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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on February 17, 2012

Registration No. 333-              

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



AdChina Ltd.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)

Cayman Islands
(State or other jurisdiction of
incorporation or organization)
  7370
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification Number)



20/F, Media Zone Jing An
No. 211 Shi Men Yi Road, Shanghai 200041
People's Republic of China
+86 (21) 6267-5588
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)



Law Debenture Corporate Services Inc.
400 Madison Avenue, 4th Floor
New York, New York 10017
(212) 750-6474
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:
Z. Julie Gao, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
c/o 42/F, Edinburgh Tower, The Landmark
15 Queen's Road Central
Hong Kong
+852 3740-4700
  Leiming Chen, Esq.
Simpson Thacher & Bartlett LLP
c/o ICBC Tower, 35/F
3 Garden Road
Central, Hong Kong
+852 2514-7600

Approximate date of commencement of proposed sale to the public:
as soon as practicable after the effective date of this registration statement.

            If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

            If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

            If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

            If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o



CALCULATION OF REGISTRATION FEE

 
Title of each class of
securities to be registered

  Proposed maximum
aggregate
offering price(1)

  Amount of
registration fee

 
Class A ordinary shares, par value US$0.00005 per share(2)(3)   US$100,000,000   US$11,460
 
(1)
Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

(2)
Includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes Class A ordinary shares that are issuable upon exercise of the underwriters' option to purchase additional shares. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.

(3)
American depositary shares issuable upon deposit of the Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-             ). Each American depositary share represents             Class A ordinary shares.

            The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.


Table of Contents

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion. Dated              , 2012

                          American Depositary Shares

GRAPHIC

AdChina Ltd.

Representing             Class A Ordinary Shares



          This is an initial public offering of American depositary shares, or ADSs, each representing             Class A ordinary shares of AdChina Ltd., or AdChina. AdChina is offering                          ADSs to be sold in the offering. [The selling shareholders identified in this prospectus are offering an aggregate of                           ADSs. AdChina will not receive any of the proceeds from the sale of the ADSs being sold by the selling shareholders.]

          Prior to this offering, there has been no public market for the ADSs or our ordinary shares. It is currently estimated that the initial public offering price per ADS will be between US$                          and US$                          . We have applied to list the ADSs on the Nasdaq Global Market under the symbol "ADCN."

          See "Risk Factors" on page 15 to read about factors you should consider before buying the ADSs.



          Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.



 
  Per ADS   Total  

Initial public offering price

  US$     US$    

Underwriting discount

  US$     US$    

Proceeds, before expenses, to AdChina

  US$     US$    

[Proceeds, before expenses, to the selling shareholders

  US$     US$   ]

          We plan to adopt a dual-class voting structure immediately prior to the completion of this offering, subject to our existing shareholders' approval. Under our proposed dual-class voting structure, our share capital will consist of Class A and Class B ordinary shares upon the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Each Class A ordinary share will be entitled to one vote per share, and each Class B ordinary share will be entitled to 20 votes per share and will be convertible at any time into one Class A ordinary share. Class A ordinary shares will not be convertible into Class B ordinary shares under any circumstances. Upon the completion of this offering, Mr. Alan Fangjun Yan, our founder, chairman and chief executive officer, and Ms. Yuying Zhao, Mr. Yan's wife, will hold 7,280,000 and 720,000 Class B ordinary shares, respectively, which, together with the 2,621,663 Class A ordinary shares held by individual shareholders who authorized Mr. Yan to vote these shares on their behalf under power of attorney and the 333,050 Class A ordinary shares that Mr. Yan has the right to acquire upon exercise of stock options within 60 days after the date of this prospectus, will represent an aggregate of         % of our aggregate voting power, assuming the underwriters do not exercise their option to purchase additional ADSs. See the related risk factors on pages 27 and 44 of this prospectus for a detailed discussion of risks associated with our dual-class share structure.

          To the extent the underwriters sell more than                          ADSs, the underwriters have the option to purchase up to an aggregate of                          additional ADSs from AdChina [and the selling shareholders] at the initial public offering price less underwriting discounts.



          The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on or about                          , 2012.

Goldman Sachs (Asia) L.L.C.   Credit Suisse



Prospectus dated                                        , 2012.


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TABLE OF CONTENTS

 
  Page  

Prospectus Summary

    1  

Risk Factors

    15  

Special Note Regarding Forward-Looking Statements

    46  

Use of Proceeds

    47  

Dividend Policy

    48  

Capitalization

    49  

Dilution

    51  

Exchange Rate Information

    53  

Enforceability of Civil Liabilities

    54  

Corporate History and Structure

    56  

Selected Consolidated Financial Data

    61  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    65  

Industry Background

    95  

Business

    100  

Principal PRC Regulations

    112  

Management

    118  

Principal and Selling Shareholders

    129  

Related Party Transactions

    133  

Description of Share Capital

    135  

Description of American Depositary Shares

    141  

Shares Eligible for Future Sale

    152  

Taxation

    154  

Underwriting

    161  

Legal Matters

    167  

Experts

    168  

Where You Can Find Additional Information

    169  

Conventions Which Apply to This Prospectus

    170  

Index to Consolidated Financial Statements

    F-1  



          You should rely only on the information contained in this prospectus or in any related free-writing prospectus that we have filed with the Securities and Exchange Commission, or the SEC. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

          We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus outside the United States.

          Until                  , 2012 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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PROSPECTUS SUMMARY

          The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under "Risk Factors," before deciding whether to buy our ADSs.


AdChina Ltd.

Overview

          We operate a leading integrated internet advertising platform in China, according to research conducted in April 2011 by iResearch Consulting Group, or iResearch, a third-party market research firm. Our online platform reached 486 million monthly unique visitors in December 2011 according to a report issued in February 2012 by DCCI, an internet data search agency in China, and our mobile platform provided our advertisers with access to 249 million monthly unique visitors in December 2011. Our online publisher base comprised 409 publishers in China, including 20 of the top 50 websites in China based on rankings from Alexa.com, a third-party website, as of February 1, 2012. We provide advertisers with targeted nationwide access to Chinese consumers, and we enable publishers who use our platform to better monetize their traffic.

          Based on our industry knowledge, advertisers historically have had few options to reach a nationwide audience in China due to its highly fragmented media distribution system and underdeveloped advertising services sector. As consumers have increasingly migrated online, the wide range of activities they pursue across millions of websites has led to increasing diversification of user traffic, which we believe prevents advertisers from realizing the promise of internet advertising: targeted, nationwide consumer reach. As a result, internet advertising spending as a percentage of total advertising spending in China lagged behind consumer time spent online as a percentage of time spent on all media platforms. We believe that a lack of reliable, third-party tools for advertisers to measure their return on investment and for publishers to offer effectively targeted advertising solutions have further contributed to this lag in internet advertising growth.

          Our mission is to become the indispensable platform for internet advertising in China. We offer a differentiated value proposition to advertisers that enables them to achieve a higher return on investment by matching individual advertising campaigns to their target audiences across a variety of formats and access points, enabling advertisers to realize the interactivity and precision targeting capabilities of the internet at scale. In doing so, we also help participating publishers better monetize their traffic and improve the liquidity of their advertising inventory. As a result, we provide internet users with value-added advertising content that is tailored to their interests.

          Our integrated internet advertising platform comprises software and related technical support services that automatically deliver targeted advertisements from advertisers to websites or mobile apps or sites of publishers with whom we have contractual arrangements. Our platform effectively integrates advertisers with publishers and delivers advertisements across different ad formats and different types of internet access devices. The core component of our platform, our AdChina AdManager system, tracks available advertising space from publishers, processes orders from advertisers, analyzes audience data and matches advertisements to their target audience almost instantaneously across the entire range of our publisher base. We have extended the reach of AdChina AdManager system by providing a hosted demand platform for advertising agencies and advertisers and a separate hosted supply platform for internet publishers that operate online websites or mobile apps or sites addressing mobile device access.

          We derive substantially all of our revenues from the provision of internet advertising services and solutions. We believe that our differentiated value proposition has contributed to the rapid

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increase in our advertisers, from 139 in 2009 to 264 in 2010 and 452 in 2011, at a three-year compound annual growth rate, or CAGR, of 80.3%. Our net revenues increased from US$10.8 million in 2009 to US$27.3 million in 2010 and US$50.7 million in 2011, at a three-year CAGR of 116.6%. Due to the significant cost of revenues and operating expenditures required to ramp up our business and operations at the early stage of development of our company, we incurred losses from continuing operations of US$2.2 million, US$2.0 million and US$18.6 million in 2009, 2010 and 2011, respectively. Our net losses reflected non-cash share-based compensation expenses in an aggregate amount of US$0.6 million in 2009, US$1.4 million in 2010 and US$21.2 million in 2011.

Our Industry

          China had the second largest advertising market in Asia and the third largest in the world in 2010, according to a report issued in December 2011 by ZenithOptimedia, a media market analysis company, and internet advertising has emerged as a viable advertising channel in China as a result of a growing internet user base and increasing time spent online per user. In China, internet advertising represented 18.2% of the overall advertising market in 2010 and is estimated to have surpassed newspaper and become the second largest ad spending category in 2011. By 2013, total internet advertising spending in China is expected to reach US$11.8 billion, representing a three-year CAGR of 35.7%, according to ZenithOptimedia.

          Internet advertising mainly involves display advertising and search advertising. Brand advertising represents the vast majority of display advertising, spanning from static display ads to rich media ads to in-video ads. Performance-based advertising, mainly represented by search ads, delivers measurable internet advertising results to advertisers. Display advertising, unlike search, is monetized based on display time or advertising impressions delivered rather than user clicks or other user actions. We believe that brand advertising will continue to represent the majority of spending on internet advertising in China due to an emerging branding economy, which is fueled by rapid growth in disposable income for a significant portion of the Chinese population. In the meantime, new categories of sites, such as online video, social networking sites and microblogs, open up new possibilities for display advertising as they attract increasing internet traffic.

          However, internet advertising has not yet achieved its full potential. As internet usage has grown in China, online traffic has become more fragmented, which we believe makes it increasingly difficult for advertisers to reach their target audience. Based on our industry knowledge, advertisers have historically found it challenging to define and accurately measure the impressions actually delivered to target consumers. On the other hand, many mid- and small-sized publishers in China lack the scale or sales force on a standalone basis to adequately engage with large advertisers, and the sales forces of large publishers normally focus on their premium inventory. At the same time, there is an absence of reliable third-party audience analytics for publishers. We believe that few intermediaries provide deep audience insight or robust technology-driven internet advertising services or solutions and there is an opportunity for intermediaries who can provide broad access to advertising space across leading publisher websites and advertising formats with the technological expertise to target and deliver advertisements in real time.

Our Strengths

          As we further discuss in "Business — Our Strengths," we believe that the following competitive strengths contribute to our success and differentiate us from our competitors:

    platform scale driving strong network effects for advertiser brand exposure and publisher inventory monetization;

    end-to-end platform deeply embedded on both the demand side and the supply side;

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    robust, proprietary technologies supporting our internet advertising platform;

    strategic positioning to collect consumer data and apply proprietary insights; and

    experienced management team with market knowledge and operational expertise.

Our Strategies

          Our goal is to become the indispensable platform for internet advertising in China. Specifically, we plan to achieve this objective by pursuing the following strategies:

    attract new advertisers and increase per advertiser spend on our platform;

    deepen and expand our relationships with publishers;

    promote the adoption of our demand platform for advertising agencies and advertisers and our supply platform for publishers;

    extend the functionality of our integrated platform; and

    pursue strategic investments, acquisitions and alliances.

Our Challenges

          Our ability to realize our business objective and execute our strategies is subject to risks and uncertainties, including the following:

    our limited operating history in a rapidly developing and evolving industry;

    our history of net losses;

    our ability to retain existing customers and publishers and attract new customers and publishers;

    the prospects for the continued development of the internet advertising industry;

    our ability to introduce new or enhanced services and solutions; and

    our ability to manage our growth.

          See "Risk Factors" and other information included in this prospectus for a discussion of these and other risks and uncertainties associated with our business and investing in our ADSs.

Corporate History and Structure

          We began our business operations in China in August 2007 through Shanghai New E-Media Advertising Co., Ltd., or New E-Media, a company established by our founder, Mr. Alan Fangjun Yan, and Mr. Yan's wife, Ms. Yuying Zhao, in Shanghai. New E-Media primarily engages in providing internet advertising services and solutions. Mr. Yan set up AdChina, Inc. in the United States in April 2007.

          Starting April 2008, as part of a single plan with the purpose of raising capital by issuing equity interests to new investors in a private placement, we (1) incorporated our current holding company, AdChina Ltd., in the Cayman Islands and engaged in a series of transactions in which AdChina Ltd. acquired AdChina, Inc.; (2) established Kendall Technology Development (Shanghai) Co., Ltd. (formerly, Kendall (Shanghai) Investment & Consulting Co., Ltd.), or Kendall, our wholly owned subsidiary in China, to control and consolidate the assets related to our China operations; and (3) issued Series A preferred shares to a substantial group of new investors. Kendall primarily engages in providing technology consulting and administrative services. As we did not conduct any business through AdChina, Inc., we dissolved this entity in June 2011.

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          Prior to 2011, we also operated an e-commerce business in China through contractual arrangements between Kendall and Topweaver Digital Technology Co., Ltd., or Topweaver, a PRC domestic company owned by our founder. Topweaver sold merchandise sourced from manufacturers and distributors in China and operated the YoBrand.com website. To focus on our core businesses, Kendall terminated these arrangements with Topweaver in September 2010.

          In March 2011, we established AdChina Media (Hong Kong) I Limited, AdChina Media (Hong Kong) II Limited, and AdChina Mobile Media (Hong Kong) Limited, our wholly owned subsidiaries in Hong Kong. We plan to use at least one of these entities to enter into commercial contracts with customers or advertisers who are domiciled outside of China. We have no current plans for any of these entities to enter into contractual arrangements with variable interest entities in China.

          To more clearly define our business divisions, we established Eagle-eyed Technology Development (Shanghai) Co., Ltd., or Eagle-eyed, in June 2011 as a wholly owned subsidiary of AdChina Media (Hong Kong) I Limited in China and Shanghai Yihong Advertising Co., Ltd., or Yihong, through Mr. Yan and Mr. Huayi Cheng as Yihong's shareholders in September 2011. Eagle-eyed was subsequently renamed as Shanghai Menlo Network Technologies, Inc., or Menlo, in January 2012. Menlo primarily engages in providing technology consulting and solutions in connection with the various software systems under our demand side and supply side platforms. Yihong is another consolidated affiliated entity of ours and it primarily engages in providing internet advertising services and solutions.

          In November 2011, we established Shanghai Yizhun Culture and Media Co., Ltd., or Yizhun, as a wholly owned subsidiary of Menlo. Yizhun does not currently conduct any business. In the future, we expect Yizhun to engage in internet advertising business to further streamline our business divisions after it and its offshore parent company obtain the necessary qualifications required under applicable PRC law.

          PRC laws and regulations currently limit foreign ownership of companies that provide advertising services. To comply with these restrictions, we provide internet advertising services and solutions in China through Kendall's contractual arrangements with our consolidated affiliated entities, New E-Media and Yihong.

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          The following diagram illustrates our anticipated shareholding, voting and corporate structure immediately after the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs:

GRAPHIC


(1)
New E-Media is our consolidated affiliated entity. New E-Media is 91% owned by our founder, Mr. Alan Fangjun Yan, and 9% owned by Mr. Yan's wife, Ms. Yuying Zhao, both of whom are PRC citizens. We exercise effective control over New E-Media through its contractual arrangements with Kendall. See "Corporate History and Structure."
(2)
Yihong is our consolidated affiliated entity. Yihong is 95% owned by our founder, Mr. Alan Fangjun Yan, and 5% owned by our chief technology officer, Mr. Huayi Cheng, both of whom are PRC citizens. We exercise effective control over Yihong through its contractual arrangements with Kendall. See "Corporate History and Structure."

          Our wholly owned PRC subsidiary Kendall entered into a series of contractual arrangements with our consolidated affiliated entities and their shareholders that enable us to exercise effective control over the consolidated affiliated entities through proxy agreements and receive substantially all of the economic benefits of the consolidated affiliated entities in the form of service fees in consideration for the technical services provided by Kendall. As a result of these contractual arrangements, we are considered the primary beneficiary of the consolidated affiliated entities and we have consolidated the financial results of the consolidated affiliated entities in our consolidated financial statements in accordance with generally accepted accounting principles in the United

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States, or U.S. GAAP. For a description of these contractual arrangements, see "Corporate History and Structure." For a detailed description of the regulatory environment that necessitates the adoption of our corporate structure, see "Principal PRC Regulations." For a detailed description of the risks associated with our corporate structure and the contractual arrangements that support our corporate structure, see "Risk Factors — Risks Related to Our Corporate Structure."

Corporate Information

          Our principal executive offices are located at 20/F, Media Zone Jing An, No. 211 Shi Men Yi Road, Shanghai, 200041, People's Republic of China. Our telephone number at this address is +86 (21) 6267-5588. Our registered office in the Cayman Islands is located at the offices of Corporate Filing Services Limited, 4th Floor, Harbour Center, P.O. Box 613, George Town, Grand Cayman, Cayman Islands. We also have offices in Beijing, Guangzhou and Xiamen in China.

          Investors should submit any inquiries to the address and telephone number of our principal executive offices set forth above. Our corporate website is www.adchina.com and the information contained on this website is not a part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc.

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THE OFFERING

          The following assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.

Price per ADS

  We currently estimate that the initial public offering price will be between US$                          and US$                          per ADS.

ADSs offered by us

 

                          ADSs

[ADSs offered by the selling shareholders

 

                          ADSs]

ADSs to Class A ordinary share ratio

 

Each ADS represents                          Class A ordinary shares, par value US$0.00005 per share.

ADSs outstanding immediately after this offering

 

                          ADSs

Ordinary shares outstanding immediately after this offering

 

                          ordinary shares, par value US$0.00005 per share, comprised of                          Class A ordinary shares and                          Class B ordinary shares.

The ADSs

 

The depositary will hold the Class A ordinary shares underlying your ADSs and you will have rights as provided for in the deposit agreement.

 

We have no plan to pay dividends in the foreseeable future. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses.

 

You may turn in your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

To better understand the terms of the ADSs, you should carefully read the "Description of American Depositary Shares" section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

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Ordinary shares

 

We plan to adopt a dual-class voting structure immediately prior to the completion of this offering, subject to our existing shareholders' approval. Under our proposed dual-class voting structure, our ordinary share capital will consist of Class A ordinary shares and Class B ordinary shares upon the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Subject to certain exceptions, holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to 20 votes per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

 

We plan to issue Class A ordinary shares represented by our ADSs in this offering.

 

Immediately upon the completion of this offering, we expect (i) 7,280,000 ordinary shares held by our founder, chairman and chief executive officer, Mr. Alan Fangjun Yan through Universe Access Enterprises Limited, a limited liability company incorporated in the British Virgin Islands, of which Mr. Yan is the sole director, and 720,000 ordinary shares held by Mr. Yan's wife, Ms. Yuying Zhao, through Master Field Management Limited, a limited liability company incorporated in the British Virgin Islands, will be automatically re-designated as Class B ordinary shares on a 1-for-1 basis, (ii) all preferred shares will be automatically converted into and re-designated as 44,518,750 Class A ordinary shares on a 1-for-1 basis and (iii) all other outstanding ordinary shares will be re-designated as Class A ordinary shares on a 1-for-1 basis. In addition, all options, restricted share units and other types of awards under our existing and future share incentive plans, whether granted prior to the completion of this offering or to be granted after this offering, will entitle the holders to the equivalent number of Class A ordinary shares once the granted awards are vested and/or exercised. As a result, our founder, chairman and chief executive officer, Mr. Alan Fangjun Yan, together with Ms. Zhao, will beneficially own (1) 8,000,000 Class B ordinary shares; (2) 2,621,663 Class A ordinary shares held by individual shareholders who authorized Mr. Yan to vote these shares on their behalf under power of attorney; and (3) 333,050 Class A ordinary shares that Mr. Yan has the right to acquire upon exercise of options or vesting of restricted share units.

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Option to purchase additional ADSs

 

We [and the selling shareholders] have granted the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of                          additional ADSs.

Use of proceeds

 

We estimate that we will receive net proceeds of approximately US$                           million from this offering, assuming an initial public offering price of US$                          per ADS, which is the mid-point of the estimated range of the initial public offering price set forth on the front cover of this prospectus (after deducting underwriting discounts and commission and estimated offering expenses payable by us).

 

We intend to use the net proceeds from this offering for, among other things, continuing investment in our technology and solutions development, acquiring strategic advertising inventory, pursuing sales and marketing initiatives to facilitate our geographical expansion, and for general corporate purposes and strategic investments and acquisitions (although we are not currently negotiating any such acquisitions). See "Use of Proceeds" for more information.

 

[We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.]

Listing

 

We have applied to list the ADSs on the Nasdaq Global Market, or Nasdaq.

Proposed Nasdaq trading symbol

 

ADCN

Depositary

 

JPMorgan Chase Bank, N.A.

Lock-up

 

We, [the selling shareholders,] our directors and executive officers, and all of our other shareholders and [some of our option holders] have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus, subject to certain exceptions.

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Corporate structure

 

We are a holding company and conduct our operations primarily through our wholly owned subsidiaries and consolidated affiliated entities in China. As a result, our ability to pay dividends on our ordinary shares (including ordinary shares represented by ADSs) after the completion of this offering depends upon dividends paid by our PRC subsidiaries. Our PRC subsidiaries have never paid dividends and will not be able to pay dividends until they generate accumulated profits and meets the requirements for statutory reserve funds under PRC law. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Holding Company Structure." In addition, because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

Risk factors

 

See "Risk Factors" and other information included in this prospectus for a discussion of risks you should carefully consider before investing in the ADSs.

          The number of ordinary shares that will be outstanding immediately after this offering:

    assumes conversion and redesignation of all outstanding Series A, Series B, Series C and Series D preferred shares into 44,518,750 Class A ordinary shares immediately prior to the completion of this offering;

    assumes no exercise of the underwriters' option to purchase additional ADSs;

    excludes             ordinary shares issuable upon the exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of US$             per share, and             ordinary shares issuable pursuant to our restricted share unit grants; and

    excludes             ordinary shares reserved for future issuances under our share incentive plans.

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Our Summary Consolidated Financial and Operating Data

          The following summary consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the summary consolidated balance sheet data as of December 31, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus and should be read in conjunction with those consolidated financial statements and notes thereto and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2009 has been derived from our audited consolidated financial statements not included herein. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results for any period are not necessarily indicative of results to be expected for any future period.

 
  Year Ended December 31,  
 
  2009   2010   2011  
 
  (US$ thousands except share, ADS, per share, per ADS and advertiser and publisher data)
 

Consolidated Statement of Operations Data:

                   

Net revenues

    10,796     27,274     50,671  

Cost of revenues(1)

    (7,330 )   (14,612 )   (24,567 )
               

Gross profit

    3,466     12,662     26,104  

Operating expenses:

                   
 

Technology and development(1)

    (700 )   (2,011 )   (2,753 )
 

Sales and marketing(1)

    (3,057 )   (7,985 )   (15,512 )
 

General and administrative(1)

    (2,206 )   (4,433 )   (27,188 )
 

Other operating income

        277     996  
               

Total operating expenses

    (5,963 )   (14,152 )   (44,457 )
               

Operating loss from continuing operations

    (2,497 )   (1,490 )   (18,353 )

Interest income

    50     45     285  

Interest expense

    (44 )        

Other income/(expenses)

    (1 )   (92 )   130  
               

Loss before income tax

    (2,492 )   (1,537 )   (17,938 )

Income tax benefit/(expense)

    263     (426 )   (617 )
               

Loss from continuing operations, net of tax

    (2,229 )   (1,963 )   (18,555 )

Loss from discontinued operations, net of tax

    (196 )   (1,055 )    
               

Net loss

    (2,425 )   (3,018 )   (18,555 )
               

Deemed dividends on Series C convertible preferred shares

            (1,942 )

Net loss attributable to ordinary shareholders

    (2,425 )   (3,018 )   (20,497 )
               

Loss per share, basic and diluted:

                   
 

Continuing operations

    (0.25 )   (0.20 )   (1.67 )
 

Discontinued operations

    (0.03 )   (0.10 )    
               
 

Total

    (0.28 )   (0.30 )   (1.67 )
               

Loss per ADS, basic and diluted:

                   
 

Continuing operations

                   
 

Discontinued operations

                   
 

Total

                   

Weighted average shares used in calculating basic and diluted loss per share

    8,770,000     9,954,250     12,266,696  

Pro forma loss per share, basic and diluted:(2)(6)

                (0.35 )

Pro forma loss per ADS, basic and diluted:(2)(6)

                   

Weighted average shares used in calculating basic and diluted pro forma loss per share

                53,228,826  

Selected Non-GAAP Financial Data(3):

                   

Adjusted income (loss) from continuing operations

    (1,600 )   (573 )   2,619  

Adjusted EBITDA

    (1,646 )   255     3,712  

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  Year Ended December 31,  
 
  2009   2010   2011  
 
  (US$ thousands except share, ADS, per share, per ADS and advertiser and publisher data)
 

Selected Operating Data:

                   

Number of advertisers(4)

    139     264     452  

Net revenues per advertiser

    78     103     112  

Number of online publishers(5)

    302     403     409  

(1)
Including share-based compensation expenses as set forth below:

   
  Year Ended December 31,  
   
  2009   2010   2011  
   
  (US$ thousands)
 
 

Cost of revenues

    49     45     361  
 

Technology and development

    10     134     410  
 

Sales and marketing

    320     783     747  
 

General and administrative

    250     428     19,656  
                 
 

Total

    629     1,390     21,174  
                 
(2)
For the year ended December 31, 2011, pro forma basis reflects the assumed conversion of all of our outstanding Series A, Series B and Series C preferred shares as of January 1, 2011 (or at the time of issuance, if later).

