F-1/A 1 df1a.htm AMENDMENT NO.1 TO FORM F-1 Amendment No.1 to Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on January 13, 2010

Registration No. 333-164216

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

Form F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

IFM Investments Limited

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Cayman Islands   6531   Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

26/A, East Wing, Hanwei Plaza

No.7 Guanghua Road, Chaoyang District

Beijing 100004, People’s Republic of China

(86-10) 6561-7788

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

CT Corporation System

111 Eighth Avenue

New York, New York 10011

(212) 664-1666

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Edmund C. Duffy, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, NY 10036

(212) 735-3000

 

Jon L Christianson, Esq.

Peter X. Huang, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

30th Floor, Tower 2, China World Trade Center

No. 1 Jianguomenwai Avenue

Beijing, China 100004

(8610) 6535-5500

 

David T. Zhang, Esq.

Allen C. Wang, Esq.

Latham & Watkins

41st Floor, One Exchange Square

8 Connaught Place, Central

Hong Kong

(852) 2522-7886

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

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.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) 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.  ¨

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.  ¨

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.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of securities
to be registered

   Amount to be
registered(1)(2)
   Proposed maximum
offering price
        per share(1)        
   Proposed maximum
aggregate

offering price(1)
   Amount of
registration fee
 

Class A ordinary shares, par value US$0.001 per share(3)

   287,212,500    US$0.7167    US$205,835,625    US$14,677 (4) 

 

 

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act.
(2) Includes (a) Class A ordinary shares represented by American depositary 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 share are first bona fide offered to the public, and (b) Class A ordinary shares represented by American depositary shares to be sold upon the exercise of the underwriters’ option to purchase additional Class A ordinary shares. These Class A ordinary shares are not being registered for the purposes of sales outside the United States.
(3) American depositary shares evidenced by American depositary receipts issuable upon deposit of the Class A ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 (Registration No.333-164239). Each American depositary share represents fifteen (15) Class A ordinary shares.
(4) Of which US$13,120 was previously paid.

 

 

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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

Subject to completion

Preliminary prospectus dated January 13, 2010

16,650,000 American Depositary Shares

LOGO

IFM Investments Limited

Representing 249,750,000 Class A Ordinary Shares

 

 

This is our initial public offering. We are offering 12,487,500 American depositary shares, or ADSs, each representing fifteen (15) of our Class A ordinary shares, par value US$0.001 per share. Certain of our shareholders identified in this prospectus are offering an additional 4,162,500 ADSs. No public market currently exists for our Class A ordinary shares or ADSs. We will not receive any proceeds from the ADSs sold by the selling shareholders.

We currently anticipate the initial public offering price of our ADSs to be between US$8.75 and US$10.75 per ADS. We have been approved to have our ADSs listed on the New York Stock Exchange under the symbol “CTC.”

Investing in our ADSs involves a high degree of risk. See “Risk Factors” beginning on page 13.

 

 

 

           Per ADS                    Total          

Public Offering Price

   US$                         US$                     

Underwriting Discount

   US$      US$  

Proceeds, before expenses, to Us

   US$      US$  

Proceeds to the Selling Shareholders

   US$      US$  

The selling shareholders have granted the underwriters a 30-day option to purchase up to 2,497,500 additional ADSs from the selling shareholders at the initial public offering price less the underwriting discount and commission.

Delivery of our ADSs will be made on or about             , 2010.

Neither the Securities and Exchange Commission nor any state securities commission 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.

 

 

 

Goldman Sachs

   Morgan Stanley

 

William Blair & Company

 

Oppenheimer & Co.

The date of this prospectus is             , 2010.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

  1

RISK FACTORS

  13

FORWARD-LOOKING STATEMENTS

  31

USE OF PROCEEDS

  32

DIVIDEND POLICY

  33

CAPITALIZATION

  34

DILUTION

  36

EXCHANGE RATE INFORMATION

  38

SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA

  39

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

  42

OUR INDUSTRY

  65

OUR BUSINESS

  74

OUR CORPORATE HISTORY AND STRUCTURE

  89

MANAGEMENT

  92

PRINCIPAL AND SELLING SHAREHOLDERS

  98

OUR RELATIONSHIP WITH REALOGY AND RELATED PARTY TRANSACTIONS

  100

REGULATIONS

  104

DESCRIPTION OF SHARE CAPITAL

  110

SHARES ELIGIBLE FOR FUTURE SALE

  122

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

  124

TAXATION

  134

ENFORCEABILITY OF CIVIL LIABILITIES

  140

UNDERWRITING

  142

CONFLICTS OF INTEREST

  148

EXPENSES RELATING TO THIS OFFERING

  148

LEGAL MATTERS

  149

EXPERTS

  149

WHERE YOU CAN FIND MORE INFORMATION

  150

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  F-1

 

 

You should rely only on the information contained in this prospectus. Neither we nor the selling shareholders have authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus may only be used where it is legal to offer and sell these securities. Unless otherwise indicated, the information in this document may only be accurate as of the date of this document.

Until             , 2010, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY

You should read the following summary together with the entire prospectus, including the more detailed information regarding us, the ADSs being sold in this offering, and our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should consider carefully, among other things, the matters discussed in the section entitled “Risk Factors.” Unless the context indicates otherwise, all share and per share data in this prospectus give effect to a 10-for-1 share split that became effective on January 4, 2010.

Our Company

We are a leading comprehensive real estate services provider with the largest network of real estate sales offices in China. We are the exclusive franchisor in China for the CENTURY 21® brand, one of the world’s most recognized brands in the real estate industry. As of September 30, 2009, our CENTURY 21® China network covered 34 major cities with more than 1,000 sales offices, employed approximately 14,900 sales professionals and staff and maintained approximately 4.7 million property listings. In the first half of 2009, based on transaction volume, we ranked among the top three market leaders in over 90% of the cities in which we operate and were the market leader in more than 30% of those cities. We primarily focus on China’s fast-growing and highly fragmented secondary real estate market, which we expect to outgrow the primary market, especially in more economically prosperous cities.

We operate under three different but closely related business lines: company-owned brokerage services, mortgage management services and franchise services. We have deployed a unique business model that has allowed us to rapidly scale our company-owned operations by leveraging the in-depth market knowledge and human capital developed from our franchise network.

We started our franchise services business in 2000 and have rapidly expanded our franchise network and our brand. Our franchise services business grants regional franchise rights for the CENTURY 21® brand to regional sub-franchisors in China who, in turn, open their own sales offices or grant third parties the right to open sales offices within their region. We generate revenue from our franchise services by collecting initial franchise fees and ongoing service fees from these regional sub-franchisors. Our franchise network has provided us with valuable information to gauge market maturity and identify potential opportunities to establish and grow our company-owned brokerage services business. Until we launched our company-owned brokerage services business in 2006, we generated our net revenues solely from our franchise services business. We started our company-owned brokerage services business in Beijing and Shanghai in 2006 and in Shenzhen in 2008, and have quickly expanded our company-owned sales office network in these cities through organic growth and acquisitions of sales offices owned by third parties. As of September 30, 2009, we had approximately 280 company-owned sales offices, representing approximately 26.1% of our CENTURY 21® China network. Our company-owned brokerage services business owns and operates regional sub-franchisors and sales offices in the CENTURY 21® China network. We generate revenue from our company-owned brokerage services primarily through commissions earned from home buyers, sellers, lessors and lessees. In 2008 and the nine months ended September 30, 2009, our company-owned sales offices contributed approximately 75.4% and 91.9% respectively, of our total net revenues.

In 2008, we launched our independent mortgage management services in Beijing and Shanghai, providing services to customers both inside and outside our CENTURY 21® China network. Our mortgage management services business provides mortgage advisory services to home buyers and home owners and interim guarantee services to commercial banks. We generate revenue from our mortgage management services primarily through commissions earned from commercial banks in consideration of our advisory services and

 

 

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interim guarantee services. Our mortgage management services business is well positioned to take advantage of referrals from our extensive network of company-owned sales offices. In the first nine months of 2009, a substantial majority of the transactions handled by our company-owned brokerage services in which mortgages were utilized made use of our mortgage management services. We have provided services for home mortgages with an aggregate loan amount of approximately RMB6.1 billion since we launched our mortgage management service business through September 30, 2009. Our contingent guarantee obligation associated with our interim guarantees as of September 30, 2009 was RMB829.3 million.

Our rapid growth is supported by our information systems and training programs. Our information systems provide real-time and in-depth management and sales information, support our network of sales offices, and drive our marketing efforts. We strongly believe in training members of our management team, who are generally required to complete quarterly training courses. Additionally, all of our sales professionals are required when they join us to complete training courses that we conduct in-house, and are also required to complete monthly refresher or new skills courses.

We have experienced substantial growth since we commenced operations in 2000. Our total net revenues increased from RMB38.4 million in 2006 to RMB273.4 million in 2008, representing a compound annual growth rate of 166.8%, and from RMB208.9 million in the nine months ended September 30, 2008 to RMB443.7 million in the same period in 2009, representing an increase of 112.4%. After incurring net losses of RMB72.8 million and RMB131.9 million for the years ended December 31, 2007 and 2008, respectively, we became profitable during the nine month period ended September 30, 2009 with a net income of RMB88.3 million (US$12.9 million). We have received numerous awards and recognitions for our service quality and business achievements, including the “Highly Appraised Franchisor Award” by the China Chain Store and Franchise Association in 2008 and 2009, “Prominent Real Estate Services Provider” by Sina.com in 2008, and “Most Reputable Real Estate Services Provider” by Sohu.com in 2009.

Industry Background

The PRC economy has grown significantly since the PRC government introduced economic reforms in the late 1970s. This growth has accelerated since China entered the World Trade Organization in 2001. China’s economic growth, together with an increase in disposable incomes, a rise in urbanization levels, the emergence of a mortgage lending market and government housing reforms, have driven the expansion of China’s real estate market. The secondary residential property market in China has grown significantly as home inventory increases and the turnover rate for existing homes rises. However, the secondary residential property market in China is still at a relatively early stage of development. The ratio between secondary and primary residential property transaction volumes in the first half of 2009 in Beijing and Shanghai was only 1.30 times and 1.94 times, respectively, compared to 13.15 times in the U.S. and 5.16 times in Hong Kong.

The real estate services industry in China, which includes primary brokerage services, secondary brokerage services, mortgage management services and leasing services, has become increasingly specialized as it has grown in size and complexity. Secondary residential property brokerage services include brokerage services for existing home sales, leases and related services. An important aspect of China’s secondary residential property brokerage industry is the predominance of open listings, under which property listings can be marketed simultaneously by multiple agents. As a result, brokerage firms in China rarely share listing information with their competitors and large-scale players in the industry generally have a competitive advantage over their smaller counterparts. The secondary residential property brokerage industry in China is currently highly fragmented. We believe that industry consolidation will become an increasingly prevalent trend. As the residential mortgage market increases in size and sophistication, specialized mortgage management agents are becoming important channels for commercial banks to distribute their real estate financing products. Amounts of

 

 

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outstanding residential mortgages in China grew from RMB825 billion as of December 31, 2002 to RMB2.98 trillion as of December 31, 2008, representing a compound annual growth rate of 23.9%.

