registers on the Company’s website.
|
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
14.
|
CUSTOMERS’ REFUNDABLE FEES
|
Roll-forward of customers’
refundable fees:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
Balance at beginning of year
|
|
|
28,630
|
|
|
|
7,070
|
|
Cash received from customers during the year
|
|
|
69,148
|
|
|
|
20,512
|
|
Revenue recognized during the year
|
|
|
(30,998
|
)
|
|
|
(13,563
|
)
|
Payments to sales and marketing agents during the year
|
|
|
(36,836
|
)
|
|
|
(7,313
|
)
|
Refunds paid during the year
|
|
|
(23,941
|
)
|
|
|
(2,128
|
)
|
Foreign currency translation adjustments
|
|
|
1,067
|
|
|
|
(602
|
)
|
Balance at end of year
|
|
|
7,070
|
|
|
|
3,976
|
|
|
15.
|
CONVERTIBLE SENIOR NOTES
|
On December 4, 2013, the Company
issued US$400,000, including an US$50,000 overallotment option (the “Overallotment Option”) which was exercised on
January 3, 2014, of convertible senior notes which would mature on December 15, 2018 (collectively the “December 2018 Notes”).
The total net proceeds from the December 2018 Notes were US$390,455. The investors may convert the December 2018 Notes to Class
A ordinary shares at any time in whole or in part at specified conversion prices. The conversion rate for the December 2018 Notes
was initially 9.6839 ADSs per US$1,000 principal amount of notes (equivalent to an initial conversion price of approximately US$103.26
per ADS), subject to adjustment as described in the respective Subscription Agreement.
Investors of the December 2018
Notes had the right to require the Company to repurchase for cash all or part of their notes on December 15, 2016, and this was
exercised accordingly. The Company repurchased a total of US$394,300 of the December 2018 Notes, which represents approximately
98.6% of the outstanding principal amount of the Notes prior to such repurchase. In 2018, the Company repurchased the remaining
balance of US$5,700 of the December 2018 Notes.
On September 24, 2015, the Company
issued (i) 3,418,803 Class A ordinary shares for US$100,000 and (ii) US$100,000 of convertible notes which will mature on September
24, 2022 (the “September 2022 Notes”) to Safari Company. The Safari Company is beneficially owned by the Carlyle Company
(“Carlyle”) (72%) and Ateefa Limited, a company owned by Vincent Tianquan Mo (28%). A representative of Carlyle is
entitled to hold a seat on the Company’s board of directors so long as Carlyle continues to beneficially own at least 1%
of the Company’s total outstanding share capital calculated on a fully-diluted basis. The total net proceeds from the Class
A ordinary shares and the September 2022 Notes were US$199,645. The investors may convert the September 2022 Notes to Class A
ordinary shares at any time in whole or in part at specified conversion prices. The conversion rate for the September 2022 Notes
is initially 27.9086 Class A Shares per US$1,000 principal amount of the Note (equivalent to an initial conversion price of approximately
US$35.83 per Class A Share), subject to adjustment as described in the respective Subscription Agreement.
On November 4, 2015, the Company
issued (i) an aggregate of 8,436,581 Class A shares for an total consideration of US$246,770 and (ii) US$200,000 of convertible
notes which will mature on November 3, 2022 (the “November 2022 Notes”). The total net proceeds from the Class A ordinary
shares and the November 2022 Notes were US$446,059. The investors may convert the November 2022 Notes to Class A ordinary shares
at any time in whole or in part at specified conversion prices. The conversion rate for the November 2022 Notes is initially 27.9086
Class A Shares, representing Class A ordinary shares at par value HK$1.00 per share, per US$1,000 principal amount of the Note
(equivalent to an initial conversion price of approximately US$35.83 per Class A Share), subject to adjustment as described in
the respective Subscription Agreement.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
15.
|
CONVERTIBLE SENIOR NOTES (continued)
|
On October 25, 2018, the Company
and the note holder entered into a Note Repurchase Agreement pursuant to which the Company issued five replacement notes in the
total amount of US$150,000 to the same note holder (“New November 2022 Notes”), together with US$38,860 paid in cash
in satisfaction of the November 2022 Notes. The New November 2022 Notes have the same terms as the November 2022 Notes,
except for the change of principal amount from US$200,000 to US$150,000.
The December 2018 Notes, the
September 2022 Notes, the November 2022 Notes and the New November 2022 Notes bear interest at the rate of 2.00%, 1.50%, 1.50%
and 1.50% per annum, respectively, payable semi-annually. The December 2018 Notes, September 2022 Notes, November 2022 Notes and
New November 2022 Notes are collectively referred to as the “Notes”.
The Company intends to use the
proceeds of the Notes for general corporate purposes, including development of new products and services, working capital, capital
expenditures, business expansion and potential business acquisitions, technologies and/or products.
The Notes are senior unsecured
obligations and rank (i) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated
in right of payment to the Notes; (ii) equal in right of payment to any of the Company’s unsecured indebtedness that is
not so subordinated; (iii) effectively junior in right of payment to any of the Company’s secured indebtedness to the extent
of the value of the assets securing such indebtedness; and (iv) structurally junior to all indebtedness and other liabilities
of the subsidiaries or consolidated controlled entities of the Company.
The issuance costs of US$9,545,
US$355 and US$711 of the December 2018 Notes, the September 2022 Notes and the November 2022 Notes, respectively, were amortized
as interest expense using the effective interest rate method through the maturity date of the respective Notes.
The principal amount and unamortized
discount/premium and debt issuance costs as of December 31, 2017 and 2018 were as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
Principal amount
|
|
|
305,700
|
|
|
|
250,000
|
|
Unamortized (discount)/premium and
debt issuance costs
|
|
|
(8,635
|
)
|
|
|
4,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,065
|
|
|
|
254,435
|
|
The effective interest rate
was 2.86%, 1.56%, 2.46% and 0.69% for the December 2018 Notes, the September 2022 Notes, the November 2022 Notes and the New November
2022 Notes, respectively. For the years ended December 31, 2016, 2017 and 2018, the Company recognized interest expense related
to the Notes of US$17,001, US$6,395 and US$6,154, respectively.