(3)
See "— Non-GAAP Financial Measures."

(4)
Represents the number of advertisers who used our platform to execute advertising campaigns during the period indicated.

(5)
Represents the number of publishers on whose websites we had the right to place advertisements at the end of the period indicated.

(6)
In February 2012, we issued 3,339,164 Series D preferred shares and repurchased 3,250,000 outstanding ordinary shares. After giving effect to the issuance of Series D preferred shares, the automatic conversion of Series D preferred shares into Class A ordinary shares immediately upon the completion of this offering and the repurchase of ordinary shares as if such events took place on December 31, 2011, our pro forma basic and diluted loss per share for the year ended December 31, 2011 would have been US$(0.35) and US$(0.35), respectively, and our pro forma basic and diluted earnings per ADS for the year ended December 31, 2011 would have been             and             , respectively.

 
  As of December 31,  
 
  2009   2010   2011  
 
  (US$ thousands)
 

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents

    12,030     47,750     53,642  

Total current assets

    22,886     67,527     78,955  

Total assets

    24,219     69,801     82,111  

Total current liabilities

    2,621     11,220     17,688  

Total liabilities

    2,621     11,220     17,688  

Total equity

    21,598     58,581     64,423  

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Non-GAAP Financial Measures

          We use two financial measures not calculated in accordance with U.S. GAAP. Adjusted income/(loss) from continuing operations is a non-GAAP financial measure which excludes share-based compensation from loss from continuing operations. Adjusted EBITDA is a non-GAAP financial measure which represents loss from continuing operations plus interest expense, income tax expense or benefit, depreciation and amortization and share-based compensation less interest income. The computation of adjusted income/(loss) from continuing operations and adjusted EBITDA are as follows.

 
  Year Ended December 31,  
 
  2009   2010   2011  
 
  (US$ thousands)
 

Loss from continuing operations

    (2,229 )   (1,963 )   (18,555 )

Add: Share-based compensation

    629     1,390     21,174  
               

Adjusted income (loss) from continuing operations

    (1,600 )   (573 )   2,619  
               

Loss from continuing operations

   
(2,229

)
 
(1,963

)
 
(18,555

)

Add: Income tax expense/(benefit)

    (263 )   426     617  

          Depreciation and amortization

    223     447     761  

          Interest expense

    44          

          Interest income

    (50 )   (45 )   (285 )

          Share-based compensation

    629     1,390     21,174  
               

Adjusted EBITDA

    (1,646 )   255     3,712  
               

          The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP and may not be comparable to other companies' non-GAAP measures with similar titles. The information about our financial performance provided by adjusted income/(loss) from continuing operations is used by our management for a variety of purposes. We regularly communicate this financial measurement result to our board of directors and discuss with the board our interpretation of such results. We consider this financial measurement as an important element in our budgeting process. In addition, we use our adjusted income/(loss) from continuing operations as a key performance target in determining certain compensation for executives, largely because we believe that this measure is indicative of the how the fundamental business is performing and is being managed.

          We use adjusted income/(loss) from continuing operations and adjusted EBITDA to enhance our understanding of our operating performance in the ordinary, ongoing and customary course of our operations. We historically have found it helpful, and believe that investors have found it helpful. We also provide information relating to our adjusted income/(loss) from continuing operations and adjusted EBITDA so that analysts, investors and other interested persons have the same data that we use to assess our core operating performance. We believe that adjusted income/(loss) from continuing operations and adjusted EBITDA should be viewed only as a supplement to the GAAP financial information. We also believe, however, that providing this information in addition to, and together with, GAAP financial information permits analysts, investors and other interested persons to obtain a better understanding of our core operating performance and to evaluate the efficacy of the methodology and information used by our management to evaluate and measure such performance on a standalone and a comparative basis.

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          The use of adjusted income/(loss) from continuing operations and adjusted EBITDA has certain limitations. Share-based compensation expense has been and will be incurred and is not reflected in the presentation of adjusted income/(loss) from continuing operations. Share-based compensation expense, depreciation and amortization expense for various long-term assets, income tax expense or benefit, interest expense and interest income have been and will be incurred and are not reflected in the presentation of adjusted EBITDA. Each of these items should also be considered in the overall evaluation of the results. We compensate for these limitations by providing the relevant disclosure of the depreciation and amortization, interest expense, income tax expense and other relevant items both in the reconciliations to the U.S. GAAP financial measures and in the consolidated financial statements, all of which should be considered when evaluating the performance.

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RISK FACTORS

          An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

We are a relatively young company subject to risks and uncertainties associated with operating in a rapidly developing and evolving industry. Our limited operating history makes it difficult to evaluate our business and prospects.

          We launched our integrated internet advertising platform in China in 2007 and have experienced rapid growth since then. We expect we will continue to expand as we grow our advertiser and publisher bases and explore new market opportunities. However, due to our limited operating history, our historical growth rate may not be indicative of our future performance. We cannot assure you that we will grow at the same rate as we did in the past. You should consider our prospects in light of the risks and uncertainties fast-growing companies with a limited operating history may encounter. Today, as a fast growing company in the rapidly developing and evolving internet advertising industry, we face numerous risks and uncertainties. Some of these risks relate to our ability to:

    capitalize on our investments to change our historical loss position and achieve and sustain profitability;

    expand and further develop our relationships with advertisers, advertising agencies and publishers and maintain and increase our advertising space;

    maintain the technological advantages of our integrated internet advertising platform and keep up with the technological developments or new business models of the internet advertising industry;

    effectively manage our growth;

    compete effectively with our competitors in the internet advertising industry and increase our share of advertising spending; and

    attract and retain qualified personnel.

          You should consider our business and prospects in light of the risks and uncertainties we face as a fast growing company operating in a rapidly developing and evolving market. We may not be successful in addressing the risks and uncertainties listed above, among others, which may materially and adversely affect our business prospects.

We incurred losses in 2009, 2010 and 2011 and may continue to incur losses in the future.

          We incurred net losses of US$2.4 million, US$3.0 million and US$18.6 million in 2009, 2010 and 2011, respectively, primarily due to the significant cost of revenues and operating expenditures required to ramp up our business and operations at the early stage of development of our company and a significant increase in share-based compensation expenses in 2011. Our ability to achieve profitability is affected by various factors, many of which are beyond our control. For example, our revenue growth and profitability depend on the continuous development of the internet advertising industry in China and advertisers' allocation of more advertising budgets to internet advertising and mobile apps. We may continue to incur losses in the future due to our

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continued investments in technology, research and development, our continued sales and marketing initiatives, and the costs of procuring advertising space or for other reasons. We may also continue to incur losses in the future due to changes in the macroeconomic and regulatory environment or competitive dynamics and our inability to respond to these changes in a timely and effective manner.

We generate our revenues almost entirely from advertising services and solutions we provide on our integrated internet advertising platform. If we fail to retain existing customers or publishers, attract new customers or deepen or expand our relationships with publishers, our financial condition, results of operations and prospects may be materially and adversely affected.

          We generate our revenues almost entirely from advertising services and solutions we provide to customers on our internet advertising platform. We use the term customer to refer to the party with whom we sign a contract for an advertising campaign, which may be the advertiser or an advertising agency that represents the advertiser. In order to retain existing customers and attract new customers by maximizing their return on their investment, we depend on our ability to match each individual advertising campaign to its target audience across formats and access points, enabling customers to leverage the interactivity and precision targeting capabilities of the internet. In doing so, we also help participating publishers who use our platform to better monetize their advertising space and improve their liquidity. We cannot assure you that we will successfully retain existing customers or attract new customers in the future, or maintain or improve our relationships with our publishers. If our advertisers determine that their expenditures on our internet advertising platform do not generate sufficient returns, they may allocate a portion or all of their advertising budgets to other advertising channels and reduce or discontinue business with us. Since most of our customers are not bound by long-term contracts, they may also amend or terminate advertising arrangements with us easily without incurring liabilities. Failure to retain existing customers or attract new customers to advertise on our platform may materially and adversely affect our business, financial condition, results of operations and prospects. In addition, our success depends in part on our ability to effectively manage our advertising space, which we refer to as inventory, through publishers who may not ensure us a consistent supply of advertising space. If our publishers are no longer satisfied with the results generated by using our platform to monetize their advertising space, they may reduce or discontinue their cooperation with us and we would lose a portion or all of the inventory through which we can deliver advertisements. In the event that we lose publishers or access to a portion of their advertising inventory, we may incur significant costs replacing the publishers or lost advertising space in a timely manner or at all, which may adversely affect our revenues.

If the internet advertising industry fails to continue to develop, or if the internet advertising market develops more slowly than expected, our profitability and prospects may be materially and adversely affected.

          Our business and prospects depend on the continuing development of the internet advertising industry in China as we derive substantially all of our revenues from our internet advertising services and solutions. Both the internet and broadband penetration rates in China are relatively low as compared to those in many developed countries. Many advertisers in China have limited experience with internet advertising, have historically allocated less significant portions of their advertising budgets to internet advertising and may consider internet advertising a less attractive channel than traditional broadcast and print media in promoting their products and services. Our current or potential advertisers may have limited experience with the internet as an advertising channel, and may not consider the internet as effective in promoting their products and services as other media. Our profitability and prospects depend on the continuing development of the internet

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advertising industry in China and may be affected by a number of factors, many of which are beyond our control, including:

    our ability to keep up with technological innovation or new business models of the internet advertising industry or the changing requirements of advertising agencies, advertisers and publishers;

    acceptance of internet advertising as an effective marketing channel;

    changes in government regulations or policies affecting the internet advertising industry; and

    internet usage and penetration rates in China.

We operate in a rapidly developing and evolving industry. If we fail to introduce new or enhanced services and solutions to keep up with the technological developments or new business models of the internet advertising industry, or the changing requirements of customers and publishers, our business, financial condition and results of operations may be materially and adversely affected.

          The internet and internet advertising industries are rapidly evolving and are subject to continuous technological developments and changing customer demands. Our future success depends in part upon our ability to enhance and integrate our existing services and solutions and to introduce new, competitively priced services and solutions with features that meet evolving technological developments and customer requirements, all in a timely and cost-effective manner. For example, we must develop and promote new services and solutions to address the emerging mobile internet market in order to maintain our competitive position. If we do not adapt our services and solutions to such changes in an effective and timely manner, we may lose customers or publishers who currently use the services and solutions provided over our internet advertising platform. Furthermore, changes in technologies or new business models may require substantial investments in product development or infrastructure. We may not execute our business strategies successfully due to a variety of reasons such as technical hurdles, misunderstanding or erroneous prediction of market demand or lack of necessary resources. Failure to keep up with technological development or new business models of the internet advertising industry or the changing requirements of customers and publishers may result in our services and solutions being less attractive to existing or potential customers, which in turn, may materially and adversely affect our business, results of operations and prospects.

          A number of factors, including the following, could have a negative impact on the success of the services and solutions we provide over our internet advertising platform:

    delays or difficulties in developing, integrating or customizing new services and solutions;

    our competitors' introduction of new services or solutions ahead of us, or their introduction of superior or cheaper services or solutions;

    customers' development of in-house services and solutions that could eliminate the need for our services and solutions;

    failure to anticipate changes in customers' or publishers' requirements;

    publishers' choice to monetize their advertising space without using our services and solutions; and

    failure to react in a timely manner to greater adoption of new advertising pricing models.

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If we do not effectively manage our growth, our operating performance will suffer and we may lose customers.

          We have experienced rapid growth in the number of our advertisers, the number of our publishers, and our headcount and operations, and we may experience continued growth in our business through internal growth and acquisitions or strategic alliances. Our expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. Our planned expansion will also require us to maintain the consistency of our service offerings to ensure that our market reputation and leadership does not suffer as a result of any deviations, whether actual or perceived, in the quality of our service offerings. Our future results of operations depend to a large extent on our ability to manage this expansion and growth successfully. In particular, continued growth may make it more challenging for us to accomplish the following:

    ensure current employee productivity and recruit, train and retain highly skilled personnel, including sales and marketing, research and development, customer service and internet advertising services specialists;

    manage the risks related to our acquisition and utilization of advertising space;

    attract and retain customers and publishers;

    successfully expand our internet advertising platform to accommodate mobile internet usage;

    successfully expand our internet advertising platform to support performance-based solutions; and

    develop and improve our operational, financial and management controls and maintain adequate reporting systems and procedures.

          We cannot assure you that our current platform and technology, procedures and controls will be adequate to support our contemplated growth. If we fail to manage our growth effectively, our business, results of operations and prospects may be materially and adversely affected.

Many of our existing and potential publishers are pursuing emerging or unproven business models. If their business models prove not to be viable, there could be a substantial decline in demand for our services.

          Since the proliferation of broadband and mobile internet and the subsequent monetization of internet services and applications are relatively recent phenomena in China, many of our existing and potential publishers' business models that center on the delivery of internet services and applications to users remain unproven. For example, user-generated content websites, microblogging and social networking companies are among the publishers in our publisher base. These publishers will no longer be able to provide us with advertising space if their internet services or applications fail to generate a sufficient return on their investment or if their own business models fail to succeed. Moreover, some of our existing and potential publishers are pursuing businesses in areas which have undefined regulatory parameters in China, and such companies face a risk of having their activities restricted or shut down for regulatory reasons. If our existing and potential publishers' business models are not successful, we could experience difficulties in meeting our customers' advertising needs, which may result in a substantial decrease in the demand for our services from our existing and potential customers, which would harm our results of operations and financial condition, and our growth and prospects could be materially and adversely affected.

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We depend on publishers for advertising space, and consolidation of publishers or any decline or shortage in the supply of advertising space available through our platform could cause our revenues to decline or cause our cost of revenues to increase.

          Over 98% of our revenues in 2010 and 2011 were attributable to monetization of internet audience originated from advertising space that we purchase from publishers. In many instances, publishers can change the amount of advertising space they make available to us at any time and, therefore, affect our revenues. Alternatively, publishers may place significant restrictions on our offerings. These restrictions may prohibit advertisements from specific advertisers or specific industries, or restrict the use of certain creative content or formats. In addition, the advertising space provided by publishers may also be limited by more stringent requirements of any future PRC laws and regulations on the supervision of internet advertisements and internet video advertisements. If a publisher decides not to make advertising space available to us, or decides to charge higher prices or places significant restrictions on the use of such space, we may not be able to find advertising space from other publishers that satisfies our requirements in a timely and cost-effective manner or at all. In addition, the number of advertisers that acquire space from websites either directly or indirectly through their representatives continues to increase, which may have a negative impact on the availability and price of advertising space. Consolidation of publishers could eventually lead to a concentration of desirable space on a small number of websites, which could limit or reduce the supply of space available to us or increase the price of space to us. We cannot assure you that we will be able to acquire advertising space that meets our advertisers' requirements. If any of these things occur, our operating costs may increase or our revenues may decline.

Our growth prospects could be limited if internet advertising pricing models other than the CPT model fail to gain wider acceptance among industry participants in China.

          Currently, the most prevalent internet advertising sales model in China is cost-per-time, or CPT, whereby publishers are paid based on the period of time an internet advertisement is displayed regardless of the number of times the advertisement is viewed, which are referred to as impressions, and regardless of the advertisement's effectiveness. A majority of our business is currently based on a cost-per-thousand impressions, or CPM, pricing model, where the customer pays us based on the number of impressions. We believe that part of our future growth may come from a shift to other sophisticated internet advertising pricing models such as cost-per-action, or CPA, which are based on some measure of the advertisement's effectiveness. If the CPM or CPA pricing models fail to gain wider acceptance in China, the market for our services may develop more slowly than we expect, or even decline. If the market fails to shift to these more sophisticated models, our growth prospects could be materially and adversely affected.

If we are unable to accurately price advertising space on our platform, our margins may decline or our growth could be adversely affected.

          We are developing performance-based solutions that we expect to offer to customers on a CPA basis. We currently set the rates for substantially all of our advertising services and solutions on a CPM basis and we have minimal experience with charging customers on a CPA basis. A majority of our online publishers currently charge us for the use of their advertising space on a CPM basis, and there is no assurance that they would be willing to adopt a CPA pricing model. If customers pay us on a CPA basis and we pay publishers on a CPM basis, this could result in us paying a higher price to our publishers for advertising space than our customers are effectively paying us for such space if we underestimate the number of impressions it actually takes to achieve an action, in which case our margins may decline and our results of operations would suffer. If we overestimate the number of impressions it actually takes to achieve an action, we may

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not be able to locate sufficient advertising space at the prices we would be willing to pay, which could hamper our growth and also cause our results of operations to suffer.

Failure to retain large advertising agencies or attract additional agencies on favorable terms could materially and adversely affect our gross margin. In addition, any further consolidation of advertising agencies in China could increase the bargaining power of larger advertising agencies, which may adversely impact our gross margin.

          We have signed a significant portion of our advertising agreements with various third-party advertising agencies. In China's advertising industry, advertising agencies typically have longer histories with the advertisers they represent than we do. As a relatively young company, we intend to strategically leverage advertising agencies' resources to increase our sales and expand our advertiser base so as to enlarge our share of the overall advertising spending. As a result, we increasingly rely on third-party advertising agencies to maintain our relationships with our advertisers. In consideration for the third-party advertising agencies' services, we pay them commissions primarily based on the volume of business they bring to us. If we fail to retain and enhance the business relationships with third-party advertising agencies, we may suffer from a loss of advertisers and our business, financial condition, results of operations and prospects may be materially and adversely affected. In addition, there has been some consolidation in China's internet advertising market. If this trend continues, a small number of large advertising agencies may be in a position to demand higher commissions for advertising agency services, which could reduce our gross margin.

We expect to continue to experience intense competition. If we fail to compete effectively against other internet advertising companies and other internet advertising solution providers, we could lose customers or advertising space from publishers and our revenue may decline.

          As demand for internet advertising services and solutions continues to increase, we expect new competitors to enter the market and existing competitors to allocate more resources to developing and marketing internet advertising services and solutions. As a result, we expect competition in the internet advertising market to intensify. We compete both for internet advertising business from advertisers and advertising agencies and for high-quality advertising space from publishers. Our primary current and potential competitors include internet advertising companies and solution providers such as Adsit! Media Corporation, Adsame Networks Technology Incoporated, Shanghai MediaV Advertising Co., Ltd., YoYi Media (Beijing) Interactive Advertising Co., Ltd., hdtMEDIA Corporation and Shanghai Quantone Digital Advertising Co., Ltd., an entity related to Allyes Online Media Holding Ltd. We also compete for a share of advertisers' overall marketing spending with large internet companies and traditional media, including website publishers with their own sales forces that sell their advertising space directly to advertisers; major internet portals and search companies; and direct marketing, television, radio, cable and print advertising companies. Our ability to compete depends on many factors, including price, return on advertising expenditures, the market acceptance of internet advertising pricing models other than the CPT model, availability of quality advertising space, the effectiveness of our technologies and the quality of our customer service. If these factors are unfavorable to us, we may not be able to compete effectively or maintain our market position.

          Among our existing and potential competitors, some have longer operating histories, broader customer reach and significantly greater financial, technical and marketing resources than we do. These competitors may engage in more extensive research and development, marketing campaigns and sales efforts than we can and develop or promote services and solutions that are similar to or better than ours. In addition, our international peers may establish cooperative arrangements with our domestic competitors. This may significantly enhance their competitive advantages in the

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internet advertising industry in China. New and increased competition is likely to result in price reductions, reduced margins or a loss of our market leading position, any of which could cause us to lose customers or advertising space with publishers or decrease the advertising spending on our platform, which may materially and adversely affect our business, results of operations and financial condition.

Limitations on our ability to collect and use data derived from our internet advertising platform, or challenges to our right to collect and use such data, could significantly diminish the value of our technologies and services and cause us to lose customers and revenues.

          When a user visits a publisher's website on our platform, we use technologies, including cookies, to collect information such as the user's IP address, browsing history, ads delivered by us that have been previously viewed by the user and responses by the user to those ads, as well as any data reported by the user such as gender, age or income. In order to plan and optimize advertising campaigns effectively, we need to access and analyze this information. Certain of our publishers may prohibit or limit our collection or use of this data. The broad adoption of certain user-end computer software or programs may pose technical restrictions on our ability to legally collect user data. Interruptions, failures or defects in our data collection systems, as well as privacy concerns regarding the collection of user data, could also limit our ability to analyze data from our customers' advertising campaigns. In addition, there is no assurance that the Chinese government will not adopt legislation that prohibits or limits collection of user data on the internet and the use of such data, or that third parties will not bring lawsuits against us relating to internet privacy and data collection. If that happens, we may be unable to provide effective technologies and services to customers and we may lose customers or revenues. Lawsuits or administrative inquiries could be costly and divert management resources, and the outcome of such lawsuits or inquiries may be uncertain and may harm our business.

Misappropriation or misuse of confidential information, including user data, could cause us to lose customers or publishers or incur liability.

          We currently retain highly confidential information, including user data, in secure database servers. Although we observe security measures throughout our operations and limit access to such information, we cannot assure you that we will be able to prevent unauthorized individuals from gaining access to these database servers. Any unauthorized access to our servers, or abuse by our employees, could result in the theft of confidential information. If confidential information is misappropriated or misused, we could lose customers or publishers or become subject to liability or litigation and our reputation could be harmed, any of which could materially and adversely affect our business and results of operations.

Our quarterly revenues and operating results are subject to significant fluctuations and may continue to fluctuate from period to period in the future, which makes our quarterly results of operations difficult to predict.

          Our quarterly revenues and operating results have fluctuated in the past and may continue to fluctuate depending upon a number of factors, many of which are out of our control. Our business is subject to seasonal fluctuations, with the fourth quarter generally being our strongest and the first quarter our weakest. Expenditures by advertisers and advertising agencies vary in cycles and tend to reflect overall economic conditions, both in China and globally, as well as budgeting and buying patterns in different industries and companies. Advertisers may alternate between periods with major advertising campaigns and periods of relative inactivity. Because most advertising campaigns are short in duration and we typically sign contracts on a campaign-by-campaign basis, it is difficult for us to forecast our results of operations for future quarters. Our business may also be affected

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on a quarter-to-quarter basis by the loss, consolidation or addition of major advertisers or publishers. Comparing our operating results on a quarter-to-quarter basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly revenues and our costs and expenses as a percentage of our revenues may be significantly different from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause the price of our ADSs to fall. If our revenues for a particular quarter are lower than expected, we may be unable to reduce our operating expenses and cost of revenues for that quarter by a corresponding amount, which would harm our operating results for that quarter relative to our operating results from prior quarters.

Our business, financial condition and results of operations, as well as our ability to obtain financing, may be adversely affected by a downturn in the global or Chinese economy.

          The global economy and financial markets have experienced significant disruptions since 2008 and the effect of the crisis has persisted through 2009 and 2010, and to a lesser extent in 2011. China's economy has also faced challenges. It is uncertain whether the recovery from the disruptions of 2008 is sustainable. Since we derive, and expect to continue to derive, our revenues almost entirely from internet advertising services and solutions in China, and the advertising industry tends to be cyclical and is particularly sensitive to overall economic conditions as well as budgeting and buying patterns, our business and prospects may be affected by economic conditions in China. We cannot assure you that reductions in marketing spending will not occur. We cannot assure you that advertising spending in general or with respect to our offerings in particular will increase, or not decrease, from current levels. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective advertisers' spending priorities. Therefore, a slowdown in China's economy or the global economy may lead to a reduction in advertising activities, which could materially and adversely affect our financial condition and results of operations.

          Moreover, the occurrence of a sovereign debt crisis, banking crisis or other financial disruptions may have a material and adverse impact on the availability of financing to us. The weak economy could erode investors' confidence, which constitutes the basis of the credit markets. Renewed financial turmoil affecting the financial markets, banking systems or currency exchange rates may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at all, which could materially and adversely effect our business, results of operations and prospects.