Our Strengths and Strategies

We believe that the following strengths differentiate us from our competitors and have enabled us to capture a leading position in the rapidly growing real estate services industry in China:

 

   

We leverage one of the world’s most recognized real estate service brands to drive our leadership in China;

 

   

We have a unique business model that allows us to rapidly scale our distribution network and expand our product and service offerings;

 

   

We are the leader in the faster growing and more sustainable secondary real estate brokerage market;

 

   

We utilize our nationwide network to maintain a growing database of property listings that draws new customers and provides opportunities for future growth;

 

   

We have developed world class, standardized information systems and training systems to support the scalability of our business model; and

 

   

We have an experienced and stable management team.

Our aim is to further widen our leadership as China’s largest real estate service provider, through the following strategies:

 

   

Strengthen our distribution network;

 

   

Expand existing product lines;

 

   

Enhance brand awareness; and

 

   

Invest in human capital management.

Our Challenges and Risks

The successful execution of our strategies is subject to certain challenges and risks that may materially affect us, including:

 

   

Fluctuations in China’s real estate market;

 

   

Uncertainty in the further development and expansion of the real estate services industry in China;

 

   

Governmental regulations of the real estate industry in China;

 

   

Our ability to receive dividends from, and to make loans to and direct investment in, our operations in China as an offshore holding company;

 

   

Our aggregate net losses of RMB204.7 million for the two years ended December 31, 2008, which were partially offset by net income of RMB88.3 million for the nine months ended September 30, 2009; and

 

   

Adverse developments in general business, economic and political conditions globally and in China.

In addition to the foregoing, under Rule 2720 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc., Goldman Sachs (Asia) L.L.C. is technically deemed to have a conflict of interest in connection

 

 

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with this offering because one of its affiliates will beneficially own approximately 28.4% of our outstanding ordinary shares immediately prior to the completion of this offering. Accordingly, Morgan Stanley & Co. International plc is acting as the qualified independent underwriter, as defined under such rule, and has participated in the preparation of this prospectus and exercised the usual standards of due diligence in respect thereto.

Please see “Risk Factors” and other information included in this prospectus for a detailed discussion of these challenges and risks.

Corporate History and Structure

We became the exclusive franchisor of the CENTURY 21® brand in China on March 22, 2000 through IFM Company Limited, or IFM Co., a Cayman Islands company controlled by one of our founders, Donald Zhang. We incorporated our company, IFM Investments Limited, in the Cayman Islands on November 30, 2005. We underwent a reorganization in 2006. Upon the effectiveness of our reorganization on August 24, 2006, we became the holding company of our various subsidiaries, including IFM Co. From 2006 to 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued a total of 311,367,270 preferred shares to a number of private equity investors and Realogy Corporation, or Realogy, the owner of the CENTURY 21® brand.

Our principal subsidiaries include:

 

   

IFM Co., which holds the exclusive franchise rights for the CENTURY 21® brand in China;

 

   

Beijing Anxinruide Real Estate Brokerage Co. Limited, or Beijing Anxin, which owns our company-owned sales offices in Beijing;

 

   

Shanghai Ruifeng Real Estate Investments Consulting Co. Limited, or Shanghai Ruifeng, which owns our company-owned sales offices in Shanghai; and

 

   

CIR Real Estate Consultant (Shenzhen) Co. Limited, or Shenzhen CIR, which owns our company-owned sales offices in Shenzhen.

 

 

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The following diagram illustrates our anticipated shareholding and corporate structure with our principal subsidiaries immediately following this offering(1):

LOGO

 

(1) Represents economic ownership of our Class A and Class B ordinary shares. Immediately prior to this offering, IFM Overseas Partners, Goldman Sachs Strategic Investments, GL Asia Mauritius II and Realogy each owned 52.1%, 28.4%, 18.4% and 1.1%, respectively, of our ordinary shares.
(2) Consists of 61,108,179 Class A ordinary shares and 64,893,563 Class B ordinary shares, which have substantially the same rights as Class A ordinary shares except that they are not entitled to vote as further described in “Description of Share Capital — Classes of shares.”

Corporate Information

Our principal executive office is located at 26/A, East Wing, Hanwei Plaza, No.7 Guanghua Road, Chaoyang District, Beijing 100004, People’s Republic of China. Our telephone number at this address is (86-10) 6561-7788 and our fax number is (86-10) 6561-3321. Our registered office in the Cayman Islands is located at the offices of Trident Trust Company (Cayman) Limited, Fourth Floor, One Capital Place, P.O. Box 847GT Grand Cayman, Cayman Islands. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is http://www.century21cn.com. The information contained on our website is not part of this prospectus.

 

 

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Conventions That Apply to This Prospectus

Unless otherwise indicated, references in this prospectus to:

 

   

“we,” “us,” “our” and “our company” refer to IFM Investments Limited, a Cayman Islands company, and its predecessor entities and its subsidiaries;

 

   

“ADSs” are to our American depositary shares, each of which represents fifteen (15) Class A ordinary shares;

 

   

“ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;

 

   

“China” and the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau;

 

   

“Shares” or “ordinary shares” are to our ordinary shares, par value US$0.001 per share which include both Class A ordinary shares and Class B ordinary shares;

 

   

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

 

   

“US$” and “U.S. dollars” are to the legal currency of the United States.

Unless otherwise indicated, references to our principal subsidiaries in this prospectus are specified as follows:

 

   

“Beijing Anxin” is to Beijing Anxinruide Real Estate Brokerage Co. Limited, a company incorporated in the PRC;

 

   

“IFM Beijing” is to Beijing Aifeite International Franchise Consultant Co. Limited, a company incorporated in the PRC;

 

   

“IFM BJ Broker” is to Beijing IFM International Real Estate Brokerage Co. Limited, a company incorporated in the PRC;

 

   

“IFM Co.” is to IFM Company Limited, a company incorporated in the Cayman Islands;

 

   

“IFM SH” is to Shanghai Yaye Real Estate Brokerage Co. Limited, a company incorporated in the PRC;

 

   

“MMC BJ” is to Beijing Kaishengjinglue Guarantee Co. Limited, a company incorporated in the PRC;

 

   

“MMC SH” is to Shanghai Kaiyi Investment Consultant Management Co. Limited, a company incorporated in the PRC;

 

   

“Shanghai Ruifeng” is to Shanghai Ruifeng Real Estate Investments Consulting Co. Limited, a company incorporated in the PRC; and

 

   

“Shenzhen CIR” is to CIR Real Estate Consultant (Shenzhen) Co. Limited, a company incorporated in the PRC.

Unless otherwise indicated, information in this prospectus assumes that:

 

   

the underwriters do not exercise their option to purchase additional ADSs; and

 

   

all outstanding preferred shares are converted into 158,339,339 of our Class A ordinary shares and 80,502,938 of our Class B ordinary shares upon the closing of this offering.

This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. All translations from Renminbi to U.S. dollars were made at the noon buying rate in New York City for cable

 

 

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transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the translation of Renminbi into U.S. dollars has been made at the noon buying rate in effect on September 30, 2009, which was RMB6.8262 to US$1.00. We make no representation that the Renminbi or dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On January 8, 2010, the noon buying rate was RMB6.8274 to US$1.00.

This prospectus contains references to compound annual growth rate, which represents the rate of return on an annualized basis over the relevant time period.

CENTURY 21® is a registered trademark owned by a subsidiary of Realogy Corporation.

 

 

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The Offering

 

ADSs offered by us

12,487,500 ADSs.

 

ADSs offered by the Selling Shareholders

4,162,500 ADSs.

 

Offering price

We estimate that the initial public offering price will be between US$8.75 and US$10.75 per ADS.

 

ADSs outstanding immediately after this offering

16,650,000 ADSs (or 19,147,500 ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

Ordinary shares outstanding immediately after this offering

621,261,214 Class A ordinary shares and 64,893,563 Class B ordinary shares (or 632,187,769 Class A ordinary shares and 53,967,008 Class B ordinary shares if the underwriters exercise their option to purchase additional ADSs in full).

 

ADSs

Each ADS represents fifteen (15) Class A ordinary shares, par value US$0.001 per ordinary share. The ADSs will be evidenced by American depositary receipts, or ADRs.

The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADR holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time.

You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

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

 

Option to purchase additional ADSs

The selling shareholders have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 2,497,500 additional ADSs at the initial public offering price, less underwriting discounts and commissions.

 

Use of proceeds

We estimate that we will receive net proceeds of approximately US$109.8 million from this offering, after deducting the underwriting

 

 

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discounts, commissions and estimated offering expenses payable by us and assuming an initial public offering price of US$9.75 per ADS, being the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus. We intend to use our net proceeds from this offering to fund the development of our company-owned brokerage services business through selected strategic acquisitions to enter new cities and by opening additional company-owned sales offices and, to invest and upgrade our information and operations systems and to fund general corporate purposes.

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

See “Use of Proceeds.”

 

Listing

We have been approved to have our ADSs listed on the New York Stock Exchange under the symbol “CTC.” Our ordinary shares will not be listed on any exchange or quoted for trading on any automated quotation system or any over-the-counter trading system.

 

Lock-up

We have agreed with the underwriters to a lock-up of our shares for a period ending 180 days after the date of this prospectus. In addition, each of our existing shareholders has also agreed with the underwriters to a lock-up of their shares for a period of 180 days after the date of this prospectus. See “Shares Eligible For Future Sale” and “Underwriting.”

 

Risk factors

See “Risk Factors” in this prospectus beginning on page 13 and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in our ADSs.

 

Depositary

JPMorgan Chase Bank N.A.

 

Payment and settlement

We expect our ADSs to be delivered against payment on or about             , 2010.

 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA

You should read the summary consolidated financial information and operating data in conjunction with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The following summary consolidated financial information and operating data for the periods and as of the dates indicated should be read in conjunction with our audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our summary consolidated statement of operations data for the years ended December 31, 2007 and 2008 and for the nine months ended September 30, 2009 and summary consolidated balance sheet data as of December 31, 2007 and 2008 and September 30, 2009 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our summary consolidated statement of operations data for the nine months ended September 30, 2008 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial data. The unaudited selected financial data include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary for a fair presentation of the financial position and the results of operations for the interim unaudited period. Our summary consolidated statement of operations data for the year ended December 31, 2006 and summary consolidated balance sheet data as of December 31, 2006 have been derived from our financial statements not included in this prospectus. Our audited and unaudited consolidated financial statements have been prepared and presented in accordance with accounting principles generally accepted in the United States of America, or US GAAP. The historical results are not necessarily indicative of results to be expected in any future period.