Accounting treatment
The Notes were originally recorded
as long-term debt. The conversion option was not required to be bifurcated because the conversion options of the December 2018
Notes, the September 2022 Notes, the New November 2022 Notes are indexed to the Company’s ADSs and Class A ordinary shares,
respectively, and meet all additional conditions for equity classification. Since the conversion options were not required to
be bifurcated, the Company then determined if there were any beneficial conversion features (“BCF”) in accordance
with ASC 470-20. The Company assessed the embedded conversion option feature of the December 2018 Notes and the September 2022
Notes and concluded that there is no BCF because the effective conversion price of the December 2018 Notes and the September 2022
Notes exceeded the fair value of the Company’s ADSs and Class A ordinary shares at their respective commitment dates. For
the November 2022 Notes, the Company recognized a BCF of US$12,113 through a credit to additional paid-in capital because the
fair value per Class A ordinary share of US$38.00 exceeded the most favorable conversion price of US$35.83 at the commitment date
on November 4, 2015. The resulting discount of US$12,113 to the November 2022 Notes is then accreted to the redemption value as
interest expense using the effective interest method through the consolidated statements of comprehensive income (loss) over the
term of the November 2022 Notes. The Company did not reassess the BCF upon the exchange of the November 2022 Notes with the New
November 2022 Notes since the exchange is not accounted for as an extinguishment.
In connection with the make-whole
fundamental change provision within the Notes agreements, the number of ADSs and Class A ordinary shares issuable upon conversion
of the Notes will be increased if the Holders decide to convert. As (i) the fair value of the ADSs into which the December 2018
Notes is convertible plus the make-whole ADSs and (ii) the fair value of the Class A ordinary shares into which the September
2022 Notes, the November 2022 Notes and the New November 2022 Notes are convertible plus the make-whole Class A ordinary shares,
respectively, do not approximate the fair value at the settlement date, the make-whole features are not indexed to the Company’s
ADSs for the December 2018 Notes and Class A ordinary shares for the September 2022, the November 2022 Notes and the New November
2022 Notes, and are required to be bifurcated. The fair values of the make-whole features were insignificant for the years ended
December 31, 2016, 2017 and 2018.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
15.
|
CONVERTIBLE SENIOR NOTES (continued)
|
The Company evaluated the embedded
contingent redemption features contained in the Notes in accordance with ASC 815. The contingent redemption features were not
required to be bifurcated because they are considered to be clearly and closely related to the debt host, as the Notes were not
issued at a substantial discount and are puttable at par.
The Company evaluated the contingent
interest features contained in the Notes in accordance with ASC 815 to determine if these features require bifurcation. Certain
embedded contingent interest features are not considered to be clearly and closely related to the debt host and met the definition
of a derivative. Accordingly, these embedded contingent interest features were bifurcated from the Notes on the issuance date,
and their fair values were insignificant for the years ended December 31, 2016, 2017 and 2018. For the embedded contingent interest
features not bifurcated from the December 2018 Notes, the September 2022 Notes, the November 2022 Notes and the New November 2022
Notes, the Company determined whether the additional interest payments need to be accrued as a liability in accordance with ASC
450. Since the likelihood of occurrence of such default events is remote, the Company determined that a liability was not probable
and no accrual was made as of December 31, 2017 and 2018. The Company will continue to assess the accrual for these additional
interest payment liabilities at each reporting date.
The Company evaluated the contemporaneous
exchange of cash between the Company and the note holder from issuance of New November 2022 Notes and satisfaction of the November
2022 Notes pursuant to ASC 470-50 and concluded that they are not substantially different. The Company determined a new effective
interest rate at the repurchase date based on the carrying amount and the revised cash flows.
As of December 31, 2018, aggregate
future principal payments for long-term debt, including short-term and long-term loans (Note 12), and convertible senior notes,
were as follows:
|
|
US$
|
|
|
|
|
|
2019
|
|
|
297,811
|
|
2020
|
|
|
14,363
|
|
2021
|
|
|
10,363
|
|
2022
|
|
|
260,363
|
|
2023 and thereafter
|
|
|
90,862
|
|
|
|
|
673,762
|
|
Ordinary Shares
Upon completion of the Company’s
initial public offering (“IPO”) in September 2010, the Company’s ordinary shares were converted into 50,767,426
Class A ordinary shares and 25,298,329 Class B ordinary shares. The Memorandum and Articles of Association were amended and restated
such that the authorized share capital consisted of 600,000,000 ordinary shares at a par value of HK$1.00 per share.
In 2015, the Company completed
various follow-on offerings which resulted in 70,736,679 Class A ordinary shares issued and outstanding as of December 31, 2015.
The rights of the holders of
Class A and Class B ordinary shares are identical, except with respect to voting rights. Each Class A ordinary share
is entitled to one vote per share whereas each Class B ordinary share is entitled to 10 votes per share. Each Class B ordinary
share is convertible into one Class A ordinary share at any time by its holder, but Class A ordinary shares are not convertible
into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a Class B ordinary shareholder
to any person or entity which is not an affiliate of such holder, such Class B ordinary shares will be automatically and immediately
converted into the equal number of Class A ordinary shares.
No class B ordinary shares were
converted into Class A ordinary shares for the years ended December 31, 2016, 2017 and 2018.
Treasury stock
Treasury
stock represents shares repurchased and held by the Company. Treasury stock is accounted for under the cost method. As of December
31, 2017 and 2018, under the repurchase plan, the Company has repurchased an aggregate of 7,065,058 Class A ordinary shares on
the open market for a total cash consideration of US$136,615. The repurchased shares are classified as “treasury stock”
in shareholders’ equity on the Company’s consolidated balance sheets.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
|
16.
|
SHAREHOLDERS’ EQUITY (continued)
|
Restricted
net assets
The Company’s ability
to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant PRC statutory
laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings,
if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the
consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial
statements of the Company’s PRC subsidiaries.