Disruption of our services due to unanticipated system failures or security attacks could cause us to lose user data or advertising space, which could harm our reputation and business.

          Our ability to provide satisfactory services to our customers over the internet advertising platform depends on the continuing and uninterrupted performance of our systems. Sustained or repeated system failures that interrupt our ability to provide services to advertising agencies, advertisers and publishers, including failures affecting our ability to deliver advertisements quickly, collect user statistics efficiently and measure the effectiveness of our advertising services and solutions accurately, would reduce significantly the attractiveness of our services and solutions to advertising agencies, advertisers and publishers. Our business, results of operations and financial condition could also be materially and adversely affected by any systems damage or failure that impacts data integrity or interrupts or delays our operations. Our computer systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious or accidental human acts, and natural disasters. Therefore, any of the above factors affecting any of these areas could substantially harm our business. Moreover, despite network security measures, our servers are potentially vulnerable to security attacks, computer viruses and

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similar disruptive problems. Despite whatever precautions we may take, any unanticipated problems and security attacks affecting our systems could cause interruptions in the delivery of our services and solutions or our ability to provide a record of past transactions and may cause loss of user data. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems.

Interruption or failure of China's internet infrastructure or our publishers' information technology and communications systems could impair our ability to effectively deliver advertisements, which could cause us to lose customers or advertising space and harm our operating results.

          Our business depends on the performance and reliability of the internet infrastructure in China and the stability of our publishers' information technology and communications systems. The availability of our advertising services and solutions depends on telecommunications carriers and other third-party providers for communications and storage capacity, including bandwidth and server storage, among other things. Almost all access to the internet is maintained through state-owned telecommunication carriers under administrative control, and we obtain access to end-user networks operated by such telecommunications carriers and internet service providers to deliver our internet advertising services and solutions to end-users. We have experienced service interruptions in the past, which were typically caused by service interruption of the value-added telecommunications service providers, such as internet data centers. In addition, since we rely on the performance of our publishers to deliver the advertisements, any interruption or failure of their information technology and communications systems may undermine the effectiveness of our advertising services and solutions and cause us to lose customers, which may harm our operating results.

Our internet advertising platform incorporates multiple proprietary technologies and our intellectual property rights are key to the success of our business. If we fail to adequately protect our intellectual property rights, our competitive position may suffer.

          We rely on a combination of copyright and trade secret protection laws in the PRC and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. We have also applied to register our logo as a trademark. We have registered 12 copyrights in China for software that comprises parts of our integrated internet advertising platform. See "Business — Intellectual Property." To protect our trade secrets and other proprietary information, our employees, consultants, advisors and business collaborators are required to enter into confidentiality agreements with us. However, implementation of intellectual property-related laws in China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Policing unauthorized use of our proprietary technology is difficult and expensive. Although we are not currently involved in any litigation with respect to intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.

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The proprietary technologies that comprise our internet advertising platform may include design or performance defects and may not achieve their intended results, any of which could impair our future revenue.

          We rely on our internet advertising platform to deliver our internet advertising services. Our proprietary technologies are relatively new, and they may contain design or performance defects that are not detectable even after extensive internal testing and may become apparent only after widespread commercial use. Any defect in those technologies as well as their subsequent alterations and improvements could hinder the effectiveness of our internet advertising platform, which would have a material and adverse effect on our competitiveness and future prospects. It is not clear whether China's existing product liability laws apply to software systems like ours. We cannot assure you that if our internet advertising technologies are found to have design or performance defects, we will not be liable for product liability claims in China. Although we have not experienced any product liability claims to date, we cannot assure you that we will not do so in the future.

          In addition, we spend significant resources on expanding our internet advertising platform to mobile internet. If these technologies do not achieve the results we desire, our expected growth in future revenue and margins may not materialize. Our success also depends on our ability to develop and introduce new proprietary technologies that address our advertisers' and website publishers' changing needs. Any new services or solutions that we develop may not achieve significant market acceptance. Our competitors may introduce new services or solutions that compete with our proprietary technologies and render our proprietary technologies unmarketable. If revenue generated from the use of our proprietary technologies does not cover our development costs and expenses, our results of operations may be harmed.

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 customers on websites and mobile apps. 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. Under the contracts we enter into with our customers, we typically require them to indemnify us for any loss resulting from the intellectual property infringement claims relating to the advertisements provided by our customers or non-compliance of such advertisement with the law. However, we cannot guarantee that the indemnities provided by the customers, if any, will be sufficient to compensate us for potential intellectual property infringement claims. 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.

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The continuing and collaborative efforts of our senior management and key employees are crucial to our success, and our business may be harmed if we lose their services.

          Our success depends on the continuous efforts and services of Mr. Alan Fangjun Yan, our founder, chairman and chief executive officer, and other members of our experienced senior management team. If, however, one or more of our executives or other key personnel are unable or unwilling to continue to provide services to us, we may not be able to find suitable replacements easily or at all. Competition for management and key personnel is intense and the pool of qualified candidates is limited. If any of our executive officers or key employees joins a competitor or forms a competing company, we may lose business collaborators, know-how and key professionals. Each of our executive officers and key employees has entered into an employment agreement with us, and has agreed to confidentiality and non-compete obligations. However, if any dispute arises between us and our executives or key employees, these agreements may not be enforceable in China, where these executives and key employees reside, in light of uncertainties with China's legal system. See "— Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us."

The financial soundness of our customers could affect our collection of accounts receivable, as well as our results of operations and cash flows.

          The financial soundness of our customers may affect our collection of accounts receivable. We generally receive payments from customers 30 to 120 days from the end of the month in which their advertisements appeared. As of December 31, 2009, 2010 and 2011, our accounts receivable balance net of allowances for doubtful accounts was US$6.8 million, US$15.9 million and US$19.7 million, respectively. We typically make a credit assessment of the customer to evaluate the collectability of the advertising service fees before entering into an advertising contract. However, we cannot assure you that we are or will be able to accurately assess the creditworthiness of each customer, and any inability of customers to pay us in a timely manner may adversely affect our liquidity and cash flows.

We have granted, and may continue to grant, stock options and other types of awards under our share incentive plans, which may result in increased share-based compensation expenses.

          We adopted three share incentive plans before 2012: the AdChina, Inc. 2007 Equity Incentive Plan, which we refer to as the 2007 Incentive Plan; the AdChina, Inc. 2008 Stock Plan, which we refer to as the 2008 Stock Plan; and the AdChina Ltd. 2008 Share Plan, as amended and restated in 2009 and 2011, which we refer to as the 2008 Plan. As of December 31, 2011, options to purchase a total of 5,530,745 ordinary shares of our company and 1,283,000 restricted share units were outstanding under the three plans. We plan to adopt a new share incentive plan, our 2012 Share Incentive Plan, prior to the completion of this offering. See "Management — Share Incentive Plans" for a detailed discussion. For the years ended December 31, 2009, 2010 and 2011, we recorded US$0.6 million, US$1.4 million and US$21.2 million, respectively, in share-based compensation expenses. We believe the granting of stock options is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant stock options to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence in our company and the market price of our ADSs may be adversely affected.

          We will be subject to reporting obligations under the U.S. securities laws after this offering. Our reporting obligations as a public company will place a significant strain on our management,

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operational and financial resources and systems for the foreseeable future. Prior to this offering, we have been a private company and have had limited accounting personnel and other resources with which to address our internal control over financial reporting. In preparing our consolidated financial statements, we and our independent registered public accounting firm identified a few control deficiencies, each as defined in the standards established by the U.S. Public Company Accounting Oversight Board in our internal control over financial reporting as of December 31, 2011.

          We have not noted any material weakness or significant deficiency as of December 31, 2011, as defined in the standards established by the U.S. Public Company Accounting Oversight Board, in our internal controls over financial reporting. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company.

          Following the identification of the control deficiencies, we have taken measures and plan to continue to take measures to remedy these deficiencies. However, the implementation of these measures may not fully address these deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Failure to correct these control deficiencies or to discover and address any other control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.

          Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2013. In addition, beginning at the same time, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. If we fail to remedy the control deficiencies, our management and our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. This could adversely impact the market price of our ADSs due to a loss of investor confidence in the reliability of our reporting processes. We will need to incur costs and use management and other resources in order to comply with Section 404.

Our corporate actions are substantially controlled by our founder, chairman and chief executive officer, Mr. Alan Fangjun Yan, who can exert significant influence over important corporate matters, which may reduce the price of our ADSs and deprive you of an opportunity to receive a premium for your shares.

          Our founder, chairman and chief executive officer, Mr. Alan Fangjun Yan, will beneficially own approximately                          % of the aggregate voting power of our company immediately after this offering and will have considerable influence over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions. Mr. Yan's wife, Ms. Yuying Zhao, will beneficially own an additional approximately                          % of the aggregate voting power of our company immediately after this offering. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in

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this offering. In addition, these persons could divert business opportunities away from us to themselves or others.

Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

          Immediately prior to the completion of this offering and subject to the approval of our existing shareholders, we expect to create a dual-class voting structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares. Subject to certain exceptions, in respect of matters requiring the votes of shareholders, holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to 20 votes per share based on our proposed dual-class voting structure. We will issue Class A ordinary shares represented by our ADSs in this offering. Immediately prior to the completion of this offering and subject to the approvals of our existing shareholders, we expect (i) 7,280,000 ordinary shares held by our founder, chairman and chief executive officer, Mr. Alan Fangjun Yan through Universe Access Enterprises Limited and 720,000 ordinary shares held by Mr. Yan's wife, Ms. Yuying Zhao, through Master Field Management Limited will be automatically re-designated as Class B ordinary shares on a 1-for-1 basis, (ii) all preferred shares will be automatically converted into and re-designated as 44,518,750 Class A ordinary shares on a 1-for-1 basis and (iii) all other outstanding ordinary shares will be re-designated as Class A ordinary shares on a 1-for-1 basis. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares. Due to the disparate voting powers associated with our two classes of ordinary shares, we anticipate that Mr. Yan and Ms. Zhao will together beneficially own approximately                          % of the aggregate voting power of our company immediately after this offering and will have considerable influence over matters requiring shareholder approval, subject to certain exceptions. This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have the effect of depriving the holders of our Class A ordinary shares and our ADSs of the opportunity to sell their shares at a premium over the prevailing market price.

We may be the subject of anti-competitive, harassing, or other detrimental conduct by third parties including complaints to regulatory agencies, negative blog postings, and the public dissemination of malicious assessments of our business that could harm our reputation and cause us to lose market share, customers and revenues and adversely affect the price of our ADSs.

          We have been, and in the future may be, the target of anti-competitive, harassing, or other detrimental conduct by third parties. Such conduct includes complaints, anonymous or otherwise, to regulatory agencies regarding our operations, accounting, revenues, business relationships, business prospects and business ethics. Additionally, allegations, directly or indirectly against us, may be posted in internet chat-rooms or on blogs or any websites by anyone, whether or not related to us, on an anonymous basis. We have been, and in the future may continue to be, subject to government or regulatory investigation as a result of such third-party conduct and may be required to expend significant time and incur substantial costs to address such third-party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Our reputation may also be negatively affected as a result of the public dissemination of anonymous allegations or malicious statements about our business,

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which in turn may cause us to lose market share, customers and revenues and adversely affect the price of our ADSs.

We may incur losses due to business interruptions resulting from occurrence of natural catastrophes, epidemics, acts of terrorism or fires, and we have limited insurance coverage.

          The occurrence of natural catastrophes such as earthquakes, floods, typhoons, tsunamis or any acts of terrorism may result in significant property damages as well as loss of revenues due to interruptions in our business operations or the operations of our customers and publishers. Epidemics and other outbreaks could require the temporary closure of our offices or the offices of our customers and publishers or prevent our staff from traveling to our customers' offices to provide customer service. The provision of our services depends on the continuing operation of our information technology and communications systems, which are vulnerable to damage or interruption from natural catastrophes and acts of terrorism. Some of our data centers are located in areas with a high risk of typhoons or earthquakes. Our disaster recovery planning cannot account for every conceivable possibility. Any damage to or failure of our systems could result in interruptions in our services, which could reduce our revenues and profits, and our brand could be damaged if customers believe our systems are unreliable.

          Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed economies. While business disruption insurance may be available to a limited extent in China, we have determined that the risks of disruption and the difficulties and costs associated with acquiring such insurance render it commercially impractical for us to have such insurance. As a result, we do not have any business liability, disruption or litigation insurance coverage for our operations in China. Any business disruption or litigation might result in our incurring substantial costs and the diversion of resources.

Risks Related to Our Corporate Structure

If the PRC government deems that the contractual arrangements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in advertising business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

          The PRC government requires any foreign entities that invest in the advertising services industry to have at least two years of direct operations in the advertising industry outside of China. We are a Cayman Islands company and a foreign legal person under PRC laws. We have not directly operated any advertising business outside of China and therefore, we currently do not qualify under PRC regulations to become the shareholder of a PRC subsidiary that engages in providing advertising services. Accordingly, our subsidiary, Kendall, is currently ineligible to apply for the required licenses for providing advertising services in China. Our advertising business is currently operated through Kendall's contractual arrangements with New E-Media and Yihong, our consolidated affiliated entities in China. New E-Media and Yihong are currently owned by individual shareholders, all of whom are PRC citizens, and they hold the requisite licenses to provide advertising services in China. Their shareholders are set forth in "Corporate History and Structure." By structuring our operations in this way, our consolidated affiliated entities, both PRC domestic companies, directly operate our internet advertising services in China, which allows us to provide advertising services in China within the PRC regulatory limitations on foreign ownership of advertising business. We have been and are expected to continue to be dependent on our consolidated affiliated entities to operate our advertising service business in China. We do not have any equity interest in the consolidated affiliated entities but effectively control their operations and receive the economic benefits and bear economic risks of them through a series of contractual arrangements. For a detailed discussion of these contractual arrangements, see "Corporate History and Structure."

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          There are uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of our contractual arrangements with the consolidated affiliated entities. We have also been advised by our PRC counsel that the structure for operating our business in China (including our ownership structure and contractual arrangements with the consolidated affiliated entities) complies, and after the completion of this offering will continue to comply, with all applicable existing PRC laws, rules and regulations, and does not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations. However, we cannot assure you that the PRC regulatory authorities will not adopt any new regulation to restrict or prohibit foreign investment in advertising business through contractual arrangement in the future, or will not determine that our ownership structure and contractual arrangements violate PRC laws, rules or regulations.

          In or around September 2011, various media sources reported that the China Securities Regulatory Commission, or the CSRC, had prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we, our consolidated affiliated entities or any of our future subsidiaries are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

    revoking the business licenses of such entities;

    discontinuing or restricting the conduct of any transactions between our PRC subsidiaries and consolidated affiliated entities;

    imposing fines, confiscating the income of the consolidated affiliated entities or our income, or imposing other requirements with which we or our PRC subsidiaries and consolidated affiliated entities may not be able to comply;

    requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our consolidated affiliated entities and deregistering the equity pledges of our consolidated affiliated entities, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over the consolidated affiliated entities; or

    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

          If the imposition of any of these penalties precludes us from operating our business, we would no longer be in a position to generate revenue or cash from it. If the imposition of any of these penalties causes us to lose our rights to direct the activities of our consolidated affiliated entities or our rights to receive their economic benefits, we would no longer be able to consolidate these entities, and our financial statements would no longer reflect the results of operations from the business conducted by our consolidated affiliated entities except to the extent that we receive payments from them under the contractual arrangements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.

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We rely on contractual arrangements with our consolidated affiliated entities in China and their shareholders for our operations, which may not be as effective as direct ownership in providing operational control.

          Since PRC laws restrict foreign equity ownership in companies engaged in advertising businesses in China, we rely on contractual arrangements with our consolidated affiliated entities and their shareholders to operate our business in China. If we had direct ownership of our consolidated affiliated entities, we would be able to exercise our rights as a shareholder to effect changes in their board of directors, which in turn could effect changes at the management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements, we rely on our consolidated affiliated entities and their shareholders' performance of the contractual obligations to exercise effective control. In addition, our contractual arrangements generally have a term of 20 years with an automatic extension in one-year terms, which is subject to Kendall's unilateral termination right. In general, neither our consolidated affiliated entities nor their shareholders may terminate the contracts prior to the expiration date. However, the shareholders of our consolidated affiliated entities may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated affiliated entities. We may replace the shareholders of our consolidated affiliated entities at any time pursuant to our contractual arrangements with them and their shareholders. However, if any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. See "— Any failure by our consolidated affiliated entities or their shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business." Therefore, these contractual arrangements may not be as effective as direct ownership in providing us with control over the consolidated affiliated entities.

Any failure by our consolidated affiliated entities or their shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business.

          Our consolidated affiliated entities and their shareholders may fail to take certain actions required for our business or follow our instructions despite their contractual obligations to do so. If they fail to perform their obligations under their agreements with us, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, which may not be effective.

          Under the equity interest pledge agreement between Kendall and the shareholders of our consolidated affiliated entities, these shareholders pledged all of their equity interests in the consolidated affiliated entities to Kendall. Our PRC counsel, Jun He Law Offices, has advised us that the equity interest pledge of New E-Media and Yihong was duly created and effective given that such pledge has already been duly registered with the relevant local branch of the State Administration for Industry and Commerce in accordance with the PRC Property Rights Law. If our consolidated affiliated entities or any of their shareholders breaches their obligations under the contractual arrangements, we may be able to successfully enforce the pledges.

          All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over

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our consolidated affiliated entities, and our ability to conduct our business may be adversely affected.

Contractual arrangements with our consolidated affiliated entities may result in adverse tax consequences to us.

          Under applicable PRC tax laws and regulations, arrangements and transactions between related parties may be subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements between Kendall, our wholly owned subsidiary in China, our consolidated affiliated entities in China and the shareholders of our consolidated affiliated entities were not entered into on an arm's-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment on taxation. In addition, the PRC tax authorities may impose interest on late payments on our consolidated affiliated entities for the adjusted but unpaid taxes. Our results of operations may be materially and adversely affected if our consolidated affiliated entities' tax liabilities increase significantly or if they are required to pay interest on late payments.

The shareholders of our consolidated affiliated entities may have potential conflicts of interest with us, which may materially and adversely affect our business.

          Mr. Alan Fangjun Yan, Ms. Yuying Zhao and Mr. Huayi Cheng are shareholders of our consolidated affiliated entities. Mr. Yan is our founder and chief executive officer. Ms. Zhao is the spouse of Mr. Yan, and she does not have any management or board position at our company. Mr. Cheng is our chief technology officer. We provide no incentives to Mr. Yan, Ms. Zhao and Mr. Cheng for the purpose of encouraging them to act in our best interests in their capacity as the shareholders of our consolidated affiliated entities. As a director and/or an executive officer of our company, each of Mr. Yan and Mr. Cheng has a duty of loyalty and care to us under Cayman Islands law. In addition, pursuant to the proxy agreements entered into by Kendall, the consolidated affiliated entities and their shareholders, Kendall may, through executing a power of attorney at any time, designate any person at its discretion as the attorney-in-fact of the shareholders of the consolidated affiliated entities to act on their behalf on all matters of the consolidated affiliated entities requiring shareholders' presence, vote or approval under PRC laws and regulations and the consolidated affiliated entities' articles of association. We are not aware of any other publicly listed companies with a similar corporate and ownership structure as ours that has brought conflicts of interests claims against the shareholders of its consolidated affiliated entities. However, we cannot assure you that when conflicts of interest arise, the shareholders of our consolidated affiliated entities will act in the best interests of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our consolidated affiliated entities, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

We may rely principally on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.

          We are a holding company, and we rely principally on dividends and other distributions on equity paid by our wholly owned PRC subsidiaries, Kendall and Menlo, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If they incur debt on their own behalf in the

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future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements Kendall currently has in place with our consolidated affiliated entities in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us.

          Under PRC laws and regulations, Kendall and Menlo, as wholly foreign-owned enterprises in the PRC, may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, they are required to set aside at least 10% of their accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of their registered capital. At their discretion, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. As of December 31, 2011, the registered capital of Kendall was US$15.0 million. Kendall had accumulated retained earnings of RMB4.7 million (US$0.7 million) from incorporation to December 31, 2011. Our PRC subsidiaries have not paid dividends to our offshore entity. We plan to continue to use substantially all of Kendall's earnings to fund our business operations or expansion.

          Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also "— Risks Related to Doing Business in China — Under the PRC Enterprise Income Tax Law, we may be classified as a PRC 'resident enterprise,' which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment."

PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may limit our use of the proceeds we receive from this offering to fund our expansion or operations.

          In utilizing the proceeds we receive from this offering in the manner described in "Use of Proceeds," as an offshore holding company with PRC subsidiaries, we may make additional capital contributions to our PRC subsidiaries, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiaries or consolidated affiliated entities, or acquire offshore entities with business operations in China in an offshore transaction. However, most of these uses are subject to PRC regulations and approvals. For example:

    capital contributions to our PRC subsidiaries, whether existing ones or newly established ones, must be approved by the PRC Ministry of Commerce or its local counterparts;

    loans by us to our PRC subsidiaries, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with the PRC State Administration of Foreign Exchange, or SAFE, or its local branches; and

    loans by us to our consolidated affiliated entities, which are domestic PRC entities, must be approved by the National Development and Reform Commission and must also be registered with SAFE or its local branches.

          Further, Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC, unless it is provided for otherwise.

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          We cannot assure you that we will be able to obtain the necessary government registrations or approvals on a timely basis, if at all, with respect to our future plans to use the U.S. dollar proceeds we receive from this offering for our expansion and operations in China. If we fail to receive such registrations or approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.

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 and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

          The Chinese 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 Chinese government has implemented measures 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 China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China's economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

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

Uncertainties with respect to the PRC legal system could adversely affect us.

          We conduct our business primarily through our PRC subsidiaries and consolidated affiliated entities in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are foreign-invested enterprises and are subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.

          In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve

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uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

          Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until some time after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

          We believe that trademarks, trade secrets, copyright, and other intellectual property we use are important to our business. We rely on a combination of trademark, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. Protection of intellectual property rights in China may not be as effective as in the United States or other jurisdictions, and as a result, we may not be able to adequately protect our intellectual property rights, which could adversely affect our revenues and competitive position.

Fluctuations in exchange rates may have a material adverse effect on your investment.

          The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People's Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

          Substantially all of our revenues and costs are denominated in Renminbi. At the Cayman Islands holding company level, we rely entirely on dividends and other fees paid to us by our subsidiaries and consolidated affiliated entities in China. Any significant revaluation of the Renminbi may materially and adversely affect our cash flows, net revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of the Renminbi against the U.S. dollar would make any new Renminbi-denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into Renminbi for such purposes. Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.

          Very limited hedging options are available in China 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 adequately hedge our exposure or at all. In addition, our currency exchange loss may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

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Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

          The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our wholly owned PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. However, approval from or registration with appropriate government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. Without prior approval or registration from SAFE, cash generated from the operations of our PRC subsidiaries and affiliated entities may not be used to pay off debt in a currency other than the Renminbi owed by our subsidiaries and affiliated entities to entities outside China, or to make other capital expenditures outside China in a currency other than the Renminbi. If our consolidated affiliated entities liquidate, the proceeds from the liquidation of their assets may not be used outside of the PRC or be given to investors who are not PRC nationals without prior approval. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

The approval of the CSRC may be required in connection with this offering under regulations adopted in 2006, and if required, we cannot assure you that we will be able to obtain such approval.

          In 2006, six PRC regulatory agencies, including the CSRC, jointly promulgated regulations commonly referred to as the M&A Rules. The M&A Rules require, among other things, offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.

          While the applicability of the new regulations remains unclear, our PRC counsel, Jun He Law Offices, has advised us that, based on their understanding of the current PRC laws and regulations:

    the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to CSRC approval procedures;

    despite the above, prior approval from CSRC is not required under the new regulations for the listing and trading of our ADSs on Nasdaq, unless we are clearly required to do so by subsequent rules of the CSRC, because (i) neither AdChina Ltd. nor its subsidiaries Kendall or Menlo, each a wholly foreign-owned enterprise incorporated in China, has acquired any equity or assets of any existing PRC domestic company; and (ii) Kendall entered into contractual arrangements with New E-Media, Yihong and their shareholders due to the limits under PRC laws and regulations regarding foreign ownership of companies that provide advertising services, and no provision under the M&A Rules clearly classifies contractual arrangements (including contractual arrangements to derive economic interests from our consolidated affiliated entities and pledges of equity of our consolidated affiliated entities) as a type of transaction subject to this regulation.

          There are still uncertainties as to how the M&A Rules will be interpreted and implemented. If the CSRC or other PRC regulatory agencies subsequently determine that we need to obtain the

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CSRC's approval for this offering, the CSRC or other PRC regulatory agencies may, among other things, impose fines and penalties on our operations in the PRC, delay or restrict the transfer of the proceeds from this offering into the PRC, order our PRC subsidiaries to terminate the contractual arrangements with the consolidated affiliated entities and their shareholders or take other actions that could have a material adverse effect on our business, financial condition or results of operations. The CSRC or other PRC regulatory agencies may also take actions requiring us to halt this offering before settlement and delivery of the ADSs offered by this prospectus.