 

    For the Year Ended December 31,     For the Nine Months Ended
September 30,
 
        2006             2007             2008             2008             2009      
    (RMB)     (RMB)     (RMB)     (RMB)     (RMB)     (US$)(1)  
    (in thousands, except for share and per share data)  
                      (unaudited)              
Statement of Operations Data:            
Revenue            

Net revenues

  38,425      189,029      273,359      208,877      443,691      64,998   

Costs and Expenses

           

Commissions and other agent related costs

  (4,620   (82,866   (151,550   (116,250   (197,978   (29,003

Operating costs

  (9,914   (79,886   (146,457   (110,889   (85,183   (12,479

Selling, general and administrative expenses

  (40,285   (94,471   (102,952   (76,456   (70,278   (10,295

Total costs and expenses

  (54,819   (257,223   (400,959   (303,595   (353,439   (51,777

(Loss) / income from operations

  (16,394   (68,194   (127,600   (94,718   90,252      13,221   

Interest income

  848      1,708      4,441      2,708      1,575      231   

Interest expense

  (1,299                         

Foreign currency exchange loss

  (1,537   (5,485   (5,526   (4,458   (480   (70

(Loss) / income before income tax and share of associates’ losses

  (18,382   (71,971   (128,685   (96,468   91,347      13,382   

Income tax

  (799   (394   (2,076   (1,780   (2,821   (414

Share of associates’ losses

  (373   (409   (1,126   (1,050   (193   (28

Net (loss) / income

  (19,554   (72,774   (131,887   (99,298   88,333      12,940   

Non-controlling interest

  1,524      (1,347   (431   (431          

Net (loss) / income attributable to IFM Investments Limited

  (18,030   (74,121   (132,318   (99,729   88,333      12,940   

Net (loss) / income per Share

           

Basic

  (0.07   (0.31   (0.57   (0.43   0.13      0.02   

Diluted

  (0.07   (0.31   (0.57   (0.43   0.13      0.02   

Net (loss) / income per ADS

           

Basic

  (1.12   (4.69   (8.54   (6.43   2.00      0.29   

Diluted

  (1.12   (4.69   (8.54   (6.43   1.96      0.29   

Weighted average number of ordinary shares used in
per share calculations(2):

           

Basic

  260,000,000      260,000,000      260,000,000      260,000,000      260,000,000      260,000,000   

Diluted

  260,000,000      260,000,000      260,000,000      260,000,000      264,262,500      264,262,500   

 

 

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(1) Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York.
(2) On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 each, 20,000,000 Series A preferred shares of par value US$0.01 each and 11,136,727 Series B preferred shares of par value US$0.01 each were divided into 260,000,000 ordinary shares of US$0.001 par value each, 200,000,000 Series A preferred shares of par value US$0.001 each and 111,367,270 Series B preferred shares of par value US$0.001 each, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760. The share split has been retroactively reflected for all periods presented herein.

 

    As of December 31,     As of September 30,
    Actual     Actual     Pro Forma
As Adjusted(2)
    2006     2007     2008     2009     2009
    (RMB)     (RMB)     (RMB)     (RMB)     (US$)(1)     (RMB)   (US$)(1)
    (in thousands)

Balance Sheet Data:

         

Cash and cash equivalents

  110,505      331,216      176,977      263,176      38,554      1,012,381   148,308

Restricted cash

  6,793      14,497      17,213      21,565      3,159      21,565   3,159

Accounts receivable, net

  6,437      9,965      13,633      60,030      8,794      60,030   8,794

Amount due from related parties

  80,789      44,068      38,110      6,210      910      6,210   910

Property and equipment, net

  5,822      42,467      42,954      41,076      6,017      41,076   6,017

Intangible assets, net

  27,943      26,317      29,796      28,318      4,148      28,318   4,148

Total assets

  255,750      513,187      360,895      462,792      67,796      1,211,997   177,550

Accrued expenses and other current liabilities

  38,535      52,234      53,597      97,450      14,276      97,450   14,276

Total liabilities

  106,073      145,647      111,356      123,660      18,115      123,660   18,115

Convertible redeemable preferred shares

  172,131      469,971      501,892      514,162      75,322      -   -

Total shareholders’ (deficit)/equity

  (22,454   (102,431   (252,353   (175,030   (25,641   1,088,337   159,435
                                     

 

 

(1) Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York.
(2) Our consolidated balance sheet data as of September 30, 2009 is adjusted to give effect to the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering, and the issuance and sale of ADSs by us in this offering, assuming an initial public offering price of US$9.75 per ADS (the mid-point of the estimated initial public offering price range), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A US$1.00 increase (decrease) in the assumed initial public offering price of US$9.75 per ADS would increase (decrease) the amounts representing cash and cash equivalents, total assets and total shareholders’ deficit by US$11.6 million.

 

 

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     For the year ended or as of
December 31,
   For the nine months ended
or as of September 30,
         2007             2008            2008            2009    
                (unaudited)     
Other Financial and Operating Data:           

Company-owned brokerage services

          

Net revenues (in thousands of RMB)

   151,692      206,076    153,703    407,937

Average number of operating sales offices(1)

   143      279    296    233

Average monthly net revenues per operating sales office (in thousands of RMB)

   88.4      61.6    57.7    194.5

Mortgage management services

          

Net revenues (in thousands of RMB)

        10,650    7,903    22,467

Loan amount of referred mortgages (in thousands of RMB)

        1,879,500    1,369,000    4,171,000

Franchise services

          

Net revenues (in thousands of RMB)

   37,337      56,633    47,271    13,287

Number of regional sub-franchisors as of the period end

   23      28    27    28

 

(1) Equals the sum of the number of operating sales offices that existed at the end of each month in the applicable period, divided by the number of months in such period.

 

 

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RISK FACTORS

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

Risks Related to Our Business

Our business is susceptible to fluctuations in the real estate market in China, and the property market in China is volatile and at an early stage of development, which could have a material and adverse effect on our business, financial condition and results of operations.

We conduct our real estate services business primarily in China, and our business depends substantially on the conditions of the real estate market in China. The real estate market in China remains at an early stage of development, and social, political, economic, legal and other factors may affect its development. For example, the lack of a mature and active secondary market for private properties and the limited amount of mortgage loans available to individuals in China may result in fluctuations in residential real estate markets. Although demand for private residential property in China has grown rapidly in recent years, this growth has often been coupled with volatile market conditions and fluctuations in property prices. For example, the rapid expansion of the property market in major provinces and cities, such as Beijing, Shanghai and Shenzhen, in the early 1990s, led to an oversupply in the mid-1990s and a corresponding fall in property values and rentals in the second half of the decade. We believe our business has been affected by fluctuations in the real estate market in China. For instance, our average monthly net revenues per operating sales office decreased by 36% and 23% in Beijing and Shanghai respectively, from 2007 to 2008. We believe this decrease was partially due to the weakness of the real estate market in China in 2008. On the other hand, our average monthly net revenues per operating sales office increased by 416.6% and 167.4% in these cities during the nine months ended September 30, 2009 compared to the same period in 2008. We believe such increase was partially due to the recovery of real estate market in China during 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.” The PRC property market may experience, and transaction volume may be impacted by, undersupply or oversupply and property price fluctuations caused by economic, social, political and other factors. Any future overdevelopment in the property sector or other adverse changes in the economic, political or social environment in China may result in an oversupply of properties and a decrease in property prices and overall transaction activities, which could materially and adversely affect our business, financial condition and results of operations.

In addition, as all of our company-owned sales offices are strategically located in large metropolitan areas in Beijing, Shanghai and Shenzhen, any decrease in demand or any other adverse developments in these regions may materially and adversely affect our business, financial condition and results of operations.

Adverse developments in general business and economic conditions could have a material and adverse effect on our business, financial condition and results of operations.

Our business and operations are sensitive to general business and economic conditions globally and in China. These include short-term and long-term interest rates, inflation or deflation, fluctuations in debt and equity capital markets, consumer confidence and the general condition of the PRC and world economies. Certain recent adverse developments in the global financial markets have impacted the global economy. These developments include, among others, a general slowdown of economic growth in China, the U.S. and elsewhere globally, and substantial volatility and tightening of liquidity in financial and real estate markets. Numerous general business and economic factors could contribute to a real estate market downturn and adversely affect our business, including: (1) any systemic weakness in the banking and financial sectors; (2) any substantial declines in the stock markets or continued stock market volatility; (3) any increase in levels of unemployment; (4) a lack

 

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of available credit and lack of confidence in the financial sector; and (5) any general economic downturn in China or the global economy. Adverse developments in these general business and economic conditions could have a material and adverse effect on our business, financial condition and results of operations.

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

The real estate market in China is typically affected by changes in government policies affecting the financial markets and related areas. In the past, the PRC government has adopted various administrative measures to restrain what it perceived as unsustainable growth in the real estate market, particularly when the real estate market in China has experienced rapid and significant growth. In 2007, home sales and prices in China rose rapidly to unprecedented levels, culminating in a housing downturn beginning in late 2007 due to the PRC government’s intervention in the real estate market to stabilize market prices and reduce market speculation. Although home sales and prices in China recovered in 2009, the PRC real estate market could experience a prolonged downturn in the future, which could have a material and adverse impact on our business, financial condition and results of operations. Any of the following could cause a decline in home sales and prices or the related revenue we generate from our business:

 

   

any contractionary monetary policy adopted by the PRC government, including any significant rise in interest rates;

 

   

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

 

   

any significant increase in transaction costs as a result of changes in PRC government policies regarding real estate transaction taxes, such as the recent announcement regarding the reinstatement of a sales tax on residential property sales by individuals within five years of purchase;

 

   

any adverse change in PRC government policies regarding the acquisition and/or ownership of real estate property;

 

   

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

 

   

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

We experienced net losses for the years ended December 31, 2007 and 2008, and there is no assurance that we will be profitable in the future.

During the years ended December 31, 2007 and 2008, we experienced net losses of RMB72.8 million and RMB131.9 million, respectively, primarily due to expenses arising from the addition of a significant number of company-owned sales offices and, to a lesser extent, in 2008, the effects of the global economic downturn on the real estate industry in China. Consequently, our accumulated deficit was RMB268.0 million and RMB179.7 million as of December 31, 2008 and September 30, 2009, respectively. We expect to continue to increase costs and operating expenses as we implement initiatives to continue to grow our business, particularly our company-owned brokerage services business. If our net revenues do not increase to offset any expected increases in costs and operating expenses, we will not be profitable. You should not consider our revenue growth in recent periods as indicative of our future performance. Net revenues in future periods could decline or grow more slowly than we expect. Although we had net income of RMB88.3 million for the nine months ended September 30, 2009, we cannot assure you that we will be profitable in the current year, or that we will be able to maintain profitability in the future.

