20-F 1 v195732_20f.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 20-F


o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report
For the transition period from to
Commission file number: 001-34132

CHINA MASS MEDIA CORP.
(Exact name of Registrant as specified in its charter)

Not Applicable
 
Cayman Islands
(Translation of Registrant’s name into English)
 
(Jurisdiction of Incorporation or Organization)
 
6th Floor, Tower B, Corporate Square, 35 Finance Street
Xicheng District, Beijing 100033
People’s Republic of China
(Address of Principal Executive Offices)

Mr. Eric Wang Lam Cheung, Chief Financial Officer
Tel: (8610) 8809-1099
Email: ericwlcheung@chinammia.com
Fax: (8610) 8809-1088
6th Floor, Tower B, Corporate Square, 35 Finance Street
Xicheng District, Beijing 100033
People’s Republic of China
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

Title of each class
 
Exchange on which registered
Ordinary shares, par value US$0.001 per share
American depositary shares, each representing 30
ordinary shares
 
New York Stock Exchange*
New York Stock Exchange
 

*
Not for trading but only in connection with the listing on New York Stock Exchange of the American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the
Act: None
Number of outstanding shares of each of the issuer’s classes of capital or common stock as of
December 31, 2009:
716,375,000 Ordinary Shares, par value US$0.001 per share
 

 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15)(d) of the Securities Exchange Act of 1934. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated
Filer x
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
International Financial Reporting
Standards as issued by the International
Accounting Standards Board o
Other o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o
(APPLICABILITY ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 13, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes o No o
 

 
Table of Contents
 
Part I

   
Page
INTRODUCTION
 
4
FORWARD-LOOKING STATEMENTS
 
5
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 
5
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
5
ITEM 3.
KEY INFORMATION
 
5
ITEM 4.
INFORMATION ON THE COMPANY
 
31
ITEM 4A
UNRESOLVED STAFF COMMENTS
 
47
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
47
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
66
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
76
ITEM 8.
FINANCIAL INFORMATION
 
79
ITEM 9.
THE OFFER AND LISTING
 
81
ITEM 10.
ADDITIONAL INFORMATION
 
82
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
96
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
97
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
99
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
99
ITEM 15.
CONTROLS AND PROCEDURES
 
99
ITEM 16A.
AUDIT COMMITTEE FINANCIAL
 
100
ITEM 16B.
CODE OF ETHICS
 
101
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
101
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
101
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
   
 
PURCHASERS
 
102
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
 
102
ITEM 16G.
CORPORATE GOVERNANCE
 
102
ITEM 17.
FINANCIAL STATEMENTS
 
102
ITEM 18.
FINANCIAL STATEMENTS
 
102
ITEM 19.
EXHIBITS
 
103
 
3

 
INTRODUCTION

Unless otherwise indicated, references in this annual report to:

“ADRs” are to the American depositary receipts that evidence our ADSs;

“ADSs” are to our American depositary shares, each of which represents 30 ordinary shares;

“China” or the “PRC” are to the People’s Republic of China, excluding, for the purpose of this annual report on Form 20-F only, Taiwan and the special administrative regions of Hong Kong and Macau;

“RMB” and “Renminbi” are to the legal currency of China;

“series A preferred shares” are to our convertible series A preferred shares, par value US$0.001 per share;

“shares” or “ordinary shares” are to our ordinary shares, par value US$0.001 per share; and
“US$,” “$” and “U.S. dollars” are to the legal currency of the United States.
 
Unless the context indicates otherwise, “we,” “us,” “our company” and “our” refer to China Mass Media Corp., or CMM, Universal International Advertising Limited, or UIAL, Mass Media and Universal International Advertising Co., Ltd., or Universal, and, up to December 31, 2007, Mass Media International Advertising Co., Ltd., or Mass Media.

Unless otherwise indicated, all share and per share information in this annual report gives effect to the 1,000-for-one share split of our ordinary shares and series A preferred shares effected in the form of a grant of bonus shares on July 17, 2008, but does not give effect to the stock dividend that was approved by our board of directors in May 2010 and by shareholders in July 2010, under which our shareholders are entitled to receive one additional ordinary share for every ten ordinary shares they hold.

This annual report on Form 20-F includes our audited combined statements of operations data for the years ended December 31, 2007, 2008 and 2009, and combined balance sheet data as of December 31, 2008 and 2009.
 
We completed the initial public offering of 7,212,500 ADSs, each representing 30 ordinary shares on August 7, 2008. On August 4, 2008, we listed our ADSs on NYSE Arca under the symbol “CMM.” On August 25, 2009 we transferred the listing of our ADSs from NYSE Arca to the New York Stock Exchange, or the NYSE.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to our business, operating results and financial condition as well as our current expectations, assumptions, estimates and projections about our industry. All statements other than statements of historical fact in this annual report are forward-looking statements. These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

In some cases, these forward-looking statements can be identified by words or phrases such as “aim,” “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “potential,” “will” 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, among other things, statements relating to:
 
4

 
our goals and strategies;

our expectations regarding demand for our services;

our future business development, financial condition and results of operations;

expected changes in our revenues, expenses, profits, earnings and other estimated financial information;

our plan to obtain additional advertising time slots from China Central Television, or CCTV, and regional television networks;

expected changes in CCTV’s advertising policies or practices;

competition in the PRC advertising market;

the expected growth in the urban population, consumer spending, average income levels and advertising spending levels;

PRC governmental policies and regulations relating to the advertising market;

the current global financial crisis and economic downturn; and

those other risks identified in “Item 3. Key Information—D. Risk Factors.”
 
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we reference in this annual report and have filed as exhibits to the annual report completely and with the understanding that our actual future results may be materially different from what we expect.

PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.
5

 
ITEM 3.
KEY INFORMATION
 
A.
Selected Financial Data
 
The following selected combined statements of operations data for the three years ended December 31, 2007, 2008 and 2009 and selected combined balance sheets data as of December 31, 2008 and 2009 have been derived from our audited combined financial statements included elsewhere in this annual report. The following selected combined statements of operations data for the years ended December 31, 2005 and 2006 and selected combined balance sheets data as of December 31, 2005, 2006 and 2007 have been derived from our audited combined financial statements not included in this annual report. These combined financial data have been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent registered public accounting firm.

The selected combined financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited combined financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our combined financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.

The basic and diluted earnings per share data for all periods presented below have been adjusted for the one-for-ten stock dividend declared by our board of directors in May 2010 and approved by our shareholders in July 2010.
 
6

 
   
Year Ended December 31,
 
   
2005
   
2006
   
2007
   
2008
   
2009
 
   
(RMB)
   
(RMB)
   
(RMB)
   
(RMB)
   
(RMB)
   
(US$)
 
    
(In thousands, except for per share data)
 
Selected Combined Statement of Operation Data
                                   
                                     
Revenues:
                                   
Advertising agency services
    215,448       245,200       202,637       334,053       397,279       58,202  
Special events services
    15,228       -       15,991       -       -       -  
Production and sponsorship services
    2,336       10,487       60,018       34,935       30,305       4,439  
Total revenues
    233,012       255,687       278,646       368,988       427,584       62,641  
Less: business tax
    (19,163 )     (20,472 )     (23,110 )     (16,006 )     (16,022 )     (2,347 )
Total net revenues
    213,849       235,215       255,536       352,982       411,562       60,294  
Operating costs and expenses:
                                               
Cost of revenues
    (29,311 )     (26,734 )     (30,148 )     (40,200 )     (40,239 )     (5,895 )
Cost of revenues – media fees to a related party
    -       -       -       (163,200 )     (230,000 )     (33,695 )
Sales and marketing expenses
    (10,069 )     (7,038 )     (5,600 )     (8,204 )     (17,362 )     (2,544 )
General and administrative expenses
    (8,494 )     (5,631 )     (8,505 )     (24,487 )     (33,194 )     (4,863 )
Total operating costs and expenses
    (47,874 )     (39,403 )     (44,253 )     (236,091 )     (320,795 )     (46,997 )
Operating income
    165,975       195,812       211,283       116,891       90,767       13,297  
Interest and investment income
    1,331       3,434       10,774       15,103       9,494       1,391  
Other income (expenses), net
    (151 )     (1,560 )     (3,128 )     (1,441 )     533       78  
Income before tax
    167,155       197,686       218,929       130,553       100,794       14,766  
Income tax expense
    (24,738 )     (28,271 )     (10,619 )     (20,139 )     (14,328 )     (2,099 )
Net income
    142,417       169,415       208,310       110,414       86,466       12,667  
Net income allocated to participating preferred shares
    (24,951 )     (29,682 )     (36,496 )     (9,752 )     -       -  
Net income available to ordinary shareholders
    117,466       139,733       171,814       100,662       86,466       12,667  
Earnings per ordinary share, basic and diluted
    0.26       0.31       0.38       0.17       0.11       0.02  
Earnings per ADS, basic
    7.77       9.24       11.36       5.12       3.29       0.48  
Earnings per ADS, diluted
    7.77       9.24       11.36       5.12       3.28       0.48  
Dividends declared per share
    0.22       0.32       0.40       0.19       -       -  
Shares used in calculating earnings per ordinary share, basic
    453,640       453,640       453,640       589,764       788,013       788,013  
Shares used in calculating earnings per ordinary share, diluted
    453,640       453,640       453,640       589,764       789,861       789,861  
Shares used in calculating earnings per ADS, basic
    15,121       15,121       15,121       19,659       26,267       26,267  
Shares used in calculating earnings per ADS, diluted
    15,121       15,121       15,121       19,659       26,329       26,329  
 
7

 
   
As of December 31,
 
    
2005
   
2006
   
2007
   
2008
   
2009
 
    
(RMB)
   
(RMB)
   
(RMB)
   
(RMB)
   
(RMB)
   
(US$)
 
    
(In thousands)
 
Selected Combined Balance Sheet Data
                             
Cash and cash equivalents
    374,044       510,915       138,262       566,889       508,778       74,536  
Total current assets
    393,981       547,443       385,450       1,150,558       657,652       96,347  
Total non-current assets
    22,744       26,546       18,092       57,261       55,464       8,125  
Total assets
    416,725       573,989       403,542       1,207,819       713,116       104,472  
Total current liabilities
    326,584       436,685       274,827       819,777       236,468       34,643  
Total liabilities
    326,584       436,685       274,827       819,777       236,468       34,643  
Total shareholder’s equity
    90,141       137,304       128,715       388,042       476,648       69,829  
Total liabilities and shareholder’s equity
    416,725       573,989       403,542       1,207,819       713,116       104,472  
 
Exchange Rate Information

We publish our financial statements in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in the City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2009, which was RMB6.8259 to US$1.00. No representation is made that the Renminbi amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On August 20, 2010, the exchange rate as published by the Federal Reserve Board was RMB 6.7900 to US$1.00.

The following table sets forth information regarding the noon buying rate in Renminbi per U.S. dollar for the periods indicated.
 
   
Renminbi per U.S. Dollar Noon Buying Rate(1)
 
    
Period End
   
Average (2)
   
Low
   
High
 
2005
    8.0702       8.1826       8.0702       8.2765  
2006
    7.8041       7.9579       7.8041       8.0702  
2007
    7.2946       7.5806       7.2946       7.8127  
2008
    6.8225       6.9193       6.7800       7.2946  
2009
    6.8259       6.8295       6.8176       6.8470  
December
    6.8259       6.8275       6.8244       6.8299  
2010
                               
January
    6.8268       6.8269       6.8258       6.8295  
February
    6.8258       6.8285       6.8258       6.8330  
March
    6.8258       6.8262       6.8254       6.8270  
April
    6.8247       6.8256       6.8229       6.8275  
May
    6.8305       6.8275       6.8245       6.8310  
June
    6.7815       6.8184       6.7815       6.8323  
July
    6.7735       6.7762       6.7709       6.7807  
August (through August 20)
    6.7900       6.7812       6.7670       6.8038  
 

 
(1)
For periods prior to January 1, 2009, the exchange rates reflect the noon buying rates as reported by the Federal Reserve Bank of New York. For periods after January 1, 2009, the exchange rates reflect the exchange rates as set forth in the H.10 statistical release of the Federal Reserve Board.
(2)
Annual averages are calculated by using the average of the exchange rates at the end of each month during the period. Monthly averages are calculated by using the average of the daily rates during the relevant period.
 
8

 
B.
Capitalization and Indebtedness

Not Applicable.

C.
Reasons for the Offer and Use of Proceeds

Not Applicable.

D.
Risk Factors

Risks Related to Our Business and Industry

Our business substantially depends on CCTV. We rely on our access to advertising time slots on CCTV to broadcast our clients’ advertisements. Any unfavorable change in CCTV’s advertising model, any changes that adversely affect CCTV’s market position or any limitation on our access to desired television advertising time slots could harm the effectiveness and attractiveness of our services.
 
CCTV is the main television network from which we currently obtain advertising time. We place our advertising clients’ advertisements on CCTV, the largest television network in China, which offers 21 public channels in China and around the world. According to China Radio & TV Yearbook, CCTV had the largest market share in China in terms of total television advertising revenues. We believe CCTV is generally perceived as the most influential and reputable television medium by the public in China, due to its central government sponsorship, extensive network coverage and long broadcasting history in China. As such, advertisers often regard CCTV as the television advertising platform on which they can gain the maximum exposure and recognition for their products or services in China. We believe our access to a substantial number of advertising time slots on five channels of CCTV, particularly during certain popular television programs, enhances our service offerings. CCTV uses third-party agencies, such as our company, to sell a significant portion of its advertising time slots to advertisers, while selling the remaining portion of its advertising time slots directly by itself or through auctions. Since 2009, CCTV has begun to sell more of its advertising time slots by itself or through auctions under a new initiative. For example, CCTV ceased to grant us the advertising right to the 2010 Chinese New Year Gala program, and sold the advertising time slots for that program by itself, which have had a material adverse effect on our results of operations. If CCTV continues to apply or expand the application of such initiative, we may lose the advertising time slots for other programs on CCTV that we currently have. As a result, we may lose our advertising clients and our business, financial condition and results of operations could be materially and adversely affected. In addition, certain of CCTV’s senior management members changed in May 2009, which could result in other changes of CCTV’s program mix and operational model.

An unfavorable change in CCTVs market position could materially and adversely affect us. CCTV is owned by China’s central government, and its dominant position in China’s television advertising market is derived primarily from its status as one of the central government’s key channels for communication with the public. As a result, CCTV enjoys certain favorable governmental support that is not available to other television networks. For example, the central government mandates that CCTV’s Channel 1, on which we have a substantial number of advertising time slots, be broadcast by all regional television networks in China, which makes this channel particularly attractive to advertisers who want to achieve nationwide exposure. Nevertheless, CCTV faces increasing competition from regional television networks that strive to offer more attractive television programs to compete with CCTV for television audiences. If CCTV fails to compete successfully against these other networks, it may lose its market share. Any changes that could potentially erode CCTV’s dominant market position, such as relaxation of media control by the government or inadequate response to competition from other networks by CCTV, could in turn reduce the attractiveness of our advertising offerings.

 
9

 
 
CCTV has considerable bargaining power over us. Consistent with industry practice in China, the pricing and payment terms of our advertising contracts with CCTV are typically negotiated annually, including the contracts that have terms of more than one year. As CCTV is owned by the government, our negotiating power with CCTV is limited. In general, CCTV would be less likely to enter into new contracts with us if we failed to bring in sufficient advertising revenues for the advertising time slots contracted to us in a previous year. From time to time we enter into contracts with CCTV and commit ourselves to a minimum amount of advertising revenues with respect to certain advertising time slots provided to us. Under all such contracts, we are required to pay the agreed-upon minimum amounts to CCTV even if we do not successfully procure advertisers for the time slots. If we fail to procure sufficient advertising clients for the secured time slots or receive total amounts lower than what we have committed ourselves to deliver, we will be required to cover the difference ourselves, as a result of which our financial condition and results of operations could be adversely affected. In addition, CCTV adopted a new payment term in 2010 for advertising time slots we obtained through auctions, under which we are required to pay 30% of the annual media fee in advance as deposit with the remaining fee being payable in 12 monthly payments throughout the year. Such payment term will have a significant impact on our cash flow. Moreover, as our existing contracts expire, we may be unable to renew or extend the terms of contracts for desired advertising time slots on desirable CCTV channels or at favorable price levels, if at all. Any significant decreases in our CCTV advertising time slot resources as a result of our failure to renew or extend our existing contracts with CCTV could materially and adversely affect the effectiveness and attractiveness of our advertising offerings.

CCTV may change or discontinue our services or not renew our service contract upon its expiration. CCTV may change or discontinue our services or not renew our service contract upon its expiration. For example, we used to provide special events services to assist CCTV in the sales and marketing of advertising time slots for major sporting events broadcast on its Channels 1 and 2 and the service term was renewed annually in prior years. In 2009, however, CCTV did not renew our service contract for 2010.

We rely on access to advertising time slots during a limited number of television programs to place our clients’ advertisements and the desirability of the advertising time slots we obtain depends on the popularity of the relevant television programs and other factors that are difficult to predict.

We rely significantly on our rights to advertising time slots during a limited number of television programs, including Television Guides and the programs under our Daytime Advertising Package, all of which are broadcast on CCTV. We also obtained advertising rights to a number of additional programs on CCTV Channels E and F, which became available to us in 2008. In addition, we successfully bid for the advertising rights to the Periodic China News Package on CCTV Channel 4 in 2010 through auctions. Although we occasionally procure advertising time slots during other programs on CCTV, we substantially rely on the regular daily television programs we have obtained from CCTV to place advertisements for clients and generate revenues. We do not have control over the availability or scheduling of these programs. If any of such programs are rescheduled to times that are unattractive to our clients or if any of such programs are shortened or canceled by CCTV and we cannot obtain alternative media resources, we would face difficulty in marketing our services and our revenues may decline. For example, the advertising time for World Update, a program on CCTV Channel 4 for which we have obtained advertising rights, was reduced from three minutes to two minutes in 2008 when the length of the program was shortened, and eventually the program was cancelled in May 2008. This type of change to the advertising time slots currently available to us may cause a decrease in our revenues from advertising agency services in future periods.

In addition, the value of television advertising time slots depends primarily on the popularity, ratings and demographics of the viewership of the program to which such advertising time slots are attached. Therefore, the perceived effectiveness and desirability of our services to a certain extent depends on the acceptance by the public of the television programs to which our advertising time slots are attached, which is difficult to predict. The success of a television program also depends on the quality and acceptance of other competing programs, the availability of alternate forms of entertainment, the general trend of leisure time activities and other tangible and intangible factors, many of which are difficult to predict. Poor ratings of a television program in targeted demographics can lead to a reduction in the advertising spending for any advertising time slots related to that program. If any of the television programs to which our advertising time slots are attached becomes unpopular, our service offerings may become less attractive to our clients and our financial condition and results of operations could be materially and adversely impacted as a result.