          The M&A Rules also establish procedures and requirements that could make some acquisitions of PRC companies 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. We may expand our business in part by acquiring complementary businesses. 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 our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

PRC regulations relating to offshore investment activities by PRC residents may limit our subsidiaries' ability to increase their registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries, or otherwise expose us to liability under PRC law.

          SAFE promulgated regulations in October 2005 commonly referred to as Circular 75 that require PRC residents, including legal persons and natural persons, to register with the relevant local branches of SAFE before establishing or controlling any company outside of China, referred to as an offshore special purpose company, for purpose of raising funds from overseas to acquire assets of, or equity interests in, PRC companies. In addition, any PRC resident who makes, or has previously made, direct or indirect investments in such an offshore special purpose company is required to further update that registration for matters including increases or decreases in the offshore special purpose company's share capital, transfers or swaps of its shares, mergers, division, long-term equity or debt investments, and the creation of any security interest. Moreover, the PRC subsidiaries of such offshore special purpose company are required to coordinate and monitor the filing of SAFE registrations by the offshore special purpose company's shareholders who are PRC residents, and do so in a timely manner. Any failure to comply with the above registration or amendment requirements could result in the PRC subsidiaries' being prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent companies, offshore parent companies being restricted in their ability to contribute additional capital into their PRC subsidiaries, and other liabilities under PRC laws for evasion of foreign exchange restrictions.

          We believe that all of our founders who are PRC residents have completed their required initial registrations with SAFE and are preparing their applications to amend their registrations to reflect recent developments in our company and our PRC subsidiaries. However, we may not at all times be fully aware or informed of the identities of all of our beneficial owners who are PRC residents, and we may not always be able to cause our other shareholders or beneficial owners to comply with Circular 75, nor can we ensure you that if the other shareholders or PRC resident beneficial owners choose to make the registration, such registrations will be successfully completed. The failure or inability of our shareholders who are PRC residents and PRC resident beneficial owners to make any required registrations or subsequent registrations or comply with these requirements may subject such shareholders or beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital or provide loans (including using the proceeds from this

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offering) to our China operations, limit our PRC subsidiaries' ability to pay dividends or otherwise distribute profits to us, or otherwise materially and adversely affect us.

          In March 2007, SAFE issued further regulations requiring Chinese citizens who are granted stock options by an overseas publicly listed company to register with SAFE through a Chinese agent or Chinese subsidiary of the overseas publicly listed company and complete certain other procedures. We and our PRC employees who have been granted stock options, restricted share units and restricted shares will be subject to these regulations upon the completion of this offering. Any failure of our PRC stock option holders, restricted share unit holders or restricted share holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries' ability to distribute dividends to us, or otherwise materially adversely affect our business.

Under the PRC Enterprise Income Tax Law, we may be classified as a PRC "resident enterprise," which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.

          Under the PRC Enterprise Income Tax Law, which became effective on January 1, 2008, an enterprise established outside the PRC with "de facto management bodies" within the PRC should be considered a "resident enterprise" and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the implementation regulations to the Enterprise Income Tax Law, a "de facto management body" is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, a circular issued by the State Administration of Taxation on April 22, 2009 known as Circular 82 sets out the standards and procedures for recognizing the location of the "effective management" of an enterprise registered outside of the PRC and funded by Chinese enterprises as controlling investors. This circular specifies that certain PRC-invested enterprises will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders' meetings; and half or more of the senior management or directors having voting rights.

          Given that our Cayman holding company is incorporated and controlled by PRC individuals instead of PRC enterprises or PRC enterprise groups, it is unclear whether Circular 82 applies to us, and we are not aware of any clear guidance regarding the criteria pursuant to which the PRC tax authorities will determine the tax residency of an overseas company controlled by PRC individuals under the applicable PRC laws and regulations. Furthermore, we are not aware of any offshore holding company with a corporate structure similar to ours ever having been deemed a PRC resident enterprise by the PRC tax authorities. However, as the tax resident status of an enterprise is subject to determination by the PRC tax authorities, our subsidiaries and our consolidated variable interest entities all operate in the PRC and uncertainties remain with respect to the interpretation of the term "de facto management body" as applicable to our offshore entity, we may be considered a resident enterprise and may therefore be subject to the enterprise income tax at 25% on our global income. If we earn income outside of the PRC, the imposition of a tax on our global income could raise our effective tax rate and have a material adverse effect on our results of operations.

          If we are classified as a PRC resident enterprise, dividends we pay to non-PRC resident enterprise shareholders will be subject to PRC withholding tax, and while our holding company is incorporated in the Cayman Islands, we expect that we would deduct the appropriate withholding

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taxes from any dividend that we paid. Further, foreign ADS holders may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC, although procedures for the payment of such taxes do not exist and it is not clear whether or how the PRC government might enforce such taxes against persons who are not residents of the PRC. Any such tax may reduce the returns on your investment in our ADSs. Although our holding company is incorporated in the Cayman Islands, it remains unclear whether gains realized by our foreign ADS holders will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise, and it is unclear whether non-PRC shareholders of AdChina Ltd. would be able to claim the benefits of any tax treaties between their tax residence and the PRC in the event that AdChina Ltd. is treated as a PRC resident enterprise.

Discontinuation or reduction of any of the preferential tax treatments or other government incentives available to us in the PRC, imposition of any additional PRC taxes or assessment of tax penalties could adversely affect our financial condition and results of operations.

          Local PRC governments have adopted incentives to encourage the development of technology companies. Our wholly owned subsidiary, Kendall, was designated as "software company" by the relevant PRC government authorities in June 2011 and thus was entitled to an income tax exemption for two years beginning with its first profitable year and a 50% tax reduction at a rate of 12.5% for the subsequent three years. See "Management's Discussion and Analysis of Financial Condition and Results of Operation — Taxation". Preferential tax treatment and other government incentives granted to Kendall by the local governmental authorities is subject to review and may be adjusted or revoked at any time. The discontinuation or reduction of any preferential tax treatments currently available to us and Kendall will cause our effective tax rate to increase, which could have a material adverse effect on our financial condition and results of operations. In addition, during periodic or ad hoc examinations and audits, PRC tax authorities may find our tax accounting practice inconsistent with the guidelines and principles set forth in the state or local tax laws and regulations. For example, the local tax bureau in Shanghai recently conducted a tax audit on New E-Media, which resulted in findings of certain insignificant non-compliance. See "Principal PRC Regulations — Other Regulations — Regulations on Taxation." If we are deemed not fully in compliance with PRC tax laws and regulations, we may be subject to additional PRC taxes or assessment of tax penalties, which could adversely affect our financial condition and results of operations.

Risks Related to this Offering

There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

          Prior to this initial public offering, there has been no public market for our shares or ADSs. We have applied to list the ADSs on Nasdaq. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

          Negotiations with the underwriters will determine the initial public offering price for our ADSs which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

The market price for our ADSs may be volatile.

          The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the

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performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed internet or other companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies' securities after their offerings, including internet and e-commerce companies, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011, which may have a material and adverse effect on the market price of our ADSs.

          In addition to market and industry factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following:

    regulatory developments affecting us, our customers or our industry;

    announcements of studies and reports relating to the quality of our services or those of our competitors;

    changes in the economic performance or market valuations of other companies that provide internet advertising services or solutions;

    actual or anticipated fluctuations in our quarterly results of operations and changes of our expected results;

    changes in financial estimates by securities research analysts;

    conditions in the internet advertising industry;

    announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital commitments;

    additions to or departures of our senior management;

    detrimental negative publicity about us, our competitors or our industry;

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

    release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and

    sales or perceived potential sales of additional ordinary shares or ADSs.

Because our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

          If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$             per ADS, representing the difference between the assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price, and our net tangible book value per ADS as of December 31, 2011, after giving effect to the automatic conversion of our preferred shares, immediately upon the completion of this offering and net proceed, to us from this offering.

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In addition, you may experience further dilution to the extent that our Class A ordinary shares are issued upon the exercise of share options and pursuant to our restricted share unit grants.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

          We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

          Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our PRC subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

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

          Sales of our ADSs or ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have             ordinary shares outstanding including             Class A ordinary shares represented by ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. The remaining Class A ordinary shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the lock-up period at the discretion of the representatives of the underwriters. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs may decline.

          Upon completion of this offering, certain holders of our ordinary shares will have the right to cause us to register under the Securities Act the sale of their shares, subject to the 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs, in the public market could cause the price of our ADSs to decline.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

          Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the Class A ordinary shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the Class A ordinary shares represented by the ADSs. If we request the depositary to act, we will provide the depositary with a meeting notice setting forth details concerning the matters to be voted upon at least 35 days in advance of the meeting date. However, you may not receive voting materials in time to instruct the depositary to

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vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. For details of voting rights of our ordinary shareholders, please refer to "Description of Share Capital — Ordinary Shares — Voting Rights", and for details of voting rights for our ADS holders, please refer to "Description of American Depositary Shares — Voting Rights."

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is impractical to make them available to you.

          We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

          The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

You may be subject to limitations on transfer of your ADSs.

          Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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 conduct substantially all of our operations in China and substantially all of our directors and officers reside outside the United States.

          We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our PRC subsidiaries and consolidated affiliated entities. Substantially all of our directors and officers reside outside the United States and a substantial portion of their assets are located outside of 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 Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and

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officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see "Enforceability of Civil Liabilities."

          Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2011 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which provides persuasive, but not binding, authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.

          As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

          Because we qualify as a foreign private issuer under the Securities Exchange Act of 1934, as amended, or the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

    the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

    the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

    the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

    the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

          We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

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As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied with the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.

          As a company incorporated in the Cayman Islands and listed on Nasdaq, we are subject to the Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from Nasdaq corporate governance listing standards. For example, neither the Companies Law of the Cayman Islands nor our sixth memorandum and articles of association requires a majority of our directors to be independent, we could include non-independent directors as members of our compensation committee and nominating committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directors are present. Currently, we do not plan to rely on home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.

You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.

          We intend to use the net proceeds of this offering for, among other things, continuing investment in our technology and solutions development, acquiring strategic advertising inventory, sales and marketing initiatives to facilitate our geographical expansion, general corporate purposes and strategic acquisitions. However, our management will have considerable discretion in the application of the net proceeds received by us. For more information, see "Use of Proceeds." You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

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

          We will adopt our sixth amended and restated memorandum and articles of association that will become effective immediately upon the closing of this offering. Our sixth new memorandum and articles of association will contain certain provisions that could limit the ability of others to acquire control of our company, including a dual-class voting structure that gives disproportionate voting power to the Class B ordinary shares held by our founder, chairman and chief executive officer, Mr. Alan Fangjun Yan, and his wife, Ms. Yuying Zhao, and a provision that grants authority to our board directors to establish from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

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We may be classified as a passive foreign investment company for United States federal income tax purposes, 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 assets, which may be determined based on the market 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 a PFIC. Under U.S. federal tax law, we will be classified as a PFIC for any taxable year if either (i) at least 75% of our gross income for the taxable year is passive income or (ii) at least 50% of the value of our assets (based on the average quarterly value of our assets during the taxable year) is attributable to assets that produce or are held for the production of passive income. Based on our current gross income and assets and projections as to the value of our ordinary shares and ADSs following this offering, we do not expect to be classified as a PFIC for the current taxable year or in the foreseeable future. While we do not anticipate becoming a PFIC, fluctuations in the market price of our ADSs or ordinary shares may cause us to become a PFIC for the current or any subsequent taxable year.

          Although the law in this regard is unclear, we treat the consolidated affiliated entities as being owned by us for United States federal income tax purposes, not only because we control their management decisions but also because we are entitled to substantially all of the economic benefits associated with those entities, and, as a result, we consolidate their results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of those entities for United States federal income tax purposes, we would likely be treated as a PFIC for our taxable year ending on December 31, 2012 and any subsequent taxable year. Because of the uncertainties in the application of the relevant rules and because PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and the value of our active versus passive assets, there can be no assurance that we will not be a PFIC for the current or any future taxable year. The overall level of our passive assets will be affected by how, and how quickly, we spend our liquid assets and the cash raised in this offering. Under circumstances where revenues from activities that produce passive income significantly increase relative to our revenues from activities that produce non-passive income or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially increase.

          If we were to be or become a PFIC, a U.S. Holder (as defined in "Taxation — Material United States Federal Income Tax Considerations — General") may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an "excess distribution" under the United States federal income tax rules. Further, if we were a PFIC for any year during which a U.S. Holder held our ADSs or ordinary shares, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder held our ADSs or ordinary shares. Although U.S. holders of PFIC shares can sometimes avoid the rules described above by electing to treat such PFIC as a "qualified electing fund," this option will not be available to U.S. Holders because, even if we were to be or become a PFIC, we do not intend to comply with the requirements necessary to permit U.S. Holders to make such election. If a U.S. Holder owns our ADSs or ordinary shares during any taxable year that we are a PFIC, the holder must file an annual report with the U.S. Internal Revenue Service. Each U.S. Holder is urged to consult its tax advisor concerning the United States federal income tax consequences of purchasing, holding and disposing of ADSs or ordinary shares if we are or become treated as a PFIC, including the possibility of making a mark-to-market election and the unavailability of the election to treat us as a qualified electing fund. For more information, see "Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company Considerations" and "— Passive Foreign Investment Company Rules."

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If we are required to pay U.S. taxes, the value of your investment in our company could be substantially reduced.

          Our company is a corporation organized under the laws of the Cayman Islands. As such, our company believes that it is properly classified as a non-United States corporation for United States federal income tax purposes. Under certain provisions of the Code and regulations, however, if pursuant to a plan (or a series of related transactions), a non-United States corporation, such as our company, acquires substantially all of the assets of a United States corporation, and after the acquisition 80% or more of the stock (by vote or value) of the non-United States corporation (excluding stock issued in a public offering related to the acquisition) is owned by former shareholders of the United States corporation by reason of their ownership of the United States corporation, the non-United States corporation will be considered a United States corporation for United States federal income tax purposes. Our founder originally formed AdChina, Inc. in the United States. Through a series of private transactions in April 2008 involving our company, former shareholders of AdChina, Inc. came to hold less than 80% of our stock, and, as such, we do not believe that our company should be treated as a United States corporation under the rules described above. If, contrary to this view, the United States tax authorities successfully treated our company as a United States domestic corporation as a result of the restructuring and related transactions that occurred in connection with our incorporation (or otherwise), our company would be subject to United States federal income tax on its worldwide taxable income as if it were a United States corporation, which could materially increase our expenses and reduce the amounts available to pay as dividends to our shareholders and, accordingly, materially reduce the value of your investment in our company. You are urged to consult your tax advisor concerning the income tax consequences of purchasing, holding or disposing of ADSs or ordinary shares if we were to be treated as a United States domestic corporation for United States federal income tax purposes.

We will incur increased costs as a result of being a public company.

          As a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission and Nasdaq, have detailed requirements concerning corporate governance practices of public companies including Section 404 relating to internal control over financial reporting. We expect these and other rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate with reasonable certainty the amount of additional costs we may incur or the timing of such costs.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

          This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

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

    our goals and growth strategies;

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

    expected changes in our revenue and certain cost or expense items;

    our ability to develop new services and solutions and attract advertisers and publishers;

    growth, trends and competition in the internet advertising industry;

    our ability to protect our intellectual property rights;

    our expectations regarding the demand for, and market acceptance of, our services and solutions;

    our ability to retain and deepen our relationships with our customers and publishers;

    our expectation regarding the use of proceeds from this offering; and

    assumptions underlying or related to any of the foregoing.

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

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

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USE OF PROCEEDS

          We estimate that we will receive net proceeds from this offering of approximately US$                           million after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial offering price of US$                          per ADS, the mid-point of the range shown on the front cover page of this prospectus. [We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.] A US$1.00 increase (decrease) in the assumed initial public offering price of US$                          per ADS would increase (decrease) the net proceeds of this offering by US$                           million, assuming the sale of                          ADSs at US$                          per ADS, the mid-point of the range shown on the front cover page of this prospectus and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

          The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and obtain additional capital. We intend to use the net proceeds received by us from this offering for the following purposes:

    approximately US$                           million for continuing investment in our technology and solutions development, with focus on our mobile platform and performance-based solutions;

    approximately US$                           million for acquiring strategic advertising inventory, including selectively extending our reach to publishers who have complementary audience bases;

    approximately US$                           million for pursuing sales and marketing initiatives to facilitate our geographical expansion within China, including further expanding the headcount of our sales force and increasing spending on training we provide to our sales force; and

    the remainder for general corporate purposes, including strategic investments and acquisitions (although we are not currently negotiating any such acquisitions).

          The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. For example, we may use a portion of the net proceeds we receive from this offering for strategic acquisitions, although we are not currently negotiating any acquisition transactions.

          In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions and to our consolidated affiliated entities only through loans, and only if we satisfy the applicable government registration and approval requirements. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. See "Risk Factors — Risks Related to Our Corporate Structure — PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may limit our use of the proceeds we receive from this offering to fund our expansion or operations."

          Pending use of the net proceeds, we intend to hold our net proceeds in short-term, interest-bearing debt instruments or demand deposits.

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DIVIDEND POLICY

          We have not previously declared or paid cash dividends and we have no plan to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

          We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See "Principal PRC Regulations — Other Regulations — Regulations on Dividend Distribution."

          Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See "Description of American Depositary Shares." Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

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CAPITALIZATION

          The following table sets forth our capitalization as of December 31, 2011:

    on an actual basis;

    on a pro forma basis to reflect (i) the automatic conversion and re-designation of all of our outstanding Series A, Series B and Series C preferred shares as 41,179,586 Class A ordinary shares, (ii) the automatic re-designation of all ordinary shares held by Universe Access Enterprises Limited and Master Field Management Limited as 8,000,000 Class B ordinary shares immediately prior to closing of this offering; and (iii) the automatic re-designation of all other ordinary shares outstanding as of December 31, 2011, as 9,558,407 Class A ordinary shares; and

    on a pro forma as adjusted basis to reflect (i) the planned automatic conversion and re-designation of all of our outstanding Series A, Series B and Series C preferred shares into 41,179,586 Class A ordinary shares immediately upon the completion of this offering; (ii) the automatic re-designation of all ordinary shares held by Universe Access Enterprises Limited and Master Field Management Limited to 8,000,000 Class B ordinary shares immediately prior to closing of this offering; (iii) the issuance of 3,339,164 Series D preferred shares in February 2012, which will be automatically converted into and re-designated as the equivalent number of Class A ordinary shares upon the conversion of this offering; (iv) the automatic re-designation of all other ordinary shares outstanding as of the date of this prospectus as 6,308,407 Class A ordinary shares; and (v) the sale of             Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

          You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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  As of December 31, 2011  
 
  Actual   Pro forma   Pro forma
as adjusted(1)
 
 
  (US$)
 

Equity:

                   
 

Ordinary shares (US$0.00005 par value; 65,000,000 shares authorized; 17,558,407 shares issued and outstanding on an actual basis; none outstanding on a pro forma or pro forma as adjusted basis)

    878            
 

Class A ordinary shares (US$0.00005 par value;              shares authorized; 50,737,993 shares issued and outstanding on a pro forma basis;              shares issued and outstanding on a pro forma as adjusted basis)

        2,537        
 

Class B ordinary shares (US$0.00005 par value;              shares authorized; 8,000,000 shares issued and outstanding on a pro forma and pro forma as adjusted basis)

        400        
 

Series A convertible preferred shares (US$0.00005 par value; 13,260,000 shares authorized; 13,256,892 shares issued and outstanding on an actual basis; none outstanding on a pro forma or pro forma as adjusted basis)

    7,311,067            
 

Series B convertible preferred shares (US$0.00005 par value; 18,300,000 shares authorized; 18,298,715 shares issued and outstanding on an actual basis; none outstanding on a pro forma or pro forma as adjusted basis)

    18,105,704            
 

Series C convertible preferred shares (US$0.00005 par value; 9,630,000 shares authorized; 9,623,979 shares issued and outstanding on an actual basis; none outstanding on a pro forma or pro forma as adjusted basis)

    39,781,242            
 

Series D convertible preferred shares (US$0.00005 par value; 6,370,000 shares authorized, none issued and outstanding on an actual basis, none issued and outstanding on a pro forma basis, and 3,339,164 shares issued and outstanding on a pro forma as adjusted basis)

    N/A     N/A        
 

Additional paid-in capital(2)

    24,573,709     89,769,663        
 

Accumulated other comprehensive income

    2,135,323     2,135,323        
 

Accumulated deficit

    (27,484,485 )   (27,484,485 )      
               
 

Total equity(2)

    64,423,438     64,423,438        
               

Total capitalization(2)

    64,423,438     64,423,438        
               

(1)
The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, total equity and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.

(2)
Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) each of additional paid-in capital, total equity and total capitalization by US$             million.

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DILUTION

          Our net tangible book value as of December 31, 2011 was approximately US$             per ordinary share and US$             per ADS. Net tangible book value per ordinary share represents the amount of total tangible assets, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share.

          Without taking into account any other changes in such net tangible book value after December 31, 2011, other than to give effect to (1) the conversion of all of our Series A, Series B, Series C and Series D preferred shares into ordinary shares, which will occur automatically upon the completion of this offering, and (2) our issuance and sale of             ADSs in this offering, at an assumed initial public offering price of US$             per ADS, the mid-point of the estimated public offering price range, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2011 would have been US$             per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, or US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share, or US$             per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share, or US$             per ADS, to purchasers of ADSs in this offering.

          The following table illustrates the dilution on a per ordinary share basis assuming that the initial public offering price per ordinary share is US$             and all ADSs are exchanged for ordinary shares:

Assumed initial public offering price per ordinary share

  US$    

Net tangible book value per ordinary share

  US$    
       

Amount of dilution in net tangible book value per ordinary share to new investors in the offering

  US$    
       

Amount of dilution in net tangible book value per ADS to new investors in the offering

  US$    
       

          A US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$              million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$             per ordinary share and US$             per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

          The following table summarizes, on a pro forma basis as of December 31, 2011, the differences between our shareholders as of December 31, 2011 and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid at an assumed initial public offering price of US$             per ADS

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before deducting estimated underwriting discounts and commissions and estimated offering expenses.

 
  Ordinary Shares Purchased   Total Consideration   Average
Price Per
Ordinary
share
  Average
Price
Per
ADS
 
 
  Number   Percent   Amount   Percent  

Existing shareholders

                                     

New investors

                                     
                               

Total

                                     
                               

          A US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders, average price per ordinary share and average price per ADS paid by all shareholders by US$             , US$             , US$             and US$             , respectively, assuming the sale of             ADSs at US$             , the mid-point of the range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses payable by us.

          The discussion and tables above also assume no exercise of any outstanding stock options and excludes the impact of the restricted share unit grants as of the date of this prospectus. As of the date of this prospectus, there were             ordinary shares issuable upon exercise of outstanding stock options at a weighted average exercise price of US$             per ordinary share, and             ordinary shares issuable pursuant to restricted share unit grants, and there were             ordinary shares available for future issuance upon the exercise of future grants under our share incentive plans. To the extent that any of these options are exercised or any of these restricted share units are vested, there will be further dilution to new investors.

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EXCHANGE RATE INFORMATION

          Substantially all of our operations are conducted in China and all of our revenues are denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.2939 to US$1.00, the noon buying rate in The City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2011. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, at the rates stated below, 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 February 10, 2012, the noon buying rate was RMB6.2991 to US$1.00.

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

 
  Exchange Rate  
Period
  Period End   Average(1)   Low   High  
 
  (RMB per US$1.00)
 

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  

2010

    6.6000     6.7603     6.6000     6.8330  

2011

    6.2939     6.4475     6.6364     6.2939  
 

August

    6.3778     6.4036     6.4401     6.3778  
 

September

    6.3780     6.3885     6.3975     6.3780  
 

October

    6.3570     6.3718     6.3825     6.3534  
 

November

    6.3765     6.3564     6.3839     6.3400  
 

December

    6.2939     6.3482     6.3733     6.2939  

2012

                         
 

January

    6.3330     6.3107     6.3330     6.2940  
 

February (through February 10, 2012)

    6.2991     6.3020     6.3120     6.2938  

Source: Federal Reserve Statistical Release

(1)
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

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ENFORCEABILITY OF CIVIL LIABILITIES

          We were incorporated in the Cayman Islands in order to enjoy the following benefits:

    political and economic stability;

    an effective judicial system, by which we mean that we believe that the judicial system of the Cayman Islands will reach and enforce legal judgments in accordance with the law of the Cayman Islands in a relatively reliable fashion;

    a favorable tax system;

    the absence of exchange control or currency restrictions; and

    the availability of professional and support services.