We do not own the CENTURY 21® brand and our right to use the CENTURY 21® brand is subject to risks and limitations.

Realogy owns the CENTURY 21® brand and system. Through our wholly owned subsidiary IFM Company Limited, or IFM Co, we hold the exclusive right to franchise, manage and operate the CENTURY 21®

 

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franchise network in China. Our interests and business strategies could be different from those of Realogy. See “Our Relationship with Realogy and Related Party Transactions.” Any adverse development in our relationship with Realogy could have a material and adverse effect on our business, financial condition and results of operations.

Our rights to use the CENTURY 21® brand are set forth in our master sub-franchise agreement with Realogy. The master sub-franchise agreement has a term of 25 years starting on March 2000, extendable at our election for additional terms of 25 years upon payment of renewal fees. As contractual rights, our rights to use the CENTURY 21® brand remain subject to the risks and limitations customarily associated with contractual relationships, including but not limited to, a party’s right to terminate the agreement in the event the other party materially breaches the agreement, a party’s right to terminate in certain specified circumstances, and the risk that the contract may be voided if either party were to enter bankruptcy or a similar restructuring process. An agreement could be rejected in connection with a bankruptcy of another party thereto if, in the business judgment of a trustee of a party, as debtor-in-possession, rejection of the contract would benefit a party’s estate. A bankruptcy by our licensor or any owner of the CENTURY 21® trademarks or system know-how could impede our right to use the CENTURY 21® brand and system. Any such adverse development could result in, among other things, an inability to use the CENTURY 21® brand and system, incurrence of material expenses in connection with building our brand or acquiring another brand to support our company-owned brokerage business and franchise services business, payment of fees or compensation relating to settlements with the regional sub-franchisors or franchisees that terminate their franchise relationships with us, or diminished market recognition, any or all of which could have a material and adverse effect on our business, financial condition and results of operations.

If the value of the CENTURY 21® brand or image diminishes, it could have a material and adverse effect on our business, financial condition and results of operations.

We believe the CENTURY 21® brand is associated with leadership in integrated and high quality real estate services among real estate market participants in China. The CENTURY 21® brand is important to our operations. Our continued success in maintaining and enhancing the CENTURY 21® brand and our image depends on our ability to satisfy customer needs by further developing and maintaining the quality of our services across our operations, as well as our ability to respond to competitive pressures. If we were unable to satisfy customer needs or if our public image or reputation were otherwise diminished, our business transactions with our customers or the commission or franchise fees that we charge could decline, and we could face difficulties in attracting and retaining regional sub-franchisors, franchisees or sales professionals. If the value of the CENTURY 21® brand diminishes globally or in China, our business, financial condition and results of operations may be materially and adversely affected.

Any failure to protect our brand, trademarks and other intellectual property rights could have a negative impact on our business.

We believe the CENTURY 21® brand owned by Realogy and the trade secrets, copyrights and other intellectual property rights owned by us are important to our success. Any unauthorized use of these intellectual properties could harm our competitive advantages and business. Historically, China has not protected intellectual property rights to the same extent as the United States and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized use is difficult. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application and enforcement of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks. If we are unable to adequately protect the intellectual property rights that we own or use, we may lose these rights and our business, financial condition and results of operations may be materially and adversely affected.

Our continuing reliance on our information systems, which include our proprietary Sales Information System, or SIS, and our Human Resource and Commission Information System, or HCIS, each of which is

 

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copyright protected, depends in large part on retaining our proprietary rights to these information systems. We have also imposed contractual obligations on employees and consultants and taken other precautionary measures to maintain the confidentiality of our proprietary information, and have restricted the use of that proprietary information other than for our company’s benefit. If the copyrights for our information system are infringed, or our sales professionals, staff and consultants otherwise do not honor their contractual obligations and misappropriate our information systems, databases or other proprietary information, our business, financial condition and results of operations may be materially and adversely affected.

Competition in the real estate brokerage business in China is intense and may adversely affect our business, financial condition and results of operations.

Competition in the real estate brokerage business in China is intense, especially in the densely populated areas. We primarily compete with Centaline (China) Property Consultants Limited in the Beijing, Shanghai and Shenzhen markets for secondary real estate brokerage business, and to a lesser extent, with E-house (China) Holdings Limited in these cities for primary real estate brokerage business. We also compete with regional competitors in each of the regions where we own and operate sales offices. Some of these companies may have greater financial resources than we do, including greater marketing budgets and technological advantages. In addition, the secondary real estate brokerage industry has low capital commitment requirements for small operations, lowering the barriers to entry for new participants, especially participants pursuing alternative methods of marketing real estate, such as internet-based listing services. Real estate brokers compete for sales and marketing business primarily on the basis of the services offered, reputation, brand recognition, personal contacts, local expertise and brokerage commission rates. Any decrease in the market average brokerage commission rate may adversely affect our net revenues and profits. We also compete for the services of qualified sales professionals. Such competition could reduce commissions retained by our company after giving effect to the split with sales professionals and could increase the amounts that we spend on recruiting and retaining sales professionals.

We face competition in the franchise services business.

For our franchise services business, our products consist of our brand name and the support services we provide to our regional sub-franchisors and franchisees. We compete with regional and local real estate brokerage brand franchisors. In addition, other international real estate services brand franchisors, such as Coldwell Banker, have entered or plan to enter into the China market. Upon the expiration of a franchise agreement, a franchisee may choose to obtain a franchise from one of our competitors or operate as an independent broker. Competitors may offer our regional sub-franchisors and franchisees whose franchise agreements are expiring similar or better products and services at rates lower than what we or our regional sub-franchisors charge. To remain competitive in the sale of franchises and to retain our existing regional sub-franchisors and franchisees, we may have to reduce the fees we charge our regional sub-franchisors or franchisees.

We face competition in the mortgage management services business.

We face competition in the mortgage management services business from in-house mortgage management teams of our competitors in the brokerage business, commercial banks and specialized mortgage management services providers. Additionally, there may be adverse changes in national or local mortgage and banking practices, such as a recent agreement among certain commercial banks in Shanghai to collectively cease to pay mortgage referral commissions in connection with secondary real estate transactions. Any increase in the level of competition or any negative development described above could materially and adversely affect our business, financial condition and results of operations.

 

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If our company-owned or franchised sales offices fail to obtain or maintain licenses or permits necessary to engage in the real estate brokerage business, our business, financial condition and results of operations could be materially and adversely affected.

Our company-owned sales offices and franchised sales offices are required to obtain and maintain certain licenses and permits to engage in the real estate brokerage business. We and our regional sub-franchisors also need licenses and permits to operate our CENTURY 21® franchise network in China. These licenses and permits are typically required to be renewed every one or two years. We are also subject to numerous national, provincial and local laws and regulations specific to the services we provide. If we or our regional sub-franchisors or franchisees fail to obtain or maintain the licenses and permits for conducting our company-owned brokerage or franchise services businesses required by law, the relevant governmental authorities may order us to suspend relevant operations or impose fines or other penalties. There is no assurance that we, our company-owned sales offices or our franchised sales offices will be able to obtain or renew these licenses in a timely manner, or at all.

Regional sub-franchisors and franchisees could take actions that could harm our business.

We do not own or control certain of our regional sub-franchisors and franchisees. These regional sub-franchisors and franchisees may not operate their business in a manner consistent with our standards, or may not hire and train qualified sales professionals and other employees. If these regional sub-franchisors or franchisees were to provide a diminished quality of service to their customers, our brand, reputation and goodwill may suffer. Additionally, our regional sub-franchisors and franchisees may engage in or be accused of engaging in unlawful or tortious conduct. Such conduct, or the accusation of such conduct, could harm our brand image, reputation or goodwill. Any of these incidents could in turn materially and adversely affect our business, financial condition and results of operations.

Our regional sub-franchisors and franchisees owned by independent business operators may from time to time disagree with our interpretation of our respective rights and obligations under the franchise agreements or fail to make timely service fees payments thereunder. This has led to disputes among the regional sub-franchisors, the franchisees and us in the past. We expect such disputes to occur from time to time in the future as we continue to offer franchise rights to third parties. To the extent we have such disputes, the attention of our management and our regional sub-franchisors or the franchisees will be diverted and our reputation may suffer as a result. Any of the aforementioned situations could have a material and adverse effect on our business, financial condition and results of operations.

The loss of any members of our senior management or other key sales professionals and staff could adversely affect our financial performance.

Our success depends on the continued service of our key executive officers, particularly Mr. Donald Zhang and Mr. Harry Lu. We do not carry key man life insurance on any of our personnel. The loss of the services of one or more members of our senior management team could hinder our ability to effectively manage our business and implement our growth strategies. If we lose the services of any of our key executive officers, we cannot assure you that we will be able to appoint or integrate adequate replacement personnel into our operations in a timely manner. Our failure to do so could in turn disrupt our operations and the growth of our business.

Our success largely depends on the efforts and abilities of our senior management team and the management teams of regional sub-franchisors and sales offices owned and operated by us. Our ability to retain our management teams is generally subject to numerous factors, including the compensation packages we offer and our ability to maintain a cohesive company culture and other factors. Any prolonged downturn in the real estate market and any cost cutting measures we implement could result in significant attrition among our current managers. If any member of our senior management team or other key sales professionals and staff joins a competitor or forms a competing company, we may lose customers, key sales professionals and staff, and we

 

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may not be able to promptly fill their positions with comparably qualified individuals without a significant increase in costs. Any of the foregoing adverse developments could materially and adversely affect our business, financial condition and results of operations.

We are subject to risks related to litigation filed by or against us, and adverse litigation results may harm our business and financial condition.

We have been, and may in the future be, a party to litigation and other proceedings filed by or against us, including actions relating to intellectual property, franchise or sub-franchise arrangements with our regional franchisors or franchisees, or vicarious liability based upon the conduct of our individual sales professionals and staff or agents. For example, we have occasionally resorted to litigation against certain of our regional sub-franchisors with whom we have terminated our relevant sub-franchise relationship for the sub-franchisor’s material breach of the regional sub-franchise agreement. In addition, we have litigated against third parties who have infringed the CENTURY 21® trademark. Although we have historically been successful in such litigation, we cannot predict the cost of such proceedings or their ultimate outcome, including any remedies or damages that may be awarded, and adverse results in such litigation and other proceedings may harm our business, financial condition and results of operations.

We are subject to risks related to the interim guarantees that we provide to our mortgage management services customers in Beijing.