In accordance with the PRC Regulations
on Enterprises with Foreign Investment and its articles of association, a foreign invested enterprise established in the PRC is
required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and
bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign invested
enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached
50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign invested enterprises.
The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. The WOFEs were
established as foreign invested enterprises and therefore are subject to the above mandated restrictions on distributable profits.
Additionally, in accordance
with the Company Law of the PRC, a domestic enterprise is required to provide a statutory common reserve of at least 10% of its
annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s
PRC statutory accounts. A domestic enterprise is also required to provide a discretionary surplus reserve, at the discretion of
the board of directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned
reserves can only be used for specific purposes and are not distributable as cash dividends. The PRC Domestic Entities and the
PRC Domestic Entities’ subsidiaries were established as domestic invested enterprises and therefore are subject to the above
mentioned restrictions on distributable profits.
As a result of these PRC laws
and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as
general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net
assets to the Company. Amounts restricted are net assets of the Company’s PRC subsidiaries, as determined pursuant to PRC
generally accepted accounting principles, totaling US$983,333 and US$885,152 as of December 31, 2017 and 2018, respectively.
Therefore, in accordance with Rules 504 and 4.08(e)(3) of Regulation S-X, the condensed parent company only financial
statements as of December 31, 2017 and 2018 and for each of the three years in the period ended December 31, 2018 are
disclosed in Note 24.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
Cayman Islands
Under the current laws of the
Cayman Islands, the Company and subsidiaries incorporated in the Cayman Islands are not subject to tax on income or capital gains.
In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
(“BVI”)
Under the current laws of the
BVI, subsidiaries incorporated in the BVI are not subject to tax on income or capital gains. In addition, upon payments of dividends
by these companies to their shareholders, no BVI withholding tax will be imposed.
Hong Kong
Under the Hong Kong tax laws,
subsidiaries in Hong Kong are subject to the Hong Kong profits tax rate at 16.5% and they are exempted from income tax on their
foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends. A two-tiered profits tax rates
regime was introduced in 2018 where the first HK$2 million of assessable profits earned by a company will be taxed at half of
the current tax rate (8.25%) whilst the remaining profits will continue to be taxed at 16.5%. There is an anti-fragmentation measure
where each group will have to nominate only one company in the group to benefit from the progressive rates. No provision for Hong
Kong profits tax has been made in the financial statements as the subsidiaries in Hong Kong have no assessable profits for the
three years ended December 31, 2018.
United States of America
On December 22, 2017, the Tax
Act was enacted and contains significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory
tax rate from 35% to 21% and creates new taxes focused on foreign-sourced earnings and related-party payments, including the creation
of the base erosion anti-abuse tax and a new tax on global intangible low-taxed income ("GILTI").
The Securities and Exchange
Commission (SEC) staff issued SAB 118 on December 22, 2017, which allows companies to record provisional amounts during a measurement
period not to extend beyond one year of the enactment date.
The Tax Act reduces the U.S.
statutory tax rate from 35% to 21% for years after 2017. Accordingly, the Company re-measured its deferred taxes as of December
31, 2017, to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. As
Best Work Holdings (New York) LLC. is loss making since incorporated therefor the Company recognized a deferred tax asset of US$13,834
to reflect the reduced U.S. tax rate and full valuation allowance is provided and corresponding remeasurement were made to unrecognized
tax benefit and valuation allowance.
Singapore
A subsidiary was incorporated
in Singapore in November 2014 and does not conduct any substantive operations of its own. No provision for Singapore profits tax
has been made in the financial statements as this entity has no assessable profits for the three years ended December 31, 2018.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
China
In March 2007, a new enterprise
income tax law (the “New EIT Law”) in the PRC was enacted which became effective on January 1, 2008. The New
EIT Law applies a unified 25% enterprise income tax (“EIT”) rate to both foreign invested enterprises and domestic
enterprises, unless a preferential EIT rate is otherwise stipulated. On April 14, 2008, relevant governmental regulatory
authorities released further qualification criteria, application procedures and assessment processes for meeting the High and
New Technology Enterprise (“HNTE”) status under the New EIT Law which would entitle qualified and approved entities
to a favorable EIT tax rate of 15%. In April 2009 and June 2017, the State Administration for Taxation (“SAT”) issued
Circular Guoshuihan [2009] No. 203 (“Circular 203”) and SAT Announcement [2017] No. 24 (“Announcement 24”)
stipulating that entities which qualified for the HNTE status should apply with in-charge tax authorities to enjoy the reduced
EIT rate of 15% provided under the New EIT Law starting from the year when the new HNTE certificate becomes effective. The HNTE
certificate is effective for a period of three years and can be renewed for another three years. Subsequently, an entity needs
to re-apply for the HNTE status in order to be able to enjoy the preferential tax rate of 15%.
The Company obtained
new HNTE certificates for its various subsidiaries i.e. SouFun Media, Beijing Zhong Zhi Shi Zheng, SouFun Network,
Beijing Technology, Beijing JTX Technology and Hong An Tu Sheng in November 2015 and subsequently renewed in September and
October 2018. Therefore, these six subsidiaries can enjoy the preferential tax rate of 15% in years 2015, 2016 and 2017. The Company newly applied for the HNTE status for Beijing Tuoshi in 2016 and received the new HNTE certificates in
December 2016. Beijing Tuoshi can enjoy the preferential tax rate of 15% for the three years ended December 31, 2018. The
Company newly applied for the HNTE status for Beijing Li Man Wan Jia, Beijing Hua Ju Tian Xia and Beijing Zhong Zhi Xun Bo in
2018 and received the new HNTE certificates in September, September and October 2018, respectively. Beijing Li Man Wan Jia,
Beijing Zhong Zhi Xun Bo and Beijing Hua Ju Tian Xia can enjoy the preferential tax rate of 15% in 3 years since 2018. The
Company newly applied for the Xinjiang Huoerguosi Economic and Technological Development Zone tax preference status for
Xinjiang Zhongzhi in 2017 and received the certificates in September 2017. Xinjiang Zhongzhi can enjoy the preferential tax
rate of 0% in 4 years since 2017.