          However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

    the Cayman Islands has a less developed body of securities laws than the United States and these securities laws provide significantly less protection to investors; and

    Cayman Islands companies may not have standing to sue before the federal courts of the United States.

          Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders be arbitrated.

          All of our operations are conducted outside the United States, and substantially all of our assets are located outside the United States. A majority of our officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

          We have appointed Law Debenture Corporate Services Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

          Conyers Dill & Pearman, our counsel as to Cayman Islands law, and Jun He Law Offices, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

    recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

    entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

          Conyers Dill & Pearman has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation. There are currently no treaties or reciprocal agreements made between the Cayman Islands and China or the United States that allow enforcement of foreign judgments without having to commence proceedings in the Cayman Islands. The Cayman Islands courts can be expected to

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follow English case law precedents which permit a minority shareholder to commence a representative action against, or derivative actions in our name in the Cayman Islands courts to challenge (i) an act which is beyond the powers of the Company or illegal, (ii) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us, and (iii) an irregularity in the passing of a resolution which requires a qualified (or special) majority under Cayman Islands law.

          Jun He Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. However, China does not have any treaties or other agreements with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or the Cayman Islands. In addition, it will be difficult for U.S. shareholders to originate actions against us in China, because we are incorporated under the laws of the Cayman Islands and it is difficult for U.S. shareholders, by virtue of holding our ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have subject matter jurisdiction as required by the PRC Civil Procedures Law.

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CORPORATE HISTORY AND STRUCTURE

          We began our business operations in China in August 2007 through Shanghai New E-Media Advertising Co., Ltd., or New E-Media, a company established by our founder, Mr. Alan Fangjun Yan, and Mr. Yan's wife, Ms. Yuying Zhao, in Shanghai. New E-Media primarily engages in providing internet advertising services and solutions. Mr. Yan set up AdChina, Inc. in the United States in April 2007.

          Starting April 2008, as part of a single plan with the purpose of raising capital by issuing equity interests to new investors in a private placement, we (1) incorporated our current holding company, AdChina Ltd., in the Cayman Islands and engaged in a series of transactions in which AdChina Ltd. acquired AdChina, Inc.; (2) established Kendall Technology Development (Shanghai) Co., Ltd. (formerly, Kendall (Shanghai) Investment & Consulting Co., Ltd.), or Kendall, our wholly owned subsidiary in China to control and consolidate the assets related to our China operations; and (3) issued Series A preferred shares to a substantial group of new investors. Kendall primarily engages in providing technology consulting and administrative services. As we did not conduct any business through AdChina, Inc., we dissolved this entity in June 2011.

          Prior to October 2010, we also operated an e-commerce business in China through contractual arrangements between Kendall and Topweaver Digital Technology Co., Ltd., or Topweaver, a PRC domestic company owned by our founder. Topweaver sold merchandise sourced from manufacturers and distributors in China and operated the YoBrand.com website. To focus on our core businesses, Kendall terminated these arrangements with Topweaver in September 2010, after which Topweaver was no longer our consolidated affiliated entity.

          In March 2011, we established AdChina Media (Hong Kong) I Limited, AdChina Media (Hong Kong) II Limited, and AdChina Mobile Media (Hong Kong) Limited, our wholly owned subsidiaries in Hong Kong, which will primarily engage in providing internet and mobile internet advertising services and solutions.

          To more clearly define our business divisions, we established Eagle-eyed Technology Development (Shanghai) Co., Ltd., or Eagle-eyed, in June 2011 as a wholly owned subsidiary of AdChina Media (Hong Kong) I Limited in China and Yihong through Mr. Yan and Mr. Huayi Cheng as Yihong's shareholders in September 2011. Eagle-eyed was subsequently renamed as Shanghai Menlo Network Technologies, Inc., or Menlo, in January 2012. Menlo primarily engages in providing technology consulting and solutions in connection with the various software systems under our demand side and supply side platforms. Yihong is another consolidated affiliated entity of ours and it primarily engages in providing internet advertising services and solutions.

          In November 2011, we established Shanghai Yizhun Culture and Media Co., Ltd., or Yizhun, as a wholly owned subsidiary of Menlo. Yizhun does not currently conduct any business. In the future, we expect Yizhun to engage in internet advertising business to further streamline our business divisions after it and its offshore parent company obtain the necessary qualifications required under applicable PRC law.

          PRC laws and regulations currently limit foreign ownership of companies that provide advertising services. To comply with these restrictions, we provide internet advertising services and solutions in China through Kendall's contractual arrangements with our consolidated affiliated entities, New E-Media and Yihong.

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          The following diagram illustrates our anticipated shareholding, voting and corporate structure immediately after the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs:

GRAPHIC


(1)
New E-Media is our consolidated affiliated entity. New E-Media is 91% owned by our founder, Mr. Alan Fangjun Yan, and 9% owned by Mr. Yan's wife, Ms. Yuying Zhao, both of whom are PRC citizens. We exercise effective control over New E-Media through its contractual arrangements with Kendall. See "Corporate History and Structure."
(2)
Yihong is our consolidated affiliated entity. Yihong is 95% owned by our founder, Mr. Alan Fangjun Yan, and 5% owned by our chief technology officer, Mr. Huayi Cheng, both of whom are PRC citizens. We exercise effective control over Yihong through its contractual arrangements with Kendall. See "Corporate History and Structure."

          Our wholly owned PRC subsidiary Kendall entered into a series of contractual arrangements with New E-Media and Yihong and their shareholders that enable us to exercise effective control over these consolidated affiliated entities through proxy agreements and receive substantially all of the economic benefits of these consolidated affiliated entities in the form of service fees in consideration for the technical services provided by Kendall.

          We do not have any equity interest in our consolidated affiliated entities. However, we have been dependent on our consolidated affiliated entities to operate our business in China, and we expect to continue to be dependent on our consolidated affiliated entities as long as PRC law does

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not allow us to directly operate our business in China. We rely on our consolidated affiliated entities to maintain or renew the qualifications, licenses or permits that are necessary for them to conduct our business in China. We believe that we have the power under our contractual arrangements to cause our consolidated affiliated entities and their shareholders to renew, revise or enter into new contractual arrangements with us prior to the expiration of the current arrangements on terms that would enable us to continue to operate our business in China after the expiration of the current arrangements, or in the event of certain amendments and changes to the current applicable PRC laws, regulations and rules, on terms that would enable us to directly operate our business in China legally. For a detailed description of the regulatory environment that necessitates the adoption of our corporate structure, see the section in this prospectus headed "Principal PRC Regulations." For a detailed description of the risks associated with our corporate structure and the contractual arrangements that support our corporate structure, see "Risk Factors — Risks Related to Our Corporate Structure."

Contractual Arrangements with Our Consolidated Affiliated Entities

Contractual Arrangements with New E-Media and Its Shareholders

          The following is a summary of the currently effective contracts between our wholly owned PRC subsidiary Kendall, our consolidated affiliated entity New E-Media, and the shareholders of New E-Media.

Proxy Agreement

          Pursuant to a proxy agreement entered into between Kendall, New E-Media and its shareholders in March 2009, the shareholders of New E-Media each irrevocably appointed, by executing a power of attorney, the person designated by Kendall as their attorney-in-fact to act on their behalf on all matters of New E-Media requiring shareholders' presence, vote or approval under PRC laws and regulations and New E-Media's articles of association. The attorney-in-fact may exercise the shareholders' rights in their own discretion, without prior consent or advice from the shareholders, provided that they give prompt notice to the shareholders under certain circumstances. Each power of attorney will remain in force until the termination or expiration of the proxy agreement, or until Kendall issues a written notice to replace the designated person with another person. Upon receiving such notice, the shareholders of New E-Media are each required by the terms of the proxy agreement to execute a new power of attorney. The term of the proxy agreement is 20 years and will be extended automatically thereafter in one-year increments unless Kendall provides written notice otherwise prior to the relevant expiration date. The proxy agreement may be terminated by the agreement of all parties in writing, and it will be terminated if Kendall or New E-Media dissolves due to the expiration of its business license. New E-Media and its shareholders cannot terminate the proxy agreement without Kendall's written approval unless otherwise provided by law.

Exclusive Services Agreement

          Pursuant to an exclusive services agreement entered into between Kendall and New E-Media in March 2009, Kendall has the exclusive right to provide services to New E-Media based on New E-Media's business needs, and to provide hardware or personnel support in connection with such services. Kendall is entitled to designate any third party to provide such services, or transfer its rights and obligations under this agreement to any third party. In consideration of the services provided by Kendall, New E-Media agrees to pay a service fee based on a set formula defined in this agreement. Under this formula, the annual service fee is calculated by deducting an agreed-upon amount of cost and expenses incurred by New E-Media from the net revenues of New E-Media for that year. As a result, we believe that Kendall receives substantially all of the economic

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benefits of New E-Media in the form of the service fee based on the exclusive services agreement. If New E-Media encounters difficulties in making the service fee payments in time, Kendall has the discretion to agree to a delayed payment by New E-Media, or both parties may agree in writing to adjust the amount of service fee. In connection with the intellectual property rights resulting from the performance of this agreement, if the relevant technologies were jointly developed by New E-Media and Kendall, or developed by New E-Media based on technologies commissioned by Kendall, Kendall will own such intellectual property rights; if the relevant technologies were independently developed by New E-Media, New E-Media will own such intellectual property rights subject to certain rights and privileges of Kendall's regarding the transfer and license of such intellectual properties. The term of this agreement is 20 years and will be extended automatically thereafter in one-year increments unless Kendall gives a written notice to terminate prior to the termination date. New E-Media cannot terminate the exclusive service agreement without Kendall's approval, unless otherwise provided by law.

Exclusive Option Agreement

          Pursuant to the exclusive option agreement entered into among Kendall, New E-Media and the shareholders of New E-Media in March 2009, New E-Media's shareholders irrevocably grant Kendall or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of their equity interests in New E-Media, and New E-Media irrevocably grants Kendall or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of the assets of New E-Media, including but not limited to any intellectual properties and any investment rights and interests. The exercise price shall be the registered capital corresponding to the purchased equity interest, or the net book value corresponding to the purchased assets, subject to the lowest price then permitted by PRC law. Subject to then applicable PRC law and this agreement, Kendall has sole discretion to decide the time and method of exercising the options, and it can exercise such options by itself or designate any third party to exercise them, in whole or in part. Without Kendall's written consent, New E-Media and its shareholders may not transfer, pledge, or otherwise dispose of material assets or equity interests in any way. The exclusive option agreement will remain in full force and effect until all of the equity interests and assets in New E-Media have been acquired by Kendall or its designated representative(s). New E-Media and its shareholders cannot terminate the exclusive option agreement without Kendall's approval, unless otherwise provided by law.

Equity Interest Pledge Agreement

          Pursuant to the equity interest pledge agreement entered into among Kendall, New E-Media and the shareholders of New E-Media in March 2009, the shareholders of New E-Media have pledged all of their equity interests in New E-Media to Kendall to guarantee New E-Media's and its shareholders' performance of their obligations under, where applicable, the proxy agreement, the exclusive services agreement and the exclusive option agreement. If New E-Media or any of its shareholders breach their contractual obligations under these agreements, Kendall, as pledgee, will be entitled to certain rights, including the right to sell or auction the pledged equity interests. Without Kendall's prior written consent, shareholders of New E-Media may not transfer, accept, incur or allow any encumbrance on the pledged equity interests or contribute additional capital into New E-Media. Subject to certain exceptions, if there is any possibility that the value of the pledged equity interests will be materially diminished in a way that would jeopardize Kendall's interests, Kendall is entitled to sell or auction the pledged equity interests. During the term of this agreement, Kendall is entitled to collect all of the dividends and other distributions paid on the pledged equity interests. The pledge agreement became effective upon proper execution by all parties of the equity interest pledge agreement and the proper record of such equity interest pledge activities on the register of shareholders of New E-Media. Upon effectiveness of the agreement, the pledgors are

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required to provide the pledgees with a certificate from competent local branch of the State Administration for Industry and Commerce evidencing proper registration of the pledge arrangement.

Contractual Arrangements with Yihong and Its Shareholders

          In September 2011, we established Yihong through Mr. Alan Fangjun Yan and Mr. Huayi Cheng as Yihong's two shareholders, in order to more clearly define our business divisions. Yihong primarily engages in providing internet advertising services and solutions. We entered into a series of agreements with Yihong and its shareholders in order to be the primary beneficiary of, and substantially control, Yihong. Yihong became our consolidated affiliated entity as a result of these contractual arrangements.

          Our agreements with Yihong and its shareholders include:

    a proxy agreement between the shareholders of Yihong and Kendall;

    an exclusive services agreement between Yihong and Kendall;

    exclusive option agreements among Yihong, Kendall and the shareholders of Yihong; and

    equity interest pledge agreements among Yihong, Kendall and the shareholders of Yihong.

          The terms of these contractual arrangements are substantially identical to the terms of our contractual arrangements with New E-Media and its shareholders. Other than the party-specific information, there are no material differences between the terms of these contractual arrangements between Yihong and its shareholders and those between New E-Media and its shareholders.

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SELECTED CONSOLIDATED FINANCIAL DATA

          The following selected consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the selected consolidated balance sheet data as of December 31, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus and should be read in conjunction with those consolidated financial statements and notes thereto and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The selected consolidated statements of operations data for the years ended December 31, 2008 and 2009 have been derived from our audited consolidated financial data and from our audited consolidated financial statements, respectively, not included herein. The selected consolidated balance sheet data as of December 31, 2008 have been derived from our unaudited consolidated financial information as of December 31, 2008 prepared on the same basis as our audited consolidated financial data, not included herein. Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP and have been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent registered public accounting firm. We were incorporated in April 2007. We have not included financial information for the period from our inception (April 2007) to December 31, 2007, as such information is not available on a basis that is consistent with the consolidated financial information for the years ended December 31, 2008, 2009, 2010 and 2011, and cannot be provided on a U.S. GAAP basis without unreasonable effort or expense. Our historical results for any period are not necessarily indicative of results to be expected for any future period.

 
  Year Ended December 31,  
 
  2008   2009   2010   2011  
 
  (US$ thousands except share, ADS, per share,
per ADS and advertiser and publisher data)

 

Consolidated Statement of Operations Data:

                         

Net revenues

    2,764     10,796     27,274     50,671  

Cost of revenues(1)

    (2,734 )   (7,330 )   (14,612 )   (24,567 )
                   

Gross profit

    30     3,466     12,662     26,104  

Operating expenses:

                         
 

Technology and development(1)

    (508 )   (700 )   (2,011 )   (2,753 )
 

Sales and marketing(1)

    (1,244 )   (3,057 )   (7,985 )   (15,512 )
 

General and administrative(1)

    (1,367 )   (2,206 )   (4,433 )   (27,188 )
 

Other operating income

            277     996  
                   

Total operating expenses

    (3,119 )   (5,963 )   (14,152 )   (44,457 )
                   

Operating loss from continuing operations

    (3,089 )   (2,497 )   (1,490 )   (18,353 )

Interest income

    22     50     45     285  

Interest expense

    (454 )   (44 )        

Other income/(expenses)

        (1 )   (92 )   130  
                   

Loss before income tax

    (3,521 )   (2,492 )   (1,537 )   (17,938 )

Income tax benefit/(expense)

    492     263     (426 )   (617 )
                   

Loss from continuing operations, net of tax

    (3,029 )   (2,229 )   (1,963 )   (18,555 )

Loss from discontinued operations, net of tax

    (0 )   (196 )   (1,055 )    
                   

Net loss

    (3,029 )   (2,425 )   (3,018 )   (18,555 )
                   

Deemed dividends on Series C convertible preferred shares

                (1,942 )

Net loss attributable to ordinary shareholders

    (3,029 )   (2,425 )   (3,018 )   (20,497 )
                   

Loss per share, basic and diluted:

                         
 

Continuing operations

    (0.35 )   (0.25 )   (0.20 )   (1.67 )
 

Discontinued operations

    (0.00 )   (0.03 )   (0.10 )    
                   
 

Total

    (0.35 )   (0.28 )   (0.30 )   (1.67 )
                   

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  Year Ended December 31,  
 
  2008   2009   2010   2011  
 
  (US$ thousands except share, ADS, per share,
per ADS and advertiser and publisher data)

 

Loss per ADS, basic and diluted:

                         
 

Continuing operations

                         
 

Discontinued operations

                         
 

Total

                         

Weighted average shares used in calculating basic and diluted loss per share

    8,723,452     8,770,000     9,954,250     12,266,696  

Pro forma loss per share, basic and diluted:(2)(6)

                      (0.35 )

Pro forma loss per ADS, basic and diluted:(2)(6)

                         

Weighted average shares used in calculating basic and diluted pro forma loss per share

                      53,228,826  

Selected Non-GAAP Financial Data(3):

                         

Adjusted income (loss) from continuing operations

    (2,171 )   (1,600 )   (573 )   2,619  

Adjusted EBITDA

    (2,142 )   (1,646 )   255     3,712  

Selected Operating Data:

                         

Number of advertisers(4)

    47     139     264     452  

Net revenues per advertiser

    59     78     103     112  

Number of online publishers(5)

    171     302     403     409  

(1)
Including share-based compensation expenses as set forth below:


   
  Year Ended December 31,  
   
  2008   2009   2010   2011  
   
  (US$ thousands)
 
 

Cost of revenues

    1     49     45     361  
 

Technology and development

    5     10     134     410  
 

Sales and marketing

    364     320     783     747  
 

General and administrative

    488     250     428     19,656  
                     
 

Total

    858     629     1,390     21,174  
                     
(2)
For the year ended December 31, 2011, pro forma basis reflects the assumed conversion of all of our outstanding Series A, Series B and Series C preferred shares as of January 1, 2011 (or at the time of issuance, if later).

(3)
See "— Non-GAAP Financial Measures."

(4)
Represents the number of advertisers who used our platform to execute advertising campaigns during the period indicated.

(5)
Represents the number of publishers on whose websites we had the right to place advertisements at the end of the period indicated.

(6)
In February 2012, we issued 3,339,164 Series D preferred shares immediately upon the completion of this offering and repurchased 3,250,000 outstanding ordinary shares. After giving effect to the issuance of Series D preferred shares, the automatic conversion of Series D preferred shares into Class A ordinary shares and the repurchase of ordinary shares as if such events took place on December 31, 2011, our pro forma basic and diluted loss per share for the year ended December 31, 2011 would have been US$(0.35) and US$(0.35), respectively, and our pro forma basic and diluted earnings per ADS for the year ended December 31, 2011 would have been             and             , respectively.

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  As of December 31,  
 
  2008   2009   2010   2011  
 
  (US$ thousands)
 

Consolidated Balance Sheet Data:

                         

Cash and cash equivalents

    1,182     12,030     47,750     53,642  

Total current assets

    5,023     22,886     67,527     78,955  

Total assets

    5,984     24,219     69,801     82,111  

Total current liabilities

    676     2,621     11,220     17,688  

Total liabilities

    676     2,621     11,220     17,688  

Mezzanine equity

    3,536              

Total equity

    1,772     21,598     58,581     64,423  

Non-GAAP Financial Measures

          We use two financial measures not calculated in accordance with U.S. GAAP. Adjusted income/(loss) from continuing operations is a non-GAAP financial measure which excludes share-based compensation from loss from continuing operations. Adjusted EBITDA is a non-GAAP financial measure which represents loss from continuing operations plus interest expense, income tax provision, depreciation and amortization and share-based compensation less interest income. The computation of adjusted income/(loss) from continuing operations and adjusted EBITDA are as follows.

 
  Year Ended December 31,  
 
  2008   2009   2010   2011  
 
  (US$ thousands)
 

Loss from continuing operations

    (3,029 )   (2,229 )   (1,963 )   (18,555 )

Add: Share-based compensation

    858     629     1,390     21,174  
                   

Adjusted income (loss) from continuing operations

    (2,171 )   (1,600 )   (573 )   2,619  
                   

Loss from continuing operations

   
(3,029

)
 
(2,229

)
 
(1,963

)
 
(18,555

)

Add: Income tax expense (benefit)

    (492 )   (263 )   426     617  

          Depreciation and amortization

    89     223     447     761  

          Interest expense

    454     44          

          Interest income

    (22 )   (50 )   (45 )   (285 )

          Share-based compensation

    858     629     1,390     21,174  
                   

Adjusted EBITDA

    (2,142 )   (1,646 )   255     3,712  
                   

          The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP and may not be comparable to other companies' non-GAAP measures with similar titles. The information about our financial performance provided by adjusted income/(loss) from continuing operations is used by our management for a variety of purposes. We regularly communicate this financial measurement result to our board of directors and discuss with the board our interpretation of such results. We consider this financial measurement as an important element in our budgeting process. In addition, we use our adjusted income/(loss) from continuing operations as a key performance target in determining certain compensation for executives, largely because we believe that this measure is indicative of the how the fundamental business is performing and is being managed.

          We use adjusted income/(loss) from continuing operations and adjusted EBITDA to enhance our understanding of our operating performance in the ordinary, ongoing and customary course of

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our operations. We historically have found it helpful, and believe that investors have found it helpful. We also provide information relating to our adjusted income/(loss) from continuing operations and adjusted EBITDA so that analysts, investors and other interested persons have the same data that we use to assess our core operating performance. We believe that adjusted income/(loss) from continuing operations and adjusted EBITDA should be viewed only as a supplement to the GAAP financial information. We also believe, however, that providing this information in addition to, and together with, GAAP financial information permits analysts, investors and other interested persons to obtain a better understanding of our core operating performance and to evaluate the efficacy of the methodology and information used by our management to evaluate and measure such performance on a standalone and a comparative basis.

          The use of adjusted income/(loss) from continuing operations and adjusted EBITDA has certain limitations. Share-based compensation expense has been and will be incurred and is not reflected in the presentation of adjusted income/(loss) from continuing operations. Share-based compensation expense, depreciation and amortization expense for various long-term assets, income tax expense or benefit, interest expense and interest income have been and will be incurred and are not reflected in the presentation of adjusted EBITDA. Each of these items should also be considered in the overall evaluation of the results. We compensate for these limitations by providing the relevant disclosure of the depreciation and amortization, interest expense, income tax expense and other relevant items both in the reconciliations to the U.S. GAAP financial measures and in the consolidated financial statements, all of which should be considered when evaluating the performance.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled "Selected Consolidated Financial Data" and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and elsewhere in this prospectus.

Overview

          We operate a leading integrated internet advertising platform in China, according to iResearch. We serve two primary constituencies:

    Advertisers.  We provide internet advertising services and solutions to advertisers, either directly or through advertising agencies, who wish to reach a targeted, nationwide audience of Chinese consumers. The number of advertisers using our platform to execute advertising campaigns increased from 139 in 2009 to 264 in 2010 and 452 in 2011, for a three-year CAGR of 80.3%. Our net revenues per advertiser increased from US$78 thousand in 2009 to US$103 thousand in 2010 and US$112 thousand in 2011.

    Internet Publishers.  We acquire advertising space from internet publishers who wish to better monetize the traffic generated by their websites and mobile apps. Our online publisher base has grown from 171 publishers as of December 31, 2008, to 302 as of December 31, 2009, 403 as of December 31, 2010 and 409 as of December 31, 2011. Our online platform reached 486 million monthly unique visitors in December 2011, and our mobile platform provided our advertisers with access to 249 million monthly unique visitors in December 2011.

          We currently operate our business as a single segment and derive substantially all of our revenues from the provision of internet advertising services and solutions.

          We have grown rapidly since our inception. Our net revenues increased from US$10.8 million in 2009 to US$27.3 million in 2010 and US$50.7 million in 2011, for a three-year CAGR of 116.6%. Due to the significant cost of revenues and operating expenditures required to ramp up our business and operations at the early stage of development of our company and a significant increase in share-based compensation expenses in 2011, we incurred losses from continuing operations of US$2.2 million, US$2.0 million and US$18.6 million in 2009, 2010 and 2011, respectively. Our net losses reflected non-cash share-based compensation expenses in an aggregate amount of US$0.6 million in 2009, US$1.4 million in 2010 and US$21.2 million in 2011.

          To comply with PRC legal restrictions on foreign ownership of companies that provide advertising services and solutions, we provide internet advertising services and solutions in China through our consolidated affiliated entities, New E-Media and Yihong. We have contractual arrangements with New E-Media and Yihong and their shareholders that enable us to exercise effective control over and receive substantially all of the economic benefits from New E-Media and Yihong. As a result of these contractual arrangements, we are considered the primary beneficiary of New E-Media and Yihong and we consolidate their results in our financial statements. We previously conducted an e-commerce business through Topweaver that was unrelated to our core business of providing advertising services and solutions, but in September 2010 we terminated our contractual arrangements with Topweaver in order to concentrate on our core business. We consolidated Topweaver prior to the termination as we had effectively controlled and received substantially all of the economic benefits from Topweaver through those contractual arrangements.