As is customary in the mortgage management industry in Beijing, we provide interim guarantees to commercial banks in respect of the mortgage loans they extend to property buyers prior to the time when the mortgage registration certificate is issued to the bank by the applicable property registry. See “Our Business – Our Services – Mortgage Management Services.” If a bank fails to obtain the mortgage registration certificate or the property buyer defaults on his payment obligations during the term of an interim guarantee, we may be required to pay the amount of the delinquent mortgage payments or any measurable loss suffered by the bank. If multiple home buyers default on their payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to recover the amounts paid with respect to our guarantees, we will suffer financial losses. As of December 31, 2008 and September 30, 2009, the contingent guarantee obligation in connection with our provision of interim guarantees amounted to RMB227.8 million and RMB829.3 million, respectively. Although we have not experienced any losses associated with our interim guarantees for the years ended December 31, 2007 and 2008, we have accrued RMB0.5 million for the nine months ended September 30, 2009 for the estimated loss associated with our interim guarantees. If substantial and widespread defaults by our customers occur at the time when the real estate market deteriorates rapidly and for a sustained period and we are called upon to honor our guarantees, our financial condition and results of operations will be materially and adversely affected.

We rely on our information systems to operate our business and maintain our competitiveness, and any disruption to it could harm our business.

Our business depends upon the use of information systems, including systems providing real-time and in-depth management and sales information and support to our network of sales offices and marketing efforts. We rely significantly on our in-house information technology team with support from third-party outsourcing firms, to develop, maintain and regularly upgrade our information systems. In addition, some operations of these information systems depend upon third party technologies, systems and services. We cannot assure you that we will continue to have access to the products or services provided by our third party providers on commercially reasonable terms, or at all. We also cannot assure you that we will be able to continue to effectively operate and maintain our information systems, or to effectively retain our key personnel for the maintenance and management of our information systems.

In addition, we expect to refine and enhance our information systems on an ongoing basis, and we expect that advanced new technologies and systems will continue to be introduced. We may not be able to

 

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replace our existing information systems or introduce new information systems as quickly as our competitors or in a cost-effective manner.

In addition, our information systems are vulnerable to damage or interruption from various causes, including (1) natural disasters, war and acts of terrorism, (2) power losses, computer system failures, internet and telecommunications or data network failures, operator error, losses and corruption of data, and similar events and (3) computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information and other physical or electronic breaches of security. While we maintain certain disaster recovery capabilities for critical functions in most of our businesses, these capabilities may not successfully prevent a disruption to or material and adverse effect on our businesses or operations in the event of a disaster or other business interruption. Any extended interruption in our information systems could significantly reduce our ability to conduct our business and generate revenue. Additionally, we do not carry business interruption insurance for any losses that may occur.

If we cannot manage our growth, our operating results or profitability could be materially and adversely affected.

We have experienced substantial growth since we began operations in 2000. Our net revenues amounted to RMB38.4 million in 2006, RMB189.0 million in 2007, RMB273.4 million in 2008, and RMB443.7 million in the nine months ended September 30, 2009. We intend to continue to expand our operations, which will continue to place substantial demands on our managerial, operational, financial, technological and other resources. Our planned expansion will also place significant demands on us to ensure that our brand does not suffer as a result of any decreases, whether actual or perceived, in the quality of our services. In order to manage and support our growth, we must continue to improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain additional qualified sales professionals as well as other administrative and sales and marketing personnel, particularly as we expand into new markets. We may not be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new expansion into our operations. During our expansion, we may also face other difficulties as a result of a number of factors, many of which are beyond our control, such as any general unfavorable conditions in the real estate market, cost overruns due to price increases by third party vendors or delays or denials of required approvals by relevant government authorities. As a result, our operating results or profitability could be materially and adversely affected.

We may not be successful in our business expansions through future acquisitions.

We have established our company-owned brokerage services business in Shanghai and Shenzhen through acquisitions. In territories where we do not have company-owned sales offices, one of our expansion strategies is to establish our own brokerage services business by acquiring existing chains of sales stores or regional sub-franchisors when their operations become mature and profitable. However, our experience in Shanghai and Shenzhen may not be replicable in other areas of China. The success of our acquisition strategy will also depend upon our ability to negotiate with acquisition targets on favorable terms, and to finance and complete these transactions.

We also need to effectively integrate newly-acquired brokerage businesses into our existing operations, which may involve complex operational and personnel-related challenges, including rectifying possible inconsistencies in standards, controls, procedures and policies, maintaining important business relationships, overcoming local cultural differences, and controlling unanticipated expenses related to such integration. We may also incur material costs relating to such integration. A prolonged diversion of management’s attention and any delays or difficulties we encounter in connection with the integration of any business that we have acquired or may acquire in the future could prevent us from realizing the anticipated cost savings and revenue growth from our acquisitions.

 

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We may be unable to obtain adequate financing to fund our capital requirements.

We expect that over the next several years, a substantial portion of our cash flow will be used to finance the expansion of our company-owned brokerage services business to increase our market share in existing markets and to expand our geographical presence. Although we anticipate that our available funds and expected cash flows from operations will be sufficient to meet our cash needs for at least the next twelve months, this assumption is based on management’s ability to successfully execute its business plan, which includes increasing sales, generating positive operating cash flows and obtaining additional funding to support longer term capital requirements. We cannot assure you that we will obtain such financing at a reasonable cost or at all. Our inability to finance our planned capital expenditures or future acquisitions could materially and adversely affect our business, financial condition and results of operations.

We may not be able to successfully execute our business development strategy, which could have a material and adverse effect on our business, financial condition and results of operations.

We plan to continue to expand our business into new geographical areas in China and to enter into new businesses to diversify our portfolio of products and services. Because China is a large and diverse market, home buying trends and demands may vary significantly by region, and our experience in the markets in which we currently operate may not be applicable in other parts of China. As a result, we may not be able to leverage our experience to expand into other parts of China or to enter into businesses with respect to new products or services. When we enter new markets, we may face intense competition from companies with greater experience or an established presence in the targeted areas or from other companies with similar expansion targets. In addition, our business model may not be successful in new and untested markets. Therefore, we may not be able to successfully execute our business development strategy, which could have a material and adverse effect on our business, financial condition and results of operations.

We may not maintain sufficient insurance coverage for the risks associated with our business operations.

Risks associated with our businesses and operations include but are not limited to claims for wrongful acts committed by our sales professionals, disputes with our regional sub-franchisors or franchisees that we do not own, the loss of intellectual property rights or the failure of information technology systems crucial to our operations, the loss of key personnel and risks posed by natural disasters. Any of these risks may result in significant losses. We maintain insurance coverage we consider customary in China for the industry in which we operate and in compliance with the insurance requirements imposed on us by our master sub-franchise agreement with Realogy. However, we cannot assure you that our insurance coverage is sufficient to cover any losses that we may sustain, or that we will be able to successfully claim our losses under our existing insurance policy on a timely basis or at all. If we incur any loss not covered by our insurance policies, or the compensated amount is significantly less than our actual loss or is not timely paid, our business, financial condition and results of operations could be materially and adversely affected.

When preparing our consolidated financial statements for the years ended December 31, 2007 and 2008, we noted one material weakness in our internal control over financial reporting. If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately report our financial results may be impaired, which could adversely impact investor confidence and the market price of our ADSs.

Prior to this offering, we have been a private company with limited accounting and other resources with which to adequately address our internal controls and procedures. When preparing our consolidated financial statements for the years ended December 31, 2007 and 2008, we noted one material weakness in our internal control over financial reporting relating to a lack of sufficient resources to perform period-end financial reporting procedures, address complex accounting issues under US GAAP and prepare and review financial statements and related disclosures under US GAAP. This material weakness resulted in adjustments to the company’s

 

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consolidated financial statements for the years ended December 31, 2007 and 2008. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting” for a detailed discussion.

If the material weakness is not remedied or recurs, or if we identify additional weaknesses or fail to timely and successfully implement new or improved controls, our ability to assure timely and accurate financial reporting may be adversely affected, we may be required to restate our financial statements, and we could suffer a loss of investor confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs, result in lawsuits being filed against us by our shareholders, or otherwise harm our reputation.

Seasonality in the real estate market could adversely affect our business.

The real estate brokerage business is subject to seasonal fluctuations. Historically, real estate brokerage revenues and transaction volumes have generally been low during January and February as well as the late summer months in China. However, many of our expenses, such as those relating to leasing, administrative or sales and marketing efforts, are fixed and cannot be reduced during a seasonal slowdown. As a result, our operating results have fluctuated from quarter to quarter. These fluctuations are likely to continue and operating results for any period may not be indicative of our performance in any future period. If our operating results for any quarterly period fall below investor expectations or estimates by securities research analysts, the trading price of our ADSs may decline.

Our corporate actions are substantially controlled by Mr. Donald Zhang and Mr. Harry Lu.

Immediately following this offering, Mr. Donald Zhang, our chairman and chief executive officer, and Mr. Harry Lu, our vice chairman and president, will beneficially own approximately 37.9% of our outstanding shares or 36.8% if the underwriters exercise their option to purchase additional ADSs in full. Accordingly, Messrs. Zhang and Lu will have significant influence in determining the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, the election of directors and other significant corporate actions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering.

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

Section 303A of the Corporate Governance Rules of the New York Stock Exchange requires listed companies to have, among other things, a majority of its board members be independent and a nominating and corporate governance committee consisting solely of independent directors. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee. Since a majority of our board of directors will not consist of independent directors as long as we rely on the foreign private issuer exemption, fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result.

 

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An occurrence of a widespread health epidemic or other outbreaks could have a material and adverse effect on our business, financial condition and results of operations.

Our business could be adversely affected by the effects of Influenza A virus subtype H1N1, or A (H1N1), Severe Acute Respiratory Syndrome, or SARS, avian influenza or other epidemics or outbreaks on the economic and business climate. A prolonged outbreak of A (H1N1), any recurrence of SARS, avian influenza or other adverse public health developments in China or elsewhere in the world could have a material and adverse effect on our business operations. Such outbreaks could significantly impact the real estate market and cause a temporary closure of our facilities. Such impact or closures would severely disrupt our operations and adversely affect our business, financial condition and results of operations. Our operations could be disrupted if any of our sales professionals, staff or customers were suspected of having A (H1N1), SARS or avian influenza, since this could require us to quarantine some or all of our sale professional and staff or disinfect our facilities and may deter our customers or potential customers from visiting our sales offices. In addition, our business, financial condition and results of operations could be adversely affected to the extent that A (H1N1), SARS, avian influenza or other outbreak harms the global or Chinese economy in general.

Risks Related to Doing Business in China

Adverse changes in economic and political policies of the PRC government could have a material and adverse effect on overall economic growth in China, which could materially and adversely affect our business.

We conduct substantially all of our business operations in China. As the real estate sector is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Accordingly, our business, financial condition, results of operations and prospects depend to a significant degree on economic developments in China. China’s economy differs from the economies of most other countries in many respects, including with respect to the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has experienced significant growth in the past 30 years, this growth has remained uneven across different periods, regions and among various economic sectors. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since late 2003, the PRC government has implemented a number of measures, such as increasing the People’s Bank of China’s statutory deposit reserve ratio and imposing commercial bank lending guidelines, which had the effect of slowing the growth of credit availability. In 2008 and 2009, however, in response to the global financial crisis, the PRC government has loosened such requirements. Any future actions and policies adopted by the PRC government could materially affect the Chinese economy and slow the growth of the real estate market in China, which could materially and adversely affect our business.