If any entities fail to maintain
the HNTE qualification under the New EIT Law, they will no longer qualify for the preferential tax rate of 15%, which could have
a material and adverse effect on the Company’s results of operations and financial position provided that they do not qualify
for any other preferential tax treatment. Historically, the abovementioned PRC subsidiaries have successfully obtained or renewed
the HNTE certificates when the previous certificates had expired.
Subsequent to government approval
in May 2014, Beijing Li Man Wan Jia, Beijing Zhong Zhi Xun Bo and Beijing Hua Ju Tian Xia obtained the Software Enterprise status
with effect from January 1, 2013. Accordingly, these three subsidiaries are entitled to the two-year EIT exemption for years 2013
and 2014 and a reduced EIT rate of 12.5% for years 2015, 2016 and 2017.
Moreover, the current EIT Law
treats enterprises established outside of China with “effective management and control” located in the PRC as PRC
resident enterprises for tax purposes. The term “effective management and control” is generally defined as exercising
overall management and control over the business, personnel, accounting, properties, etc. of an enterprise. The Company, if considered
a PRC resident enterprise for tax purposes, would be subject to the PRC EIT at the rate of 25% on its worldwide income for the
period after January 1, 2008. As of December 31, 2017 and 2018, the Company had not accrued for PRC tax on such basis. We will continue to monitor our tax status.
FANG HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands of United States
Dollars (“US$”), except for number of shares and per share data)
Income (loss) before income
taxes consisted of:
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
PRC
|
|
|
(136,773
|
)
|
|
|
56,101
|
|
|
|
(89,670
|
)
|
Non-PRC
|
|
|
(7,878
|
)
|
|
|
(12,995
|
)
|
|
|
(39,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(144,651
|
)
|
|
|
43,146
|
|
|
|
(129,355
|
)
|
Income tax expenses (benefits)
comprised:
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Current tax expense
|
|
|
27,685
|
|
|
|
21,759
|
|
|
|
6,825
|
|
Deferred tax benefit
|
|
|
(2,701
|
)
|
|
|
(317
|
)
|
|
|
(21,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,984
|
|
|
|
21,442
|
|
|
|
(14,446
|
)
|
A reconciliation between the
amount of income tax expenses (benefits) and the amount computed by applying the PRC statutory tax rate to income (loss) before
income taxes was as follows:
|
|
For
the Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Income (loss) before income taxes
|
|
|
(144,651
|
)
|
|
|
43,146
|
|
|
|
(129,355
|
)
|
Income tax at applicable tax rate of 25%
|
|
|
(36,163
|
)
|
|
|
10,786
|
|
|
|
(32,339
|
)
|
Effect of international tax rate differences
|
|
|
(598
|
)
|
|
|
472
|
|
|
|
6,891
|
|
Non-deductible expenses
|
|
|
24,135
|
|
|
|
7,360
|
|
|
|
19,427
|
|
Non-taxable income
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,145
|
)
|
Effect of tax holidays or preferential tax rates
|
|
|
(5,759
|
)
|
|
|
(12,001
|
)
|
|
|
(6,557
|
)
|
Effect of tax rate changes
|
|
|
-
|
|
|
|
(1,725
|
)
|
|
|
-
|
|
Investment basis difference in the PRC Domestic Entities
|
|
|
(2,757
|
)
|
|
|
2,696
|
|
|
|
-
|
|
Withholding tax
|
|
|
-
|
|
|
|
-
|
|
|
|
11,720
|
|
Research and development super-deduction
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,260
|
)
|
Changes in valuation allowance
|
|
|
30,856
|
|
|
|
8,849
|
|
|
|
(1,707
|
)
|
Expiration of loss carry forwards
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Unrecognized tax benefits
|
|
|
-
|
|
|
|
(4,302
|
)
|
|
|
(8,881
|
)
|
Interest and penalties
on unrecognized tax benefits
|
|
|
15,270
|
|
|
|
9,307
|
|
|
|
1,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,984
|
|
|
|
21,442
|
|
|
|
(14,446
|
)
|
FANG HOLDINGS
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands
of United States Dollars (“US$”), except for number of shares and per share data)
A roll-forward of unrecognized
tax benefits, exclusive of related interest and penalties, was as follows:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
70,296
|
|
|
|
78,933
|
|
|
|
79,436
|
|
Increase relating to prior year tax positions
|
|
|
5,070
|
|
|
|
4,192
|
|
|
|
577
|
|
Increase relating to current year tax positions
|
|
|
4,769
|
|
|
|
10,666
|
|
|
|
9,183
|
|
Decrease relating to reversal of prior years’ tax position
|
|
|
-
|
|
|
|
(14,102
|
)
|
|
|
(1,821
|
)
|
Decrease relating to expiration of applicable statute of limitations
|
|
|
-
|
|
|
|
(4,586
|
)
|
|
|
(9,220
|
)
|
Foreign currency translation adjustments
|
|
|
(1,202
|
)
|
|
|
4,333
|
|
|
|
(3,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
78,933
|
|
|
|
79,436
|
|
|
|
74,995
|
|
As of December 31, 2017 and
2018, the Company had recorded US$144,915 and US$137,904 as an accrual for unrecognized tax benefits and related interest and
penalties, respectively, which is included in the account of “Other non-current liabilities”. As of December 31, 2017
and 2018, unrecognized tax benefits of US$77,561 and US$72,608 respectively, would impact the effective tax rate if recognized.