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Factors Affecting Our Results of Operations

Internet Advertising Spending

          We sell advertising services and solutions to both international and Chinese advertisers that wish to reach a target audience of Chinese consumers through our internet advertising platform. Our customers' advertising spending budgets are strongly influenced by macroeconomic conditions, particularly those conditions that affect consumer spending. The annual per capita disposable income of urban residents in China has increased from RMB13,786 in 2007 to RMB21,810 in 2011, representing a CAGR of 12.2%, according to the National Bureau of Statistics of China. The proportion of advertising spending that is devoted to internet advertising is affected by trends in internet usage, both in terms of the internet penetration rate and in terms of the average amount of time each user spends on the internet. China's internet user base has grown from 210 million in 2007 to 513 million in 2011, representing a CAGR of 25.0%, and average time spent online per user has also increased from 16.2 hours per week in 2007 to 18.7 hours per week in 2011, according to reports issued in January 2008 and January 2012 by CNNIC, the official China Internet Network Information Center. As a result, internet advertising spending in China increased from US$2.5 billion in 2008 to US$3.1 billion in 2009 and US$4.7 billion in 2010 and is expected to increase to US$6.4 billion in 2011, according to ZenithOptimedia. These trends have created favorable conditions for our growth since the founding of our company in 2007, and continued growth in our addressable market should give us further opportunities to expand our business. ZenithOptimedia projects that internet advertising spending in China will reach US$11.8 billion by 2013.

Size and Reach of Our Platform

          The size of the audience that we can target is affected by the number of people who use the internet in China, how much time they spend on internet, including mobile internet and the size and reach of our platform. The size and reach of our platform are a function of the number of publishers who are willing to offer advertising space over our platform and the popularity of the websites or mobile apps or sites operated by those publishers. We expanded our online publisher base from 171 publishers as of December 31, 2008 to 302 as of December 31, 2009, 403 as of December 31, 2010 and 409 as of December 31, 2011, and our online platform reached 486 million monthly unique visitors in December 2011. Our mobile platform provided our advertisers with access to 249 million monthly unique visitors in December 2011. We must continue to expand our publisher base to keep pace with continued growth in China's internet user base and the emergence of popular new websites, although it is unlikely that our publisher base will continue to expand as rapidly in the future as it did when we were still in the early stages of assembling it. The increasing fragmentation of the internet audience in China reduces the percentage of total page views that the top websites represent and also may require us to enlarge our publisher base in order to maintain our platform's reach.

Acceptance of More Sophisticated Pricing Models

          Internet advertising in China still largely follows a CPT pricing model. We offer internet advertising services and solutions primarily based on a CPM pricing model, which is better suited to targeted advertising than the CPT pricing model, and we are developing new performance-based services and solutions that will be based on a CPA pricing model. We generated around 93% of our total net revenues from services and solutions priced under the CPM model in 2011 and around 2% under the CPT model. In the second quarter of 2011, we launched trial advertising campaigns priced with CPA features. The willingness of Chinese advertisers to change their existing practices and adopt more sophisticated pricing models will affect the demand for our services and solutions. We believe that willingness of Chinese advertisers to adopt a CPM pricing model has not been a

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limiting factor in our growth to date, as we have been able to provide advertisers with measurement and analysis tools that help demonstrate the effectiveness of our targeted advertising under the CPM pricing model.

Improvements in Technology

          Our ability to develop and apply improved technology affects the attractiveness of our targeted advertising services and solutions. It also affects our ability to reach each advertiser's target audience and also to accurately value and efficiently utilize our advertising space. As targeted advertising becomes more effective, and as improvements in reporting and analytical tools allow advertisers to measure their return on investment from internet advertising spending with greater accuracy, we believe that advertisers will be willing to pay higher prices for targeted advertising services and solutions. We invested US$0.7 million, US$1.0 million, US$2.5 million and US$3.4 million in research and development in 2008, 2009, 2010 and 2011, respectively. After we launched AdChina AdManager in December 2007, our research and development efforts were concentrated on building out our platform, and these efforts culminated in the launch of various software systems under our demand side and supply side platforms. For the remainder of 2012 our research and development initiatives will focus on the following key areas: improvements to our ability to analyze and utilize our user data; further enhancements of ADP, including further developing the real-time bidding system under DSP for advertising inventory; further developing our mobile platform and the launch of our new performance-based solutions, which would enable us to offer services and solutions using a CPA pricing model.

Number of Advertisers and Average Spend Per Advertiser

          We derived over 98% of our net revenues in 2010 and 2011 from internet advertising services and solutions that we provide to advertisers. Our net revenues are a function of both the number of advertisers for whom we execute advertising campaigns each year and the average spend per advertiser each year. We define average spend per advertiser as fees earned from customers during a given period divided by the number of advertisers during that period. Since our inception, we have been generally successful in increasing each of these measures each year. Our number of advertisers grew by 196% from 2008 to 2009, by 90% from 2009 to 2010, and by 71% from 2010 to 2011, while our average spend per advertiser grew by 32% from 2008 to 2009, by 33% from 2009 to 2010 and by 9% from 2010 to 2011. Increases in the number of our advertisers are driven primarily by our sales and marketing efforts, which entail educating potential customers about the differentiated reach and measurable return on investment enabled by our platform. In addition, increases in the number of our advertisers are driven by word of mouth regarding our platform as well as advertiser interest in utilizing internet advertising. Increases in average spend per advertiser are primarily driven by our customers' satisfaction with our services and solutions, which often relates to our success in demonstrating to them a higher return on investment than they are able, or would likely be able, to achieve through other channels. In addition to seeking out prospective advertisers, our sales force also visits our existing advertisers, including ones that are represented by advertising agencies and are not our direct customers, to build our relationship and persuade them to increase the amount of their budget they spend on our advertising platform. In addition, increases in average spend per advertiser are driven by increases in advertisers' marketing budgets overall or in the relative percentage of those budgets allocated to the China market or to internet advertising.

Advertising Agency Commissions

          As is customary in the advertising industry in China, we pay commissions to third-party advertising agencies who represent advertisers that use our platform. The commissions are generally calculated on a sliding scale as a percentage of fees earned from customers, increasing

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with the volume of fees that we receive through an advertising agency. Increases or decreases in the commission rates that we negotiate with advertising agencies will tend to decrease or increase our net revenues, which are reported net of such commissions. Historically, our average commission rate fell almost a third, by 31%, from 2008 to 2009 as one large customer to whom we had granted a favorable commission rate in 2008 no longer accounted for as large a proportion of our gross fees in 2009. Our average commission rate more than doubled, by 112%, from 2009 to 2010 because we pursued a strategy of sourcing more of our business through advertising agencies and because the growth of our business meant that our advertising agency customers often qualified for higher commissions under our sliding scale policy. Our average commission rate decreased approximately 10% from 2010 to 2011, as the number of direct customers significantly outgrew the number of advertising agencies over this period, which over-weighed the higher commissions to some advertising agency customers under our sliding scale policy. We expect the average agency commission rate to increase as our business grows and generates more fees, since the commissions are calculated on a sliding scale as a percentage of fees earned from customers. However, we anticipate that any such increase will be limited in the longer term as we reach the volume caps that we place on our agency commission rates in our agreements with advertising agencies.

Selected Statements of Operations Items

Net Revenues

          We currently derive substantially all of our net revenues from internet advertising services and solutions that we provide to advertisers on our integrated platform, both directly to the advertisers and indirectly through advertising agencies. We generally sell advertising services and solutions in the context of specific advertising campaigns and sign a separate contract for each campaign, the duration of which is typically one month. Our net revenues reflect the fees earned from customers net of commissions we pay on an annual basis to third-party advertising agencies who represent advertisers that use our integrated platform, business tax, related surcharges and government-imposed cultural development fees. We began to derive a portion of our net revenues in 2010 from technology fees paid by advertising agencies and advertisers for the use of different systems under ADP and by publishers for the use of different systems under ASP, but the amount is currently not significant.

          We offer internet advertising services and solutions over four sectors. Of our four sectors, our three online sectors — portals and vertical sites, online video, and social media — comprise websites typically accessed through personal computers. We distinguish the three online sectors from each other on the basis of the content of the websites, and we classify all websites other than video and social media ones into the portal and vertical site sector. Our fourth sector is mobile internet, which comprises websites and mobile apps intended to be accessed through mobile devices. While we use this sector classification system for our own internal purposes, most advertisers do not limit their advertising campaigns to a single sector. The following table shows the

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percentage of fees earned from customers we derived from each sector over each of the periods indicated:

 
  Year Ended December 31,  
 
  2008   2009   2010   2011  
 
  (% of fees earned from customers)
 

Portals and vertical sites

    100.0     93.6     85.7     79.3  

Online video

        3.5     9.4     16.3  

Social media

        2.9     4.4     0.9  

Mobile internet

            0.5     3.5  
                   

Total

    100.0     100.0     100.0     100.0  
                   

Note: We use fees earned from customers for this purpose rather than net revenues because it is impractical to allocate agency commissions among the different sectors.

          During our first full year of operations in 2008, we built up our publisher base from websites that appealed primarily to women, and we marketed to advertisers who sought a primarily female target audience. In 2009, we diversified our publisher base to include more websites that appealed to male and youth demographics, and at the same time we also targeted advertisers spanning more industries. By the year ended December 31, 2011, we had successfully diversified our sources of revenue to the point where no industry accounted for more than 15% of our fees earned from customers. The following table shows the percentage of fees earned from customers we derived from each industry over each of the periods indicated:

 
  Year Ended December 31,  
 
  2008   2009   2010   2011  
 
  (% of fees earned from customers)
 

Food and beverage

    4.0     10.1     13.3     14.2  

Mobile communication

    1.8     13.9     15.2     12.0  

Cosmetics and personal care

    72.4     31.2     12.8     10.1  

Automotive

    1.6     3.7     7.2     9.8  

Household products

    2.9     4.9     7.3     8.8  

Apparels

    1.8     4.5     4.7     6.7  

Internet services

    0.6     8.0     5.1     6.3  

IT products

    3.4     5.6     6.0     5.8  

Others

    11.5     18.1     28.4     26.3  
                   

Total

    100.0     100.0     100.0     100.0  
                   

Note: We use fees earned from customers for this purpose rather than net revenues because it is impractical to allocate agency commissions among the different industries.

          As we have diversified our sources of revenue, we have also become less dependent upon any individual customer. In 2008, our largest customer accounted for 32% of our net revenues, whereas our largest customer in 2011 only accounted for 12% of our net revenues. We use the term customer to refer to the party with whom we sign a contract for an advertising campaign, which may be the advertiser or an advertising agency that represents the advertiser. In each of 2009, 2010 and 2011, our largest customer was an advertising agency that represented many different advertisers.

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Cost of Revenues

          Cost of revenues consist primarily of media costs and other costs:

 
  Year Ended December 31,  
 
  2008   2009   2010   2011  
 
  (US$ thousands)
 

Media costs

    2,214     6,112     12,516     20,387  

Other costs

    520     1,218     2,096     4,180  
                   

Total

    2,734     7,330     14,612     24,567  
                   

          Our media costs consist of payments for advertising space on websites and mobile apps. We purchase advertising space from publishers on both an exclusive and a non-exclusive basis. Purchasing on an exclusive basis gives us the exclusive right to place advertisements in that space within the specified contractual period, which is generally one year but sometimes two or three years. We pay a fixed sum for such space regardless of whether we use it, subject to various conditions such as the website continuing to generate a certain minimum traffic over the life of the arrangement. Purchasing on a non-exclusive basis gives us the right to place an advertisement in that space if it is not otherwise taken at the time when we place the advertisement. Contracts for non-exclusive advertising space generally also have a duration of one year. We pay for such space only if we use it, at a price that is generally negotiated upfront on an annual basis.

          Other costs include the salary and benefits (including share-based compensation) for employees who are primarily engaged in activities that contribute directly to the generation of revenue, such as the employees in our ad services group and our publisher relations group. Also included in other costs are the direct overhead expenses and certain costs for maintaining our platform, such as the cost of our content delivery platform and the depreciation and amortization of related equipment.

Operating Expenses

          Operating expenses consist primarily of technology and development expenses, sales and marketing expenses, and general and administrative expenses, net of other operating income.

 
  Year Ended December 31,  
 
  2008   2009   2010   2011  
 
  (US$ thousands)
 

Technology and development

    508     700     2,011     2,753  

Sales and marketing

    1,244     3,057     7,985     15,512  

General and administrative

    1,367     2,206     4,433     27,188  

Other operating expenses/(income)

            (277 )   (996 )
                   
 

Total

    3,119     5,963     14,152     44,457  
                   

          Our technology and development expenses consist primarily of salary and benefits (including share-based compensation) for employees engaged in development and enhancement of our platforms and systems, amortization of our capitalized internal developed software costs and travel expenses incurred by the relevant employees. We expect our technology and development expenses to increase as we continue to develop new services and solutions, such as enhancements to our ADP platform (including further developing the real-time bidding system under DSP for advertising inventory) and mobile advertising platform and the development of our performance-based solutions.

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          Our sales and marketing expenses consist primarily of salary and benefits (including share-based compensation), travel and entertainment expenses, and sales commissions for our employees engaged in sales and marketing activities. We expect our sales and marketing expenses to increase as we expand our sales and marketing team to support the growth of our business.

          Our general and administrative expenses consist primarily of salary and benefits for employees engaged in management and administration, and share based compensation for such employees and certain of our non-employee advisors, business and strategic development expenses incurred by those employees, public relations and meeting expenses, and professional service fees, such as audit fees. We expect our general and administrative expenses to increase after the completion of this offering, when we become a publicly listed company; such costs would include costs relating to enhancing our internal controls, complying with Section 404 of the Sarbanes-Oxley Act and maintaining investor relationships.

          Our other operating income related primarily to government subsidies that we received from a local government for general corporate purposes and to support our ongoing operations in the region. Such subsidies are granted from time to time at the discretion of the government authority. We are not subject to any obligations related to the grant of such subsidies, and the use of such subsidies is at our discretion.

Taxation

Cayman Islands

          We are not subject to income or capital gains tax under the current laws of the Cayman Islands.

PRC

          The PRC Enterprise Income Tax Law applies a uniform enterprise income tax rate of 25% to all enterprises incorporated in China unless they qualify certain preferential treatment. Dividends paid by our subsidiaries to our holding company in the Cayman Islands will be subject to a 10% withholding tax.

          Kendall, our wholly owned subsidiary in the PRC, was designated as "software company" by the relevant PRC government authorities in June 2011 and thus was entitled to an income tax exemption for two years beginning with its first profitable year and a 50% tax reduction at a rate of 12.5% for the subsequent three years.

          If our holding company in the Cayman Islands were deemed to be a "resident enterprise" under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See "Risk Factors — Risks Related to Doing Business in China — Under the PRC Enterprise Income Tax Law, we may be classified as a PRC 'resident enterprise,' which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment." Under such circumstances, it is unclear whether dividends paid by Kendall to our holding company in the Cayman Islands would continue to be subject to the 10% withholding tax.

          In November 2011, the Ministry of Finance released Circular Caishui [2011] No. 111 mandating Shanghai to be the first city in China to carry out a pilot program of tax reform. Effective January 1, 2012, any entity in Shanghai that falls in the category of "selected modern service industries" will switch from a business tax payer to a value-added tax, or VAT, payer, who is permitted to offset expenses incurred in providing the relevant services against the taxable income. All of our subsidiaries and consolidated affiliated entities in Shanghai fall into this category and will be subject to VAT at a rate of 6% and will stop paying business tax from January 1, 2012 onwards.

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We expect that the subjection to VAT will not have material impact on our consolidated financial statements.

Hong Kong

          Our subsidiaries did not have assessable profits that were earned in or derived from Hong Kong. Accordingly, no Hong Kong profit tax has been provided for in the periods presented.

Critical Accounting Policies

          We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

          The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Accounts Receivable

          We generally allow a credit period of 30 to 120 days to our customers after we complete the delivery of their advertising campaign. Accounts receivable primarily represent amounts due from customers that are recorded at their carrying value. Accounts receivable are reduced by an allowance that reflects our best estimate of the amounts that will not be collected. We review our accounts receivable on a periodic basis and record allowances when there is a doubt on the collectability of the balance. In evaluating the collectability of an account receivable balance, management considers various factors, including the aging of the balance, customer specific facts and economic conditions. Overdue balances greater than 30 days are reviewed individually for collectability.

          Accounts receivable balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.

Revenue Recognition

          Internet advertising revenue.    We currently derive substantially all of our net revenues from internet advertising services and solutions that we provide to advertisers, both directly to the advertisers and indirectly through advertising agencies. We recognize revenues when the following criteria are met: persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery has occurred and collectability is reasonably assured. Revenues represent fees earned from customers net of agency commissions, business tax, related surcharges and government-imposed cultural development fees.

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          Customer advertising campaign agreements are generally short term in nature (typically one month), and revenue is recognized over the service period in which the campaigns are delivered provided that no significant obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. Our prices for advertising campaigns utilize a CPM pricing model. In our contracts we typically charge a fixed fee for delivering a guaranteed number of impressions. We act as a principal in all transactions and record advertising revenues on a gross basis due to our legal and substantial obligations to perform in accordance with our customer contracts and the risk and rewards we retain in regards to fulfilling those obligations, which make us the primary obligor to the advertisers. The associated expenses are recorded as cost of revenues.

          Internet advertising revenue recognition requires judgment, including whether certain arrangement includes multiple elements, and if so, whether vendor-specific objective evidence or third-party evidence of fair value exists for those elements. If vendor-specific objective evidence or third-party evidence of the fair value of each element of the arrangement exists, the elements of the contract are unbundled and the revenue is recognized for each element when or as delivered. For contracts where we provide customers with advertising campaigns that contain multiple deliverables (for example, advertisements in different formats to be delivered over different periods of time), since we sell the marketing services over a broad price range, there is a lack of objective and reliable evidence of fair value for each deliverable included in the arrangement, and depending on the nature of customer arrangement, revenue may be contingent upon the delivery of previously undelivered items. Accordingly, we account for these contracts as a single unit of account, and such revenues are deferred and subsequently recognized ratably upon the commencement of the last deliverable over the remaining performance period of the arrangement. Revenue is deferred when non-refundable payments are received from customers prior to satisfaction of the revenue recognition criteria discussed above. When all of the elements within an arrangement are delivered ratably over the agreement period, the revenues are recognized on a straight line basis over the contract period.

          We adopted ASU No. 2009-13 on January 1, 2011 on a prospective basis for applicable transactions originating or materially modified after December 31, 2010. This standard eliminates the use of the residual method and requires arrangement consideration to be allocated based on the relative selling price for each deliverable. It also modifies the fair value requirements by requiring the use of a best estimate of selling price in addition to vendor specific objective evidence and third party evidence for determining the selling price of a deliverable. The adoption of this standard did not have a significant impact on our revenue recognition for multiple deliverable arrangements. Internet advertising revenue recognition requires judgment, including whether an arrangement includes multiple elements, and if so, when neither vendor specific objective evidence nor third party evidence of selling price exists, we use our best estimate of selling price to allocate arrangement consideration on a relative basis to each element. Best estimate of selling price is generally based on the selling prices of the various elements when they are sold to customers of a similar nature and geography on a stand-alone basis or an estimated stand-alone pricing when the element has not previously been sold stand-alone. These estimates are generally based on pricing strategies, market factors and strategic objectives. Revenue is deferred when non-refundable payments are received from customers prior to the satisfaction of revenue recognition criteria discussed above. When each element within an arrangement is delivered ratably over the agreement period, the revenues are recognized on a straight-line basis over the delivery period.

          We also offer incentives to our advertising agency customers in the form of volume commissions. These incentives are accrued depending on the agreements with the customers based on a pre-determined sliding scale percentage. The commissions are usually settled on annual basis in the following fiscal year. We estimate the commission payable at the end of each

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accounting period end based on the aggregate revenue using the applicable commission rate and the commissions are recorded as a reduction of revenue.

          Technology fee.    We also generate technology fees for making our systems directly available to our customers. Such revenue is recognized over the contractual period, provided no significant obligations of ours remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. Our customers do not have the right to take possession of our software at any time during or after the term of the relevant customer agreement. Accordingly, our revenue recognition is outside the scope of the prescribed accounting guidance relevant to software revenue. The volume of such transactions is not significant.

          Internet advertising design service fee.    Internet advertising designing revenues represent fees earned from our customers for providing design solutions for internet advertising. There is no warranty, maintenance or other post contract services after the design solution is delivered to our customers. The revenues are recognized upon customer acceptance of the design deliverables, and the volume of such transactions is not significant.

          Barter transactions.    We occasionally enter into cross-promotional agreements, which represent advertising-for-advertising barter transactions. Such barter transactions should be recorded at fair value only if such value of the advertising surrendered in the transaction is determinable within reasonable limits. We recognized revenue for such barter transactions only when the fair value is determinable and the volume of such transactions is not significant.

          E-commerce sale of merchandise.    Prior to discontinuing our e-commerce operations in September 2010, we sold merchandise sourced from manufacturers and distributors in China and operated the YoBrand.com website. We recorded product sales and related costs on a gross basis when we were the primary obligor in a transaction. When we were not the primary obligor in a transaction and were instead acting as an agent, fees earned are recorded on a net basis. Revenue from our e-commerce sale of merchandise was recorded net of value-added and business taxes. The volume of our e-commerce transactions was not significant.

Income Taxes

          The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including the long-range forecast of future taxable income and the evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowances are made to earnings in the period when such assessments are made.

          Our tax rate is based on expected income, statutory tax rates and tax planning opportunities available in the jurisdictions in which we operate. For interim financial reporting, we estimate the annual effective tax rate based on projected taxable income for the full year and record a quarterly income tax provision in accordance with the anticipated annual effective tax rate. As the year progresses, we refine the estimates of the year's taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date

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provision reflects the expected annual tax rate. In arriving at the estimated effective tax rate, no effect shall be included for the tax related to significant, unusual or extraordinary items for the interim period or for the fiscal year. The tax effects of these items should instead be computed and recognized as a discrete tax event in the period of occurrence. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions.

          We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which we have already properly recorded the tax benefit in the income statement. At least quarterly, we assess the likelihood that the deferred tax asset balance will be recovered from future taxable income. We take into account such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of a realization of a deferred tax asset. To the extent recovery is unlikely, a valuation allowance is established against the deferred tax asset which will increase our income tax expense in the year such determination is made. Based on our review of the factors mentioned above, we consider it is more likely than not that Kendall and New E-Media will realize the benefits of these deductible differences, and accordingly we did not provide any valuation allowances on the deferred tax assets for the years ended December 31, 2009, 2010 and 2011.

          We recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense, if any. At December 31, 2009, 2010 and 2011, the amounts of gross unrecognized tax benefits were US$0. We do not anticipate any significant increase to our liability for unrecognized tax benefit within the next 12 months.

Share-based Compensation Expenses

          We have adopted stock option plans to attract and retain the best personnel and provide additional incentives to directors, employees, consultants and advisors of our company. We have authorized the issuance and reservation of up to a total of 22,022,152 ordinary shares under all our share incentive plans. We had 1,283,000 vested and unvested restricted share units and 5,530,745 vested and unvested options granted to certain directors, employees, officers, consultants and advisors outstanding as of December 31, 2011. The aggregated intrinsic value of all outstanding vested and unvested options based on the difference between the IPO price and the exercise price of the options outstanding as of December 31, 2011 is             . Such intrinsic value is calculated based on the difference between the IPO price and the exercise price of the options multiplied by the number of outstanding vested and unvested options.

          We account for the share based compensation of the options granted to our employees based on the grant date fair value of the option. The options granted to non-employees are remeasured each period end. We account for restricted share units granted based on the grant date fair value of the underlying ordinary shares. Our share-based compensation expenses have been categorized as either cost of revenue, general and administrative expenses, sales and marketing expenses or technology and development expenses, depending on the job or service functions of the grantees.

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          We account for any change in any of the terms or conditions of stock options as a modification of the award. When a modification occurs, we calculate incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent assumptions at the modification date. For vested options, we would recognize incremental compensation cost in the period the modification occurs and for unvested options, we would recognize, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date. In March 2011, we modified 265,302 share options previously granted to certain non-employees by accelerating the vesting schedule of those options. Total share-based compensation expense recognized for these non-employee options for the year ended December 31, 2011 was US$1.3 million.

          Among options and restricted share units granted to our directors, executive officers and other employees pursuant to stock option plans, the options to purchase 2,541,513 ordinary shares and 445,000 restricted share units have both service and performance conditions. The fair value of these granted options is estimated based on the probability as to whether performance targets will be achieved. If such targets are not met, no compensation cost is recognized and any recognized compensation cost is reversed. In September 2011, we modified 450,875 share options and 305,000 restricted share units with both performance and services conditions by changing the vesting terms into service condition only. Before the modification, no compensation cost for these options and restricted share units was recognized as the original performance targets were not expected to be met and none of the options and restricted share units were expected to be vested. The incremental compensation cost of US$2.0 million and US$2.3 million, respectively, which represents the total cumulative compensation cost revaluated immediately after the modification, should be recognized for the award over the remaining vesting period. In addition, we modified 1,250,000 share options which were granted and immediately vested in April 2011 and replaced them with equal number of fully vested restricted share units of our company. The fair value of US$4.4 million for these immediately vested options was expensed on the original grant day, and the incremental cost of US$3.9 million resulting from the replacement was recognized on the date of modification.