 
10

 
 
Our ability to adjust our advertisement costs is limited and any substantial increase in the prices charged by CCTV for the advertising time slots available to us may reduce our revenues and profitability.
 
In negotiating with our advertising clients, we price the advertising time slots for most daily television programs based on a number of factors, including market demand for such advertising time slots, target audience, the ratings and quality of the relevant television programs and prices charged by our competitors. We also refer to the rate cards published by CCTV for its advertising time slots. We typically negotiate the pricing terms with CCTV with respect to the advertising time slots of such daily television programs available to us on an annual basis. In such contracts, we and CCTV agree on the prices that we will pay to CCTV for these time slots, which are generally lower than the published rate card prices. We typically retain the difference between the prices we charge to our advertising clients and the prices we pay to CCTV as our commission. CCTV usually increases the prices charged to us and the prices on its published rate cards every year. We are typically able to pass on such price increases to our advertising clients. However, in the future we may not always be able to do so. Due to its dominant market position, CCTV enjoys much greater bargaining power over price increases than we do and our ability to control such advertisement costs is limited. If CCTV substantially raises the prices charged to us for the advertising time slots available to us and we are unable to pass on such costs to our advertising clients, our revenues would decrease and our profitability may decline. For example, CCTV increased the media fees for Channel 4 programs by approximately 40.9% in 2009, which has negatively affected our operating income from these programs. As a further example, we obtained in an auction the advertising rights to the Periodic China News Package on CCTV Channel 4 in 2010 and if we cannot pass on the cost of the bid media fee to our customers, we will sustain a loss on that program.

We receive a substantial portion of our revenues from a limited number of large clients, and the loss of these clients, or the loss of significant advertisers by our agency clients, could materially and adversely impact our business, financial condition and results of operations.
 
A relatively small number of clients are responsible for a substantial percentage of our revenues. In the years ended December 31, 2007, individual clients accounting for more than 10% of our revenues in the aggregate were responsible for 32.3% of our total revenues. None of our clients accounted for more than 10% of our total revenues in 2008 and 2009 because we recorded the advertising revenues from CCTV Channel 4 programs on a gross basis, which increased our revenue basis. Most of our large clients are third-party advertising agencies who obtained advertising time slots from us for their advertising clients and may in turn rely on a limited number of large advertisers for their businesses. The performance of such third-party advertising agencies has a direct impact on our operating results. Advertisers who access our advertising time slots through other advertising agencies may reduce advertising and marketing spending or cancel projects at any time for any reason. Any of our advertising clients may not continue to utilize our services to the same extent, or at all, in the future. A significant reduction in advertising and marketing spending by, or the loss of one or more of, our advertising clients, if not replaced by new clients or an increase in business from existing clients, could make it difficult for us to fill the time slot vacancies and our revenues and profits could decline significantly as a result. The third-party advertising agencies may also introduce their advertising clients to other advertising service providers who have obtained other advertising time slots from CCTV or other television networks. As a result, any loss of our significant clients, or the loss of significant advertisers by our agency clients, could have a material and adverse effect on our financial condition and results of operations. In addition, if any client with whom we have a substantial amount of business experiences financial difficulty, we could be unable to collect accounts receivable on a timely basis, if at all. This may result in an increase in our bad debt expenses and adversely affect our results of operations.

 
11

 
 
We face significant competition, and if we do not compete successfully against existing and new competitors, we may lose our market share and our profitability may be materially harmed.
 
The advertising industry is highly competitive and fragmented in China. As an increasing number of companies enter the industry, competition continues to intensify. Our direct competitors are other national or regional advertising or marketing services providers that offer television airtime to advertisers, primarily including SinoMedia Holding Limited, Walk-on Advertising Co., Ltd. and Charm Communication Corp. We compete with other television advertising agencies for the limited time slots available on CCTV or other television networks on the basis of sales and marketing capabilities, operating track record and service quality. In particular, some of our advertising clients are other advertising agencies who could become our competitors seeking the same limited media resources. If CCTV continues or expands the practice to sell its advertising time slots through auctions, we may face increased competition in obtaining desired advertising time slots from CCTV. We also compete with other television advertising agencies for advertisers’ spending on the basis of desirability of time slots offered, television network coverage, service quality, reputation, pricing and relationships with television networks.

We face competition from new entrants in the television advertising sector. Wholly foreign-owned advertising companies have been allowed to operate in China since December 2005, which exposes us to increased competition from international advertising companies that have greater financial and other resources than us. Fixed costs in the advertising industry are generally low, and it is customary that advertising service contracts with advertising clients, such as ours, are entered into on a short-term and non-exclusive basis. It is possible that our competitors, including new market entrants, could acquire a significant number of clients and establish a significant presence in our markets.

Some of our existing and potential competitors may have competitive advantages, such as closer cooperative relationships with CCTV, longer operating histories, larger market shares, access to larger client bases or media resources, or greater financial, sales and marketing, distribution, technical or other resources, than we do. Increased competition will provide potential clients with a wider choice of advertising and marketing service providers, which could lead to lower prices and decreased revenues and profits for us. We may not be able to successfully compete against new or existing competitors and failure to do so may cause our market share and our revenues to decline significantly.

In addition, television networks, upon which we depend for our business, also compete with other forms of advertising media, such as radio, newspapers, magazines, the Internet, indoor or outdoor flat panel displays, billboards and public transport advertising, for overall advertising spending. In particular, we believe that the Internet is becoming increasingly popular as an alternative advertising medium among advertisers. In addition, technology in television, video, data services and other media used in the entertainment industry is changing rapidly, and advances in technology have led to alternative methods of content delivery and storage. Certain changes in the behavior of television viewers driven by these methods of delivery and storage could have a negative effect on the television advertising revenues. For example, devices that enable users to view television programs on a time-delayed basis or allow them to fast-forward or skip advertisements may cause changes in consumer behavior that could adversely affect the advertising revenues of television networks and our results of operations.

We derive substantially all of our revenues from the provision of advertising services, a business that is particularly sensitive to changes in economic conditions and other general trends.

 
We derive substantially all of our revenues from a single business, the provision of advertising services. Demand for our services and the resulting advertising spending by our clients are highly sensitive to changes in general economic conditions and other general trends, including changes in lifestyle patterns and consumers’ tastes and preferences. Recessionary economic cycles may adversely affect the businesses of our advertising clients, which can have the effect of reducing the volume of advertising time slots and other services advertisers purchase from us. For example, in the second half of 2008 and the first half of 2009, the global recession had negatively affected the business of many of our clients or potential clients in China, which significantly reduced the demand for our services in those periods. Additionally, advertisers could also decide to spend more of their advertising budget on non-television advertising media because of perceived changes in consumers’ lifestyles or their tastes and preferences. A general decrease in total advertising spending, or a decrease in the demand for our advertising services in particular, would materially and adversely affect our ability to generate revenues and have a significant negative effect on our financial condition and results of operations.

 
12

 
 
Advertising clients periodically review and change their advertising or marketing models and strategies, and if we fail to adapt quickly to such changes, we may be unable to attract advertisers and increase the demand for our services, and therefore be unable to maintain or increase our revenues and profits.

 
Advertising service contracts with clients are generally entered into on a short-term and non-exclusive basis. Clients may move their accounts to another agency on relatively short notice. For example, in 2007, one advertiser reduced its advertising spending for time slots during the Television Guides program, which resulted in a substantial decrease in our revenues. In many cases, we represent a client for only a portion of its advertising or marketing needs or only in specific advertisements or marketing campaigns, thus enabling the client to continually compare the effectiveness of our services against that of other agencies. A client’s decision to place its advertisements through us is affected by a number of factors, including the desirability of time slots we offer, the extent of television network coverage we provide, our service packages and pricing structure and the client’s perception of the effectiveness and quality of our services. If we fail to retain our existing clients or increase advertisers’ awareness and utilization of our services, or to formulate attractive service packages and pricing structures to attract new clients, demand for our services will not grow and may even decrease. Advertisers might be unwilling to seek time slots from us or to pay the levels of advertising fees we require to generate profits, which could materially and adversely affect our ability to increase our revenues and our profitability.

We depend on the services of key personnel, including Mr. Shengcheng Wang, who is our chairman and chief executive officer, and our business and growth prospects may be severely disrupted if we lose their services.

Mr. Shengcheng Wang, our chairman and chief executive officer, has led our company since our establishment. Our business and operations depend to a significant extent on his business vision, industry expertise, experience with our business operations and management skills, as well as his relationships with CCTV, many of our key clients and our employees. We do not maintain key-man life insurance for Mr. Shengcheng Wang. If he becomes unable or unwilling to continue in his present position, we may not be able to replace him in a timely manner or at all, which would have a material adverse effect on our business and growth prospect. We also rely on the performance of a number of other key employees. Although we believe that we have established a reputation in the industry that attracts talented personnel, we are still vulnerable to adverse consequences from the loss of key employees due to competition among providers of advertising services for talented personnel.

The current global financial crisis and economic downturn may continue to have a material and adverse effect on our businesses, results of operations and financial condition.
 
The current global financial crisis and economic downturn have adversely affected economies and businesses around the world, including in China. Due to the global economical downturn, a decrease in exportation and domestic consumer demand and a slowdown in domestic property investments, the economic situation in China was severe during the second half of 2008 and the first half of 2009. Principally due to this change in the macro- economic conditions, advertisers had downsized or cancelled their advertising campaigns and as a result the demand for our advertising services had been declining in the second half of 2008 and the first half of 2009, which had a material adverse effect upon our business and profitability. The demand for our services increased in the second half of 2009 as China’s economy started to recover from the global financial crisis. However, if the global financial crisis continues or deteriorates or if the economy of China does not fully recover as expected or begin to fluctuate, the demand for our services may drop and as a result, our businesses, results of operations and financial condition could continue to be materially and adversely affected.

 
13

 
 
A significant percentage of our outstanding ordinary shares is beneficially owned by Mr. Shengcheng Wang, our chairman and chief executive officer, and, as a result, he has substantial influence over our company and his interests may not be aligned with the interests of our other shareholders.

As of August 20, 2010, Mr. Shengcheng Wang, our chairman and chief executive officer, beneficially owns 69.80% of our outstanding ordinary shares. Accordingly, he has significant influence in determining the outcome of any corporate transaction or other matters submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. Mr. Wang also has the power to prevent or cause a change in control. In addition, without the consent of Mr. Wang, we could be prevented from entering into transactions that could be beneficial to us. Mr. Wang may cause us to take actions that are opposed by other shareholders as his interests may differ from those of other shareholders, including those who hold our ADSs.

Moreover, certain of Mr. Wang’s family members, including his parents, have owned or controlled a number of companies that conduct businesses similar to ours and enter into transactions with us from time to time. For example, Mr. Wang’s immediate family members indirectly own a 50% interest in Guang Er Gao Zhi FTP, with whom we entered into a framework agreement to procure advertising rights to several CCTV programs in 2008 and 2009. See “Related Party Transactions—Transactions with Guang Er Gao Zhi FTP.” All of such companies are managed separately by management teams different from that of our company. Although Mr. Wang and his parents and spouse have agreed not to engage in any business that directly or indirectly competes with us, such undertakings may not be as effective as we expect, and any breach of such undertakings by Mr. Wang or his immediate family members may result in conflicts of interests and harm the interests of our other shareholders.
 
If we fail to maintain an effective and adequate sales and marketing team, our sales and revenues could materially decrease.
 
We depend on our sales personnel to increase advertisers’ awareness, acceptance and utilization of our services, which are crucial to our revenues, business and growth. We recruited a number of senior sales executives and doubled the size of our sales force in 2009. As of December 31, 2009, we had 72 employees directly engaged in sales. Consistent with the industry norm, we typically experience a high turnover rate among our sales personnel, and we cannot assure you that our current sales personnel will remain effective or loyal to us. We face intense competition for experienced sales personnel both from our direct competitors and other advertising and media companies. Furthermore, we will need to continue expanding our sales force if our business continues to grow. We may not be able to hire, retain, integrate or motivate an adequate number of qualified new sales personnel as we grow our business, which could disrupt our business and cause our revenues to materially decrease.

We may not be able to successfully solicit sponsors for the public service announcements we produce and therefore may not receive sponsorship fees to cover our production costs. In addition, we enter into fixed-price contracts with respect to our content production services, and our failure to accurately estimate the resources required for the execution of these contracts could negatively affect our results of operations.
 
We are committed to produce public service announcements for the daily “Guang Er Gao Zhi” program broadcast on CCTV. We typically solicit sponsors for such announcements we produce and the sponsor’s name will be shown at the end of an announcement. We charge fees for this service based on the value of such sponsorship to the sponsors. If we are unable to procure sponsors for the public service announcements we produce, we will not be able to cover the costs we incur in producing such announcements. For example, the sponsorship for the public service announcements dropped significantly in 2009 due to the global financial crisis, which negatively affected our revenue and profitability. In addition, all of our content production services are provided on a fixed-price basis. Such contracts require us to undertake projections and planning related to resource utilization and costs, and we bear the risk of cost overruns in connection with our production projects. If we cannot secure a price increase from our clients and try to complete our production within a restricted budget, we may not be able to deliver the content at the quality expected from us. Any failure to accurately estimate the resources required for a project or any other factors that may impact our costs to complete the project, or any failure to complete our production at the committed performance level, could adversely affect our profitability and results of operations.

 
14

 
 
Our strategy to acquire complementary businesses and assets involves significant risks and uncertainty that may prevent us from achieving our objectives and harm our financial conditions and results of operations.
 
Our business strategy includes selective acquisitions of businesses and assets that are complementary to our current advertising business. The implementation of this strategy involves significant risks and uncertainties, including our ability to:
 
identify and acquire suitable businesses or assets on commercially reasonable terms or at all;

raise sufficient capital to fund the acquisitions;

integrate acquired services, products or operations into our organization effectively;

retain and motivate key personnel and retain the clients of acquired entities; and

derive the intended financial benefits from our acquisitions.

Our management may be required to devote significant time and attention to acquisitions and to integrating newly acquired companies into our existing operations. There are other risks associated with acquisitions, including:
 
unforeseen or hidden liabilities, including exposure to lawsuits, associated with newly acquired businesses or assets;
 
short-term deterioration in our operating results due to new acquisitions of unprofitable companies;
 
failure to generate sufficient revenues to offset the costs and expenses of acquisitions;
 
potential impairment losses or amortization expenses relating to intangible assets arising from any of such acquisitions, which may materially reduce our net income;
 
potential conflicts with our existing employees and advertising clients as a result of our integration of newly acquired companies; and
 
our inexperience in carrying out acquisitions, as we have not previously engaged in any such transactions.
 
Any of these risks could materially increase our costs and expenses associated with any such acquisitions, which in turn could harm our financial condition and results of operations, and we may be unable to recover our investment in the acquired business or assets.
 
If our clients forfeit the use of advertising time they have won in CCTV’s annual open bidding process, we may lose the deposit we placed with CCTV.
 
During CCTV’s annual open bidding process, we bid on behalf of our clients for advertising time. As a condition for attending the CCTV bidding process, both our clients and we are required to place a deposit with CCTV. The amount of our deposit depends on the number of clients that we represent in the process. According to CCTV’s bidding policy, such deposit will be returned to us when our clients complete the placement of advertisements on a minimum percentage of the advertising time won by them in the bidding process. The minimum percentage is specified by CCTV. We have the right to sell the advertising time on which our clients cannot or decide not to place advertisements, unless our clients do not use the minimum percentage of such advertising time as required by CCTV, in which case CCTV has the right to retain the deposit placed by our clients and us, and demand further compensation from our clients and us if CCTV incurs additional actual loss. Therefore, we may lose our deposit to CCTV if our clients fail to place advertisements on the time slots that we have obtained for our clients through the bidding process. If this happens, our financial condition and results of operations may be materially and adversely affected. In addition, any such occurrence may negatively affect our relationship with CCTV and materially and adversely affect our business prospects. At December 31, 2009, our aggregate bidding deposits held by CCTV was RMB 3.8 million.

 
15

 
 
We may encounter difficulties in expanding into regional television networks, which may materially and adversely affect our business, financial condition and results of operations.
 
We currently obtain all of our advertising time slots from CCTV. One element of our strategy is to expand our presence on regional television networks. Our implementation of this strategy will be subject to many risks, including, but not limited to, the following:
 
we have no track record in obtaining advertisement resources from regional television networks;
 
our experience and expertise gained from our cooperation with CCTV may not be successfully applied to the regional television networks;
 
we do not have a long-standing history with these regional television networks as we do with CCTV;
 
we will face intense competition from advertising companies that are already well-established in those markets;
 
we may not be able to accurately assess and adjust to the consumer tastes, preferences and demands in the relevant regional markets; and
 
we may not be able to generate enough revenue to offset our costs.
 
These and other risks may make our expansion into regional television networks unsuccessful. In addition, implementing this strategy may require us to devote significant resources to promoting advertising time slots we obtain from regional television networks, which may divert our management’s attention from our existing business. If we are not successful in expanding into regional television networks, our business, financial condition and results of operations may be materially and adversely affected.

We may need additional capital to fund the growth of our business, which may not be available on terms acceptable to us or at all, and which, if available, could dilute your interest in our company.

Capital requirements are difficult to plan in our rapidly changing industry. We expect that our current cash and cash equivalents, cash flow from operations and the proceeds from our initial public offering will be sufficient to meet our anticipated cash needs, for both working capital and capital expenditures, for the foreseeable future. If, however, there are unforeseen changes in general business conditions or unexpected developments in our business or expansion, we may require additional cash resources. For example, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. Furthermore, if we incur more debt, we will be liable for increased debt service costs and might have to agree to operating and financing covenants that would restrict our operations and liquidity.

Our ability to obtain additional capital on commercially acceptable terms is subject to significant risks and uncertainties, including:

investors’ perception of, and demand for, our securities;

prevailing conditions of the capital markets in which we seek to raise funds;

our future results of operations, financial condition and cash flows;

 
16

 
 
PRC governmental regulation of foreign investment in advertising companies in China;

PRC governmental policies relating to foreign exchange; and

economic, political and other conditions in China.
 
Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure to raise additional funds when needed could limit our ability to expand or develop our operations to respond to market demand or competitive challenges.

If we are unable to adapt to changing technological developments in the media and advertising industries, our competitiveness, business and results of operations may be materially and adversely affected.

Technology used in advertisement content production is evolving rapidly and we need to keep pace with changes in technology and service features to meet the needs of advertisers and to remain competitive. For example, cutting edge filming equipment and editing tools, including advanced computer applications, are increasingly utilized in the content production process to achieve high quality and eye-catching visual effects. However, we may not have the financial or other resources necessary to finance and implement future technological developments or to replace obsolete technology. If we fail to identify, develop and incorporate new features or technologies in our services and operations in a timely and cost-effective manner, we may lose our competitiveness and demand for our services may decrease, which would have a material and adverse effect on our revenues and profitability. To keep pace with new technological developments, we may be required to expend significant amounts of funds to develop or acquire new technologies, which could significantly increase our costs and operating expenses and materially strain our capital resources.

Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period in the future.

Our quarterly results of operations are difficult to predict and may fluctuate significantly from period to period based on the seasonality of advertising spending. Factors that are likely to cause our operating results to fluctuate, such as a deterioration of economic conditions in China, are discussed elsewhere in this annual report. If our revenues for a particular quarter are lower than we expect, we may be unable to reduce our operating expenses for that quarter by a corresponding amount, which would harm our operating results for that quarter. In addition, we derive a portion of our revenues from our sales and marketing services to CCTV in connection with major sporting events, the occurrence of which vary from period to period. The amount of our fees for such services, and the timing of confirmation for such fees, are determined by CCTV at its sole discretion and are difficult to predict. As a result of the foregoing, our quarterly results of operations may fluctuate significantly from period to period and you should not rely on period-to-period comparisons of our historical results of operations as an indication of our future performance.

We may become subject to government actions due to our advertising content, which may have a material adverse effect on our financial condition and results of operations.

PRC advertising laws and regulations require advertisers, advertising distributors and advertising service providers, such as our company, to ensure that the content of the advertisements prepared or distributed are fair, accurate and in full compliance with applicable laws. Violation of these laws or regulations may result in penalties against us, including fines, confiscation of advertising fees, orders to cease disseminating the advertisements and orders to publish public announcements to correct the misleading information. In circumstances involving serious violations, the PRC government may revoke our license to operate advertising business. In addition, such non-compliance can constitute a violation of criminal law and criminal proceedings could be brought against us as a result.

 
17

 
 
Under the relevant PRC regulations, we are required to independently review and verify the content of our clients’ advertisements for compliance and to confirm that any required government review has been performed and that all necessary approvals have been obtained. In addition, for advertising content related to certain types of products, such as tobacco, alcohol, cosmetics, pharmaceuticals and medical instruments, we are required to confirm that the advertisers have obtained requisite government approvals relating to their operations, including the advertisers’ operating qualifications and proofs of quality inspection. Under our contracts with advertising clients, our advertisers are responsible for obtaining any PRC government approvals or licenses required for their advertisements and providing us with proof of such approvals or licenses prior to our placing their advertisements. While we review advertising content for compliance with relevant PRC laws and regulations, some advertisement that we place may still not be in compliance with the relevant PRC laws and regulations or the supporting documentation and government approvals provided to us by our advertising clients may not be true and complete. Our failure to conduct such review may subject us to governmental inspections or actions.

Governmental proceedings may harm our reputation and may divert significant amounts of our management’s time and other resources. It may be difficult and expensive to defend against such proceedings. We cannot assure you that we would successfully defend such claims, and if we fail to do so we would have to bear the costs of all such actions as well as any fines imposed on us. In addition, some of our existing contracts with our advertising clients do not provide us with any indemnity from our clients for claims relating to advertising content. As a result of the foregoing, any governmental proceedings brought against us could have a material adverse effect on our business, financial condition and results of operations.

We may be exposed to liabilities from allegations that certain of our clients’ advertisements may be false or misleading or that our clients’ products may be defective.

We may become, or may be joined as, a defendant in litigations or administrative proceedings brought against our clients by third parties, our clients’ competitors, regulatory authorities or consumers. These actions could involve claims alleging, among other things, that:
advertisements made with respect to our advertising clients’ products or services are false, deceptive, misleading, libelous, injurious to the public welfare or otherwise offensive;

our advertising clients’ products are defective or injurious and may be harmful to others; or

marketing, communications or advertising materials created for our advertising clients infringe on the intellectual proprietary rights of third parties.
 
The damages, costs, expenses or attorney’s fees arising from any of these claims could have an adverse effect on our business and results of operations to the extent that we are not adequately insured against such risks or indemnified by our clients. In any case, our reputation may be negatively affected by such allegations.

We are using the brand name “Guang Er Gao Zhi” in Chinese characters in our company logo and, through Mass Media, we have registered that brand name and logo with the State Trademark Bureau in certain categories of goods and services. The legal remedy available to us against unauthorized uses in other categories of goods and services, and/or prior uses, by other companies of “Guang Er Gao Zhi” and our logo is limited.

We believe market recognition of the “Guang Er Gao Zhi (广而告之)” brand has contributed significantly to the success of our business. “Guang Er Gao Zhi” means “to spread the message far and wide,” and is also the name of a one-minute daily public service announcement program on CCTV that we produce. Through Mass Media, we has registered with the State Trademark Bureau in the PRC the trademark relating to our brand name and our logo in the category of book publishing, movie production, radio and television program production and in the category of advertisement by posters, outdoor advertisement, mail advertisement, radio advertisement, television advertisement and advertisement agency services.

 
18

 
 
Under PRC law, the protection of our registered trademark is limited to the categories of goods and services as to which such trademark is registered. Consequently, the legal remedy available to us against unauthorized uses of our trademark in other categories of goods and services by other companies is limited. In addition, we are aware of several companies in China that are unrelated to us and have been using the Chinese characters of “Guang Er Gao Zhi” as part of their company names for a period of time. We may not be able to prevent the use of the phrase in the corporate names of these other companies, unless our trademark is legally recognized as a “well-known trademark.” The public may be confused and may mistakenly associate the products, services or activities of those companies with us, which may result in harm to the reputation of our company.
 
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

We place advertisements provided by our advertising clients on television and also produce television advertisements based on the information provided to us by our advertising clients. In doing so, we may employ information, software programs, technology or equipment supplied by other parties, to which such parties may not have intellectual property rights. Some of our existing contracts with our advertising clients do not provide us with indemnity from our clients for any intellectual property infringement claims relating to the advertisements provided by our clients. We cannot be certain that our operations or any aspects of our business do not or will not infringe upon patents, copyrights or other intellectual property rights held by third parties. Although we are not aware of any such claims, we may become subject to legal proceedings and claims from time to time relating to the intellectual property rights of others. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the intellectual property in question.

If we fail to protect our intellectual property rights, it could harm our business and competitive position.

We operate in an industry that places a premium on creative abilities and artistic talents. Many of our work products resulting from our creative activities are the subject of intellectual property rights, on which our business relies to stay competitive in the marketplace. We rely on a combination of copyright, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights. Nevertheless, these afford only limited protection and policing unauthorized use of proprietary information can be difficult and expensive. In addition, intellectual property rights historically have not been enforced in the PRC to the same extent as in the United States. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights and this could have a material adverse effect on our business, operating results and financial condition.

The discontinuation of any of the preferential tax treatments or the financial incentives currently available to us in the PRC and a newly enacted PRC tax law could adversely affect our overall results of operations.

The PRC government has provided various tax incentives to our subsidiary in China. These incentives include income tax exemption and reduced enterprise income tax rates. For example, under the PRC enterprise income tax law effective prior to January 1, 2008, our PRC subsidiary, Universal, as a foreign-invested enterprise established in the Shenzhen Special Economic Zone, was entitled to a preferential income tax rate of 15% on the income generated by its offices in Shenzhen and an income tax rate of 30% on the income generated by its offices outside of Shenzhen, as compared to the statutory income tax rate of 33%. In addition, Universal was fully exempted from PRC income tax commencing from its first profit-making year, followed by a 50% reduction in PRC income tax for the next two years. As a result, Universal was exempted from PRC income tax for the year ended December 31, 2007 and was entitled to a 50% income tax reduction for each of the years ending December 31, 2008 and 2009.

 
19

 
 
On March 16, 2007, the PRC National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the PRC State Council issued the Implementation Regulations of the Enterprise Income Tax Law, both of which became effective on January 1, 2008. The Enterprise Income Tax Law and its Implementation Regulations, or the new EIT law, imposes a uniform tax rate of 25% on all PRC enterprises, including foreign-invested enterprises, and eliminates or modifies most of the tax exemptions, reductions and preferential treatments available under the previous tax laws and regulations. Under the new EIT law, enterprises that were established before March 16, 2007 and already enjoy preferential tax treatments (i) in the case of preferential tax rates, continue to enjoy the tax rates which are being gradually increased to the new tax rates within five years from January 1, 2008 or (ii) in the case of preferential tax exemption or reduction for a specified term, continue to enjoy the preferential tax holiday until the expiration of such term. In accordance with a directive issued by the State Council in December 2007, the 15% preferential income tax we enjoyed prior to 2008 was be increased to 18% in 2008 and 20% in 2009, and will be increased to 22% in 2010, 24% in 2011 and 25% in 2012. As a result of the discontinuation of the preferential tax treatment and the new EIT law, our effective tax rate could substantially increase from 4.9% in 2007 up to as much as 25% in the near future, which could have a significant adverse effect on our net income. For 2008 and 2009, our effective tax rate increased to 14.8% and 12.6%, respectively, mainly due to the expiration on January 1, 2008 of the income tax exemption that Universal had enjoyed in 2007 and the imposition of withholding tax on dividends payable by our PRC subsidiary in 2008 and 2009.

Any increase in the enterprise income tax rate applicable to us or discontinuation or reduction of any of the preferential tax treatments or financial incentives currently enjoyed by our subsidiary in the PRC could adversely affect our business, operating results and financial condition.

The dividends we receive from our PRC subsidiary and our global income may be subject to PRC tax under the new EIT law, which would have a material adverse effect on our results of operations; our foreign ADS holders may be subject to a PRC withholding tax upon the dividends payable by us and upon gains realized on the sale of our ADSs, if we are classified as a PRC “resident enterprise.”

Under the new EIT law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise are subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. The British Virgin Islands, where UIAL, our PRC subsidiary’s direct holding company, is incorporated, does not have such a tax treaty with the PRC. If UIAL is considered a non-resident enterprise, this new 10% withholding tax imposed on our dividend income received from our PRC subsidiary would reduce our net income and have an adverse effect on our operating results. We have accrued this withholding tax in an amount of RMB 5,398,047 and RMB 2,274,872 for the years ended December 31, 2008 and 2009, respectively, based on 30% of net income attributable to UIAL that we do not expect to reinvest in our business.

Under the new EIT law, an enterprise established outside the PRC with its “de facto management body” within the PRC is considered a resident enterprise and will be subject to the 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. Substantially all of our management members are based in the PRC. If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our worldwide 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. Therefore, if CMM and UIAL are classified as resident enterprises, the dividends received from our PRC subsidiary may be exempted from income tax. 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.

 
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Moreover, under the new EIT law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC. Although CMM is incorporated in the Cayman Islands, it remains unclear whether the dividends payable by us or the gains our foreign ADS holders may realize will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.
 
Our insurance coverage is limited and we may incur substantial costs as a result of a severe business liability or disruption or other unexpected events, which could have a material adverse effect on our financial condition and results of operations.

Insurance companies in China offer limited business insurance products and generally do not, to our knowledge, offer business liability insurance. Business disruption insurance is available to a limited extent in China, but we have determined that the risks of disruption, the cost of such insurance and the difficulties associated with acquiring such insurance make it impractical for us to have such insurance. We do not maintain insurance coverage for any kinds of business liabilities or disruptions and would have to bear the costs and expenses associated with any such events out of our own resources.
 
Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of operations and the market price of our ADSs.

  The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal controls over financial reporting.

  Our management and independent registered public accounting firm have not identified any material weaknesses or significant deficiencies in our internal control over financial reporting for the year ended December 31, 2009. However, we cannot assure you that in the future our management or our independent registered public accounting firm will not identify material weaknesses or significant deficiencies during the Section 404 of the Sarbanes-Oxley Act audit process or for other reasons. In addition, because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. As a result, if we fail to maintain effective internal controls over financial reporting or should we be unable to prevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial statements, which in turn could harm our business, results of operations and negatively impact the market price of our ADSs, and harm our reputation. Furthermore, we have incurred and expected to continue to incur considerable costs and to use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
 
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We have granted employee stock options under our equity incentive plan and may continue to grant stock options and other share-based compensation in the future. Our net income could be adversely affected as a result.

We adopted an equity incentive plan in July 2008 that permits the grant of incentive stock options, non-statutory stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares, and other share-based awards to employees, directors and consultants of our company. In July 2010, we also conditionally adopted a 2010 share option scheme, which will become effective if and when our ordinary shares are listed on the Stock Exchange of Hong Kong Limited, or SEHK. Once our 2010 share option scheme becomes effective, no further option will be granted under our 2008 equity incentive plan. We have granted to our employees options under the 2008 equity inventive plan and as of August 20, 2010, options to purchase 17,655,093 ordinary shares are outstanding. As a result of these option grants and potential future grants under the 2009 equity incentive plan or the 2010 share option scheme, we have incurred share-based compensation expenses and expect to incur such expenses in future periods. The amount of these expenses will be based on the fair value of the share-based awards. We have adopted ASC 718 and ASC 505-50 for the accounting treatment of our equity incentive plan. As a result, we will have to account for compensation costs for all stock options, including stock options granted to our directors and employees, using a fair-value based method and recognize expenses in our consolidated statement of income in accordance with the relevant rules under U.S. GAAP, which may have a material adverse effect on our net income. Moreover, the additional expenses associated with share-based compensation may reduce the attractiveness of such incentive plan to us. Employee stock options or other share- based compensation we may grant in the future may have a material adverse effect on our profitability.

We may be a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

Depending upon the value of our ordinary shares and ADSs and the nature of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, by the U.S. Internal Revenue Service, or IRS, for U.S. federal income tax purposes. Based on the composition of our income and valuation of our assets, we believe we were a PFIC during the taxable year ended December 31, 2009. In addition, there can be no assurance that we will not be a PFIC for the taxable year ending December 31, 2010, as PFIC status is tested after the close of each year and depends on our assets and income in such year.
 
We will be classified as a PFIC in any taxable year if either: (1) the average quarterly percentage value 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% of the value of our total gross assets or (2) 75% or more of our gross income for the taxable year is passive income. The value of our assets for a taxable year is determined based on the sum of our average market capitalization, which is our share price multiplied by the total number of our outstanding shares, and our average liabilities over that taxable year. Accordingly, we would be a PFIC for the taxable year ending December 31, 2010 if the average quarterly value of our assets for the taxable year is not more than twice the average quarterly value of our cash, cash equivalents and other assets that produce passive income or are held for the production of passive income.

If we are classified as a PFIC in any taxable year in which you hold our ADSs or ordinary shares and you are a U.S. Holder (as defined under “Item 10. Additional Information Taxation—U.S. Federal Income Taxation”), you generally will become subject to increased U.S. federal income tax liabilities and special U.S. federal income tax reporting requirements. For more information on the U.S. federal income tax consequences to you that would result from our classification as a PFIC, see “Item 10. Additional Information Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company.”

Risks Related to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

Substantially all of our assets are located in and all of our revenues are sourced from the PRC. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in the PRC generally and by continued economic growth in the PRC as a whole.
 
 
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The PRC economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the PRC government. In addition, 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 the PRC’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.

While the PRC economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. The PRC government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in the PRC, which could in turn reduce the demand for our services and adversely affect our operating results and financial condition.

The PRC government also regulates television broadcasts, including the amount of broadcast time that may be set aside for advertisements. Changes in these regulations, and particularly any reduction in the amount of broadcast time that may be set aside for advertisements, could have a material adverse impact on our business and operations.
 
Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which legal decisions have limited value as precedents. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly increased the protections afforded to various forms of foreign or private-sector investment in the PRC. Our PRC operating subsidiary, Universal, is a foreign-invested enterprise and is subject to laws and regulations applicable to foreign investment in the PRC as well as laws and regulations applicable to foreign-invested enterprises. Universal is a privately owned company and is subject to various PRC laws and regulations that are generally applicable to companies in the PRC. These laws and regulations are still evolving, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protections that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy in the PRC legal system than in more developed legal systems. These uncertainties may also impede our ability to enforce the contracts we have entered into. As a result, these uncertainties could materially and adversely affect our business and operations.

 
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The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with our initial public offering that was completed in August 2008; the failure to obtain this approval, if required, could have a material adverse effect on our business, operating results and reputation as well as the trading price of our ADSs.

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, or MOFCOM, the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration for Taxation, the State Administration for Industry and Commerce, or the SAIC, the CSRC and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006. The M&A Rules, among other things, include provisions that purport to require that an offshore special purpose vehicle formed for the purpose of an overseas listing of securities in a PRC company obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of an application and supporting documents with the CSRC.

 
We completed our initial public offering in August 2008. The application of the M&A Rules with respect to our initial public offering remained unclear. Our PRC counsel had advised us that, because we were owned by non-PRC residents, our company was not viewed as a special purpose vehicle that was subject to the M&A Rules, thus we were not required to apply to the CSRC for approval. However, if a CSRC approval was required or is retroactively required under new PRC rules or regulations but not obtained, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. Any uncertainties or negative publicity regarding this CSRC approval requirement could have an adverse effect on the trading price of our ADSs.

The M&A Rules set forth complex procedures for acquisitions conducted by foreign investors, which could make it more difficult to pursue growth through acquisitions.

The M&A Rules, among other things, set forth complex procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Part of our growth strategy includes acquiring complementary businesses or assets. Complying with the requirements of the M&A Rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit the completion of such transactions, which could affect our ability to expand our business or maintain our market share. In addition, in the future, if any of our acquisitions were subject to the M&A Rules and were found not to be in compliance with the requirements of the M&A Rules, relevant PRC regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects.

PRC regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and may subject our PRC resident beneficial owners or employees to personal liabilities, limit our subsidiary’s ability to increase its registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiary, or may otherwise expose us to liability under PRC law.

SAFE has promulgated regulations that require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations may apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.

 
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SAFE regulations require PRC residents who make, or have previously made, direct or indirect investments in offshore companies to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update his registration with the relevant SAFE branches, with respect to that offshore company, any material change involving increase or decrease of capital, transfer or swap of shares, merger, division, equity or debt investment or creation of any security interest. Moreover, the PRC subsidiaries of that offshore company are required to coordinate and supervise the filing of SAFE registrations by the offshore company’s shareholders who are PRC residents in a timely manner. If a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries, and the offshore parent company may also be prohibited from injecting additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above may result in liability for the PRC shareholders and the PRC subsidiary under PRC law for foreign exchange registration evasion.
 
There is uncertainty concerning under what circumstances a foreign national can be classified as a PRC resident. Mr. Shengcheng Wang, our controlling shareholder, is a Canadian citizen who spends a certain amount of his time in China each year for business purposes. We have been advised by our PRC legal counsel that Mr. Wang is not subject to SAFE registration. However, the PRC government authorities may interpret Mr. Wang’s status differently or Mr. Wang’s status may change in the future if Mr. Wang extends his stay in China. Moreover, we may not be fully informed of the identities of the beneficial owners of our company and we cannot assure you that all of our PRC resident beneficial owners will comply with the SAFE regulations. The failure of our beneficial owners who are PRC residents to make any required registrations may subject us to fines and legal sanctions, and prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially and adversely affected.