The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws
or expiration of statute of limitations. However, due to the uncertainties associated with the status of examinations, including
the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future
cash outflows associated with these tax uncertainties. The amount of unrecognized tax benefits may change in the next twelve months,
pending clarification of current tax law or audit by the tax authorities. However, a reliable estimate of the range of the possible
change cannot be made at this time.
For the years ended December 31,
2016, 2017, and 2018, the Company recognized US$15,270, US$9,593 and US$1,304 in income tax expenses for interest and penalties
related to uncertain tax positions. Accrued interest and penalties related to unrecognized tax benefits were US$67,355 and US$65,296
as of December 31, 2017 and 2018, respectively.
The Company’s PRC entities
have been subject to the New EIT Law since January 1, 2008. The PRC tax authorities, US tax authorities and Hong Kong tax
authorities have up to five years, three years and six years, respectively, to conduct examinations of the Company’s tax
filings. Accordingly, the PRC subsidiaries’ tax years 2013 through 2018, the US subsidiaries’ tax years 2015 through
2018 and the Hong Kong subsidiaries’ tax years 2012 through 2018 remain open to examination by the respective taxing jurisdictions.
FANG HOLDINGS
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands
of United States Dollars (“US$”), except for number of shares and per share data)
The aggregate amount and per
share effect of tax holidays and preferential tax rates were as follows:
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amount
|
|
|
(5,759
|
)
|
|
|
(12,001
|
)
|
|
|
(6,557
|
)
|
The aggregate effect on basic and diluted earnings
per share for Class A and Class B ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
0.06
|
|
|
|
0.14
|
|
|
|
0.07
|
|
-Diluted
|
|
|
0.06
|
|
|
|
0.13
|
|
|
|
0.07
|
|
The components of deferred taxes
were as follows:
|
|
As of December 31,
|
|
|
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
|
74,040
|
|
|
|
71,
308
|
|
|
|
|
|
Impairment of loans receivable
|
|
|
274
|
|
|
|
933
|
|
|
|
|
|
Overcharged advertising and promotion fee
|
|
|
87
|
|
|
|
1,061
|
|
|
|
|
|
Fixed assets depreciation
|
|
|
49
|
|
|
|
208
|
|
|
|
|
|
Share based compensation
|
|
|
6,167
|
|
|
|
-
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
(73,015
|
)
|
|
|
(71,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
|
7,602
|
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment basis in the PRC entities
|
|
|
(61,961
|
)
|
|
|
(72,088
|
)
|
|
|
|
|
BaoAn Acquisition – Property
|
|
|
(13,309
|
)
|
|
|
(12,191
|
)
|
|
|
|
|
Investments
|
|
|
(51,229
|
)
|
|
|
(13,160
|
)
|
|
|
|
|
Interest capitalization
|
|
|
(142
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(126,641
|
)
|
|
|
(97,578
|
)
|
|
|
|
|
As of December 31, 2018, the
Company had net operating losses of US$37,243 from the Company’s subsidiaries incorporated in the US, which can be carried
forward indefinitely to offset future taxable income. The remaining accumulated net operating losses of US$238,577 arose from
several of its PRC entities, which can be carried forward to offset future taxable profit and will expire in years 2019 to 2023
if not utilized.
FANG HOLDINGS
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands
of United States Dollars (“US$”), except for number of shares and per share data)
Deferred tax liabilities
arising from undistributed earnings
As of December 31, 2017 and
2018, a portion of the aggregate undistributed earnings of the PRC subsidiaries that were available for distribution to non-PRC
parent companies was not considered to be indefinitely reinvested under ASC 740-30, “Income Taxes: Other Consideration or
Special Areas”. In accordance with the New EIT Law, a withholding income tax will be imposed on the PRC subsidiaries when
dividends are distributed to their non-PRC parent companies. The withholding tax rate is 10% unless a foreign investor’s
tax jurisdiction has a tax treaty with the PRC that provides for a lower withholding tax rate and the foreign investor is recognized
as the beneficial owner of the income under the relevant tax rules. Deferred tax liabilities amounting to US$28,716 and US$40,436
were provided for the withholding tax of the PRC entities as of December 31, 2017 and 2018, respectively.
The deferred tax liabilities
arising from the aggregate undistributed earnings of the PRC Domestic Entities and the PRC Domestic Entities’ subsidiaries
that are available for distribution to the PRC tax resident parent companies, that is, the WOFEs, amounted to US$33,246 and US$31,652
as of December 31, 2017 and 2018, respectively.
As of December 31, 2017 and
2018, the Company did not provide for deferred tax liabilities and foreign withholding taxes on certain undistributed earnings
of its PRC subsidiaries, PRC Domestic Entities and PRC Domestic Entities’ subsidiaries that were available for distribution
to non-PRC parent companies on the basis of its intent to permanently reinvest these foreign subsidiaries’ earnings. The
cumulative amount of such temporary difference was US$338,695 and US$319,483 as of December 31, 2017 and 2018, respectively. The
amount of the unrecognized deferred tax liability for temporary differences related to investments in PRC subsidiaries, PRC Domestic
Entities and PRC Domestic Entities’ subsidiaries that are essentially permanent in duration was US$33,869 and US$31,948
as of December 31, 2017 and 2018, respectively.
Stock related award incentive
plan of 1999
On September 1, 1999, the
Company’s shareholders approved the 1999 Stock Related Award Incentive Plan (the “1999 Plan”). Under the 1999
Plan, the Company may issue up to 12% of the fully diluted ordinary shares of the Company to its directors and employees. The
purpose of the 1999 Plan is to provide additional incentive and motivation to its directors and employees, through an equity interest
in the Company, to work towards increasing the value of the Company. The 1999 Plan provides for accelerated vesting, subject to
certain conditions, if there is a change in control. The 1999 Plan has no stated expiry date.