          In December 2011, we granted 1,380,000 immediately vested restricted share units to certain advisors for the advisory services they provided. The restricted share units were fully vested upon the grant and the related expenses of US$8.5 million for these immediately vested restricted share units were expensed at the time of grant. In addition, in December 2011, we modified the exercise price of 426,500 options granted in June 2011 from US$8.00 to US$6.00. The incremental cost resulting from such modification was insignificant.

          We engaged an independent third-party appraiser to assist in the determination of the fair value of our equity securities as of each option grant date in 2008, 2009, 2010 and 2011. We have also taken into consideration the transaction price of our private equity financing transactions with independent third parties closest to the respective valuation dates in our valuation process. Our management is ultimately responsible for all assumptions and valuation methodologies used in such determination.

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          The following table sets forth certain information regarding the share options and restricted share units granted to our directors, officers, employees and advisors at different dates during the 12 months prior to December 31, 2011 and up to the date of this prospectus:

Grant date
  No. of
Ordinary
Shares
Underlying
RSU
Granted
  No. of
Ordinary
Shares
Underlying
Option
Granted
  Exercise
Price Per
Share
  Weighted
average fair
value of
RSU /
Option
  Fair Value
Per Share at
Grant Date
  Intrinsic
Value Per
Option at the
Grant Date
  Type of valuation   DLOM   Discount rate  
 
   
   
  (US$)
  (US$)
  (US$)
  (US$)
   
   
   
 

January 12, 2011

        34,200     4.00     2.29     4.42     0.42   Retrospective     18 %   24 %

March 10, 2011

        680,000     4.00     3.31     6.06     2.06   Contemporaneous     15 %   21 %

March 16, 2011

        7,000     1.00     5.15     6.06     5.06   Contemporaneous     15 %   21 %

March 16, 2011

    345,000         NA     6.06     6.06     NA   Contemporaneous     15 %   21 %

April 26, 2011

        1,718,500 **   6.00     3.63     7.46     1.46   Contemporaneous     5 %   20 %

April 26, 2011

        75,000     1.00     6.46     7.46     6.46   Contemporaneous     5 %   20 %

April 26, 2011

    553,000         NA     7.46     7.46     NA   Contemporaneous     5 %   20 %

June 23, 2011*

        440,500     6.00     4.00     6.16     0.16   Contemporaneous     13 %   23 %

September 29, 2011

    305,000         NA     7.62     7.62     NA   Contemporaneous     10 %   21 %

September 29, 2011**

    1,250,000     (1,250,000 )   NA     6.65     7.62     NA   Contemporaneous     10 %   21 %

December 5, 2011

    1,530,000         NA     6.16     6.16     NA   Contemporaneous     13 %   23 %
 

TOTAL

    3,983,000     1,705,200                                          
                                                   

*
On December 5, 2011, we modified the exercise price for outstanding options granted in June 2011 from US$8.00 to US$6.00. Relevant information in this row has been updated to reflect the applicable valuation metrics on the date of modification.

**
The modification of 1,250,000 share options aforementioned, which were initially granted and immediately vested in April 2011 and then were replaced with the equal number of our fully vested restricted share units in September 2011, are excluded from the calculation of the number of the share options granted on April 26, 2011. Such 1,250,000 restricted share units are included in the calculation of the number of grants on September 29, 2011. The incremental fair value per share was US$3.14 upon the modification.

Significant Factors, Assumptions, and Methodologies Used in Determining Fair Value of Options

          The binomial model was applied in determining the fair value of our stock options. The binomial model requires the input of highly subjective assumptions including the expected stock price volatility and sub-optimal early exercise factor at which employees and non-employees are likely to exercise stock options. The sub-optimal early exercise factor was estimated based on the vesting and contractual terms of the awards and management's expectation of exercise behavior of the grantees. The risk-free rate for periods within the contractual life of the option is based on the U.S. zero coupon bond yield curve in effect at the time of grant. For expected volatilities, we have made reference to historical volatilities of several comparable companies.

          If factors change and we employ different assumptions for estimating share-based compensation expenses in future periods or if we decide to use a different valuation model, our share-based compensation expenses in future periods may differ significantly from what we have recorded in prior periods, which could materially affect our operating income, net income and net income per share.

          The binomial model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, which are characteristics not present in our option grants. Existing valuation models, including the Black-Scholes, binomial and other lattice models, may not provide reliable measures of the fair value of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may be significantly different from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based compensation awards, such as employee share options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair value originally estimated on the grant date and reported in our financial statements. Alternatively, values that are significantly higher

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than fair values originally estimated on the grant date and reported in our financial statements may be realized from these instruments. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

Significant Factors, Assumptions, and Methodologies Used in Determining Fair Value of Ordinary Shares

          We are a private company with no quoted market for our ordinary shares. We therefore needed to make estimates for the fair value of our ordinary shares at the relevant grant dates. In determining the fair value of our ordinary shares, we have considered the guideline prescribed by the AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held Company Equity Securities Issued and Compensation, or the Practice Aid. Specifically, paragraph 16 of the Practice Aid sets forth the preferred types of valuation that should be used.

          The procedures performed to determine the fair value of our ordinary shares were based on the income approach to estimate the aggregate equity value of our company at the relevant stock option or restricted share unit grant dates. The market multiple approach was performed as well to substantiate the income approach result. We have used the option-pricing method to allocate the aggregate equity value to preferred and ordinary shares. The option-pricing method treats preferred shares and ordinary shares as call options on the enterprise's value, with exercise prices based on the liquidation preference of the preferred shares. The significant assumptions used in this method include volatility and probability of different liquidity scenarios. The following table sets forth the significant assumptions applied in the option-pricing allocation method during the 12 months prior to December 31, 2011 and up to the date of this prospectus:

 
   
  Probability of liquidity scenario  
 
  Volatility  
Date
  Liquidation   Private   IPO  

January 12, 2011

    47 %   35 %   50 %   15 %

March 16, 2011

    46 %   35 %   35 %   30 %

April 26, 2011

    32 %   20 %   20 %   60 %

June 23, 2011

    41 %   20 %   20 %   60 %

September 29, 2011

    51 %   20 %   20 %   60 %

December 5, 2011

    56 %   20 %   20 %   60 %

          Volatility:    Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. We estimated the volatility of our shares based on historical volatility of comparable companies' shares.

          Probability of scenarios:    The probability of each scenario is based on the best estimate of our board and management at each valuation date. The decrease of liquidation probability from 45% on October 5, 2010 to 20% on September 29, 2011 and the increase of IPO probability from 5% to 60% for the same period is in line with the growth of our operating and financial performance, additional private equity financing, and the preparation for this offering during this period.

          The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, the unique business risks, the liquidity of our shares and our operating history and prospects at the time of each grant. The income approach and equity allocation method we used applied the following key assumptions or bases:

          General assumptions:    No material changes in the existing political, legal, fiscal and economic conditions in China; our ability to recruit and retain competent management, key

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personnel and technical staff to support our ongoing operations; and no material deviation in industry trends and market conditions from economic forecasts. These assumptions are inherently uncertain and subjective.

          Discount rate:    The risks associated with achieving the estimated cash flow were assessed in selecting the appropriate discount rates, which had been determined to be 25-35% in 2010 and 20-24% in 2011. We determined the discount rate before valuation date July 17, 2010 based on the analysis of required rates of return by equity investors in start-up, early development and expansion stage companies as referenced in the Practice Aid. Subsequent to July 17, 2010, the discount rates were based on the estimated market required rate of return for investing in our company, or weighted average cost of capital, or WACC, which was derived by using the Capital Asset Pricing Model, a method that market participants commonly use to price securities. WACC was determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and non systematic risk factors. WACCs are estimated based on certain publicly traded companies in the internet advertising industries as our guideline comparable companies. The decrease in discount rates from 25% in October 2010 to 23% in December 2011 was as a result of our business growth, operating and financial milestones achieved and obtaining preferred share financing from investors.

          Discount for lack of marketability, or DLOM:    Prior to July 16, 2010, we did not include any DLOM in our fair value calculation as that has been considered in the risk adjusted required return rates. Subsequent to July 16, 2010, when determining the DLOM, empirical studies guidelines regarding the discount of restricted stock such as FMV Opinions, Inc.'s restricted stock study were considered as the reference base, and our prospects for liquidity, assessed operating risks, concentration of ownership, uncertainty of value, etc. factors were also considered. The DLOMs were estimated to be 30% in October 2010. The DLOM further decreased to 18% in January 2011, 15% in March 2011, 5% in April and June 2011 as we commenced the preparation for this offering since January 2011. The DLOM increased to 10% in September 2011 and 13% in December due to the increased volatility and uncertainty of the global capital market. The lower DLOM is used for the valuation, the higher is the determined fair value of the ordinary shares.

          The market approach is also applied as a cross check to the income approach and is as an effective indicator of our fair value in an orderly transaction between market participants. Under the market approach, the appropriate multiples, such as EV/EBITDA, at the valuation dates, and multiplying the relevant financial indicators to be representative of the performance of our company. The market multiples were obtained through the market comparison method, where several companies with stock traded in the public market were selected for comparison purposes and used as a basis for choosing reasonable market multiples for our company.

Significant Factors Contributing to the Difference in Fair Value Determined

          The determined fair value of our ordinary shares increased from $1.93 as of July 17, 2010 to $3.19 as of October 5, 2010, primarily due to the following reasons:

    Our financial performance continued to strengthen during this period. Our net revenue in the third quarter increased by 42% over the second quarter. In addition, we achieved our first EBITDA profit (non-GAAP) in this period. The probability that we can achieve our longer term financial forecast also increased. Accordingly, we reduced the discount rate from 28% to 25%.

    The number of advertisers using our platform to execute advertising campaigns grew from 98 in the three months ended June 30, 2010 to 141 in the three months ended September 30, 2010. Net revenues per advertiser remained stable at around $58 thousand per advertiser, despite the diversification of our customer base.

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    In July 2010, one of the top international agencies adopted our system under our demand side platform system.

    An additional 21 publishers adopted our AFP operating system in the third quarter of 2010.

    In September, we launched our mobile advertising platform.

          The determined fair value of our ordinary shares increased from $3.19 as of October 5, 2010 to $4.42 as of January 12, 2011, primarily due to the following reasons:

    Our financial performance continued to improve in this period. Our net revenue in the fourth quarter continued to grow 19% compared to the third quarter. We continue to achieve the EBITDA profit (non-GAAP) for a second consecutive quarter.

    The number of advertisers using our platform to execute advertising campaigns grew from 141 in the three months ended September 30, 2010 to 154 in the three months ended December 31, 2010. The net revenues per advertiser also increased from $58 thousand to $63 thousand per advertiser quarter on quarter.

    An additional 15 publishers adopted our AFP operating system in the fourth quarter of 2010.

    Our online advertising business was becoming increasingly accepted by advertisers and we further strengthened our marketing efforts. Our operating performance continued to improve.

    We carried out our third round of private equity funding in the amount of US$38 million from the issuance and sale of our Series C preferred shares, demonstrating investors' confidence in our business and also providing additional funding for our business growth.

          The determined fair value of our ordinary shares increased from $4.42 as of January 12, 2011 to $6.06 as of March 10 and March 16, 2011, primarily due to the following reasons:

    Despite the seasonality of our business, we were able to achieve a quarterly adjusted EBITDA profit (non-GAAP) for the first quarter of a fiscal year for the first time. This represented the third consecutive quarter in which we achieved an adjusted EBITDA profit. Our first quarter earning results were higher than what we had budgeted in the fourth quarter of 2010. These operating results represent our successful business strategy execution and enhanced operating efforts. Accordingly, our discount rate has reduced from 24% to 21%.

    In January 2011, we launched AFM, our proprietary internet advertising operating system for mobile publishers.

    The number of advertisers using our platform to execute advertising campaigns grew from 154 in the three months ended December 31, 2010 to 159 in the three months ended March 31, 2011. The net revenues per advertiser decreased from $63 thousand to $52 thousand quarter on quarter mainly due to seasonality factors which were within our budgets and expectations.

    An additional 30 publishers adopted our AFP operating system in the first quarter of 2011.

    We extended our geographic reach by opening a new office in Xiamen in the first quarter of 2011.

    Due to the resulting increased likelihood of the marketability of our ordinary shares, the DLOM further decreased from 18% in January 2011 to 15% in March 2011 as we commenced the preparations for this offering in January 2011.

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          The determined fair value of our ordinary shares increased from $6.06 as of March 16, 2011 to $7.46 as of April 26, 2011, primarily due to the following reasons:

    We continued to achieve strong operating and financial performance during the period. With our increased scale and consistency of achieving our financial forecast, the discount rate decreased from 21% to 20%;

    An additional eight publishers adopted our AFP operating system in April 2011;

    Due to the resulting increased likelihood of the marketability of our ordinary shares, the DLOM further decreased from 15% in March 2011 to 5% in April 2011 as we made substantial progress towards this offering during the period.

          The determined fair value of our ordinary shares increased from $7.46 as of April 26, 2011 to $8.49 as of June 23, 2011 (which was subsequently modified to $6.16 on December 5, 2011), primarily due to the following reasons:

    Kendall, one of our wholly owned subsidiaries in the PRC, was designated as "software company" by the relevant PRC government authorities in June 2011 and thus was entitled to an income tax exemption for two years beginning with its first profitable year and a 50% tax reduction at a rate of 12.5% for the subsequent three years. We revised our budget for the next 5 years to reflect the reduced income tax rate we are entitled to.

    The number of advertisers using our platform to execute advertising campaigns grew significantly from 159 in the three months ended March 31, 2011 to 232 in the three months ended June 30, 2011.

    In June 2011, another top international agency adopted our system under our demand side platform.

          Although we continued to achieve strong operating and financial results in the third and fourth quarters of 2011, the determined fair value of our ordinary shares decreased from $8.49 as of June 23, 2011 to $7.62 as of September 29, 2011 and $6.16 as of December 5, 2011. The decrease was primarily caused by an increase of DLOM to 10% in September and 13% in December 2011 from 5% in June 2011 due to the volatility and uncertainty of the global capital markets and an increase in the discount rate to 21% in September 2011 and 23% in December 2011 from 20% in June 2011 due to the increased systematic risk and industry risk as a result of the negative overall market condition during the period.

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Results of Operations

          The following table summarizes our consolidated results of operations for the periods indicated. Our business has grown rapidly since our inception in 2007. Our limited operating history makes it difficult to predict future operating results. We believe that period-to-period comparisons of results of operations should not be relied upon as indicative of future performance.

 
  Year Ended December 31,  
 
  2009   2010   2011  
 
  (US$ thousands)
 

Net revenues

    10,796     27,274     50,671  

Cost of revenues

    (7,330 )   (14,612 )   (24,567 )
               

Gross profit

    3,466     12,662     26,104  

Operating expenses

                   
 

Technology and development

    (700 )   (2,011 )   (2,753 )
 

Sales and marketing

    (3,057 )   (7,985 )   (15,512 )
 

General and administrative

    (2,206 )   (4,433 )   (27,188 )
 

Other operating income

        277     996  
               

Total operating expenses

    (5,963 )   (14,152 )   (44,457 )
               

Operating loss from continuing operations

    (2,497 )   (1,490 )   (18,353 )

Interest income

    50     45     285  

Interest expense

    (44 )        

Other income/(expenses)

    (1 )   (92 )   130  
               

Loss before income tax

    (2,492 )   (1,537 )   (17,938 )

Income tax benefit/(expense)

    263     (426 )   (617 )
               

Loss from continuing operations

    (2,229 )   (1,963 )   (18,555 )

Loss from discontinued operations

    (196 )   (1,055 )    
               

Net loss

    (2,425 )   (3,018 )   (18,555 )
               

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Comparison of the Years Ended December 31, 2011 and 2010

          Net Revenues.    Our net revenues increased by 85.8% from US$27.3 million in 2010 to US$50.7 million in 2011. This increase was primarily due to a 71.2% increase in the number of advertisers using our platform to execute advertising campaigns, from 264 in 2010 to 452 in 2011, as our business grew, as well as a 8.5% increase in net revenues per advertiser, from US$103 thousand in 2010 to US$112 thousand in 2011. Advertisers in the automotive industry accounted for the largest increases in our net revenues over the same period last year.

          Cost of Revenues.    Our cost of revenues increased by 68.1% from US$14.6 million in 2010 to US$24.6 million in 2011. The increase in our cost of revenues was primarily due to increases in media costs.

    Media costs. Our media costs increased by 62.9% from US$12.5 million in 2010 to US$20.4 million in 2011, primarily due to the increased volume of advertising space that we purchased to accommodate the growth of our business.

    Other costs. Our other costs increased by 99.4% from US$2.1 million in 2010 to US$4.2 million in 2011, primarily due to increases in salary and benefits with increases in average related headcount from 66 in 2010 to 109 in 2011 as we expanded our business.

          Gross Margin.    Our gross margin increased from 46.4% in 2010 to 51.5% in 2011 as our economies of scale and improvements in our data analysis capability allowed us to use our advertising space more efficiently.

          Operating Expenses.    Our operating expenses increased by 214.1% from US$14.2 million in 2010 to US$44.5 million in 2011. The increase in our operating expenses was due to increases in technology and development, sales and marketing, and general and administrative expenses, net of the increase in other operating income.

    Technology and development expenses. Technology and development expenses increased by 36.9% from US$2.0 million in 2010 to US$2.8 million in 2011. This increase was primarily due to salary and benefits increasing by 57.0% from approximately US$1.1 million to approximately US$1.7 million as we increased our average related headcount from 89 in 2010 to 108 in 2011.

    Sales and marketing expenses. Sales and marketing expenses increased by 94.3% from US$8.0 million in 2010 to US$15.5 million in 2011. Travel and entertainment expenses increased by 121.1% from US$2.5 million to US$5.5 million and salary and benefits increased by 55.3% from US$3.2 million to US$5.0 million as we expanded our sales and marketing activities to build up our business and increased our average related headcount from 159 in 2010 to 222 in 2011. Sales commissions for employees increased significantly from US$0.7 million in 2010 to US$3.1 million in 2011.

    General and administrative expenses. General and administrative expenses increased significantly more than five times from US$4.4 million in 2010 to US$27.2 million in 2011 primarily due to increase of share-based compensation and headcount increase. Share-based compensation expenses increased significantly from US$0.4 million in 2010 to US$19.7 million in 2011, primarily due to share-based compensation incurred in connection with grants of options and restricted share units over the period and one-time expenses incurred for the modification of terms and vesting schedules of previously granted options and restricted share units, the grants of immediately vested options and restricted share units, and the modification by replacing previously granted and vested options to an executive with the equal number of immediately vested restricted share units.

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    Other operating income. Other operating income increased by 260.1% from US$0.3 million in 2010 to US$1.0 million in 2011. Our other operating income related primarily to government subsidies that we from time to time received from local governments for general corporate purposes and to support our ongoing operations in China.

          Income Tax Expenses.    Our income tax expenses increased by 44.9% from US$0.4 million in 2010 to US$0.6 million in 2011 primarily due to our increased taxable income for PRC tax purposes.

          Loss from Continuing Operations, Net of Tax.    As a result of the foregoing, our loss from continuing operations increased by more than 8-fold from US$2.0 million in 2010 to US$18.6 million in 2011.

          Loss from Discontinued Operations, Net of Tax.    Our loss from discontinued operations, net of tax, decreased from US$1.1 million in 2010 to zero in 2011. The losses in 2010 were incurred in our YoBrand e-commerce business, which we discontinued in September 2010 when we terminated our contractual arrangements with Topweaver.

Comparison of the Years Ended December 31, 2010 and 2009

          Net Revenues.    Our net revenues increased by 153% from US$10.8 million in 2009 to US$27.3 million in 2010. This increase was primarily due to a 90% increase in the number of advertisers using our platform to execute advertising campaigns, from 139 in 2009 to 264 in 2010, as our business grew, as well as a 33% increase in net revenues per advertiser, from US$78 thousand in 2009 to US$103 thousand in 2010. Advertisers in the mobile communication industry accounted for the largest increases in our net revenues.

          Cost of Revenues.    Our cost of revenues increased by 99% from US$7.3 million in 2009 to US$14.6 million in 2010. The increase in our cost of revenues was primarily due to increases in media costs.

    Media costs. Our media costs increased by 105% from US$6.1 million in 2009 to US$12.5 million in 2010, primarily due to the increased volume of advertising space that we purchased to accommodate the growth of our business, as well as an increase in the purchase of more expensive online advertising formats, such as online video.

    Other costs. Our other costs increased by 72.0% from US$1.2 million in 2009 to US$2.1 million in 2010, primarily due to increases in salary and benefits with increases in average related headcount from 33 in 2009 to 66 in 2010 as we expanded our business.

          Gross Margin.    Our gross margin increased from 32.1% to 46.4% as our economies of scale and improvements in our data analysis capability allowed us to use our advertising space more efficiently.

          Operating Expenses.    Our operating expenses increased by 137% from US$6.0 million in 2009 to US$14.2 million in 2010. The increase in our operating expenses was due to increases in technology and development, sales and marketing, and general and administrative expenses, net of the increase in other operating income.

    Technology and development expenses. Technology and development expenses increased by 187% from US$0.7 million in 2009 to US$2.0 million in 2010. Salary and benefits increased by 171% from US$0.4 million to US$1.1 million and travel expenses increased by 275% from US$0.1 million to US$0.3 million as we increased our average related headcount from 33 in 2009 to 89 in 2010, covered more advertisers and publishers in more geographical locations and intensified our research and development efforts to expand the functionalities of our supply side and demand side platforms.

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    Sales and marketing expenses. Sales and marketing expenses increased by 161% from US$3.1 million in 2009 to US$8.0 million in 2010. Travel and entertainment expenses increased by 302% from US$0.6 million to US$2.5 million and salary and benefits increased by 94.3% from US$1.7 million to US$3.2 million as we increased our average related headcount from 69 in 2009 to 159 in 2010 and expanded our marketing activities to build up our business. We also introduced a sales commission policy for our sales and marketing team in 2010 and incurred US$0.7 million in related expenses during that year; we did not pay sales commissions prior to 2010. We focused our efforts on developing relationships with more advertising agencies as we continued to diversify our advertiser base by industry and geography.

    General and administrative expenses. General and administrative expenses increased by 101% from US$2.2 million in 2009 to US$4.4 million in 2010. Business and strategic development expenses increased by 249% from US$0.3 million to US$0.9 million and salary and benefits increased by 62.8% from US$0.7 million to US$1.1 million as we increased our average related headcount from 24 in 2009 to 44 in 2010 and intensified our business development activities.

    Other operating income. Other operating income increased from US$0.0 million in 2009 to US$0.3 million in 2010. Our other operating income related primarily to government subsidies that we received from local governments for general corporate purposes and to support our ongoing operations in the region.

          Income Tax Benefit/(Expense).    We had income tax benefit of US$0.3 million in 2009 and income tax expenses of US$0.4 million in 2010. We incurred income tax expenses in 2010 because we had positive net income for PRC tax purposes, as certain expenses that reduce net income for U.S. GAAP purposes are not tax deductible in the PRC.

          Loss from Continuing Operations.    As a result of the foregoing, our loss from continuing operations decreased by 11.9% from US$2.2 million in 2009 to US$2.0 million in 2010.

          Loss from Discontinued Operations, Net of Tax.    Our loss from discontinued operations, net of tax, increased by 436% from US$0.2 million in 2009 to US$1.1 million in 2010. The increase was due to losses we incurred in our YoBrand e-commerce business after we commenced this new business in January 2010. We discontinued this operation in September 2010 when we terminated our contractual arrangements with Topweaver.

Selected Quarterly Results of Operations

          The following table sets forth our unaudited condensed consolidated quarterly results of operations for each of the eight quarters in the period from January 1, 2010 to December 31, 2011. You should read the following table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated quarterly financial information on the same basis as our audited consolidated financial statements. The unaudited condensed consolidated financial information includes all adjustments, consisting only of normal recurring adjustments, that we consider

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necessary for a fair presentation of our financial position and operating results for the quarters presented.