On March 28, 2007, SAFE issued the Operating Procedures on Administration of Foreign Exchange regarding PRC Individuals’ Participation in Employee Share Ownership Plans and Employee Stock Option Plans of Overseas Listed Companies, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens 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 PRC Subsidiary and our PRC employees who have been granted stock options are subject to the Stock Option Rule. If we or our PRC employees fail to comply with such regulation, we or our employees may be subject to fines and legal sanctions. See “Regulation—SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options.”
 
We rely principally on dividends and other distributions on equity paid by our wholly owned operating subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our operating subsidiary to pay dividends to us could have a material adverse effect on our ability to borrow money or pay dividends.

As a holding company, we rely principally on dividends and other distributions on equity paid by Universal for our cash requirements, including funds necessary to service any debt we may incur. If Universal incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by Universal only out of its retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, Universal is required to set aside a portion of its net income each year to fund a statutory surplus reserve. This reserve is not distributable as dividends until the accumulated amount of such reserve has exceeded 50% of its registered capital. Limitation on the ability of Universal to pay dividends to us could materially and adversely limit our ability to borrow money outside of the PRC or pay dividends to holders of our ADSs. Also see “—Risks Related to Our Business and Industry—The dividends we receive from our PRC subsidiary and our global income may be subject to PRC tax under the new EIT law, which would have a material adverse effect on our results of operations; our foreign ADS holders may be subject to a PRC withholding tax upon the dividends payable by us and upon gains realized on the sale of our ADSs, if we are classified as a PRC ‘resident enterprise.’”
 
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PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our initial public offering to make loans or additional capital contributions to our PRC operating subsidiary.

In order to utilize the proceeds of our initial public offering, we, as an offshore holding company of our PRC operating subsidiary, may use the proceeds of our initial public offering to make loans to our PRC subsidiary, or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary are subject to PRC regulations and approvals. For example, loans by us to finance the activities of Universal, a foreign-invested enterprise, cannot exceed statutory limits and must be registered with SAFE or its local counterpart.

We may also decide to finance our PRC subsidiary by means of capital contributions. Any additional capital contributions to Universal must be approved by MOFCOM. We cannot assure you that we can obtain the necessary government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to Universal. If we fail to timely receive such registrations or approvals, or at all, our ability to use the proceeds of our initial public offering and to capitalize our PRC operations would be adversely affected, which in turn would adversely and materially affect our business prospects and growth plan.

Restrictions on currency exchange under PRC laws may limit our ability to convert cash derived from our operating activities into foreign currencies and may materially and adversely affect the value of your investment.

Substantially all of our revenues and operating expenses are denominated in Renminbi. Under the relevant foreign exchange restrictions in the PRC, conversion of the Renminbi is permitted, without the need for SAFE approval, for “current account” transactions, which includes dividends, trade, and service-related foreign exchange transactions. Conversion of the Renminbi for “capital account” transactions, which includes foreign direct investment and loans, is still subject to significant limitations and requires approvals from and registration with SAFE and other PRC regulatory authorities. We cannot assure you that SAFE or other PRC governmental authorities will not further limit, or eliminate, our ability to purchase foreign currencies in the future. Any existing and future restrictions on currency exchange in the PRC may limit our ability to convert cash derived from our operating activities into foreign currencies to fund expenditures denominated in foreign currencies. If the foreign exchange restrictions in the PRC prevent us from obtaining U.S. dollars or other foreign currencies as required, we may not be able to pay dividends in U.S. dollars or other foreign currencies to our shareholders, including holders of our ADSs. Furthermore, foreign exchange transactions under the capital account transactions could affect Universal’s ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us.

Fluctuations in exchange rates could result in foreign currency exchange losses.

As substantially all of our cash and cash equivalents are denominated in Renminbi and the net proceeds from our initial public offering were denominated in U.S. dollars, fluctuations in exchange rates between the U.S. dollar and the Renminbi will affect the relative purchasing power of these proceeds and our balance sheet and earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business, financial condition or results of operations. The Renminbi is reported to be pegged against a basket of currencies, determined by the People’s Bank of China. The Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the long term, depending on the fluctuation of the basket of currencies against which it is currently valued, or it may be permitted to enter into a full float, which may also result in a significant appreciation or depreciation of the Renminbi against the U.S. dollar. Fluctuations in the exchange rate will also affect the relative value of any dividend we pay, which 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.

 
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Only limited hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort 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 hedges 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.
 
We face risks related to epidemics, which may severely disrupt our business and operations.
 
Our business could be materially and adversely affected by epidemics. For example, from December 2002 to June 2003, PRC and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. During May and June of 2003, the PRC government closed many businesses in the PRC to prevent transmission of SARS. Since 2003, there have been reports of occurrences of avian flu in various parts of the PRC, including a number of confirmed human cases and deaths. In 2009, there was an outbreak of H1N1 influenza virus (also know as “swine flu”) in Mexico and that virus quickly spread to China and other countries in the world, resulting in a world wide epidemic. Any actual or threatened outbreak of epidemics in the PRC may, among other things, significantly disrupt our and our clients’ business operations and severely restrict the level of economic activities in affected areas, which will in turn reduce the demand for advertising services.
 
Our business may be adversely affected by unforeseen events or natural disasters that are beyond our control.
 
Our business may be adversely affected by certain events or natural disasters beyond our control, such as the magnitude 8.0 earthquake that struck Sichuan Province on May 12, 2008. Many television stations in China significantly changed their programming after the earthquake to broadcast developments and rescue operations relating to the earthquake. All television channels in China ceased to broadcast any advertisements during a three-day national mourning period, from May 19, 2008 to May 21, 2008. In addition, certain television advertisements with content that was deemed to be inappropriate for broadcast during coverage of this tragic event were suspended in May and June 2008. Any natural disasters or unforeseen events in the future may cause similar changes to the programming and broadcasting schedules of television stations in China and may adversely affect the broadcast of our clients’ advertisements, which may have a material adverse effect on our business, financial condition and results of operations.
 
Risks Related to Our Ordinary Shares and ADSs
 
The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.
 
The trading prices of our ADSs experienced, and may continue to experience, significant volatility. For the period from August 4, 2008 to August 20, 2010, the trading price of our ADSs on NYSE Arca and NYSE, as the case may be, has ranged from a low of US$1.13 per ADS to a high of US$6.85 per ADS. This may happen because of broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in the PRC that have listed their securities in the United States. A number of PRC companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these PRC companies’ securities after their offerings may affect the attitudes of investors toward PRC companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.
 
In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:
 
variations in our revenues, earnings and cash flow;

 
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announcements of new investments, acquisitions, strategic partnerships, or joint ventures;

announcements of new services and expansions by us or our competitors;

changes in financial estimates by securities analysts;

additions or departures of key personnel;

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

potential litigation or regulatory investigations; and

fluctuations in market prices for our services.
 
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade. We cannot assure you that these factors will not occur in the future.

Substantial future sales or perceived sales of our ADSs or ordinary shares in the public market could cause the price of our ADSs to decline.

Sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of August 20, 2010, we had 716,375,000 ordinary shares outstanding, including 216,375,000 ordinary shares represented by 7,212,500 ADSs, and 17,655,093 ordinary shares issuable upon the exercise of options. All ADSs are freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares outstanding will be available for sale and, in the case of the ordinary shares that certain option holders will receive when they exercise their share options, until the later of (i) the first anniversary of the grant date, and (ii) the expiration of any relevant lock-up periods, subject to volume and other restrictions that may be applicable under Rule 144 and Rule 701 under the Securities Act. 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 our ADSs.

Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

Our currently effective articles of association is our fourth amended and restated memorandum and articles of association which limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

 
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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law of the Cayman Islands (2010 Revision) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial 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. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

The Cayman Islands courts are also unlikely:

to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and

to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences.

Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands company and all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our currently effective articles of association, the minimum notice period required for convening a general meeting is 14 days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. 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. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

 
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If our ordinary shares are listed on SEHK, the price of our ADSs may not be the same as, and may be affected by, that of our ordinary shares on the Hong Kong Stock Exchange.

We have applied to list our ordinary shares on SEHK. If our application is approved, our ordinary shares will be listed on SEHK. The NYSE and the SEHK have different trading hours, trading volume, trading and listing rules, liquidity and investor base (including different levels of retail and institutional participation). As a result, the price of our ADSs on the NYSE may not be the same as that of our ordinary shares on the SEHK and any changes in the price and trading volume of our ordinary shares may affect that of our ADSs. The trading price of our ordinary shares is denominated in HK dollars while that of our ADSs is denominated in U.S. dollars and as a result, any change in the exchange rates between HK dollars and U.S. dollars could also affect the price of our ADSs. Furthermore, there is no direct trading or settlement between the NYSE and the SEHK and you are required to return our ADSs in exchange for our ordinary shares and go through certain other procedures if you want to trade on SEHK. There is no assurance that such an exchange may be completed in a timely manner.
 
The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings unless:

we have failed to timely provide the depositary with notice of meeting and related voting materials;

we have instructed the depositary that we do not wish a discretionary proxy to be given;

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

 
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You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
 
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no 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 distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.
 
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. 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 provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parities, and may allow the rights to lapse. We may be unable 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 our rights offerings and may experience dilution of their holdings as a result.
 
You may be subject to limitations on transfer of your ADSs.
 
Your ADSs represented by American depositary receipts, or ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
 
ITEM 4.
INFORMATION ON THE COMPANY
  
 
A.
History and Development of the Company

We have been conducting our business through two companies in the PRC, Universal, established in August 2006, and Mass Media, established in October 2003. Both Universal and Mass Media are under common management, operated on an integrated basis and ultimately controlled by Mr. Shengcheng Wang, our chairman and chief executive officer, and his immediate family members. Since the establishment of Universal, the advertising business of Mass Media has been gradually assumed by Universal. Pursuant to an asset transfer agreement between Mass Media and Universal dated December 29, 2007, Mass Media has ceased to conduct any business relating to television advertising and transferred certain of its assets relating to television advertising to Universal. Effective from December 31, 2007, Mass Media is no longer part of our company and is not involved in our continued business operations.

 
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Previously, Universal was 70% owned by UIAL, a British Virgin Islands company established by Mr. Shengcheng Wang’s father, and 30% owned by Shenzhen Guang Er Gao Zhi Co., Ltd., a PRC domestic holding company beneficially owned by Mr. Shengcheng Wang’s immediate family members. In connection with our initial public offering, we reorganized our corporate and shareholding structure. In November 2007, a new holding company, CMM, was established by Mr. Shengcheng Wang in the Cayman Islands to serve as our entity for listing on NYSE Arca. At the same time, Mr. Shengcheng Wang’s father transferred all of the outstanding shares of UIAL to CMM for nominal consideration of US$1.0, and UIAL became a wholly owned subsidiary of CMM. UIAL subsequently purchased the remaining 30% equity interests of Universal held by Shenzhen Guang Er Gao Zhi Co., Ltd. for RMB 15.0 million (US$2.1 million).
 
In August 2008, we completed the initial public offering of our ADSs representing our ordinary shares and listed on NYSE Arca.
 
In January 2009, UIAL established a subsidiary, Greatwall Film Production (Hong Kong) Limited, in Hong Kong, which has not conducted any business activities since its establishment.
 
In April 2009, we changed our corporate name from China Mass Media International Advertising Corp. to China Mass Media Corp.
 
In August 2009, we transferred the listing of our ADSs from NYSE Arca to NYSE.
 
In May 2010, we applied to list our ordinary shares on the SEHK. Our listing application is currently under review by the SEHK. There can be no assurance that we will be able to achieve a successful listing on the SEHK.

 
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The following diagram illustrates our current corporate structure:
 
 
Our principal executive offices are located at 6th Floor, Tower B, Corporate Square, 35 Finance Street, Xicheng District, Beijing 100033, People’s Republic of China. Our telephone number at this address is (86-10) 8809-1099 and our fax number is (86-10) 8809-1088. Our registered office in the Cayman Islands is at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
 
Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.chinammia.com. The information contained on our website does not constitute a part of this annual report. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
 
 
B.
Business Overview
 
Overview
 
We believe we are a leading independent television advertising company in China. We provide a full range of integrated television advertising services, including advertising agency services and production and sponsorship services. We believe our extensive experience in media planning, packaging and sales, our access to certain high quality advertising time slots on China Central Television, or CCTV, and our ability to provide advertising services on an integrated basis that are tailored to advertisers’ needs differentiate us from most other television advertising companies operating in China. For our advertising agency services, we obtain advertising time slots on selected nationally broadcast television channels of CCTV, China’s largest television network, and procure advertisers to place advertisements during such time slots. For our production and sponsorship services, we design, produce and package content for public service announcements or commercial advertisements. In addition, we solicit sponsors for the public service announcements we produce and arrange for such announcements, as well as announcements supplied by certain of our clients, to be broadcast on CCTV.

 
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We believe we are one of the leading independent advertising companies that have obtained a large volume of high quality advertising time slots from CCTV. We have developed a good relationship and reputation with CCTV primarily as a result of our extensive experience in media planning and packaging and the substantial advertising revenues generated from our effective sales efforts. We obtained advertising rights to an average of 35 minutes per day in 2007, 313 minutes per day in 2008 and 532 minutes per day in 2009 for regular daily programs on CCTV Channel 1, 2, 4, E and F. In 2009, CCTV adopted a practice to sell through auctions the advertising time slots for certain of its programs on CCTV Channel 2 and 4 that were secured by us previously. We participated in the auction and obtained the advertising time slots for the Periodic China News Package on CCTV Channel 4. As a result, our aggregate advertising time obtained from CCTV is expected to decline to an average of 482 minutes per day in 2010 for regular daily programs on CCTV Channel 1, 2, 4, E an F. In addition, CCTV took an initiative to sell the advertising time slots for the 2010 Chinese New Year Gala program by itself and as a result, we did not obtain such advertising time slots.
 
Our clients include both advertising agencies as well as corporations or other entities seeking to advertise their own products or services. In 2009, we provided advertising agency services to over 80 non-agency advertisers that purchased advertising time slots to advertise their products or services, either directly from us or indirectly through other advertising agencies. These non-agency advertisers include large and well-recognized companies in China, most of which purchased time slots from us through their advertising agencies but none of these non-agency advertisers individually accounted for more than 10% of our total revenues.
 
We are also a leading producer of public service announcements and commercial television advertisements in China. Our production team has extensive experience in content creation and production and designed and produced over 50 public service announcements and other television advertisements in 2009.
 
Our achievements have been widely recognized by CCTV, industry organizations and government agencies. We have received numerous awards from the China Advertising Association as well as national and local governmental authorities, including the State Administration of Industry and Commerce, or SAIC, the State Administration of Radio, Film and Television, and the State Administration of Press and Publication. Our recent awards include:
 
 
·
One of the “Best Advertising Agencies of the Year” named by CCTV for 2004, 2005, 2006 and 2008.
 
 
·
The Gold, Silver and Bronze Awards of the “China Advertisement Yellow River Awards” issued by the China Advertising Association for three of our public service announcements at the 15th China International Advertising Festival of 2008 and the Silver and Bronze Awards of “China Advertising Yellow River Awards” for two of our public service announcements at the 16th China International Advertising Festival of 2009. The Yellow River Award is one of the most prestigious awards in public service announcement production in China.
 
 
·
The Gold World Medal in the category of community service programs (China) for one of our commercial television advertisements that we created and produced for CCTV at the New York Festivals International Television & Film Awards of 2010.
 
Our Services
 
We offer a full range of integrated television advertising services, including advertising agency services and production and sponsorship services. We believe our extensive experience in media planning, packaging and sales, our access to certain high quality advertising time slots on CCTV, and our ability to provide advertising services on an integrated basis that tailor to advertisers’ needs differentiate us from most other television advertising companies operating in China.

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Our Advertising Agency Services
 
We provide advertising agency services to our clients by providing them with the advertising time slots we have obtained from CCTV. We believe that we are among the leading advertising companies that have obtained a large volume of advertising time slots from CCTV. Advertisers purchase advertising time slots either directly from us or through their advertising agencies. Our advertising agency services typically start with an initial discussion between our sales and marketing personnel and a potential advertiser. After learning more about the advertiser, including its business and its goals for placing the advertisements, we conduct the relevant market research for them and propose a marketing and advertising plan, which includes our recommendations of advertising strategies and specific television channels and time slots on which to place the advertisement to maximize the desired effect. After the advertiser approves such a plan, we enter into an advertising agency contract with the client who agrees to engage us as its agent to procure the relevant advertising time slots. The contract will specify, in the case of acquiring advertising time slots from us, the time slots or the programs within which the advertisements will be broadcast and the relevant price for the advertising time slots allocated to such client. For those advertisers who use their advertising agents to seek access to the advertising time slots from us, we enter into contracts with similar terms with such advertising agents after negotiation. For those clients who engage us to help them bid for other prime advertising time slots from CCTV, the contracts specify the scope of the services we provide to these clients and we submit the bid on behalf of our clients to seek the desired CCTV time slots.
 
For those clients whose goals can be better served by having their television advertisements broadcast on other television channels or during time slots other than those we have obtained from CCTV, we perform the same services as we do for clients obtaining the advertising time slots from us, except that after our client approves the advertising plan, we act as an agent for such clients to procure advertising time slots from other advertising companies.
 
After we enter into contracts with CCTV to broadcast the relevant television advertisements of our clients, our media relationship department will review such television advertisements to ensure that the contents of the relevant advertisements are in compliance with the applicable regulatory requirements in China and the specific content or technical requirements of CCTV. We also help our clients prepare and collect the relevant legal documents required by CCTV for the release of the advertisements, including the business licenses and trademark certificates of our clients. After receiving approvals from CCTV, such advertisements will be broadcast. Our media relationship department monitors the broadcasts of our advertisements every day to ensure they are broadcast during the time slots and for the duration specified in the relevant contracts. We also provide certain advertising clients with reports that analyze and evaluate the advertising effect after the advertisements are broadcast.
 
Our Production and Sponsorship Services
 
Our ability to provide “one-stop shop” services by rendering a full range of services, including designing, producing and packaging television advertisements to our clients distinguishes us from other advertising agencies that compete with us. In many cases, we provide production and sponsorship services as a part of the integrated advertising services package we offer to our advertising clients. We produced over 50 public service announcements and commercial television advertisements in 2009.
 
We provide production services directly at the request of our clients, including both corporations and government agencies or non-governmental organizations, who either aim to promote their corporate brand names, products and services through commercial advertisements or intend to raise social consciousness or improve their company image through public service announcement. In addition, we provide sponsorship services in connection with the production of Guang Er Gao Zhi (广而告之), a 30-second daily program on CCTV Channels 1 and 2 that broadcasts exclusively the public service announcements we produce. We typically solicit sponsors for the public service announcements we already produce. After such sponsor presents relevant legal documents required by CCTV for the release of the announcement, such as the business licenses of the sponsor, we will show the sponsor’s name at the end of the announcement broadcast on the program.