The exercise price, vesting
and other conditions of individual awards are determined by the executive chairman of the board of directors. The awards are typically
subject to a three-year to a four-year service vesting condition and expire 10 or 15 years after the grant date. In addition,
the grantee must return all awards and any proceeds from the sale of the awards if he/she violates certain provisions including
a non-compete condition for a period of 2 years after cessation of employment with the Company. The non-compete condition
does not give rise to an in-substance service condition.
FANG HOLDINGS
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands
of United States Dollars (“US$”), except for number of shares and per share data)
|
18.
|
SHARE-BASED
PAYMENTS (continued)
|
Stock related award incentive
plan of 2010
On August 4, 2010, the Company’s
board of directors and shareholders approved the 2010 Stock Related Award Incentive Plan (the “2010 Plan”). Under
the 2010 Plan, the Company may issue up to 10% of the total number of ordinary shares, including ordinary shares issuable upon
conversion of any preferred shares to its directors and employees. The purpose of the 2010 Plan was to recognize and acknowledge
the contributions made to the Company by eligible employees and to promote the success of the Company’s business. The 2010
Plan allows the board of directors, or its designated committee, to establish the performance criteria when granting stock options
on the basis of any one of, or combination of, increase in share price, earnings per share, total shareholder return, return on
equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management
objectives, or other measures of performance selected by the Company’s board of directors, or its designated committee.
Partial achievement of the specified criteria may result in a vesting corresponding to the degree of achievement as specified
in the detail rules.
The exercise price, vesting
and other conditions of individual awards are determined by the executive chairman of the board of directors, except for awards
to officers which are determined by the board of directors or the compensation committee. The awards are typically subject to
a four-year service vesting condition and multiple performance conditions with a contractual life of ten years. In addition, the
grantee must return all awards and any proceeds from the sale of the awards if he/she violates certain provisions.
Stock related award incentive
plan of 2015
On June 4, 2015, the Company’s
board of directors and shareholders approved the 2015 Stock Related Award Incentive Plan (the “2015 Plan”). Under
the 2015 Plan, the Company may issue up to 1.5% of the total number of ordinary shares, including ordinary shares issuable upon
conversion of any preferred shares to its directors and employees. The purpose of the 2015 Plan was to recognize and acknowledge
the contributions made to the Company by eligible employees and to promote the success of the Company’s business. The 2015
Plan allows the board of directors, or its designated committee, to establish the performance criteria when granting stock options
on the basis of any one of, or combination of, increase in share price, earnings per share, total shareholder return, return on
equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management
objectives, or other measures of performance selected by the Company’s board of directors, or its designated committee.
Partial achievement of the specified criteria may result in a vesting corresponding to the degree of achievement as specified
in the detail rules.
The exercise price, vesting
and other conditions of individual awards are determined by the executive chairman of the board of directors, except for awards
to officers which are determined by the board of directors or the compensation committee. The awards are typically subject to
a four-year service vesting condition and multiple performance conditions with a contractual life of ten years. In addition, the
grantee must return all awards and any proceeds from the sale of the awards if he/she violates certain provisions.
On August 29, 2017 (the “2017
Replacement Date”), the Company’s board of directors approved to replace 1,377,730 share options granted during the
years ended December 31, 2015 and 2016 under the 2015 Plan to 200 employees with 153,036 options and 1,224,694 restricted shares
(the “Replacement Awards”). The exercise price of 153,036 options was reduced from US$27.2~US$30.0 per share to US$18.1
per share. The replacement awards were subject to graded vesting over four years from the Replacement Date, in which 25% of the
awards vest at the end of each of the next four years. The total incremental share-based compensation of US$12,537 resulting from
the modification is recognized ratably over the new requisite service period. The total unamortized share-based compensation of
US$7,447 resulting from the modification is recognized ratably over the original requisite service period.
On December 30, 2018 (the
“2018 Replacement Date”), the Company’s board of directors approved to replace 252,500 share options
granted during the year ended December 31, 2008 under the 1999 Plan to 5 employees with 252,500 options (the “2018
Replacement Awards”). The expiration date of 252,500 options was extended from December 30, 2018 to December 30, 2028.
The replacement awards were fully vested as of the replacement date. The total incremental share-based compensation of US$619
resulting from the modification is fully recognized during the year ended December 31, 2018.
During 2018, the Company
approved to extend the expiration date of an aggregate number of 518,175 share options granted under the 1999 Plan to 10
employees for terms between 2 days and nine years. These stock options expired prior to December 31, 2017. The awards granted
are fully vested as of the grant date. These transactions were accounted for as new grant. The total share-based
compensation of US$2,764 resulting is fully recognized during the year ended December 31, 2018.
FANG HOLDINGS
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands
of United States Dollars (“US$”), except for number of shares and per share data)
|
18.
|
SHARE-BASED
PAYMENTS (continued)
|
A summary of the equity award
activity under the 1999 Plan, 2010 Plan and 2015 Plan for the year ended December 31, 2018 was stated below:
Options Granted to Employees
and Directors
|
|
Number of
Shares
|
|
|
Weighted-
Average
per
Share
Exercise
Price
|
|
|
Weighted-
Average
Grant-date
Fair Value
per Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
7,241,667
|
|
|
|
11.93
|
|
|
|
5.51
|
|
|
|
5.01
|
|
|
US$
|
136,242
|
|
Granted (new options)
|
|
|
518,175
|
|
|
|
4.77
|
|
|
|
5.33
|
|
|
|
-
|
|
|
|
|
|
Granted (replacement options)
|
|
|
252,500
|
|
|
|
5.00
|
|
|
|
4.20
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(312,156
|
)
|
|
|
21.17
|
|
|
|
8.55
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
(1,125,301
|
)
|
|
|
11.27
|
|
|
|
5.22
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(288,331
|
)
|
|
|
10.31
|
|
|
|
4.33
|
|
|
|
-
|
|
|
|
|
|
Replaced
|
|
|
(252,500
|
)
|
|
|
5.00
|
|
|
|
3.75
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
6,034,054
|
|
|
|
10.92
|
|
|
|
4.57
|
|
|
|
4.50
|
|
|
US$
|
5,919
|
|
Vested and expected to vest
at December 31, 2018
|
|
|
6,034,054
|
|
|
|
10.92
|
|
|
|
4.57
|
|
|
|
4.50
|
|
|
US$
|
5,919
|
|
Exercisable at December 31, 2018
|
|
|
5,160,774
|
|
|
|
9.55
|
|
|
|
3.97
|
|
|
|
3.98
|
|
|
US$
|
5,919
|
|
The aggregate intrinsic value
as of December 31, 2018 in the table above represents the difference between the fair value of the Company’s ordinary share
at December 31, 2018 and the exercise price.