We rely principally on dividends and other distributions on equity paid by our subsidiaries in China to fund our cash and financing requirements, and any limitation on the ability of our subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.

We are an offshore holding company, and we rely principally on dividends from our subsidiaries in China for our cash requirements, including for the service of any debt we may incur. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our subsidiaries to distribute dividends or other

 

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payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries.

We may make loans to our PRC subsidiaries. Any loans to or investments in our PRC subsidiaries are subject to approval by or registration with relevant governmental authorities in China. We may also decide to finance our subsidiaries by means of capital contributions. According to the relevant PRC regulations on foreign-invested enterprises in China, depending on the total amount of investment, capital contributions to our PRC operating subsidiaries may be subject to the approval of the PRC Ministry of Commerce or its local branches. We may not obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

Fluctuations in the value of the RMB may have a material and adverse effect on your investment.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Since July 2008, however, the Renminbi has traded stably within a narrow range against the U.S. dollar.

There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against foreign currencies. Our revenues and costs are mostly denominated in the Renminbi, and a significant portion of our financial assets are also denominated in the Renminbi. Any significant fluctuations in the exchange rate between the Renminbi and the U.S. dollar may materially and adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our ADSs in U.S. dollars. Any fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

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 RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our 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 approval from State Administration of Foreign Exchange by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from State Administration of Foreign Exchange by complying with certain procedural requirements. But approval from or registration with appropriate government authorities is required where RMB 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. This could affect the ability of our PRC subsidiaries to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us. The PRC government may

 

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also at its discretion restrict access in the future to foreign currencies for current account transactions. 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.

Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC domestic residents may subject our PRC resident beneficial owners to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

China has regulations that subject our PRC subsidiaries to additional restrictions if we have beneficial owners of our company who are PRC residents that have not properly filed with authorities in China. See “Regulations—Regulations on Foreign Exchange Registration of Offshore Investment by PRC Residents.” Currently, we do not have beneficial owners whom we know to be PRC residents. However, we cannot provide any assurances that any PRC resident who becomes our beneficial owner in the future will be able to comply with relevant State Administration of Foreign Exchange of the PRC, or SAFE regulations in a timely manner, or at all. Any failure or inability of our PRC resident beneficial owners to comply with the registration procedures may subject such PRC resident beneficial owners to certain fines and legal sanctions, restrict our cross-border investment and financing activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign exchange-denominated loans.

As it remains uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval processes with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our business, financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject our PRC stock incentive plan participants or us to fines and other legal or administrative sanctions.

In December 2006, the People’s Bank of China promulgated Administrative Measures for Individual Foreign Exchange, or the Individual Foreign Exchange Rules, setting forth the requirements for foreign exchange transactions by PRC individuals under either the current account or the capital account. In January 2007, SAFE issued Implementing Rules for the Individual Foreign Exchange Rules, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures. We and our PRC sales professionals and staff who have been granted stock options are subject to the Stock Option Rule. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.

Any change in the preferential tax treatment we currently enjoy in the PRC may have an adverse impact on our business, financial condition and results of operations.

Our PRC subsidiaries are subject to the corporate income tax with the tax rate of 25% except for Shanghai Ruifeng, Shanghai Anshijie Real Estate Consultant Co., Ltd. and Shenzhen CIR which enjoy a

 

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preferential tax rate of 20% in 2009, and Beijing Huachuangxunjie Technology Co., Ltd, or Huachuang, which enjoys a corporate income tax exemption in 2009. We expect that our tax payments will increase in 2010 and will further increase following the expiry of the above preferential tax treatment in 2013. See “Management’s Discussions and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Taxation.”

Various local governments in China have provided discretionary preferential tax treatments to us. However, these local governments may decide to reduce or eliminate these preferential tax treatments at any time. Furthermore, these local implementations of tax laws may be found to violate national laws or regulations and we may be subject to retroactive imposition of higher taxes as a result. Starting from the year 2007, we are required to accrue taxes for these contingencies and other uncertain tax positions taken by us. The change in accounting requirement for reporting tax contingencies, any reduction or elimination of these preferential tax treatments and any retroactive imposition of higher taxes could have an adverse effect on our business, financial condition and results of operations.

Dividends payable to us by our PRC subsidiaries and gain on sale of our shares may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income and dividends distributed to our investors may be subject to PRC withholding taxes under the new CIT Law.

Under the new Corporate Income Tax Law, or CIT Law and its implementation rules, all domestic and foreign invested companies are subject to a uniform enterprise income tax at the rate of 25% and dividends from PRC subsidiaries to their foreign shareholders that are “non-resident enterprises” and any gain realized on the transfer of ADSs or shares by such shareholders will be subject to a withholding tax at the rate of 10% unless a treaty otherwise provides.

It is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the CIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises” or individuals, or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ordinary shares or ADSs may be materially and adversely affected. With the newly imposed 5% or 10% PRC dividend withholding tax, depending on the tax jurisdiction of the receiver, we will incur incremental PRC tax liabilities when PRC profits are distributed to ultimate shareholders.

In addition, under the CIT Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore may be subject to PRC enterprise income tax at the rate of 25% on their worldwide income. See “Taxation—People’s Republic of China Taxation.” If we become a PRC resident enterprise under the new PRC tax system and receive income other than dividends, our profitability and cash flow would be adversely impacted due to our worldwide income being taxed in China under the new CIT Law.

Foreign ownership of real estate agency and brokerage businesses in China is restricted under recent PRC regulations. This may limit our ability to establish our new PRC operating entities or to increase the registered capital of existing entities in the future.

On October 31, 2007, the PRC National Development and Reform Committee of China and the Ministry of Commerce of China jointly promulgated the amended Foreign Investment Industrial Guidance Catalogue, or the Catalogue, which came into effect on December 1, 2007. According to the Catalogue, real estate agency companies and real estate brokerage companies are classified to be in the restricted category of foreign investment industries.

Our PRC legal counsel, Jun He Law Offices, is of the opinion that only new real estate agency and brokerage businesses established after December 1, 2007, or any existing real estate agency and brokerage

 

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businesses that require new approvals from the Ministry of Commerce or its local branch in order to increase their registered capital or conduct an equity transfer, would be effected by the Catalogue. It may be difficult or take a long time for us to obtain any approvals from the Ministry of Commerce or its local branch in order to establish our new PRC operating entities or to increase the registered capital of existing entities in the future. We cannot assure you that, if we are required to seek such approvals in the future, we will be able to obtain them from the Ministry of Commerce or its local branch on a timely basis, or at all.

Uncertainties with respect to the Chinese legal system could have a material and adverse effect on us.

The PRC legal system is based on written statutes. Unlike under common law systems, decided legal cases have little value as precedents in subsequent legal proceedings. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general, and forms of foreign investment (including wholly foreign-owned enterprises and joint ventures) in particular. These laws, regulations and legal requirements are relatively new and are often changing, and their interpretation and enforcement involve significant uncertainties that could limit the reliability of the legal protections available to us. We cannot predict the effects of future developments in the PRC legal system. We may be required in the future to procure additional permits, authorizations and approvals for our existing and future operations, which may not be obtainable in a timely fashion or at all. An inability to obtain such permits or authorizations may have a material and adverse affect on our business, financial condition and results of operations.

The implementation of the PRC Labor Contract Law and the Implementation Regulation for the PRC Labor Contract Law may increase our operating expenses and may materially and adversely affect our business, financial condition and results of operations.

As the PRC Labor Contract Law, or Labor Contract Law, and its Implementation Regulation for the PRC Labor Contract Law, or Implementation Regulation, have been enforced for only a very short time, substantial uncertainty remains as to its potential impact on our business, financial condition and results of operations. See “Regulations — Regulations of Labor Contracts”. The implementation of the Labor Contract Law and the Implementation Regulation may increase our operating expenses, in particular our human resources costs and our administrative expenses. In the event that we decide to significantly modify our employment or labor policy or practice, or reduce the number of our sales professionals and staff, the Labor Contract Law may limit our ability to effectuate the modifications or changes in the manner that we believe to be most cost-efficient or otherwise desirable, which could materially and adversely affect our business, financial condition and results of operations.

If we fail to satisfy the regulatory requirements for provision of interim guarantees, our business, financial condition and results of operations could be materially and adversely affected.

On February 3, 2009, the State Council issued the Notice on Further Specifying the Supervisory Functions for Financing Guarantee Business, which authorized several PRC governmental bodies, led by the China Banking Regulatory Commission, to study and adopt regulatory policies and rules for the development of financing guarantee businesses in China. The provincial governmental bodies in China are authorized to adopt local regulatory rules for financing guarantee businesses within their respective jurisdictions. As of September 30, 2009, no specific rules regulating guarantee businesses have been adopted. However, we cannot assure you that we will be able to satisfy or comply with any new regulatory requirements adopted by the PRC government or provincial governmental bodies in the future. Our business, financial condition and results of operations could be materially and adversely affected by our failure to do so.

 

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Risks Related to Our ADSs and This Offering

There has been no public market for our ordinary 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 ordinary shares or ADSs. We have been approved to list our ADSs on the New York Stock Exchange. Our ordinary shares will not be listed or quoted for trading on any exchange. 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. The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs 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.

We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or ordinary shares to significant adverse tax consequences.

Based on our current income and assets and taking into consideration this offering, we presently do not believe that we should be classified as a passive foreign investment company, or PFIC, for the current taxable year. While we do not anticipate becoming a PFIC in future taxable years, the composition of our income and our assets will be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation – United States Federal Income Taxation”) would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a non-United States corporation that does not distribute all of its earnings on a current basis. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. For more information see the section titled “Taxation – United States Federal Income Taxation – Passive Foreign Investment Company Considerations.”

The market price for our ADSs may be volatile.

In addition to the volatility in the price of our ADSs which could be caused by the materialization of any of the risks described in this section, the securities markets in the United States, China and elsewhere have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

Goldman Sachs (Asia) L.L.C. may have a conflict of interest with respect to this offering.

Immediately prior to the completion of this offering, Goldman Sachs Strategic Investments (Asia) L.L.C., or Goldman Sachs Strategic Investments, an affiliate of Goldman Sachs (Asia) L.L.C., or Goldman Sachs Asia, will beneficially own approximately 28.4% of our outstanding ordinary shares. Therefore, Goldman Sachs Asia, a representative of the underwriters in this offering, will be deemed to have a “conflict of interest” with us under Rule 2720 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc.