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The production of public service announcements and commercial advertisements involves various stages, including identifying concepts, formulating ideas, drafting advertising strategies and story books, organizing pre-production meetings, drafting and finalizing the shooting book, shooting, editing and post-production procedures. We generally involve our advertising clients or sponsors who commission a public service announcement, in every production stage and receive their feedback throughout the production process to ensure that the public service announcements and commercial advertisements satisfy the specific needs and requirements of our sponsors and advertising clients.
 
Our Media Resources
 
Our media resources primarily consist of the advertising time slots we acquire from CCTV. We directly enter into contracts with CCTV to obtain exclusive advertising rights to a number of television programs on CCTV Channels 1, 2, 4, E and F, with contract terms ranging from one year to five years.
 
The following table sets forth the regular daily television programs for which we have obtained from CCTV the exclusive rights to market the advertising time slots or, in the case of Guang Er Gao Zhi, to produce the program, for 2010:

Program
 
CCTV
channel
   
Rating
in
the first
quarter
of
2010(1)
   
Advertising
time per
program
   
Broadcast
frequency per day
   
Total advertising
time per day(2)
 
Year we
first
became
an
agent or
producer
                     
Weekday
   
Weekend
   
Weekday
   
Weekend
   
               
(minutes)
   
(times)
   
(times)
   
(minutes)
   
(minutes)
   
Daytime Advertising Package
    1, 2       3.3 %     3       10
(3)
    10
(3)
    30       30  
2004
Television Guides (daytime)
    1       4.5 %     0.5       9
(3)(5)
    9
(3)(5)
    5
(5)
    4.5  
2004
Guang Er Gao Zhi (广而告之)
    1, 2       1.6 %     0.5
(6)
    4       4       2       2  
2004
Periodic China News Package
    4       1.9 %     1.5
(5)
    10
(5)
    7
(5)
    15
(5)
    10.5
(5)
2008
Various programs
    E, F                               432
(7)
    432
(7)
2008
 

 
 
(1)
Cumulative ratings at selected broadcasting times of the programs, including reruns, and calculated by us based on the data from Infosys TV, a television program rating analyzing system developed by TNS Group and operated in China by CSM Media Research Co., Ltd. A television program rating is an audience measurement that refers to the percentage of the number of viewers watching a program within a specific duration of time out of the total number of viewers. The rating information is not available for CCTV channels that are primarily broadcast overseas and have limited coverage within China, such as the Spanish (E) and French (F) channels. The rating for the first quarter of 2010 covers 29 provinces, autonomous regions or municipalities administered by the central government.
 
(2)
Total daily advertising time is calculated as an aggregate of all the available advertising time during different advertising time slots when the relevant program/advertising package is broadcast, including reruns, within the same day.
 
(3)
Represents the minimum number of reruns per day we agree with our advertising clients to broadcast on CCTV.
 
(4)
Television Guides is broadcast on CCTV Channel 1 only in 2010 and was broadcast on both CCTV Channel 1 and Channel 2 in 2009.

 
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(5)
Represents data for 2010.
 
(6)
Represents the duration of the program. We do not sell the advertising time slots of this program to advertisers; instead, we solicit sponsorships for the public service announcements broadcast on the program.
 
(7)
Represents the total available advertising time slots on CCTV’s Spanish and French Channels.

Daytime Advertising Package and Television Guides. The Daytime Advertising Package is a package of advertisements that are broadcast at least ten times per day on CCTV Channels 1 and Channel 2 throughout daytime hours between various television programs. Television Guides is a program that provides viewers with information about the schedules of various television programs, which is broadcast nine times per day on CCTV Channels 1 throughout the day. Many of such time slots are less desirable on a stand-alone basis. But based on our market analysis, we bundle these various segments of advertising time slots during certain of CCTV’s daytime programs, and sell them as packages with higher cumulative ratings and more frequent broadcasts at lower prices, and therefore create effective and cost-efficient solutions for our targeted advertising clients. In particular, our Daytime Advertising Package has become one of our most successful advertising offerings to advertisers and generated significant revenues for CCTV, which demonstrates our success in turning CCTV’s non-prime time slots into profitable advertising resources.
 
Each of our current contracts with CCTV for the advertising time slots during the Daytime Advertising Package and Television Guides has a term of three years, starting from July 1, 2008. Under these contracts, we have obtained the exclusive right to act as an agent to market such available advertising time slots and procure advertisements for CCTV and are required to pay the advertising revenues to CCTV at the agreed prices. We generally charge our clients a premium over our agreed price with CCTV, which premium constitutes a majority portion of our revenues from these contracts. We also receive a percentage of our payments to CCTV as our commissions. Each of these contracts provides that any party can terminate the contract with 90 days’ notice. We have a right of first refusal to renew these contracts under specified terms, on the condition that we deliver a notice to CCTV three months prior to the end of the contractual term.
 
Guang Er Gao Zhi (广而告之). Under relevant Chinese laws and regulations, both central and regional television stations are required to broadcast a minimum amount of public service announcements between their television programs. We have arrangements with CCTV for the production of “Guang Er Gao Zhi,” meaning “to spread the message far and wide,” a 30-second daily public service announcement program. This program includes 30-second public service announcements that are typically broadcast twice a day on CCTV Channel 1 and Channel 2, respectively. We usually engage a corporation or a governmental agency to be the sponsor and its name will be displayed at the end of the public service announcement. We also display our corporate name on each of the public service announcements broadcast in this television program. We believe that this program has contributed significantly to enhancing our company name recognition across China.
 
Periodic China News Package. The Periodic China News Package is a package of advertisements that are broadcast at least ten times per weekday and seven times per weekend on periodic China News programs on CCTV Channel 4. According to CCTV and the 2009 China Radio and TV Yearbook, at the end of 2008 CCTV Channel 4 reached altogether more than 15 million households in 93 countries, and is among the most popular Chinese language television channels watched by overseas Chinese.
 
We obtained the advertising time slots for the Periodic China News Package in an auction conducted by CCTV in 2009. We entered into a one year term contract with CCTV for the Periodic China News Package for 2010. Under that contract we are required to make a deposit with CCTV amounting to 30% of the annual media fee and to pay the remaining medial fee in 12 monthly installments throughout 2010. 25% of that deposit can be credited against the payment of the annual media fee every three months.

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In July 2008, we entered into an agreement to obtain the exclusive rights to sell all of the advertising time slots on CCTV’s Spanish Channel and French Channel for a term of five years. Broadcast 24 hours a day to 36 countries, CCTV’s Spanish and French Channels provide news, entertainment, tourism information, language learning and sports programs and introduce the Chinese culture to Spanish- and French- speaking viewers around the world. We assist CCTV in promoting these channels in Spanish- and French- speaking countries, in program production and packaging, and in procuring advertisements.
 
In addition, in 2009 we also obtained the advertising rights to certain other programs on CCTV including Chinese New Year Gala, First News, Chinese World, China News, View’s Guide and Asia Today. We did not obtain the advertising rights to these programs for 2010 because CCTV took the initiatives to sell the advertising time slots for these programs in 2010 directly by itself or through auctions .
 
Since 2009, CCTV has increased the use of auction in selling its prime-time as well as non-prime-time media resources. When participating in these auctions and making procurement decisions, we continue to implement our policy of prudently evaluating the value of available television programs, their costs and historical and potential sales volumes, among other factors. We believe we will be able to maintain a stable supply of high quality advertising time slots from CCTV through auctions.
 
Our Advertising Clients
 
Our Corporate Clients
 
Our corporate clients span a wide spectrum of industries, including telecommunications, pharmaceuticals, financial services, and garment, food and other consumer product industries. Our advertisers include many well- known companies in China. A number of these clients utilize the full range of our advertising services, including both agency and production services. We have also established business relationships with many leading domestic and international advertising agencies, some of which are members of the American Association of Advertising Agencies, who introduce clients to us for all of our services. Our access to advertising time slots on CCTV is a primary attraction for these advertising agency clients.
 
The following table sets forth the breakdown of revenue contributions in 2009 by the industries in which our corporate clients operate:

Industry
 
Percentage of Total
Revenues in 2009
 
Food and beverages
    26.7 %
Pharmaceuticals
    15.1 %
Household products and electronic appliances
    13.6 %
Telecommunications and information technology
    11.5 %
Tourism
    11.4 %
Finance and services
    8.7 %
Automotive
    6.0 %
Fashion
    1.6 %
Others
    5.6 %
      100.0 %

Our Governmental Agency Clients

Many government agencies in China formulate an annual plan to produce a certain number of public service announcements to be broadcast on national and regional television networks. As a leading public service announcement producer, we have been engaged by governmental agencies and non-governmental organizations to produce public service announcements for them. For example, we worked with the Ministry of Health to produce public service announcements to promote public awareness of measures to prevent AIDS. We also worked with the Beijing Olympics Organizing Committee to produce a series of public service announcements relating to the 2008 Beijing Olympic Games.

 
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Client Concentration
 
In the year ended December 31, 2007, individual customers accounting for more than 10% of our total revenues in the aggregate contributed 32.3% to our total revenues. None of our customers accounted for more than 10% of our total revenues in the year ended December 31, 2008 and 2009 because we recorded our advertising revenues from CCTV Channel 4 programs on a gross basis, which increased our revenue basis. See Note 3(b) to our combined financial statements included elsewhere in this annual report. Although our revenues from these advertising clients generally constitute a substantial part of our total revenues, we believe our business is not dependent on any individual advertising client.
 
Pricing
 
For our advertising agency services, we set the prices of our available advertising time slots based on the quality, rating and target audience of the relevant television programs where the advertisements will be broadcast, the sales prices of our competitors, general market conditions and market demand. Different advertising time slots are sold at different prices. CCTV annually publishes rate cards for its advertising time slots after taking into account the input from its advertising agencies, including our company. We use these rate cards as a basis for negotiations with our clients and we typically provide discounts to our clients. We typically require the agreed advertising fees to be paid in advance before the advertisements are broadcast. CCTV has been increasing the prices charged to us for many of its advertising time slots every year since our establishment, and we expect that CCTV will continue to raise such prices in the future. We believe that we will be able to pass on these price increases to our clients. For our clients who use us as the agent to seek advertising time slots from other advertising companies, we typically charge a certain percentage of the total payment made by our clients to these advertising companies as our commission.
 
We price our production and sponsorship services after taking into account the added value and the related production costs of the content we produce and the value we create for the sponsors of our public service announcements. We typically require a deposit equal to the production cost of the advertisement to be paid by the client at the time of the execution of the advertising production agreement and prior to our commencement of work. We typically require our clients to make payment in full at the time of delivery of our products. For clients who have established good relationships with us and have solid credit histories, we may, on a case-by-case basis, offer them a limited credit period.
 
Sales and Marketing
 
We recruited a number of senior sales executives and doubled the size of our sales force in 2009. As of December 31, 2009, we employed 72 sales representatives devoted to the sale and marketing of our services, whose compensation is based, to a large extent, on the sales revenues they achieve for our company. More than 50% of our sales representatives have more than five years experience in the advertising industry. We have dedicated sales teams focusing on the sales of advertising time slots we have obtained from CCTV to advertising agency companies or directly to our corporate clients. We also actively seek advertising time slots from other third party agencies if our clients’ goals can be better served by having their television advertisements broadcast at time slots other than those we have obtained from CCTV. Our Shenzhen office is responsible for the advertising sales in five provinces in southern China. We also have dedicated personnel responsible for the sales of our public service announcements. We hold our own promotional fair each year to promote the sale of the advertising time slots we have obtained from CCTV, in which representatives from both CCTV and our long- term clients will participate, and highlight the quality of our media resources and our services to potential advertisers. We believe that our extensive experience in media planning, packaging and sales, our access to desirable advertising time slots and our leading production capabilities have attracted a broad base of advertising clients and facilitated our sales efforts. We also have client service teams within our sales department to serve our important clients.

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In addition, when we provide any of our advertising agency services or advertisement production services to our clients, we seek opportunities to provide a full range of integrated advertising services to them. Some clients that initially engage us only to provide advertising agency services ultimately hire us to produce the relevant television advertisements. Similarly, our production department also seeks opportunities to introduce clients to the sales representatives of our advertising agency services.
 
We market our services primarily through direct marketing, trade shows and other media events, which include:
 
 
participating in various nationwide advertisement promotional fairs, including the annual Prime Time Advertising Resources Auction organized by CCTV in the fourth quarter of each year, to promote our advertising agency services;
 
 
providing our public service announcements to regional television networks to enhance the awareness among the public regarding the public service announcements we produce; and
 
 
participating in industry award competitions, trade shows, advertisement festivals, academic seminars and conferences to promote the awareness of our company and our advertisement production capabilities.
 
In addition, our sales and marketing activities benefit significantly from the fact that we have achieved name recognition across China through years of broadcasting the “Guang Er Gao Zhi” program on CCTV Channels 1 and 2. On this program, the public service announcements we produce are broadcast nationwide and our company name is displayed in each announcement. According to a survey conducted by CTR Market Research Co., Ltd. in June 2007, our company is the most recognized television advertising agency in China. Among the 500 randomly selected interviewees sampled in the survey across ten cities in China, 64% recognized our brand name, with our nearest competitor only recognized by less than 30% of the interviewees.
 
Information Technology
 
We use information technology and operating tools to support our business operations. We have purchased several databases from third-party market research firms and employed these databases regularly to conduct relevant research as a basis to formulate the advertising plans for our clients. The databases we currently use include Adex Power and Infosys TV. Adex Power is an advertisement monitoring database that contains original data for each advertisement on almost all of the television stations across China, such as the length of the advertisement, the content of the advertisement and the television programs within or between which such advertisement was broadcast. We can also perform analysis under this Adex Power system to produce the relevant data or comparison we need in order to provide advice to our clients. Infosys has the largest samples of television programs of CCTV, including the rating and the target audience of each television program. We use the data provided by Infosys TV to form the basis of our recommendations to our clients regarding the placement of relevant advertisements.
 
Service Quality Control
 
We aim to provide the highest quality agency and production services to our clients. Our media relationship department reviews the content of the television advertisements to ensure their compliance with the applicable legal requirements of China and the specific requirements of CCTV or the regional television networks broadcasting the advertisement. In addition, our media relationship department monitors the broadcasts of our advertisements every day to ensure they are broadcast at the time slots and for the duration as specified in the relevant contracts. We also provide certain advertising clients with reports that analyze and evaluate the advertising effect after the advertisements are broadcast.

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Moreover, in order to ensure the quality of our agency services, we provide regular training to our sales force and our administrative staff with respect to the changes in general market conditions, recent developments in different industries in China and client communication skills. We also hold regular meetings with our clients to receive their feedback on our services.
 
In order to ensure the quality of the television advertisements and public service announcements we produce, we closely analyze market trends and clients needs, and employ advanced film and sound technology to deliver rich content. In particular, when engaging a third-party producer is necessary in the production of the advertisement, we typically select production crews that we have previously worked with in the past and have proved to be able to provide high quality production services.
 
Competition
 
The advertising industry in China is intensely competitive and highly fragmented. We compete with other industry participants mainly on the basis of service quality, available advertising time slots, price, reputation and relationships with television networks. We face significant competition mainly from domestic advertising companies such as SinoMedia Holding Limited, AVIC Culture Co., Ltd. and Charm Communication Group. We compete with other television advertising agencies for the limited time slots available on the CCTV channels or other television networks. In particular, some of our advertising clients are large advertising agencies who could become our competitors for the same limited media resources. We also compete with other television advertising agencies for advertising clients’ spending on the basis of desirability of time slots offered, television network coverage, service quality, brand name and pricing.
 
We also face competition from new entrants in the television advertising sector, including the wholly foreign-owned advertising companies that have been allowed to operate in China since December 2005, which exposes us to increased competition from international advertising media companies that have greater financial and other resources than we do. In addition, television, upon which we depend for our business, also competes with other forms of advertising media, such as radio, newspapers, magazines, the Internet, indoor or outdoor flat panel displays, billboards and public transport advertising, for overall advertising spending.
 
We believe that our ability to execute important advertising events and to provide integrated advertising services, ranging from the formulation of marketing plan to television advertisement production to advertisement release and broadcasting, represents a significant advantage over our competitors. However, we may not be able to maintain our competitiveness in this industry. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We face significant competition, and if we do not compete successfully against existing and new competitors, we may lose our market share and our profitability may be materially harmed.”
 
Insurance
 
We maintain property insurance for our automobiles. We do not maintain business interruption insurance or key-man life insurance. We believe our insurance coverage is customary and standard for companies of comparable size in comparable industries in China. However, we cannot assure you that our existing insurance policies are sufficient to insulate us from all losses and liabilities that we may incur. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Our insurance coverage is limited and we may incur substantial costs as a result of a severe business liability or disruption or other unexpected events, which could have a material adverse effect on our financial condition and results of operations.”

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Intellectual Property
 
We own the copyrights to the public service announcements we produce for broadcast on CCTV and regional television networks. Advertisers who choose to become the sponsors to such public service announcements do not have intellectual property rights with respect to such announcements. However, advertisers who engage us for the production of television advertisements to meet their specific content and production requirements generally hold the copyright to the relevant television advertisements or public service announcements, while we only have the right to identify our company in such advertisements or announcements as the producer of these advertisements or announcements.
 
Mass Media has registered the trademark relating to our brand name “广而告之” and our logo in the category of book publishing, movie production, radio and television program production and in the category of advertisement by posters, outdoor advertisement, mail advertisement, radio advertisement, television advertisement and advertisement agency services. The registered trademark in the former category is valid from 2007 to 2017 and in the latter category is from 2009 to 2019. According to the asset transfer agreement dated December 29, 2007 between Mass Media and Universal, Mass Media will transfer the registered trademark to Universal. The transfer of such registered trademarks is not completed as of August 20, 2010.
 
Regulation
 
This section sets forth a summary of the most significant PRC regulations that affect the business and the industries in which we operate.
 
We operate our business in China under a legal regime consisting of the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority including the State Administration for Industry and Commerce, or the SAIC. China’s Advertising Law was promulgated in 1994. From time to time, the State Council, the SAIC and other ministries and agencies have issued additional regulations that apply to our business.
 
Regulation of Advertising Services
 
Business License for Advertising Companies
 
The principal regulations governing advertising businesses in China include:
 
 
The Advertising Law (1994);
 
 
The Advertising Administrative Regulations (1987); and
 
 
The Implementing Rules for the Advertising Administrative Regulations (2004).
 
Pursuant to these regulations, companies that engage in advertising activities must obtain from the SAIC or its local branches a business license which includes the operation of an advertising business within its business scope. Companies conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of advertising income 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 laws or regulations. Our PRC subsidiary has obtained such a business license from local SAIC branch and we do not expect it to encounter any difficulties in maintaining its business license.