Total intrinsic value of options
exercised for the years ended December 31, 2016, 2017 and 2018 was US$10,011, US$ 2,953 and US$3,979 respectively.
As of December 31, 2018, there
was US$4,447 of unrecognized share-based compensation cost related to equity awards that are expected to be recognized over a
weighted-average vesting period of 1.53 years.
The fair value for stock options
granted during the year ended December 31, 2018 under the 1999 and 2015 Plan was estimated using the Black-Scholes option pricing
model. The volatility assumption was estimated based on the price volatility of the shares of the Company and comparable companies
in the internet media business. The expected term was estimated based on the resulting output of the Black-Scholes option pricing
model. The risk-free rates were based on the market yield of US Treasury Bonds and Notes with maturity terms equal to the expected
term of the option awards. Forfeitures were estimated based on historical experience. The dividend yield of nil are based on the
Company’s estimated dividend distribution for the stock options granted during the year ended December 31, 2018.
FANG HOLDINGS
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands
of United States Dollars (“US$”), except for number of shares and per share data)
|
18.
|
SHARE-BASED
PAYMENTS (continued)
|
The assumptions used to estimate
the fair values of the share options granted were as follows:
|
|
|
For
the Years Ended
December 31,
|
|
|
|
|
2018
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.19%
to 2.54
|
%
|
Dividend yield
|
|
|
nil
|
|
Expected volatility range
|
|
|
48.22% to 49.24
|
%
|
Weighted average expected life
|
|
|
0.01 to 5.50 years
|
|
Estimated forfeiture rate
|
|
|
-
|
|
Fair value of ordinary share
|
|
|
US$6.00 to US$27.90
|
|
Restricted Shares
A summary of the restricted
shares for the year ended December 31, 2018 was stated below:
Restricted Shares
Granted to Employees and Directors
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant date
Fair Value per Share
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
1,604,768
|
|
|
|
17.55
|
|
Granted
|
|
|
19,500
|
|
|
|
25.05
|
|
Forfeited
|
|
|
(201,439
|
)
|
|
|
17.91
|
|
Vested
|
|
|
(356,194
|
)
|
|
|
17.55
|
|
Unvested, December 31, 2018
|
|
|
1,066,635
|
|
|
|
17.62
|
|
Total intrinsic value of
restricted shares vested for the year ended December 31, 2018 was US$4,119.
As of December 31, 2018, there
was US$9,527 of unrecognized share-based compensation cost related to restricted shares that are expected to be recognized over
a weighted-average vesting period of 2.67 years.
Total share-based compensation
expense of share-based awards granted to employees and directors was as follows:
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
443
|
|
|
|
364
|
|
|
|
506
|
|
Selling expenses
|
|
|
512
|
|
|
|
479
|
|
|
|
405
|
|
General and administrative expenses
|
|
|
5,597
|
|
|
|
6,375
|
|
|
|
13,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,552
|
|
|
|
7,218
|
|
|
|
14,082
|
|
FANG HOLDINGS
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands
of United States Dollars (“US$”), except for number of shares and per share data)
|
19.
|
RELATED
PARTY TRANSACTIONS
|
Starting from 2011, the Company
provided Wall Street Global Training Center, Inc. with office space of approximately 220 square feet in the Company’s building
located in New York City, United States of America, free of charge. The estimated fair value of the free office space was insignificant
for each of the years ended December 31, 2016, 2017 and 2018.
The Company entered into an
agreement with Vincent Tianquan Mo to lease a building owned by him for a 10-year period for nil consideration starting from March
1, 2012. The deemed rental expense of US$154 and US$159 and US$162, and the corresponding shareholder contribution were included
in the consolidated financial statements for the years ended December 31, 2016, 2017 and 2018, respectively.
On April 1, 2013, the Company
and Beihai Silver Beach entered into a contract, pursuant to which Beihai Silver Beach was engaged to manage the hotel and office
leasing operations owned by the BaoAn Entities for ten years. The management fees incurred for the years ended December 31, 2016,
2017 and 2018 were US$421 and US$501, and US$523 respectively.
In the year ended December 31,
2016, Upsky San Francisco, Upsky Long Island and Beihai Silver Beach provided hotel accommodation to the Company amounting to
US$17, US$81 and US$113. No such services were provided for the years ended December 31, 2017 and 2018.
In the year ended December 31,
2016, New York Military Academy, a company of which Vincent Tianquan Mo is a director, provided training service to the Company
in the amount of US$111. No such services were provided for the years ended December 31, 2017 and 2018.
In April 2013, the Company entered
into a contract with Che Tian Xia Company Ltd. to use the latter’s domain name www.youtx.com for six years at nil consideration.
As of December 31, 2015, Nanning
Xuyin, which is 80% owned by Vincent Tianquan Mo, held 73,430,061 shares of Guilin Bank that were pledged by a third-party for
its overdue receivables to the Company through an entrustment agreement. In 2016, 30,595,859 shares of Guilin Bank have been transferred
to the Company from Naning Xuying. In 2017, the rest of shares of Guilin Bank have been transferred to the Company from Naning
Xuying.
The balances as of December
31, 2017 and 2018 represented outstanding management fees which were unsecured and interest-free.