Rule 2720 requires that a “qualified independent underwriter” (as such term is defined by Rule 2720) participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence. Accordingly, Morgan Stanley & Co. International plc is assuming the responsibilities of acting as the qualified independent underwriter in this offering. Although the qualified independent underwriter has participated in the preparation of the registration statement and prospectus and exercised the usual standards of

 

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due diligence, we cannot assure you that this will adequately address any potential conflicts of interest related to Goldman Sachs Asia and Goldman Sachs Strategic Investments. In addition, Goldman Sachs Strategic Investments will sell approximately 3.1% of our ordinary shares in this offering. Immediately at the completion of this offering, Goldman Sachs Strategic Investments will beneficially own approximately 18.4% of our outstanding ordinary shares. See “Our Relationship with Realogy and Related Party Transactions – Related Party Transactions – Private Placements” and “Underwriting.”

You will experience immediate dilution in the net tangible book value of ADSs purchased.

When you purchase ADSs in the offering, you will incur immediate dilution of approximately US$6.38 per ADS, representing the difference between the purchase price per ADS in this offering of US$9.75, being the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, and our net tangible book value per ADS as of September 30, 2009 after giving effect to the automatic conversion of all our ordinary and preferred shares into Class A and Class B ordinary shares and this offering. See “Dilution.” In addition, you may experience further dilution in the net tangible book value of the ADSs purchased to the extent that additional ordinary shares are issued upon exercise of outstanding options and options we may grant from time to time.

We may need additional capital, and the sale of additional ADSs or other equity securities or incurrence of additional indebtedness could result in additional dilution to our shareholders or increase our debt service obligations.

Historically, we have relied principally on our operational sources of cash, as well as external sources of financing to fund our operations and capital expansion needs. We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity, equity-linked or debt securities or enter into a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.

Substantial future sales of our ADSs in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.

Additional sales of our 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. Immediately upon completion of this offering, we will have 686,154,777 ordinary shares outstanding. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. 398,942,277 ordinary shares outstanding after this offering will be available for sale, upon the expiration of the applicable lock-up period, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act, assuming the underwriters exercise their option to purchase 2,497,500 additional ADSs in full. The lock-up restrictions on each of our existing shareholders in this offering will expire 180 days from the date of this prospectus. Any or all of these shares can be released prior to expiration of the lock-up period at the discretion of the representatives of the underwriters for this offering. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline.

In addition, certain holders of our ordinary shares after the completion of this offering will have the right to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in 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 public market could cause the price of our ADSs to decline.

 

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

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

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 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 shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to 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.

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

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders 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 with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

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

Your ADSs evidenced by the ADRs 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 doing so 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 deem 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, conduct substantially all of our operations in China and all of our officers reside outside the United States.

We are incorporated in the Cayman Islands. We conduct substantially all of our operations in China through the subsidiaries in China directly or indirectly owned by us. All of our officers reside outside the United

 

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States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an original action against us or against these individuals in a Cayman Islands or PRC court if you believe that we or our officers have infringed your rights under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and 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 amended and restated memorandum and articles of association and by the Companies Law (2009 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands have a less developed body of securities laws as compared to the United States, and provide significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

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

Our management will have considerable discretion as to the use of the net proceeds from this offering.

We intend to use a significant portion of the net proceeds of this offering for general corporate purposes. However, we have not allocated the net proceeds we will receive from this offering to any specific purpose. As such, our management will have considerable discretion in the application of the net proceeds received by us. 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 profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

We will incur additional costs as a result of becoming a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not have as a private company prior to this offering. In addition, new rules and regulations relating to information disclosure, financial reporting and control and corporate governance, which could be adopted by the SEC, the New York Stock Exchange and other regulatory bodies and exchange entities from time to time, could result in a significant increase in legal, accounting and other compliance costs and to make certain corporate activities more time-consuming and costly, which could materially affect our business, financial condition and results of operations.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

Forward-looking statements typically are identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions or the negative of these words or expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

 

   

our anticipated growth strategies;

 

   

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

 

   

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

 

   

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

 

   

trends and competition in the real estate services industry.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately US$109.8 million from this offering, after deducting the estimated underwriting discount and offering expenses payable by us. For the purpose of estimating net proceeds, we are assuming an initial public offering price of US$9.75 per ADS, the mid-point of the estimated range of the initial public offering price. A US$1.00 increase (decrease) in the assumed public offering price would increase (decrease) the net proceeds to us from this offering by US$11.6 million. We will not receive any proceeds from the ADSs sold by the selling shareholders.

We intend to use the net proceeds of this offering for the following purposes:

 

   

approximately US$50 million to fund the development of our company-owned brokerage services business to enter new cities through selected strategic acquisitions to enter new cities;

 

   

approximately US$20 million to fund the development of our company-owned brokerage services business in existing cities by opening additional company-owned sales offices;

 

   

approximately US$10 million to invest and upgrade our information and operations systems;

 

   

the balance to fund general corporate purposes, including our working capital needs.

As of the date of this prospectus, we cannot specify with certainty the particular uses for all of the net proceeds we will receive upon the completion of this offering. The foregoing represents our current intentions with respect to the use and allocation of the net proceeds of this offering based upon our present plans and business conditions. Accordingly, our management will have significant discretion in applying the net proceeds we will receive from the offering. The occurrence of unforeseen events or changed business conditions could result in application of the net proceeds of this offering in a manner other than as described in this prospectus.

As of the date of this prospectus, we believe that the estimated net proceeds of this offering, along with existing cash balances and ongoing operating cash flows, will provide necessary capital for our contemplated expansion plans. Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and expand our business.

As we are a holding company, we rely, in part, on dividends paid to us by our subsidiaries in China for our cash requirements, including funds to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. In China, the payment of dividends is subject to limitations. PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, our subsidiaries in China are required to set aside a certain amount of their accumulated after-tax profits each year, if any, to fund certain statutory reserves. These reserves may not be distributed as cash dividends. Further, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.

Our board of directors has sole discretion on whether to pay dividends, subject to the approval of our shareholders. 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 they 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. Cash dividends on our ADSs, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table shows our capitalization as of September 30, 2009:

 

   

on an actual basis; and

 

   

on a pro forma basis to give effect to the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering; and

 

   

on a pro forma as adjusted basis to reflect the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering, and the issuance and sale of 16,650,000 ADSs by us and the selling shareholders in this offering, assuming an initial public offering price of US$9.75 per ADS (which is the mid-point of the estimated initial public offering price range), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table in conjunction with our consolidated financial statements and related notes included in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of September 30, 2009(1)  
     Actual    Pro
Forma
   Pro Forma
As Adjusted(2)
 
     (in thousands of RMB, except share numbers)  

Preferred shares:

        

Series A preferred shares, US$0.001 par value, 200,000,000 shares authorized, issued and outstanding on an actual basis and Series B preferred shares, US$0.001 par value, 111,367,270 shares authorized, issued and outstanding on an actual basis (None outstanding on a pro-forma or pro-forma as adjusted basis as of September 30, 2009)

   514,162         

Shareholders’ deficit:

        

Class A ordinary shares, US$0.001 par value, 1,013,746,760 shares authorized, 260,000,000 shares issued and outstanding on an actual basis, 3,133,000,000 shares authorized, 418,339,339 shares issued and outstanding on a pro-forma basis, and 621,261,214 shares issued and outstanding on a pro-forma as adjusted basis as of September 30, 2009

   2,152    3,233    4,618   

Class B ordinary shares, US$0.001 par value, 100,000,000 shares authorized, 80,502,938 shares issued and outstanding on a pro-forma basis, and 64,893,563 shares issued and outstanding on a pro-forma as adjusted basis (None authorized, issued and outstanding on an actual basis as of September 30, 2009)

      550    443   

Additional paid-in capital

   2,496    515,027    1,262,954   

Accumulated deficit

   (179,680)    (179,680)    (179,680

Non-controlling interest

   2    2    2   

Total shareholders’ (deficit) / equity

   (175,030)    339,132    1,088,337   
                

Total capitalization

   339,132    339,132    1,088,337   
                

 

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(1) On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 per share, 20,000,000 Series A preferred shares of par value US$0.01 per share and 11,136,727 Series B preferred shares of par value US$0.01 per share were divided into 260,000,000 ordinary shares of US$0.001 par value per share, 200,000,000 Series A preferred shares of par value US$0.001 per share and 111,367,270 Series B preferred shares of par value US$0.001 per share, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760. The share split has been retroactively reflected for all periods presented herein.
(2) A US$1.00 increase (decrease) in the assumed initial public offering price of US$9.75 per ADS would increase (decrease) each of pro forma as adjusted additional paid-in capital, total shareholders’ equity and total capitalization by RMB79.18 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after the offering. Dilution results from the fact that the per ordinary share offering price of our ADSs is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value at September 30, 2009 was US$44.2 million, or US$0.17 per ordinary share and US$2.55 per ADS. Net tangible book value represents total consolidated tangible assets less total consolidated liabilities. Our pro forma net tangible book value at September 30, 2009 was US$44.2 million, or US$0.09 per ordinary share and US$1.33 per ADS. Pro forma net tangible book value adjusts net tangible book value to give effect to the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering.

Without taking into account any other changes in such net tangible book value after September 30, 2009, other than to give effect to (i) the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering, and (ii) our sale of 12,487,500 ADSs in this offering at the initial public offering price of US$9.75 per ADS (the mid-point of the range set forth on the cover of this prospectus) and after deducting the underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2009 would have been US$153.9 million, or US$0.22 per share and US$3.37 per ADS. This represents an immediate increase in pro forma net tangible book value of US$0.13 per ordinary share, or US$2.04 per ADS, to existing shareholders and an immediate dilution of US$0.43 per ordinary share, or US$6.38 per ADS, to investors purchasing ADSs in this offering. Dilution is determined by subtracting pro forma as adjusted net tangible book value per ADS after this offering from the amount of cash paid by a new investor for one ADS. The following table illustrates this per share dilution:

 

Assumed initial public offering price per ordinary share

   US$ 0.65   

Net tangible book value per ordinary share as of September 30, 2009

   US$ 0.17   

Pro forma net tangible book value per ordinary share as of September 30, 2009

   US$ 0.09   

Increase in pro forma net tangible book value per ordinary share attributable to this offering

   US$ 0.13   

Pro forma as adjusted net tangible book value per ordinary share after giving effect to this offering

   US$ 0.22   

Dilution per ordinary share to new investors

   US$ 0.43   

Dilution per ADS to new investors

   US$ 6.38   

Dilution to new investors (percentage)*

     65.4

 

* Calculated based on the dilution per ADS to new investors as a percentage of the per ADS initial public offering price of US$9.75 per ADS.