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Advertising Content
 
PRC advertising laws and regulations set forth certain content requirements for advertisements in China, which include prohibitions on, among other things, misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are also prohibited. It is prohibited to disseminate tobacco advertisements via broadcast, film, television or print media, or in any waiting lounge, theater, cinema, conference hall, stadium or other public area. There are also specific restrictions and requirements regarding advertisements that relate to matters such as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised through broadcast, film, television, newspaper, magazine and other forms of media, together with any other advertisements which are subject to censorship by administrative authorities according to relevant laws and administrative regulations, must be submitted to the relevant administrative authorities for content approval prior to dissemination.
 
Advertisers, advertising service providers and advertising distributors are each required by PRC advertising laws and regulations to ensure that the content of the advertisements they prepare or distribute are true and accurate as well as in full compliance with applicable laws and regulations. In providing advertising services, advertising service providers and advertising distributors must review the prescribed supporting documents provided by advertisers for advertisements and verify that the content of the advertisements complies with applicable PRC laws and regulations. In addition, prior to distributing advertisements for certain commodities which are subject to government censorship and approval, advertising distributors are obligated to ensure that such censorship has been performed and approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke violators’ licenses or permits for advertising business operations. Furthermore, advertisers, advertising service providers or advertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties in the course of their advertising business.
 
Television Advertising
 
The principal regulations governing television advertising in China include:
 
 
The Regulations on Radio and Television Administration (1997); and
 
 
The Interim Measures on Administration for Broadcasting of Radio and Television Advertisement (2003).
 
Consistent with the principles provided in the Advertising Law of 1994, these regulations set forth certain special requirements for television advertising in China, which include, among other things, limitation on time and content of advertisements. The aggregate time for broadcasting commercial advertisements must not exceed 12 minutes per hour on each television channel. In particular, the aggregate time for broadcasting commercial advertisements during the period from 19:00 to 21:00 must not exceed 18 minutes per hour on each TV channel. Television stations are also required to keep regular television programs uninterrupted and may not interpose advertisements except during normal breaks between programs. Furthermore, the broadcasting of television shall be formatted reasonably, and the quantity of commercial advertisements shall be controlled in balance. Television commercial advertisements must not include disturbing content during meal times: from 6:30 to 7:30, from 11:30 to 12:30 and from 18:30 to 20:00. There are also specific requirements regarding commercial advertisements that relate to certain special merchandise and/or services. For example, alcohol commercial advertisement is strictly restricted with a daily maximum limit of 12 advertisements and a maximum limit of two advertisements from 19:00 to 21:00 for each television channel. In addition, each television channel is required to broadcast public service announcements for no less than 3% of its commercial advertising time.
 
Limitations on Foreign Ownership in the Advertising Industry
 
The principal regulations governing foreign ownership in the advertising industry in China include:

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The Catalogue for Guiding Foreign Investment in Industry (as amended in 2007);
 
 
The Measures on Administration for Foreign-invested Advertising Enterprises (2004); and
 
 
The Notice Regarding Investment in the Advertising Enterprises by Foreign Investors through EquityAcquisitions (2006).
 
These regulations require foreign entities that directly invest in the advertising industry in China to have at least two years of direct operations in the advertising industry outside of China. Since December 10, 2005, foreign investors have been permitted to own directly a 100% interest in advertising companies in China, but such foreign investors are required to be a company with advertising as its main business and to have at least three years of operations outside of China. PRC laws and regulations do not permit the transfer of any approvals, licenses or permits, including business licenses containing a scope of business that permits engaging in the advertising business.
 
The establishment of a foreign-invested advertising enterprise, by means of either new establishment or equity acquisition of an existing domestic advertising company, is subject to examination by the SAIC or its authorized branch at the provincial level and the issuance of an Opinion on the Examination and Approval of the Foreign-invested Advertising Enterprise Project. Upon obtaining such opinion from the SAIC or its relevant branch, an approval from the MOFCOM or its competent local counterparts is required before a foreign-invested advertising enterprise may apply for its business license. In addition, if a foreign-invested advertising enterprise intends to set up any branch, it must meet the requirements that (i) its registered capital has been fully subscribed and (ii) its annual advertising sales revenues are not less than RMB 20 million.
 
Regulations on Trademarks
 
Both the PRC Trademark Law, adopted in 1982 and revised in 1993 and 2001, and the Implementation Regulation of the PRC Trademark Law, adopted in 2002, give protection to the holders of registered trademarks. The State Trademark Bureau, under the authority of the SAIC, handles trademark registrations and grants rights of a term of 10 years in connection with registered trademarks. License agreements with respect to registered trademark shall be filed with the State Trademark Bureau.
 
Regulations on Foreign Currency Exchange
 
Under the Foreign Currency Administration Rules (1996), as amended, and various regulations issued by the SAFE, and other relevant PRC government authorities, the Renminbi is convertible into other currencies for the purpose of current account items, such as trade related receipts and payments, interest payments and dividend distributions. The conversion of Renminbi into other currencies and the remittance of converted foreign currency outside China for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment, require prior approval from SAFE or its qualified local offices. Payments for transactions that take place within China must be made in Renminbi. PRC companies may repatriate foreign currency received from abroad or retain such foreign currencies offshore. The terms and conditions of repatriating or retaining offshore relevant foreign currency shall be stipulated by SAFE. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local offices.
 
Regulations on Dividend Distributions
 
The principal regulations governing dividend distributions by wholly foreign-owned enterprises include:
 
 
The Wholly Foreign-Owned Enterprise Law (1986), as amended;
 
 
Rules for the Implementation of the Wholly Foreign-Owned Enterprise Law (1990), as amended; and

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The Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).
 
Under these laws and regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these enterprises are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until their cumulative total reserve funds are equal to at least 50% of the enterprises’ registered capitals. At the discretion of these wholly foreign-owned enterprises, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds.
 
On March 16, 2007, the PRC National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the PRC State Council issued the Implementation Regulations of the Enterprise Income Tax Law, both of which became effective on January 1, 2008. Under this new law and its implementation regulations, dividends payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise are be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a lower withholding tax rate. However, the new 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, subjected to certain conditions. Therefore, if CMM and UIAL are classified as resident enterprise, the dividends received from our PRC subsidiary may be exempted from income tax. 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. See “Item 3. Key Information—D. Risk Factors—Risks Related to our Business—The dividends we receive from our PRC subsidiary and our global income may be subject to PRC tax under the new EIT law, which would have a material adverse effect on our results of operations; our foreign ADS holders may be subject to a PRC withholding tax upon the dividends payable by us and upon gains realized on the sale of our ADSs, if we are classified as a PRC “resident enterprise”.
 
SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options
 
On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice No. 75, which became effective as of November 1, 2005.
 
According to Notice No. 75, prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete certain overseas investment foreign exchange registration procedures with the relevant local SAFE branch. An amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (i) the injection of equity interests or assets of an onshore enterprise to the offshore company or (ii) the completion of any overseas fund raising by such offshore company. An amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (i) an increase or decrease in its capital, (ii) a transfer or swap of shares, (iii) a merger or division, (iv) a long-term equity or debt investment or (v) the creation of any security interests.
 
Notice No. 75 applies retroactively. As a result, PRC residents who established or acquired control of offshore companies that made onshore investments in the PRC in the past were required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. Under Notice No. 75, failure to comply with the registration procedures may result in restrictions on the relevant onshore entity, including restrictions on the payment of dividends and other distributions to its offshore parent or affiliate and restrictions on the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under Chinese foreign exchange administration regulations.

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As a Cayman Islands company, and therefore a foreign entity, if we purchase the assets or equity interest of a PRC company owned by PRC residents in exchange for our equity interests, such PRC residents will be subject to the registration procedures described in Notice No. 75. Moreover, PRC residents who are beneficial holders of our shares are required to register with SAFE in connection with their investment in us.
 
In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, or the PBOC Regulation, setting forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the capital account. In January 2007, SAFE issued implementing rules for the PBOC Regulation, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the equity incentive plan of an overseas publicly listed company. On March 28, 2007, SAFE issued the Operating Procedures on Administration of Foreign Exchange regarding PRC Individuals’ Participation in Employee Share Ownership Plans and Employee Stock Option Plans of Overseas Listed Companies, or the Stock Option Rule. The purpose of the Stock Option Rule is to regulate foreign exchange administration of PRC citizens who participate in equity incentive plans of overseas-listed companies.
 
According to the Stock Option Rule, if a PRC citizen participates in any equity incentive plan of an overseas-listed company, a PRC domestic agent or the PRC related company of such overseas listed company (such as the overseas-listed company itself, its parent company or its subsidiaries or branches in China) must, among others things, file an application with SAFE on behalf of such individual to obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises. This is because PRC citizens may not directly use overseas funds to purchase stock or exercise stock options. Concurrent with the filing of such application with SAFE, the PRC domestic agent or the PRC-related company must obtain approval from SAFE to open a special foreign exchange account at a PRC domestic bank to hold the funds required in connection with the stock purchase or option exercise, any returned principal or profits upon sales of stock, any dividends issued upon the stock and any other income or expenditures approved by SAFE. The PRC domestic agent is also required to obtain approval from SAFE to open an overseas special foreign exchange account at an overseas trust bank to hold overseas funds used in connection with any stock purchase.
 
All proceeds obtained by PRC citizens from dividends acquired from the overseas-listed company through employee stock holding plan or stock option plans or sales of the overseas-listed company’s stock acquired through other methods must be fully remitted back to China after relevant overseas expenses are deducted. The foreign exchange proceeds from these sales can be converted into Renminbi or transferred to the PRC citizen’s foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at the PRC domestic bank. If a stock option is exercised in a cashless transaction, the PRC citizen is required to remit the proceeds to the special foreign exchange account.
 
Although the Stock Option Rule has been promulgated recently and many related issues require further interpretation, we and our PRC employees who have been granted stock options will be subject to the Stock Option Rule when our company becomes an overseas-listed company. If we or our PRC employees fail to comply with the Stock Option Rule, we and/or our PRC employees may face sanctions imposed by SAFE or other PRC government authorities.
 
In addition, the State Administration for Taxation has issued circulars concerning employee stock options. Under these circulars, our employees working in the PRC who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee stock options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their stock options. If our employees fail to pay their income taxes, or we fail to withhold them, we may face sanctions imposed by the tax authorities or other PRC government authorities.

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C.
Organizational Structure
 
For a description of our organizational structure, See “Item 4. Information on the Company—A. History and Development of the Company.”
 
 
D.
Property, Plant and Equipment
 
Our corporate headquarters are located in approximately 1,564 square meters of office space in Beijing, which we rented from related parties under two leases before November 2008. In November 2008, we purchased such properties from the related parties at their fair market value as determined by an independent property valuation company. In addition, our Shenzhen office rents approximately 53 square meters of office space in Shenzhen, and its lease expires in December 2010. We believe that our existing facilities are adequate and suitable to meet our present needs and that additional space can be obtained on commercially reasonable terms to meet our future requirements.
 
ITEM 4A
UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
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 audited combined financial statements and related notes for the years ended December 31, 2007, 2008 and 2009, included elsewhere in this annual report. Our combined financial statements have been prepared in accordance with U.S. GAAP. This discussion contains forward-looking statements that involve risks and uncertainties. We caution you that our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information provided in “Item 3. Key Information—D. Risk Factors.”
 
 
A.
Operating Results
 
Overview
 
We believe we are a leading independent television advertising company in China. We provide a full range of integrated television advertising services, including advertising agency services and production and sponsorship services. We believe our extensive experience in media planning, packaging and sales, our access to certain high quality advertising time slots on CCTV, China’s largest television network, and our ability to provide advertising services on an integrated basis that are tailored to advertisers’ needs differentiate us from most other television advertising companies operating in China.
 
We derive a substantial majority of our revenues from our advertising agency services, in which we mainly procure advertisers for the time slots we have obtained on the most popular national channels of CCTV. Our advertisers purchase these services either directly from us or through advertising agencies. In the years ended December 31, 2007, 2008 and 2009, we derived 72.7%, 90.5% and 92.9%, respectively, of our total revenues from advertising agency services. Substantially all of our revenues from advertising agency services are derived from the advertising time slots on CCTV. We obtained advertising rights to an average of approximately 35 minutes per day in 2007, 313 minutes per day in 2008 and 532 minutes per day in 2009 for regular daily programs on CCTV Channels 1, 2, 4, E and F. In 2009, CCTV adopted a practice to sell through auctions the advertising time slots for certain of its programs on CCTV Channel 2 and 4 that were secured by us previously. We participated in the auction and obtained the advertising time slots for the Periodic China News Package on CCTV Channel 4. As a result, our aggregate advertising time obtained from CCTV is expected to drop to an average of 482 minutes per day in 2010 for regular daily programs on CCTV Channel 1, 2, 4, E, F. In addition, CCTV took an initiative to sell the advertising time slots for the 2010 Chinese New Year Gala program by itself and as a result, we did not obtain such advertising time slots.

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We also derive revenues from producing public service announcements and commercial television advertisements for advertisers, and soliciting sponsors for the public service announcements we produce and arranging for such announcements, as well as announcements supplied by certain of our clients, to be broadcast on CCTV. In 2009, we produced over 50 public service announcements and commercial advertisements.
 
We also derived a small portion of revenues from our special events services that we provided in prior years to assist CCTV in the sales and marketing of advertising time slots during major sporting events that are broadcast on CCTV’s Channels 1 and 2. The service contract with CCTV was not renewed for 2010 and we will not provide such services to CCTV in 2010.
 
Our net revenues increased from RMB 255.5 million in 2007 to RMB 353.0 million in 2008, and further increased to RMB 411.6 million (US$60.3 million) in 2009. Our net income decreased from RMB 208.3 million in 2007 to RMB 110.4 million in 2008, and further decreased to RMB 86.5 million (US$12.7 million) in 2009.
 
Factors Affecting Our Financial Performance and Results of Operations
 
We believe that the main factors affecting our financial performance and results of operations are:
 
 
overall demand for our services;
 
 
our ability to obtain high quality advertising time slots on favorable terms;
 
 
our ability to increase the size, quality and the level of diversification of our advertising client base;
 
 
pricing of our services; and
 
 
seasonality.
 
Overall Demand for Our Services
 
Demand for our services and, as a result, growth in our revenues are driven by overall advertising spending in China, which is influenced by the pace of overall economic growth. Any slowdown in China’s economic growth may slow our revenue growth. In 2008, the global financial crisis has given rise to a worldwide economic recession which also significantly slowed down China’s economic growth. The demand for our services had declined in the second half of 2008 and the first half of 2009. In the second half of 2009, as China’s economy continued to recover from the global financial crisis, the demand for our service had grown significantly. As a result, the revenues generated from the second half of 2009 increased significantly compared to the first half of 2009. However, if the global financial crisis continues or deteriorates or China’s economy does not recover as expected, the demand for our services could decrease again. This adverse effect could be offset if we can successfully increase our market share in the overall advertising market, which we plan to achieve through optimizing and expanding our media resources, expanding our client base and strengthening our production capabilities.
 
In addition, the demand for our services is affected by the level of television advertising spending in China, which is in turn affected by the popularity of television programs in China and advertisers’ perceptions regarding the effectiveness of television advertising. Television advertising also competes with other advertising media, such as billboards, Internet, mobile phones and out-of-home advertising networks. If television advertising becomes a less favorable choice for advertisers in China, we may not be able to successfully attract enough advertisers for our advertising time slots and our revenues and earnings growth may be affected.
 
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Ability to Obtain High Quality Advertising Time Slots on Favorable Terms
 
We depend on the high quality advertising time slots we obtain from CCTV for our advertising agency services. Substantially all of our revenues for our advertising agency services are derived from the advertising time slots we obtain from CCTV. Our ability to continue to obtain our existing advertising time slots and to add additional high quality advertising time slots will have a significant effect on our results of operations. In 2008, we secured advertising rights to several additional television programs on CCTV Channels 2, 4, E and F. However, we did not generate enough revenues from the time slots on CCTV Channel 4 to cover the fixed amount we were required to pay in 2008 and 2009, and as a result, we incurred a loss from such programs. For 2010, we did not obtain the advertising rights to all such programs except the Periodic China News Package on CCTV Channel 4 and the programs on Channel E and F. Consequently, the fixed amount of media fee we are required to pay relating to such programs will decrease in 2010. We also expect that the revenues to be generated from such programs will decrease in 2010.
 
In addition, the availability of advertising time slots may also affect the growth of our production and sponsorship services. For example, we derived a significant portion of our revenues in production and sponsorship services in 2007 from soliciting sponsorships for public service announcements broadcast on certain time slots that CCTV allocated to us when they remained unsold. Such advertising time slots were not available to us in 2008 and 2009.
 
The quality of advertising time slots available to us is measured based on the perceived effectiveness of advertisements placed during such time slots, which is in turn affected by the ratings and the geographical and demographic coverage of the relevant television programs. Our results of operations will be affected by any changes with respect to the popularity, rating or coverage of the television programs during which our advertising time slots occur.
 
Our profitability also depends on the price of advertising time slots charged to us by CCTV or other agencies. CCTV has been increasing the prices for many of its advertising time slots in recent years, and we expect that CCTV will continue to raise such prices in the future. In addition, if CCTV continues the practice to sell more of its advertising time slots through auctions, we will face increased pricing competition to obtain desired advertising time slots. Our profit margin may be affected if we are not able to obtain the rights to these advertising time slots on favorable terms or pass on the increasing costs to our clients. If any other advertising agency is able to obtain such high quality advertising time slots on terms more favorable than ours, we may lose our clients and our revenues may decline.
 
Ability to Increase the Size, Quality and the Level of Diversification of Our Advertising Client Base
 
We compete for the advertising spending of advertisers with other advertising agencies, including both international advertising agencies and domestic Chinese advertising agencies, some of which are also our clients. From time to time these agencies introduce their clients to us, primarily due to our exclusive rights over certain advertising time slots on CCTV. We believe that we distinguish ourselves from other advertising agencies in China by our ability to provide integrated advertising services that encompass media planning, packaging, creative content production and access to desirable advertising time slots to reach targeted audiences. We plan to continue to attract new business from potential clients, as well as to gain more business from our existing corporate clients, by increasing our sales efforts and by seeking opportunities to provide these clients with the full range of our services. We also intend to strategically adjust our advertising client portfolio by increasing the ratio of corporate advertising clients to advertising agency clients and by diversifying the industry mix of our advertisers, to better balance and optimize the profile of our client base. We will continue to improve the size, quality and level of diversification of our client base, leveraging our ability to provide integrated advertising services and the high quality advertising time slots we have obtained from CCTV.