 
  Three Months Ended  
 
  March 31,
2010
  June 30,
2010
  September 30,
2010
  December 31,
2010
  March 31,
2011
  June 30,
2011
  September 30,
2011
  December 31,
2011
 
 
  (US$ thousands)
 

Net revenues

    3,755     5,711     8,120     9,688     8,279     12,027     14,247     16,118  

Cost of revenues

    (2,203 )   (3,077 )   (4,278 )   (5,054 )   (4,337 )   (5,664 )   (6,767 )   (7,799 )
                                   

Gross profit

    1,552     2,634     3,842     4,634     3,942     6,363     7,480     8,319  

Operating expenses:

                                                 
 

Technology and development

    (348 )   (466 )   (557 )   (640 )   (599 )   (781 )   (757 )   (616 )
 

Sales and marketing

    (1,199 )   (1,775 )   (2,126 )   (2,885 )   (2,762 )   (3,623 )   (4,303 )   (4,824 )
 

General and administrative

    (1,102 )   (1,013 )   (1,175 )   (1,143 )   (2,542 )   (6,758 )   (6,441 )   (11,447 )
 

Other operating income

    51     73     46     107     239     185     286     286  
                                   

Total operating expenses

    (2,598 )   (3,181 )   (3,812 )   (4,561 )   (5,664 )   (10,977 )   (11,215 )   (16,601 )
                                   

Operating income/(loss) from continuing operations

    (1,046 )   (547 )   30     73     (1,722 )   (4,614 )   (3,735 )   (8,282 )

Interest income

    10     8     5     22     24     42     103     116  

Interest expense

                                 

Other expense

    (2 )   (7 )   (20 )   (63 )   (35 )   (143 )   100     208  
                                   

Income (loss) before income tax/(benefit)

    (1,038 )   (546 )   15     32     (1,733 )   (4,715 )   (3,532 )   (7,958 )

Income taxes benefit/(expense)

    (288 )   (151 )   4     9     262     (415 )   (77 )   (387 )
                                   

Income (loss) from continuing operations

    (1,326 )   (697 )   19     41     (1,471 )   (5,130 )   (3,609 )   (8,345 )

Loss from discontinued operations, net of tax

    (289 )   (388 )   (378 )                    
                                   

Net income (loss)

    (1,615 )   (1,085 )   (359 )   41     (1,471 )   (5,130 )   (3,609 )   (8,345 )
                                   

Non-GAAP Financial Measures

                                                 

Income (loss) from continuing operations

    (1,326 )   (697 )   19     41     (1,471 )   (5,130 )   (3,609 )   (8,345 )

Add: Share-based compensation

    136     181     337     736     1,685     5,360     4,593     9,536  
                                   

Adjusted income (loss) from continuing operations

    (1,190 )   (516 )   356     777     214     230     984     1,191  
                                   

Income(loss) from continuing operations

    (1,326 )   (697 )   19     41     (1,471 )   (5,130 )   (3,609 )   (8,345 )

Add: Income tax expense/(benefit)

    288     151     (4 )   (9 )   (262 )   415     77     387  

Depreciation and amortization

    85     98     124     140     160     168     217     216  

Interest expense

                                 

Interest income

    (10 )   (8 )   (5 )   (22 )   (24 )   (42 )   (103 )   (116 )

Share-based compensation

    136     181     337     736     1,685     5,360     4,593     9,536  
                                   

Adjusted EBITDA

    (827 )   (275 )   471     886     88     771     1,175     1,678  
                                   

          Our net revenues have grown steadily each quarter, subject only to seasonal effects between the fourth quarter of each year and the first quarter of the following year. The growth of net revenues was mainly attributable to increased use of our internet advertising services by advertisers to promote their brand and market their products and services. Our net revenues have generally increased at higher rate than our cost of revenues and operating expenses during these periods, as our economies of scale and improvements in our data analysis capability allowed us to use our advertising space more efficiently. We achieved positive adjusted income from continuing operations and positive adjusted EBITDA for the first time in the three months ended September 30, 2010. See "— Results of Operations — Non-GAAP Financial Measures" for the definitions of the non-GAAP financial measures presented here.

          Our business is subject to seasonal fluctuations, with the fourth quarter generally being our strongest and the first quarter our weakest, consistent with the advertising industry in general. In addition, advertising spending in China has historically been cyclical, reflecting overall economic conditions as well as the budgeting and buying patterns of our advertisers. See "Risk Factors — Risks Related to Our Business and Industry — Our quarterly revenues and operating results are subject to significant fluctuations and may continue to fluctuate from period to period in the future, which makes our quarterly results of operations difficult to predict."

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Liquidity and Capital Resources

Cash Flows and Working Capital

          Our primary sources of liquidity have historically been proceeds from issuances of convertible promissory notes and convertible preferred shares and proceeds from the sale of our internet advertising services and solutions. As of December 31, 2011, we had US$53.6 million in cash and cash equivalents. Our cash and cash equivalents generally consist of bank deposits and liquid investments with maturities of three months or less. In November 2010, we obtained an RMB20 million (US$3.2 million) line of credit from a PRC bank, primarily to supply our daily operating cash needs. This line of credit was renewed in 2011 and will expire in November 2012. As of December 31, 2011, we had not withdrawn any borrowings under this line of credit.

          We generally receive payments from customers 30 to 120 days from the end of the month in which we complete the delivery of their advertising campaign. In a minority of cases, we require prepayments of between one-third and one-half of the contractual amount, payable before the start of the contract period.

          We generally make payments to publishers for non-exclusive advertising space 30 to 45 days from the end of the month in which we use the advertising space. We generally pre-pay part of the cost for exclusive advertising space before the beginning of each quarter within the contractual period. As a result, our accounts receivable balances have been higher than our accounts payable balances. As we increase the scale of our operations, we have been able to reduce accounts receivable outstanding days by shortening the credit period offered to our customers and to increase accounts payable turnover days by negotiating longer payment terms with our enhanced bargaining power.

          Although we consolidate the results of New E-Media and Yihong, we only have access to cash balances or future earnings of New E-Media and Yihong through our contractual arrangements with them. See "Corporate History and Structure." For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see "— Holding Company Structure."

          We believe that our cash and cash equivalents, our anticipated cash flow from operations and our credit facilities will be sufficient to meet our anticipated cash needs for the next 12 months. We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, collaboration or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand, we may seek to issue debt or equity securities or obtain an additional credit facility.

          The following table sets forth a summary of our cash flows for the periods indicated:

 
  Year Ended December 31,  
 
  2009   2010   2011  
 
  (US$ thousands)
 

Net cash provided by (used in) operating activities

    (6,487 )   (875 )   5,092  

Net cash used in investing activities

    (681 )   (1,681 )   (1,407 )

Net cash provided by financing activities

    18,062     37,965     1,064  

Effect of foreign exchange rate changes on cash and equivalents

    (6 )   270     1,143  
               

Net increase in cash and cash equivalents

    10,888     35,679     5,892  

Cash and cash equivalents at the beginning of the year

    1,183     12,071     47,750  
               

Cash and cash equivalents at the end of the year

    12,071     47,750     53,642  
               

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Operating Activities

          Net cash provided by operating activities in 2011 was US$5.1 million. During 2011, we received US$51.8 million primarily from the provision of internet advertising services and solutions. We spent US$19.0 million to purchase media resources and cover direct costs relating to our revenue generating activities, US$13.7 million in staff compensation and social welfare, US$4.2 million in taxes and fees, primarily relating to income taxes, business taxes, surcharges and government-imposed cultural development fees, and US$11.0 million in technology and development, sales and marketing, and general and administrative expenses. The principal working capital items accounting for the difference between our net cash provided by operating activities and our net loss were an increase in other payables and accruals of US$2.6 million and an increase in accounts payable of US$1.7 million, which was partially offset by an increase in accounts receivable of US$3.5 million. The increases in accounts receivables, accounts payables and other payables and accruals was due to the growth and expansion of our business. The other principal non-cash item accounting for the difference between our net loss and our net cash provided by operating activities during 2011 was share-based compensation expense of US$21.2 million. The share-based compensation expense was related to modifications in 2011 in the vesting schedules of options that we had previously granted to certain of our non-employee advisors, the modification by replacing previously granted and vested options to an executive with the equal number of immediately vested restricted share units, the grant of immediately fully vested restricted share units to certain advisors, as well as other share-based compensation recognized during the period.

          Net cash used in operating activities in 2010 was US$0.9 million. In the year ended December 31, 2010, we received US$23.6 million primarily from the provision of internet advertising services and solutions. We spent US$8.2 million to purchase media resources and cover direct costs relating to our revenue generating activities, US$6.7 million in staff compensation and social welfare, US$1.1 million in taxes and fees, primarily relating to income taxes, business taxes, surcharges and government-imposed cultural development fees, and US$8.8 million in technology and development, sales and marketing, and general and administrative expenses. The principal working capital items accounting for the difference between our net cash used in operating activities and our loss were an increase in accounts receivable of US$8.6 million and partially offsetting increases in other payables and accruals of US$3.8 million, accounts payable of US$3.3 million and income tax payable of US$0.9 million. The increases in accounts receivable and accounts payable were related to the growth of our business in the second half of 2010. The increase in other payables and accruals was related to our adoption of a sales commission policy in 2010 and increased commissions to advertising agencies. The increase in income tax payable was because we had taxable income in New E-Media for the first time in 2010 and certain expenses or losses under U.S. GAAP are not deductible under PRC tax principles. We also had a loss from discontinued operations net of tax of US$1.1 million and share-based compensation of US$1.4 million in 2010.

          Net cash used in operating activities in 2009 was US$6.5 million. In the year ended December 31, 2009, we received US$7.4 million primarily from the provision of internet advertising services and solutions. We spent US$7.1 million to purchase media resources and cover direct costs relating to our revenue generating activities, US$3.4 million in staff compensation and social welfare, US$0.4 million in taxes, primarily relating to business taxes, surcharges and government-imposed cultural development fees, and US$3.1 million in technology and product development, sales and marketing, and general and administrative expenses. The principal working capital items accounting for the difference between our net cash used in operating activities and our loss were an increase in accounts receivable of US$4.4 million and an increase in prepayments and other current assets of US$2.4 million and a partially offsetting increase in accounts payable of US$1.1 million. The increases in accounts receivable, prepayments and other current assets and

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accounts payable were related to the growth of our business. We also had share-based compensation of US$0.6 million in 2009.

Investing Activities

          Net cash used in investing activities in 2011 was US$1.4 million, consisting primarily of purchases of servers, personal computers and other equipment for our business.

          Net cash used in investing activities in 2010 was US$1.7 million, consisting primarily of US$1.4 million in leasehold improvements and purchases of servers, personal computers and other equipment for our business. The purchases were in connection with our opening of a new office in Xiamen in Fujian province, as well as the relocation of our offices in Beijing and Guangzhou. We also had US$0.3 million of net investing cash flows used in discontinued operations related to our YoBrand e-commerce business, which we discontinued when we terminated our contractual arrangements with Topweaver in September 2010.

          Net cash used in investing activities in 2009 was US$0.7 million, consisting of leasehold improvements and purchases of servers, personal computers and other equipment for our business. The purchases were in connection with our further expansion in Shanghai and for equipment needs arising from our increased headcount.

Financing Activities

          Net cash provided by financing activities in 2011 was US$1.1 million, consisting primarily of the proceeds we received from the June 2011 issuance of additional Series C preferred shares as part of the Series C financing plan, partially offset by our cash payment for deferred initial public offering related cost.

          Net cash provided by financing activities in 2010 was US$38.0 million, consisting primarily of the proceeds from the issuance of our Series C preferred shares.

          Net cash provided by financing activities in 2009 was US$18.1 million, consisting of US$16.1 million in proceeds from the issuance of our Series B preferred shares and US$2.0 million in proceeds from the issuance of convertible promissory notes.

Capital Expenditures

          We made capital expenditures of US$0.7 million, US$1.4 million and US$1.4 million in 2009, 2010 and 2011, respectively. In the past, our capital expenditures were primarily used to make leasehold improvements and to purchase servers, personal computers and other equipment for our business. Our capital expenditures may increase in the near term as our business continues to grow and as we expand and improve our technology infrastructure.

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Contractual Obligations

          The following table sets forth our contractual obligations as of December 31, 2011:

 
  Payment Due by Period  
 
  Total   Less than
1 year
  1-3 years   3-5 years  
 
   
  (US$ thousands)
 

Operating Lease Obligations

    2,205     1,547     658      

Purchase Obligations

    5,823     5,598     225      

Investment Obligations

    810     810          
                   

Total

    8,838     7,955     883      
                   

          Our operating lease obligations relate to our leases of office space. Our purchase obligations relate to our contracts to purchase advertising space. Our investment obligations relate to a joint venture agreement we entered into for the purpose of setting up a joint venture entity with a third party.

Holding Company Structure

          We are a holding company with no material operations of our own. We conduct our operations primarily through our wholly owned subsidiaries and consolidated affiliated entities in China. As a result, our ability to pay dividends currently depends upon dividends paid by Kendall, which earns revenues by receiving substantially all of the economic benefits generated by our consolidated affiliated entities in the form of service fees in consideration for the technical services provided by Kendall based on contractual arrangements. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. However, if our PRC subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our PRC subsidiaries are permitted to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, our subsidiaries and our consolidated affiliated entities in China are each required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of their registered capital. In addition, our subsidiaries and our consolidated affiliated entities in China may each allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds at their discretion. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Our PRC subsidiaries have never paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds. In addition, due to restrictions on distributions of share capital from our PRC subsidiaries and affiliated entities and also as a result of their accumulated losses, total restrictions placed on the distribution of our subsidiaries and our consolidated entities' net assets were US$10.4 million and US$21.2 million as of December 31, 2010 and December 31, 2011, respectively. We have derived these numbers from our U.S. GAAP financial statements, but the accumulated losses of our PRC subsidiaries and our PRC consolidated variable interest entities would not be significantly different if calculated pursuant to PRC accounting standards and regulations.

          As an offshore holding company with PRC subsidiaries, loans by us to our PRC subsidiaries which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits equal to the difference between the total investment amount and the registered capital of the PRC subsidiaries. As of the date of this prospectus, Kendall has registered capital of US$15 million and a total investment amount of US$36.5 million. In addition, such loans must be registered with SAFE

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or its local branches. The total investment amount and the registered capital of a foreign-invested enterprise are also subject to staggered ratio restrictions under PRC law. While we do not anticipate any difficulty funding our PRC subsidiaries by increasing their registered capital and the total investment amount within the ratio restrictions when necessary or by registering loans to them with SAFE when required, we cannot assure you that we would not encounter difficulties. See "Risk Factors — Risks Related to Our Corporate Structure — PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may limit our use of the proceeds we receive from this offering to fund our expansion or operations."

          In addition, if the CSRC or other PRC regulatory agencies subsequently determine that we need to obtain the CSRC's approval for this offering, the CSRC or other PRC regulatory agencies may, among other things, delay or restrict the transfer of the proceeds from this offering into the PRC. See "Risk Factors — Risks Related to Doing Business in China — The approval of the CSRC may be required in connection with this offering under regulations adopted in 2006, and if required, we cannot assure you that we will be able to obtain such approval."

          If we are unable to transfer the proceeds of this offering to our PRC subsidiaries or to any other PRC subsidiary that we may establish, our ability to use the proceeds to invest in our technology and solutions development, acquire strategic advertising inventory, undertake sales and marketing initiatives to facilitate our geographic expansion within China, or make strategic investments and acquisitions in China would be severely hampered. In addition, since we did not generate positive cash flow from operations or from investments in 2009, 2010 and 2011, it is unclear whether we would be able to fund such uses from internally generated cash at any time in the near future.

Off-Balance Sheet Commitments and Arrangements

          We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Inflation

          Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2009, 2010 and 2011 were increases of 1.9%, 4.6% and 4.1%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.

Quantitative and Qualitative Disclosure about Market Risk

Foreign Exchange Risk

          Substantially all of our revenues and expenses are denominated in Renminbi. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars.

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          The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People's Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

          To the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.

          As of December 31, 2011, we had RMB-denominated cash balances of RMB245.6 million and U.S. dollar-denominated cash balances of US$14.6 million. Assuming we had converted the RMB-denominated cash balance of RMB245.6 million into U.S. dollars at the exchange rate of US$1.00 for RMB6.2939 as of December 31, 2011, the U.S. dollar cash balance would have been US$39.0 million. If the RMB had depreciated by 10% against the U.S. dollar, the U.S. dollar cash balance would have been US$35.5 million instead.

Interest Rate Risk

          Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used derivative financial instruments in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates.

Recent Accounting Pronouncements

          In October 2009, the Financial Accounting Standards Board, or FASB, issued ASU No. 2009-13 ("ASU 2009-13"), Multiple-Deliverable Revenue Arrangements. ASU 2009-13 amends ASC 605-25 regarding revenue arrangements with multiple deliverables. By providing another alternative for determining the selling price of deliverables, the guidance for arrangements with multiple deliverables will allow companies to allocate consideration in multiple deliverable arrangements in a manner that better reflects the transaction's economics and will often result in earlier revenue recognition. The new guidance modifies the fair value requirements of previous guidance by allowing "best estimate of selling price" in addition to vendor-specific objective evidence ("VSOE") and other vendor objective evidence ("VOE," now referred to as "TPE," standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted under the new guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.

          In October 2009, the FASB issued FASB ASU No. 2009-14, "Certain Revenue Arrangements That Include Software Elements," which is now codified under FASB ASC Topic 985, "Software." This ASU changes the accounting model for revenue arrangements which include both tangible products and software elements, providing guidance on how to determine which software, if any, relating to the tangible product would be excluded from the scope of the software revenue guidance. FASB ASU No. 2009-14 was effective on a prospective basis for revenue arrangements

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entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. We adopted this guidance as of January 1, 2011 on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

          In January 2010, FASB issued Accounting Standards Update 2010-06, Improving Disclosures about Fair Value Measurements. This amends ASC 820 (formerly Statement No. 157, Fair Value Measurements. This guidance requires a number of additional disclosures regarding (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements and (4) the transfers between Levels 1, 2 and 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on our consolidated financial statements.

          In February 2010, FASB issued Accounting Standards Update 2010-09, Subsequent Events (ASC 855): Amendments to Certain Recognition and Disclosure Requirements. This amendment addresses both the interaction of the requirements of this topic with the SEC's reporting requirements and the intended breadth of the reissuance disclosure provision related to subsequent events (ASC 855-10-50-4). All of the amendments in this update are effective upon issuance, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The adoption of ASU 2010-09 did not have a material impact on our consolidated financial statements.

          In April 2010, FASB issued Accounting Standards Update 2010-13, Compensation — Stock Compensation (ASC 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades — a consensus of the FASB Emerging Issues Task Force. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted. The adoption of ASU 2010-13 did not have a material impact on our consolidated financial statements.

          In May 2011, the FASB issued ASU No. 2011-04 ("ASU 2011-04"), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 amends the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to non-financial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance will be effective during interim and annual periods beginning after December 15, 2011. We have not early adopted the new guidance and do not expect the adoption of ASU 2011-04 to have a material impact on our consolidated financial statements.

          In June 2011, the FASB issued ASU No. 2011-05 ("ASU 2011-05"), Comprehensive Income (Topic 220) — Presentation of Comprehensive Income. ASU 2011-05 eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, it requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of net income and other comprehensive income or in two separate but consecutive

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statements. The new guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and will have presentation changes only. We have not early adopted the new guidance and do not expect the adoption of ASU 2011-05 to have a material impact on our consolidated financial statements.

Change in Accountants

          We engaged Deloitte Touche Tohmatsu CPA Ltd. or Deloitte, on June 2, 2010 to audit our consolidated financial statements for the two years ended December 31, 2009. Our chief financial officer, Ms. Bonnie Yi Zhang, was then a partner at Deloitte and in charge of the audit engagement. Ms. Zhang decided to join us as our chief financial officer and informed Deloitte of her intention to resign from the partnership in November 2010. As a result of Ms. Zhang's decision to become our chief financial officer, Deloitte was no longer independent. With the approval of our directors, we dismissed Deloitte on January 21, 2011.

          Deloitte did not complete a review or audit of our consolidated financial statements and has never issued an audit report or any audit opinion with respect to our consolidated financial statements. During the fiscal year ended December 31, 2010 and in the interim period before Deloitte's dismissal in January 2011, there were no disagreements between Deloitte and us on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. During the fiscal year ended December 31, 2010, there were no "reportable events" as defined under Item 16F(a)(1)(v) of Form 20-F that would require disclosure.

          In 2011, we provided a copy of this disclosure to Deloitte. We requested that our former independent registered public accountants, Deloitte, furnish us with a letter addressed to the SEC stating whether it agrees with the above statements, and if not, stating the respects in which it does not agree. On February 17, 2012, we received the requested letter from Deloitte, a copy of which is included as Exhibit 16.1 to the registration statement of which this prospectus forms a part.

          In light of the dismissal of Deloitte and with the approval of our directors in January 2011, we appointed PricewaterhouseCoopers Zhong Tian CPA Limited Company, or PwC, as our independent auditor to perform audits on our financial statements for the year ended December 31, 2011. During the two fiscal years ended December 31, 2010 and the subsequent period prior to engaging PwC, neither we nor any person on our behalf consulted with PwC regarding either (i) the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on our financial statements and no written or oral advice was provided by PwC was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was the subject of a disagreement or reportable event pursuant to Item 16F(a)(1)(iv) of Form 20-F and the related instructions to Item 16F, or a reportable event, as defined in Item 16F(a)(1)(v) of Form 20-F.

          We also requested our new independent registered public accountants, PwC, to review the foregoing disclosures and offered PwC the opportunity to furnish us with a letter addressed to the SEC containing any new information, clarification of our expression of its views or the respects in which it does not agree with the statements by us in response to Item 16F of Form 20-F. PwC had no disagreement with the disclosure and consequently declined the opportunity to furnish us with such a letter.

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INDUSTRY BACKGROUND

The Advertising Market in China

          China had the second largest advertising market in Asia and the third largest in the world in 2010, with a market size of approximately US$26.1 billion, or approximately 0.4% of China's GDP, according to the report issued by ZenithOptimedia in December 2011. However, China's advertising market remains small in both absolute terms and as a percentage of GDP relative to that of more developed countries such as the United States. The advertising market in the United States was approximately US$151.7 billion in 2010, or approximately 1.0% of the United States' GDP, according to the report issued by ZenithOptimedia in December 2011. Given China's projected overall economic growth as well as its lower level of advertising spending as a percentage of GDP, China's overall advertising market is expected to grow to US$40.1 billion by 2013, representing a three-year CAGR of 15.4% from 2010, significantly outpacing growth in more developed countries, according to the report issued by ZenithOptimedia in December 2011.

Total Advertising Spending

Country
  2000   2005   2010*   2011E**   2012E**   2013E**   2000-2010
CAGR
  2010-2013E**
CAGR
 
 
  (US$ million)
   
   
 

USA

    156,667     166,235     151,665     154,935     160,333     165,994     (0.3% )   3.1 %

Japan

    52,241     54,060     46,153     45,358     46,746     47,630     (1.2% )   1.1 %

China

    5,865     12,455     26,122     29,943     34,840     40,135     16.1%     15.4 %

Germany

    26,478     22,430     23,791     24,419     24,894     25,405     (1.1% )   2.2 %

UK

    16,311     18,261     18,086     18,355     19,039     19,720     1.0%     2.9 %

*: Rank by total advertising expenditures in 2010.

**: E means estimated data.

Source: ZenithOptimedia

The Rapid Growth of the Internet Advertising Market in China

          Internet users in China have spent an increasing amount of time online over the past five years. According to reports issued in January 2006 and January 2012 by CNNIC, the official China Internet Network Information Center, China's internet user base grew from 111.0 million in 2005 to 513.1 million in 2011, representing a CAGR of 29.1%. Average time spent online per user also increased from 15.9 hours per week in 2005 to 18.7 hours per week in 2011, according to reports issued by CNNIC in January 2006 and January 2012.

          Internet penetration in China is still low, however, compared to developed countries such as the United States. The internet penetration rate in China was 38% at the end of 2011, according to the report issued by CNNIC in January 2012, whereas the internet penetration rate in the United States was 82% at the end of 2011, according to Euromonitor International, a market intelligence firm.

          Internet advertising has emerged as a viable advertising channel in China as a result of the increase in China's internet user base and time spent online per user. Internet advertising represented 18.2% of the overall advertising market in China in 2010, and China's internet advertising market grew from US$0.6 billion in year 2005 to US$4.7 billion in year 2010, representing a CAGR of 51.2%, according to the report issued by ZenithOptimedia in December 2011. Internet advertising is estimated to have surpassed newspaper and become the second largest ad spending category in China in 2011. By 2013, total internet advertising spending in China is expected to reach US$11.8 billion, representing a three-year CAGR of 35.7%, according to the report issued by ZenithOptimedia in December 2011. Moreover, China's relatively low internet

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penetration suggests that the outsized growth of China's internet advertising market could continue going forward.


Advertising Spending in China by Media

 
  2000   2005   2010*   2011E**   2012E**   2013E**   2000-2010
CAGR
  2010-2013E**
CAGR
 
 
  (US$ million)
   
   
 

TV

    2,495     5,248     10,041     11,447     13,107     14,655     14.9 %   13.4 %