Full time employees of the Company
in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical
care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC
subsidiaries of the Company make contributions to the government for these benefits based on certain percentages of the employees’
salaries. The Company has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee
benefits, which were expensed as incurred, were US$79,676, US$21,583 and US$20,093 for the years ended December 31, 2016,
2017 and 2018, respectively.
The Company has commitments for the acquisition and
construction of fixed assets of US$10,665 as of December 31, 2018, which are scheduled to be paid within one year.
As of December 31, 2018, the
Company had future minimum lease payments under non-cancellable operating leases with initial terms in excess of one year as follows:
Payments under operating leases
are expensed on a straight-line basis over the periods of the respective leases. The Company’s lease arrangements have no
renewal options, rent escalation clauses, restrictions or contingent rents and are all conducted with third parties, except for
the building leased from a related party as disclosed in Note 19. For the years ended December 31, 2016, 2017 and 2018, total
rental expenses for all operating leases were US$66,330, US$27,832 and US$9,678, respectively.
In April and May 2018, the Company
was sued as one of the defendants for trade mark infringement by a third party, alleging the claim of damage in the amount of
RMB 99.9 million, RMB 300 million, and RMB 500 million, respectively. The cases are still ongoing at the Beijing Intellectual
Property Court. The Company is vigorously contesting the allegations. In February 2019, the Company was served with a subpoena
from a court in Beijing, in which a third party claimed that a contract the Company entered into was invalid. Pursuant to such
contract, the Company received shares of Guilin Bank from a debtor’s nominee to discharge its indebtedness (See Note 5).
The debtor subsequently alleged that such contract was invalid because the transfer price of such assets was below the fair market
value. The Company intends to vigorously contest the allegation.
In accordance with ASC Topic 450, no accrual of loss contingency
was accrued as of December 31, 2018 since it is not probable that a liability has been incurred because of these legal proceedings
and the amount of loss cannot be reasonably estimated.
As of December 31, 2018,
the Company had accrued US$137,904 for unrecognized tax benefits (Note 17). The final outcome of the tax uncertainty is dependent
upon various matters including tax examinations, interpretation of tax laws or expiration of statute of limitations. However,
due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant
tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties.
In accordance with ASC 280,
“Segment Reporting”, the Company’s chief operating decision maker has been identified as the executive chairman
of the board of directors and chief executive officer, who makes resource allocation decisions and assesses performance based
on the Company’s consolidated results. As a result, the Company has only one reportable segment.
As the Company generates substantially
all of its revenues from customers domiciled in the PRC, no geographical segments are presented. All of the Company’s long-lived
assets are located in the PRC except for buildings and land (i.e. including the construction in progress) with net book values
of US$104,327 and US$112,713 as of December 31, 2017 and 2018, respectively, which are located in the United States of America.
The repurchased but not retired
ordinary shares are accounted as treasury stock which are not considered outstanding and excluded from the calculation of basic
earnings (loss) per share since the date of repurchase.
Options to purchase 6,034,054
shares of common stock at US$1.95~US$30 per share and 1,066,635 restricted shares were outstanding in 2018 but were not included
in the computation of diluted EPS due to anti-dilutive effect. In addition, 2,790,860 related to the Company’s September
2022 Notes and 4,186,290 related to the Company’s New November 2022 Notes were not included in the calculation of diluted
earnings (loss) per share because the impact of inclusion would be anti-dilutive.
In 2017, the number of securities
that were not included in the calculation of diluted earnings (loss) per share because the impact of inclusion would be anti-dilutive
were as follows: 2,961,570 share options, 290,534 related to the Company’s December 2018 Notes, 2,790,860 related to the
Company’s September 2022 Notes and 5,581,720 related to the Company’s November 2022 Notes. As of December 31, 2017,
the conversion prices for the December 2018 Notes, the September 2022 Notes and the November 2022 Notes were US$19.62 per ADS,
US$7.166 per ADS and US$7.166 per ADS, respectively, as of December 31, 2017. There is no cash conversion rate.
In 2016, the number of securities
that were not included in the calculation of diluted earnings (loss) per share because the impact of inclusion would be anti-dilutive
were as follows: 5,763,088 employee stock options, 4,153,642 related to the Company’s December 2018 Notes, 2,790,860 related
to the Company’s September 2022 Notes and 5,581,720 related to the Company’s November 2022 Notes. As of December 31,
2016, the conversion prices for the December 2018 Notes, the September 2022 Notes and the November 2022 Notes were US$19.62 per
ADS, US$7.166 per ADS and US$7.166 per ADS, respectively, as of December 31, 2016. There is no cash conversion rate.
For the presentation of the
parent company only condensed financial information, the Company records its investment in subsidiaries, PRC Domestic Entities
and PRC Domestic Entities’ subsidiaries which it effectively controls through contractual agreements, under the equity method
of accounting as prescribed in ASC 323,
Investments-Equity Method and Joint Ventures
. Such investments are presented
on the condensed balance sheets as “Investment in subsidiaries, PRC Domestic Entities, and PRC Domestic Entities’
subsidiaries” and the subsidiaries, PRC Domestic Entities and PRC Domestic Entities’ subsidiaries’ profit or
loss as “Equity in profits (losses) of subsidiaries, PRC Domestic Entities and PRC Domestic Entities’ subsidiaries”
on the condensed statements of comprehensive income (loss). The parent company only condensed financial information should be
read in conjunction with the Company’s consolidated financial statements.
On January 21, 2019, the
Company announced its intention to separate into two publicly traded companies: the spun-off business that will comprise
certain portions of the Company’s listing and value-added services, and the retained business that will comprise the
Company’s remaining operations, which will continue to be operated by Fang. On May 2, 2019, the board of directors
approved the plan to separate CIH, which operates the spun-off business, into an independent publicly traded company.
The Company expects the spun-off be completed in the second quarter of 2019.