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Pricing of Our Services and Media Fee Payment Terms
 
Our results of operations significantly depend on the price of our advertising agency services, particularly the price we charge to our advertising clients for advertising time slots and, to a lesser extent, the price of our production and sponsorship services. We typically retain the difference between the price we charge to advertising clients and the price we pay for the advertising time slots as the premium for our advertising agency services. We price the advertising time slots of CCTV’s daily television programs available to us based on a number of factors, including market demand for such advertising time slots, target audiences, ratings and the quality of the relevant television programs as well as prices charged by our competitors. We price our production and sponsorship services by taking into account the added value and the related production costs of the content we provide or the value created by us for the sponsors of our public service announcements. Any factors that influence the pricing of our services will in turn affect our revenues, profitability and other operating results.
 
In addition, changes in the payment terms for our media fee payable to CCTV may have a significant impact upon our cash flow. For example, we obtained in an auction the advertising rights to the Periodic China News Package on CCTV Channel 4 in 2010. Under the auction arrangements, we are required to make a deposit in advance with CCTV amounting to 30% of the media fee with the remaining media fee payable in 12 monthly installments through 2010. We expect that such payment terms will have a significant impact upon our cash flow.
 
Seasonality
 
Aside from fluctuations in the level of advertising spending resulting from changes in the overall economic and market conditions in China, our revenues are affected by seasonal fluctuations in consumer spending that also affect the level of advertising spending in China. Although the first quarter of each year is expected to be a slow season for the sale of the advertising time slots of the CCTV Channels 2 and 4 programs we newly secured in 2008, historically our total revenues were typically higher in the first quarter than in other quarters of the year because the Chinese New Year Gala program, which generates significant revenues for us, falls in that period each year. However, in 2010 CCTV sold the advertising time slots for the 2010 Chinese New Year Gala program by itself. As a result, our results of operations for the first quarter of 2010 decreased significantly compared to the first quarter in 2009. In addition, we provided services to CCTV on an ad hoc basis in the sales and marketing of the advertising time slots for 2006 World Cup and 2008 Beijing Olympic Games. We recognized revenues from such services in connection with 2006 World Cup when we received statements or supporting documents from CCTV in 2007. We did not recognize any revenues from such services in connection with the 2008 Beijing Olympic Games, as we have not yet received payment for such services. Due to the seasonal fluctuations in advertising spending, the ad hoc basis of special event services and other factors, our quarterly results of operations may fluctuate significantly from period to period.

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Revenue
 
The table below sets forth the breakdown of our three revenue sources for the periods indicated:

   
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
   
Amount
   
% of
Total
Revenues
   
Amount
   
% of
Total
Revenues
   
Amount
   
% of
Total
Revenues
 
   
(RMB)
         
(RMB)
         
(RMB)
   
(US$)
       
   
(In thousands, except percentages)
 
Revenues:
                                         
Advertising agency services
    202,637       72.7 %     334,053       90.5 %     397,279       58,202       92.9 %
Special events services
    15,991       5.7 %                              
Production and sponsorship services
    60,018       21.5 %     34,935       9.5 %     30,305       4,439       7.1 %
Total revenues
    278,646       100.0 %     368,988       100 %     427,584       62,641       100 %
Less: business tax
    (23,110 )     8.3 %     (16,006 )     4.3 %     (16,022 )     (2,347 )     -3.7 %
Total net revenues
    255,536       91.7 %     352,982       95.7 %     411,562       60,294       96.3 %

We derive revenues from the following sources:
 
 
Advertising agency services. We currently derive a substantial majority of our revenues from providing advertising agency services, in which we obtain advertising time slots on popular television channels of CCTV and procure advertisers to place advertisements on such time slots.
 
Our commission for advertising agency services typically represents the difference between the price we charge to our advertising clients and the price we pay for the available advertising time slots. Our advertising clients typically make payments for our agency services at least one week before the relevant advertisements are broadcast, but we only recognize revenues when those advertisements are broadcast. If the advertisements are not broadcast, for instance due to CCTV’s change of program schedule, the advance payments will be returned to our clients.
 
We generally record revenue with amounts of billings to our clients net of media fees because we believe that the media supplier, not us, is the primary obligor and bears the majority of the risks and rewards in these arrangements. However, when we purchase blocks of advertising time slots and attempt to sell these advertising time slots to advertisers, we bear the majority of the risks and rewards in these arrangements. In such cases, revenues are recognized at gross billings to our clients and the cost for purchasing the advertising time slots is allocated to cost of revenues on a straight-line basis. We also assist some of our advertising clients in bidding for prime advertising time slots from CCTV, for which we receive a certain percentage of our clients’ related advertising expenditures as our fees.
 
 
Special events services. From time to time we provide special events services to CCTV, in which we assist CCTV in the sales and marketing of advertising time slots in connection with major sporting events broadcast on CCTV. Under this arrangement, our sales representatives will, together with CCTV and sales representatives from an independent third-party advertising company, form an advertising sales team for these special events. Our fees for such services will be determined on a case-by-case basis by CCTV based on the total advertising sales on CCTV Channels 1 and 2 relating to such special event. We typically receive a certain percentage of the total advertising sales as our compensation. Due to our inability to estimate the amount of revenues we will receive, we do not recognize the revenues from our special events services until we receive settlement statements from CCTV and the settlement of our service fees is reasonably assured, which generally occur several months after our services are rendered. We usually receive payment for these services several months after receiving the related statements. As a result, there is often a significant time lag between our performance of these services, our recognition of the related revenues and our actual receipt of payment. We have not recognized any revenues from our special events services provided in connection with the marketing and sales of the advertising time slots relating to 2008 Beijing Olympic Games. The service contract with CCTV was not renewed for 2010 and we will not provide such services to CCTV in 2010.

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Production and sponsorship services. We derive a portion of our revenues from our production and sponsorship services. We design, produce and package content for public service announcements and commercial advertisements. We also solicit sponsors for the public service announcements we produce and arrange for such announcements, as well as announcements supplied by certain of our clients, to be broadcast on CCTV. The sponsor’s name will be shown at the end of the announcement.
 
For commercial television advertisements, advertisers will pay for our production services and sometimes for the broadcast of the advertisements produced by us if we also arrange for such broadcast. For public service announcements, advertisers will pay for the sponsorships. We typically require a prepayment from our clients at the time of the execution of the advertising production agreements and prior to the commencement of our work, but our revenues are typically recognized at the time the final work products are delivered to our clients or are broadcast.
 
Operating Costs and Expenses
 
The following table sets forth our operating costs and expenses for the periods indicated, both in absolute amounts and as percentages of our net revenues:
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
   
Amount
   
% of
Net
Revenues
   
Amount
   
% of
Net
Revenues
   
Amount
   
% of
Net
Revenues
 
   
(RMB)
         
(RMB)
         
(RMB)
   
(US$)
       
   
(In thousands, except percentages)
 
Cost of revenues
    30,148       11.8 %     203,400       57.6 %     270,239       39,590       65.7 %
Sales and marketing expenses
    5,600       2.2 %     8,204       2.3 %     17,362       2,544       4.2 %
General and administrative expenses
    8,505       3.3 %     24,487       6.9 %     33,194       4,863       8.1 %
Total operating costs and expenses
    44,253       17.3 %     236,091       66.8 %     320,795       46,997       78.0 %

Cost of Revenues

Prior to 2008, we recorded all of our revenues from our advertising agency services after deducting the media costs. Our cost of revenues consisted primarily of the costs that we incurred to produce our public service announcements and commercial advertisements and production and promotional costs related to the Chinese New Year Gala program and special events, including wages of production personnel, costs and depreciation of the production equipment, office rental expenses directly related to our production services, wages of media research and relationship personnel and costs associated with the monitoring, assessment and evaluation of the advertisements. In 2008, we obtained advertising rights to certain CCTV Channel 4 programs for which we are committed to pay a fixed amount of media fees. We record such media fees as our cost of revenues when the advertising time slots purchased are consumed on a straight-line basis and record the revenues from such Channel 4 programs on a gross basis. As a result, the media fee costs for the Channel 4 programs account for a substantial majority of our cost of revenues in 2008 and 2009, with the media fees accounting for a higher percentage of our cost of revenues in 2009 as CCTV increased the media fees for such Channel 4 programs by approximately 40.9% in that period. In 2010 we did not obtain the advertising rights to most of such programs on CCTV Channel 4 that we had in 2008 and 2009 and as a result, we expect that our cost of revenues will drop in 2010.

 
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Sales and Marketing Expenses
 
Our sales and marketing expenses consist primarily of salaries and benefits for our sales and marketing personnel, office rental expenses directly related to our sales and marketing activities, traveling expenses incurred by our sales personnel and promotional and entertainment expenses. Our sales personnel receive performance-based compensation and we market our services primarily through the efforts of our sales and marketing personnel. Our sales and marketing expenses increased significantly in 2009 partly due to the fact that we significantly expanded our sales team. We expect selling and marketing expenses to increase as we expand our sales force.
 
General and Administrative Expenses
 
Our general and administrative expenses primarily consist of salaries and benefits for our management, accounting and administrative personnel, professional service fees, office rental and maintenance expenses directly related to our general office administration activities, depreciation of office equipment, other administrative expenses and allowances for doubtful accounts. We expect our general and administrative expenses to increase as we hire additional personnel, improve our corporate infrastructure and incur additional costs to meet the requirements of being a public company in the U.S. For example, we hired additional financial staff with experience in U.S. GAAP and SEC reporting requirements and engaged outside legal counsels. In particular, we engaged an outside consulting firm to assist us in our efforts to comply with Section 404 of the Sarbanes-Oxley Act, which requires a public company to include a report of management on the effectiveness of its internal control over financial reporting. All of these measures have considerably increased our general and administrative expenses in the periods following our initial public offering. In addition, we also incurred, and will continue to incur, costs associated with public company reporting requirements, such as the requirements to file an annual report and other event-related reports with the SEC.
 
Share-Based Compensation Expenses
 
We adopted an equity incentive plan in July 2008, pursuant to which we may issue up to 50,000,000 ordinary shares upon exercise of awards granted under the plan. On July 1, 2008, options to purchase 42,891,000 ordinary shares were granted under this plan at an exercise price of US$0.685 per ordinary share. On February 21, 2009, our board of directors resolved to offer to the grantees of our stock options the opportunity to modify the terms of their existing options through (i) resetting the exercise price of each option to US$0.0726 per ordinary share, which equals approximately one-thirtieth (owing to the 30 to 1 ordinary share to ADS ratio) of the average closing trading price per ADS of our company as reported on NYSE Arca in the last 60 days immediately prior to February 13, 2009; and (ii) reducing the number of each award of options by 50%. No other changes were made to the terms and conditions of the stock options. All grantees of our stock options accepted this offer. As of August 20, 2010, options to purchase 17,655,093 ordinary shares were outstanding, at an exercise price of US$0.0726 per ordinary share.
 
We have adopted Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 718 and ASC 505-50 for the accounting treatment of our stock option plan and we will record compensation expenses based on the fair value of the award. See “—Critical Accounting Policies—Share-Based Compensation” and “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers.” We expect to amortize the total amount of share-based compensation expenses over the vesting period of four years commencing July 2008 on a straight line basis over the requisite service period for each separately vesting portion of the awards. We incurred RMB 2,139,736 (US$313,473) in share-based compensation expenses in 2009.

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Taxation
 
Taxation in the Cayman Islands and the British Virgin Islands
 
Neither the Cayman Islands nor the British Virgin Islands currently levies 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. There are no other taxes likely to be material to our company levied by the government of the Cayman Islands or by the government of the British Virgin Islands, except for stamp duties that may be applicable on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. Neither the Cayman Islands nor the British Virgin Islands is a party to any double taxation treaties that are applicable to any payments made to or by the Company. There are no exchange control regulations or currency restrictions in the Cayman Islands or the British Virgin Islands.
 
PRC Enterprise Income Tax
 
Prior to January 1, 2008, both Mass Media and Universal were subject to the PRC Enterprise Income Tax Law Concerning Foreign-Invested Enterprises and Foreign Enterprises, or the old EIT law. Under the old EIT law, each of Mass Media and Universal, as a foreign-invested enterprise established in the Shenzhen Special Economic Zone, was entitled to a preferential income tax rate of 15% on the income generated by its offices based in Shenzhen and an income tax rate of 30% on the income generated by its offices based outside of Shenzhen, as compared to the statutory enterprise income tax rate of 33%. In addition, each of Mass Media and Universal was fully exempted from PRC income tax commencing from its first profit-making year, followed by a 50% reduction in PRC income tax for the next two years. As a result, Universal was exempted from PRC income tax for the year ended December 31, 2007 and was entitled to a 50% income tax reduction for the years ending December 31, 2008 and 2009.
 
On March 16, 2007, the PRC National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the PRC State Council issued the Implementation Regulations of the Enterprise Income Tax Law, both of which became effective on January 1, 2008. The Enterprise Income Tax Law and its Implementation Regulations, or the new EIT law, imposes a uniform tax rate of 25% on all PRC enterprises, including foreign-invested enterprises, and eliminates or modifies most of the tax exemptions, reductions and preferential treatments available under the old EIT law. Under the new EIT law, enterprises that were established before March 16, 2007 and already enjoy preferential tax treatments, in accordance with any detailed directives to be issued by the State Council, (i) in the case of preferential tax rates, continue to enjoy the preferential tax rates which are being gradually increased to the new tax rates within five years from January 1, 2008 or (ii) in the case of preferential tax exemption or reduction for a specified term, continue to enjoy the preferential tax holiday until the expiration of such term. According to the new EIT law, Universal’s 50% income tax reduction treatment expired on December 31, 2009. However, Universal will continue to enjoy the preferential tax rates which are being gradually increased to the new tax rates within five years from January 1, 2008.
 
Under the old EIT law, dividend payments to foreign investors made by foreign-invested enterprises in the PRC, such as our PRC subsidiary, were exempted from PRC withholding tax. Under the new EIT law, however, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise are subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. The British Virgin Islands, where UIAL is incorporated, does not have such a tax treaty with the PRC. If UIAL is considered a non-resident enterprise, the 10% withholding tax impacted on divided income received from our PRC subsidiary would reduce our net income and have an adverse effect on our operating results.
 
We intend to permanently reinvest 70% of the earnings made by our PRC subsidiary. Starting from January 1, 2008, we accrued 10% withholding tax on those earnings from our PRC subsidiary that we have no intention to permanently reinvest, which represents 30% of the earnings made by our PRC subsidiary.

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Under the new EIT law, an enterprise established outside the PRC with its “de facto management body” within the PRC is considered a resident enterprise and is subject to the 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. Substantially all of our management members are based in the PRC. If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our worldwide 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. Therefore, if CMM and UIAL, our PRC subsidiary’s direct holding company, are classified as resident enterprises, the dividends received from our PRC subsidiary may be exempted from income tax. However, it remains unclear how the PRC tax authorities will interpret the treatment of an offshore company, like us, having indirect ownership interests in PRC enterprises through intermediary holding vehicles.
 
Our effective tax rate was 4.9% in 2007, 14.8% in 2008 and 12.6% in 2009. Our effective tax rate in 2008 and 2009 increased as a result of the expiration on January 1, 2008 of Universal’s income tax exemption status as well as the accrual of withholding tax on distributable earnings from PRC operations that we do not intend to permanently reinvest.
 
PRC Business Tax and Related Surcharges
 
Our PRC subsidiary is required to pay business tax at a rate of 5.0%, and related surcharges at a rate of approximately 3.0%, on our revenues from providing advertising services. Under the PRC tax law, business tax is levied on the net amount of total advertising revenues less media fees paid to the media providers. As we reported revenues from certain of our advertising time slots on a gross basis, our effective business tax rate was approximately 3.7% of our total revenues in 2009.
 
Critical Accounting Policies
 
We prepare our combined financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities as of the date of our financial statements and our revenues and expenses during the financial reporting period. Our estimates and assumptions are based on available information and our historical experience, as well as other estimates and assumptions that we believe to be reasonable. The estimates and assumptions that form the basis for our judgments may not be readily apparent from other sources. We continually evaluate these estimates and assumptions based on the most recently available information, our own experience and other assumptions that we believe to be reasonable. Our actual results may differ significantly from estimated amounts as a result of changes in our estimates or changes in the facts or circumstances underlying our estimates and assumptions. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on our management’s judgment. When reviewing our combined financial statements, you should take into account:
 
 
our critical accounting policies discussed below;
 
 
the related judgments made by our management and other uncertainties affecting the application of these policies;
 
 
the sensitivity of our reported results to changes in prevailing facts and circumstances and our related estimates and assumptions; and
 
 
the risks and uncertainties described under “Risk Factors.”
 
See note 2 to our combined financial statements for additional information regarding our critical accounting policies.

55

 
Revenue Recognition
 
We derive revenues primarily from providing services in three areas: (i) advertising agency services, in which we procure advertising clients to place television advertisements in the time slots we have obtained from CCTV, (ii) special events services to CCTV, in which we assist CCTV in the sales and marketing of advertising time slots for major sporting events broadcast on CCTV, and (iii) production and sponsorship services, in which we produce public service announcements, or commercial advertisements, for our clients or solicit sponsors for the public service announcements we produce and arrange for such announcements, as well as announcements supplied by certain of our clients, to be broadcast on CCTV.
 
We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is reasonably assured. Revenue arrangements involving multiple deliverables are broken down into single-element arrangements based on their relative fair value for revenue recognition purposes, when possible. We recognize revenues on the elements delivered and defer the recognition of revenues for the fair value of the undelivered elements until the remaining obligations have been satisfied. When there is no objective and reliable evidence of the fair value of the undelivered items, we recognize revenues of the elements delivered as a single unit of accounting. Generally, we receive advanced payments for our advertising services and record them as customer advances. Such prepayments are only recognized as revenues when the services are rendered.
 
We have adopted the net presentation for business tax and related surcharges. Business tax and related surcharges are deducted from revenues before arriving at net revenues. Alternatively, we could adopt the gross presentation and present our revenues gross of business tax and related surcharges, while recording the business tax and related surcharges in cost of revenues. However, we believe that the net presentation better reflects our results of operations, since we consider business tax and related surcharges as taxes based on revenues collected from customers that reduce revenues earned by us.
 
Advertising agency services. In the substantial majority of our advertising agency arrangements, we contract separately with our clients and the media supplier and are responsible for the payments to the media supplier and collections from our clients. In compliance with ASC 605-45, “Revenue Recognition: Principal Agent Considerations”, , or ASC 605-45, we assess whether we or the media supplier is the primary obligor in these service contracts. We evaluate the terms of our agreements with our clients and give appropriate consideration to other key indicators, such as inventory risk, latitude in establishing price, variability of earnings, ability to change the programs the media supplier provides, discretion in supplier selection and credit risk to the vendor.
 
Since the first year of operation, we have been arranging our clients’ advertisements on the advertising time slots of the regular daily programs on CCTV Channel 1 and Channel 2 and the annual Chinese New Year Gala program. In general, we are not obligated to pay the media fees until we have sold the advertising time slots to our clients. In these cases, we record the net amounts of the gross billings to our clients less media fees as revenues on the dates of broadcast in accordance with the guidance in ASC 605-45 because we believe that the media supplier, not us, is the primary obligor and bears the majority of the risks and rewards under such arrangements.
 
In order to obtain exclusive access to the advertising time slots on certain CCTV Channel 4 programs, starting from 2008, we purchase the advertising time slots on certain CCTV Channel 4 programs with a fixed media cost and attempt to sell these advertising time slots to our clients. We believe we bear the majority of the risks and rewards under such arrangements. Therefore, revenues are recognized at gross billings to our clients in accordance with the guidance in ASC 605-45 on the dates of broadcast of the advertisements. Cost for purchasing the advertising time slots from the media supplier is recorded as our cost of revenues on a straight- line basis. If we had recorded all revenues from advertising agency services on a gross basis, total revenues and cost of revenues would have been higher. However, operating income would remain unchanged for the periods presented.

56

 
Special events services to CCTV. We historically assisted CCTV on an ad hoc basis in the sales and marketing of advertising time slots during major sporting events that were broadcast on CCTV Channels 1 and 2 under general framework agreements between CCTV and us. Our fees were determined on a case-by-case basis by CCTV and represented a certain percentage of the total advertising revenues earned by CCTV Channels 1 and 2 relating to each major sporting event. We were not able to estimate our service fees earned until we received settlement statements from CCTV, which generally occurred several months after our services were rendered. As such, we recognized revenues from our special events services when we received such settlement statements from CCTV and settlement of our service fees is reasonably assured. If we were able to estimate our service fees earned or were able to receive settlement statements from CCTV and are reasonably assured that CCTV would settle our service fees on a more timely basis, the timing of recognizing revenues from special events services to CCTV would be accelerated. We have not recognized any revenues from our special events services provided in connection with the marketing and sales of the advertising time slots relating to 2008 Beijing Olympic Games. The service contract with CCTV was not renewed for 2010 and we will not provide such services to CCTV in 2010..
 
Production and sponsorship services. We recognize revenues from production services at the time the productions are completed. For sponsorship services, we either provide sponsors with a pool of public service announcements already produced by us to choose from, or produce new announcements based on sponsors’ original ideas, and arrange to broadcast such public service announcements, as well as announcements supplied by clients themselves, in which sponsors’ names will be shown. We recognize revenues from sponsorship services only at the time such announcements with sponsors’ names are broadcast on the time slots we obtain from CCTV and other criteria, such as the execution of sponsorship agreements, are met.
 
Income Tax
 
On January 1, 2007, we adopted ASC 740-10, “Income Taxes,” or ASC 740-10. ASC 740-10 clarified the accounting for uncertainty in an enterprise’s financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 requires management to evaluate its open tax positions that exist on the date of initial adoption in each jurisdiction. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing ASC 740-10.
 
Under the new EIT Law adopted by the Chinese National People’s Congress in March 2007, effective from January 1, 2008, dividends from earnings made after January 1, 2008, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise are subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. The British Virgin Islands, where UIAL is incorporated, does not have such a tax treaty with the PRC. This new 10% withholding tax imposed on the dividend income received from our PRC subsidiary will reduce our net income in accordance with ASC 740-30. It is our intention to permanently reinvest part of the earnings made by our PRC foreign-invested enterprise. Starting from January 1, 2008, we have accrued the 10% withholding tax on those earnings from China operations that we have no intention to permanently reinvest. As we only distribute up to 30% of our PRC subsidiary’s annual income as dividends, our effective withholding tax rate is approximately 3%.
 
We make assumptions, judgments and estimates in the recognition and measurement of a tax position taken or expected to be taken in a tax return. These judgments, assumptions and estimates take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts of unrecognized, uncertain tax positions, if any, provided or to be provided for in our combined financial statements.

57

 
Share-Based Compensation
 
Share-based compensation is accounted for in accordance with ASC 718, “Compensation-Stock Compensation”, or ASC 718, for share-based payment transactions with employees. For service-based share option awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a graded-vesting basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. For performance-based share option awards, our board of directors determines the performance goals and vesting schedule of these awards and an evaluation is made each quarter as to the likelihood of the performance criteria being met; share-based compensation cost is then recorded based on the fair value for the number of options expected to vest on a graded-vesting basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period.
 
We use the Black-Scholes option pricing model to determine the fair value of share options. The determination of the fair value of share-based compensation awards on the date of grant using the Black-Scholes option pricing model is affected by the share price as well as assumptions regarding a number of complex and subjective variables, including the expected term of the awards, the expected share price volatility over the expected term of the awards, actual and projected employee share option exercise behavior, risk-free interest rates and expected dividends.
 
If we use different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the change in our stock-based compensation expense could materially affect our operating income, net income and net income per share. Furthermore, we are required to estimate forfeitures at the time of grant and record stock-based compensation expense only for those awards that are expected to vest. If actual forfeitures differ materially from our estimated forfeitures, we may need to revise those estimates used in subsequent periods.
 
Results of Operations
 
The following tables present our summary combined statements of operations for each of the years ended December 31, 2007, 2008 and 2009. Our historical results presented below are not necessarily indicative of the results for any future periods.

   
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
   
(RMB)
   
(RMB)
   
(RMB)
   
(US$)
 
   
(In thousands)
 
Revenues:
     
Advertising agency services
    202,637       334,053       397,279       58,202  
Special events services
    15,991                    
Production and sponsorship services
    60,018       34,935       30,305       4.439  
Total revenues
    278,646       368,988       427,584       62,641  
Less: business tax
    (23,110 )     (16,006 )     (16,022 )     (2,347 )
Total net revenues
    255,536       352,982       411,562       60,294  
Operating costs and expenses:
                               
Cost of revenues
    (30,148 )     (40,200 )     (40,239 )     (5,895 )
Cost of revenues – media fees to a related party
            (163,200 )     (230,000 )     (33,695 )
Sales and marketing expenses
    (5,600 )     (8,204 )     (17,362 )     (2,544 )
General and administrative expenses
    (8,505 )     (24,487 )     (33,194 )     (4,863 )
Total operating costs and expenses
    (44,253 )     (236,091 )     (320,795 )     (46,997 )
Operating income
    211,283       116,891       90,767       13,297  
Interest and investment income
    10,774       15,103       9,494       1,391  
Other expenses, net
    (3,128 )     (1,441 )     533       78  
Income before tax
    218,929       130,553       100,794       14,766  
Income tax expense
    (10,619 )     (20,139 )     (14,328 )     (2,099 )
Net income
    208,310       110,414       86,466       12,667  

 
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The table below sets forth certain operating data in connection with our advertising agency services:
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
Number of programs secured during the period
    3       40       41  
Total advertising time obtained (seconds)(1)
    783,240       6,818,220       11,660,760  
Total advertising time sold (seconds)
    631,620       1,022,861       2,127,473  

 
(1)
Represents the total amount of time during regular television programs secured from CCTV.

Year ended December 31, 2009 compared to year ended December 31, 2008
 
Revenues
 
Our total revenues increased by 15.9% to RMB 427.6 million (US$62.6 million) in the year ended December 31, 2009 from RMB 369.0 million in the year ended December 31, 2008. This increase was attributable to the increase in revenues from our advertising agency services, partially offset by the decrease in revenues from our production and sponsorship services during this period.
 
Revenues from our advertising agency services increased by 18.9% to RMB 397.3 million (US$58.2 million) in the year ended December 31, 2009 from RMB 334.1 million in the year ended December 31, 2008. This increase was primarily attributable to an increase in the selling price of advertising time slots sold by us in the year ended December 31, 2009 compared to the year ended December 31, 2008. Our overall sales of advertising time slots were higher in 2009 compared to 2008, primarily because (i) the demand for our services was higher in 2009 when China’s economy began to recover from the financial crisis and (ii) we expanded our sales force starting from the second quarter of 2009, which helped us develop and strengthen the relationship with our direct clients and take advantage of the economic recovery in 2009.
 
Revenues from our production and sponsorship services decreased by 13.3% to RMB 30.3 million (US$4.4 million) in the year ended December 31, 2009 from RMB 34.9 million in the year ended December 31, 2008. The decrease was primarily due to the fact that our clients reduced their sponsorship for the public service announcements due to fewer national events in 2009.
 
We did not recognize any revenues from special events services in 2008 or 2009. While we provided special events services to CCTV in connection with the 2008 Beijing Olympic Games, the timing and likelihood of the final settlement from CCTV for such services remain uncertain as of this annual report and therefore we have not recorded revenues relating to such services in 2008 or 2009.
 
Net Revenues
 
Our net revenues increased by 16.6% to RMB 411.6 million (US$60.3 million) in the year ended December 31, 2009 from RMB 353.0 million in the year ended December 31, 2008. This was mainly due to the increase in revenues from advertising agency services.
 
Operating Costs and Expenses
 
Our operating costs and expenses increased by 35.9% to RMB 320.8 million (US$47.0 million) in the year ended December 31, 2009 from RMB 236.1 million in the year ended December 31, 2008.

 
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Cost of revenues. Our cost of revenues increased by 32.9% to RMB 270.2 million (US$39.6 million) in the year ended December 31, 2009 from RMB 203.4 million in year ended December 31, 2008. This increase was primarily due to a 40.9% increase of the media fee for CCTV Channel 4 programs to RMB 230.0 million (US$33.7 million) in the year ended December 31, 2009 from RMB 163.2 million in the year ended December 31, 2008. In 2008, we obtained the advertising rights to certain programs on CCTV Channel 4 for which we were committed to pay a fixed amount of media fees. We recorded such media fees as the cost of revenues on a straight-line basis and recorded the revenues from the advertising on such CCTV Channel 4 programs on a gross basis. As a result, the media fee costs for CCTV Channel 4 accounted for a substantial majority of our cost of revenues in 2008 and 2009. We sustained a loss on our advertising rights to CCTV Channel 4 programs in 2008 and 2009. In 2010, we reduced our procurement of the advertising rights to CCTV Channel 4 programs and as a result we expect that our cost of revenues will decrease in 2010.
 
Sales and marketing expenses. Our sales and marketing expenses increased by 111.6% to RMB 17.4 million (US$2.5 million) in the year ended December 31, 2009 from RMB 8.2 million in the year ended December 31, 2008. This increase was primarily due to the increase in an amount of RMB 7.6 million (US$1.1 million) in the compensation related to our increased sales efforts, including (i) the payment of sales commissions and bonuses of RMB 2.0 million (US$0.3 million) in connection with the 2009 Chinese New Year Gala and (ii) an increase in an amount of 5.6 million (US$0.8 million) in the compensation to our sales personnel as we recruited more senior sales executives, doubled the size of our sales force and increased the sales commissions in 2009. The increase, to a lesser extent, was due to (i) an increase in an amount of RMB 1.1 million (US$0.2 million) in depreciation as we purchased an office premises in late 2008 and (ii) an increase in an amount of RMB 2.1 million (US$0.3 million) in other expenses that principally include travel expenses, office costs and welfare and social security insurance expenses due to our increased efforts to develop and maintain direct customers and our doubled sales force.
 
General and administrative expenses. Our general and administrative expenses increased by 35.6% to RMB 33.2 million (US$4.9 million) in the year ended December 31, 2009 from RMB 24.5 million in the year ended December 31, 2008. This increase was primarily due to (i) an increase in an amount of RMB 7.9 million (US$1.2 million) in accounting and auditing, legal and consulting expenses, principally in connection with our compliance with U.S. securities laws as a public company and a litigation against Hasee Computer Co., Ltd. for unpaid advertising fee and (ii) an increase in an amount of RMB 1.6 million (US$0.2 million) in the compensation to our directors, management and employees. The increase was partially offset by a decrease in an amount of RMB 2.1 million (US$0.3 million) in our provision for accounts receivable recognized in general and administrative expenses as we recovered certain provision from a customer in 2009.
 
Operating Incomes
 
As a result of the foregoing, our operating income decreased by 22.3% to RMB 90.8 million (US$13.3 million) in the year ended December 31, 2009 from RMB 116.9 million in the year ended December 31, 2008. Our operating margin was 22.1% and 33.1% in the years ended December 31, 2009 and 2008, respectively.
 
Interest and Investment Income
 
Our interest and investment income decreased by 37.1% to RMB 9.5 million (US$1.4 million) in the year ended December 31, 2009 from RMB 15.1 million in the year ended December 31, 2008. This decrease was attributable to a decrease in an amount of RMB 1.8 million (US$0.3 million) in the interest income generated from our deposit with banks and a decrease in an amount of RMB 3.8 million (US$0.6 million) in the interest and investment income generated from the reduced aggregate principal amount of short-term investment products that we held in this period.
 
Income Tax Expenses
 
Our income tax expenses decreased by 28.9% to RMB 14.3 million (US$2.1 million) in the year ended December 31, 2009 from RMB 20.1 million in the year ended December 31, 2008. This decrease was mainly due to the decrease of our taxable income in this period.

 
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Net Income
 
As a result of the foregoing, our net income decreased by 21.7% to RMB 86.5 million (US$12.7 million) in the year ended December 31, 2009 from RMB 110.4 million in the year ended December 31, 2008. Our net margin was 21.0% and 31.3% in the years ended December 31, 2009 and 2008, respectively.
 
Year ended December 31, 2008 compared to year ended December 31, 2007
 
Revenues
 
Our total revenues increased by 32.4% to RMB 369.0 million in the year ended December 31, 2008 from RMB 278.6 million in the year ended December 31, 2007. This increase was attributable to the increase in revenues from our advertising agency services, partially offset by the decrease in revenues from our production and sponsorship services and a lack of revenues from special events services during this period.
 
Revenues from our advertising agency services increased by 64.9% to RMB 334.1 million in the year ended December 31, 2008 from RMB 202.6 million in the year ended December 31, 2007. This increase was primarily attributable to the fact that, while we report revenues from all other programs on a net basis, we use the gross method to report revenues generated from the sale of the advertising time slots of the CCTV Channel 4 programs newly secured in 2008. We recorded the gross amount received from our advertising clients for Channel 4 programs in 2008 as our advertising agency services revenues without netting the corresponding media fees. In addition, the increase of our advertising agency service revenues was also attributable to an increase in the total advertising time slots sold by us in the year ended December 31, 2008 compared to the year ended December 31, 2007, particularly for the CCTV Channel 2 and Channel 4 programs newly secured for 2008. Our overall sales of advertising time slots were lower in the second half of 2008 compared to the first half of 2008, primarily because (i) the global financial crisis that began in the third quarter of 2008 significantly slowed down China’s economic growth, and the advertising spending in China and the demand for our services began to decline in the fourth quarter of 2008; and (ii) the suspension of regularly scheduled television programs during Beijing Olympic Games in the third quarter of 2008 led to the cancellation or rescheduling of advertising time slots for certain of our television programs.
 
Revenues from our production and sponsorship services decreased by 41.8% to RMB 34.9 million in the year ended December 31, 2008 from RMB 60.0 million in the year ended December 31, 2007. The decrease was primarily due to the fact that certain temporary time slots, which CCTV was unable to sell otherwise and thus provided to us in 2007 to broadcast public interest announcements and generated significant revenues for us from our sponsorship services, were no longer available to us in 2008.
 
We recognized nil revenues from our special events services in the year ended December 31, 2008, while we recognized RMB 16.0 million in the year ended December 31, 2007 for our special events services to CCTV in connection with the 2006 FIFA World Cup. As of December 31, 2008, we had not received payment from CCTV and therefore no revenues were recognized in connection with the special events services we provided for 2008 Beijing Olympic Games in the year ended December 31, 2008.
 
Net Revenues
 
Our net revenues increased by 38.1% to RMB 353.0 million in the year ended December 31, 2008 from RMB 255.5 million in the year ended December 31, 2007.
 
Operating Costs and Expenses
 
Our operating costs and expenses increased by 433.5% to RMB 236.1 million in the year ended December 31, 2008 from RMB 44.3 million in the year ended December 31, 2007.

 
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Cost of revenues. Our cost of revenues increased by 574.7% to RMB 203.4 million in the year ended December 31, 2008 from RMB 30.1 million in year ended December 31, 2007. This significant increase was primarily due to the inclusion of the guaranteed media fees of RMB 163.2 million in the cost of revenues in the year ended December 31, 2008 as a result of our using the gross method of reporting for the revenues generated from the newly secured CCTV Channel 4 programs. Under our agreements with Guang Er Gao Zhi FTP, we are committed to pay a fixed amount of media fees of RMB 163.2 million for the CCTV Channel 4 programs that we secured through those agreements. The increase of our cost of revenues was to a lesser extent due to the increase of the compensation paid to our employees as a result of our workforce expansion in 2008.
 
Sales and marketing expenses. Our sales and marketing expenses increased by 46.5% to RMB 8.2 million in the year ended December 31, 2008 from RMB 5.6 million in the year ended December 31, 2007. This increase was primarily due to the increase in the average compensation per employee paid to our sales personnel as well as the increase in marketing expenses as the number of our customers expanded.
 
General and administrative expenses. Our general and administrative expenses increased by 187.9% to RMB 24.5 million in the year ended December 31, 2008 from RMB 8.5 million in the year ended December 31, 2007. This increase was primarily due to (i) the provision for doubtful accounts of RMB 4.3 million, (ii) the increase in the compensation paid to our expanded administrative personnel of RMB 5.4 million, and (iii) the increase of our professional service costs in connection with the preparation of our initial public offering in 2008 of RMB 2.3 million.
 
Operating Income
 
As a result of the foregoing, our operating income decreased by 44.7% to RMB 116.9 million in the year ended December 31, 2008 from RMB 211.3 million in the year ended December 31, 2007. Our operating margin was 33.1% and 82.7% in the years ended December 31, 2008 and 2007, respectively.
 
Interest and Investment Income
 
Our interest and investment income increased by 40.2% to RMB 15.1 million in the year ended December 31, 2008 from RMB 10.8 million in the year ended December 31, 2007. This increase was attributable to the interest income generated from the proceeds of our initial public offering and the interest and investment income generated from the greater aggregate principal amount of short-term investment products that we purchased in this period.
 
Income Tax Expenses
 
Our income tax expenses increased by 89.6% to RMB 20.1 million in the year ended December 31, 2008 from RMB 10.6 million in the year ended December 31, 2007. This increase was mainly due to the imposition of withholding tax in 2008 on part of the earnings from UIAL under the New EIT Law and the expiration on January 1, 2008 of the enterprise income tax exemption that our primary operating subsidiary in China, Universal, had enjoyed in 2007.
 
Net Income
 
As a result of the foregoing, our net income decreased by 47.0% to RMB 110.4 million in the year ended December 31, 2008 from RMB 208.3 million in the year ended December 31, 2007. Our net margin was 31.3% and 81.5% in the years ended December 31, 2008 and 2007, respectively.

 
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