A US$1.00 increase (decrease) in the assumed public offering price of US$9.75 per ADS would increase (decrease) our net tangible book value after giving effect to the offering by US$11.6 million, the pro forma as adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by US$0.02 per ordinary share and US$0.25 per ADS and the dilution per ordinary share and per ADS to new investors in this offering by US$0.05 per ordinary share and US$0.75 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 and pro forma as adjusted 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.

 

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The following table summarizes, on a pro forma as adjusted basis as of September 30, 2009, the differences between existing shareholders and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per share and the average price per ADS, each paid before deducting the underwriting discounts and commissions and our estimated offering expenses, assuming our sale of ADSs in this offering at the initial public offering price of US$9.75 per ADS, being the mid-point of the range set forth on the cover of this prospectus. The total number of ordinary shares does not include the ordinary shares underlying the ADSs to be sold upon the exercise of the option granted to the underwriters to purchase additional ADSs from the selling shareholders. The pro forma as adjusted information discussed above is illustrative only.

 

     Shares purchased     Total consideration     Average
price
  per share  
   Average
price
  per ADS  
 
       Number        Percent         Amount        Percent         
     (in thousands of US$, except per share and per ADS data)  

Existing holders

   498,842    72.7   68,166    35.9   0.14    2.05

New investors

   187,313    27.3   121,753    64.1   0.65    9.75
                                 

Total

   686,155    100.0   189,919    100.0   0.28    4.15
                                 

A US$1.00 increase (decrease) in the assumed initial public offering price of US$9.75 per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ADS paid by all shareholders by US$12.5 million, US$12.5 million and US$0.27, respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and before deducting the underwriting discounts and commissions and our estimated offering expenses.

The discussion and tables in this section assume no exercise of outstanding stock options. As of September 30, 2009, there were stock options outstanding to purchase a total of 43.8 million ordinary shares, with a weighted average exercise price of US$0.13 per share. To the extent that any of these stock options are exercised, there will be further dilution to new investors.

If the underwriters’ option to purchase additional ADSs is exercised in full, investors purchasing ADSs in this offering from us will hold 41.9% of the total number of our ordinary shares outstanding after this offering.

 

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EXCHANGE RATE INFORMATION

Our business is primarily conducted in China, and all of our revenues and expenses are denominated in Renminbi. Unless otherwise noted, all translations from Renminbi to U.S. dollars have been made at a rate of RMB6.8262 to US$1.00, the noon buying rate as certified for customs purposes by the Federal Reserve Bank of New York on September 30, 2009. We do not represent that Renminbi or U.S. dollar amounts could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates below or at all.

The following table sets forth, for the periods indicated, information concerning exchange rates between the Renminbi and the U.S. dollar based on the noon buying rate in New York City for cable transfers of Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. 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.

 

     Noon Buying Rate
Period (Year ended December 31)      Period End        Average(1)        Low        High  
    

(RMB per US$1.00)

2004

   8.2765    8.2768    8.2774    8.2764

2005

   8.0702    8.1826    8.2765    8.0702

2006

   7.8041    7.9579    8.0702    7.8041

2007

   7.2946    7.5806    7.8127    7.2946

2008

   6.8225    6.9193    7.2946    6.7800

2009

           

July

   6.8319    6.8317    6.8342    6.8300

August

   6.8299    6.8323    6.8358    6.8299

September

   6.8262    6.8277    6.8303    6.8247

October

   6.8264    6.8267    6.8292    6.8248

November

   6.8265    6.8271    6.8300    6.8255

December

   6.8259    6.8275    6.8299    6.8244

2010

           

January (through January 8)

   6.8274    6.8271    6.8280    6.8258

 

Source: Federal Reserve Bank of New York

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

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA

The following selected consolidated financial information and operating data for the periods and as of the dates indicated should be read in conjunction with our audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our selected consolidated statement of operations data for the years ended December 31, 2007 and 2008 and the nine months ended September 30, 2009 and selected consolidated balance sheet data as of December 31, 2007 and 2008 and September 30, 2009 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our selected consolidated statement of operations data for the nine months ended September 30, 2008 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial data. The unaudited selected financial data include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary for a fair presentation of the financial position and the results of operations of the interim unaudited period. Our selected consolidated statement of operations data for the year ended December 31, 2006 and selected consolidated balance sheet data as of December 31, 2006 have been derived from our financial statements not included in this prospectus. Our audited and unaudited consolidated financial statements have been prepared and presented in accordance with accounting principles generally accepted in the United States of America, or US GAAP. The historical results are not necessarily indicative of results to be expected in any future period.

We underwent a reorganization in 2006 to become the holding company of our various subsidiaries. Our reorganization became effective on August 24, 2006. Prior to the reorganization, we managed our franchise services business through a number of companies owned by our founders. We have not included financial information for the years ended December 31, 2004 and 2005, as such information is not available on a basis that is consistent with the consolidated financial information for the years ended December 31, 2006, 2007 and 2008. As our company was not created until 2006 in connection with the reorganization as described in this prospectus, the preparation of consolidated financial information for our company prior to such date would require the preparation of consolidated financial information on a predecessor entity basis for the various companies comprising the operations of our company at that time. Such group would include two companies incorporated in the Cayman Islands and seven companies incorporated in the PRC. No financial accounts were prepared in accordance with US GAAP for our company or our subsidiaries, nor were consolidated accounts prepared for our company for 2004 and 2005. Although accounts were prepared for each of the companies incorporated in the PRC on a basis to comply with PRC tax reporting laws and regulations, or PRC Statutory Accounting, given that it would be inappropriate to prepare accounts for the non-PRC companies on the basis of PRC Statutory Accounting, in order to fairly present consolidated financial information for 2004 and 2005, our company would need to adopt uniform US GAAP accounting conventions for all nine entities, which would differ significantly from PRC Statutory Accounting.

As such, our consolidated financial statements cannot be provided on a US GAAP basis or home-country GAAP basis without unreasonable effort or expense. Furthermore, we believe that the omission of selected financial data for those years would not have a material impact on a reader’s understanding of our financial results and condition, and related trends.

 

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    For the Year Ended December 31,     For the Nine Months Ended
September 30,
 
        2006             2007             2008             2008             2009      
    (RMB)     (RMB)     (RMB)     (RMB)     (RMB)     (US$)(1)  
                      (unaudited)              
    (in thousands, except for share and per share data)  
Statement of Operations Data:            
Revenue            

Net revenues

  38,425      189,029      273,359      208,877      443,691      64,998   

Costs and Expenses

           

Commissions and other agent related costs

  (4,620   (82,866   (151,550   (116,250   (197,978   (29,003

Operating costs

  (9,914   (79,886   (146,457   (110,889   (85,183   (12,479

Selling, general and administrative expenses

  (40,285   (94,471   (102,952   (76,456   (70,278   (10,295

Total costs and expenses

  (54,819   (257,223   (400,959   (303,595 )    (353,439 )    (51,777

(Loss)/Income from operations

  (16,394   (68,194   (127,600   (94,718 )    90,252      13,221   

Interest income

  848      1,708      4,441      2,708      1,575      231   

Interest expense

  (1,299                         

Foreign currency exchange loss

  (1,537   (5,485   (5,526   (4,458   (480   (70

(Loss)/Income before income tax and share of associates’ losses

  (18,382   (71,971   (128,685   (96,468 )    91,347      13,382   

Income tax

  (799   (394   (2,076   (1,780   (2,821   (414

Share of associates’ losses

  (373   (409   (1,126   (1,050   (193   (28

Net (loss)/income

  (19,554   (72,774   (131,887   (99,298 )    88,333      12,940   

Non-controlling interest

  1,524      (1,347   (431   (431          

Net (loss)/income attributable to IFM Investments Limited

  (18,030   (74,121   (132,318   (99,729 )    88,333      12,940   

Net (loss) income per Share

           

Basic

  (0.07   (0.31   (0.57   (0.43   0.13      0.02   

Diluted

  (0.07   (0.31   (0.57   (0.43   0.13      0.02   

Net (loss) income per ADS

           

Basic

  (1.12   (4.69   (8.54   (6.43   2.00      0.29   

Diluted

  (1.12   (4.69   (8.54   (6.43   1.96      0.29   

Weighted average number of ordinary shares used in per share calculations(2):

           

Basic

  260,000,000      260,000,000      260,000,000      260,000,000      260,000,000      260,000,000   

Diluted

  260,000,000      260,000,000      260,000,000      260,000,000      264,262,500      264,262,500   

 

(1) Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York.
(2) On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 per share, 20,000,000 Series A preferred shares of par value US$0.01 per share and 11,136,727 Series B preferred shares of par value US$0.01 per share were divided into 260,000,000 ordinary shares of US$0.001 par value per share, 200,000,000 Series A preferred shares of par value US$0.001 per share and 111,367,270 Series B preferred shares of par value US$0.001 per share, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760. The share split has been retroactively reflected for all periods presented herein.

 

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    As of December 31,     As of September 30,
    Actual     Actual   Pro Forma
As Adjusted(2)
    2006     2007     2008     2009   2009
    (RMB)     (RMB)     (RMB)     (RMB)   (US$)(1)   (RMB)   (US$)(1)
    (in thousands)

Balance Sheet Data:

     

Cash and cash equivalents

  110,505      331,216      176,977      263,176   38,554   1,012,381   148,308

Restricted cash

  6,793      14,497      17,213      21,565   3,159   21,565   3,159

Accounts receivable, net

  6,437      9,965      13,633      60,030   8,794   60,030   8,794

Amount due from related parties

  80,789      44,068      38,110      6,210   910   6,210   910

Property and equipment, net

  5,822      42,467      42,954      41,076   6,017   41,076   6,017

Intangible assets, net

  27,943      26,317      29,796      28,318   4,148   28,318   4,148

Total assets

  255,750      513,187      360,895      462,792   67,796   1,211,997   177,550

Accrued expenses and other current liabilities

  38,535      52,234      53,597      97,450   14,276   97,450   14,276

Total liabilities

  106,073      145,647      111,356      123,660   18,115   123,660   18,115

Convertible redeemable preferred shares

  172,131      469,971      501,892      514,162   75,322    

Total shareholders’ (deficit)/equity

  (22,454   (102,431   (252,353   (175,030)   (25,641)   1,088,337   159,435
                                 

 

 

(1) Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York.
(2) Our consolidated balance sheet data as of September 30, 2009 is adjusted to give effect to the automatic conversion of all our ordinary and preferred shares into 418,339,339 Class A and 80,502,938 Class B ordinary shares immediately prior to the closing of this offering, and the issuance and sale of ADSs by us in this offering, assuming an initial public offering price of US$9.75 per ADS (the mid-point of the estimated initial public offering price range), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A US$1.00 increase (decrease) in the assumed initial public offering price of US$9.75 per ADS would increase (decrease) the amounts representing cash and cash equivalents, total assets and total shareholders’ deficit by US$11.6 million.

 

     For the year ended or as
of December 31,
   For the Nine Months Ended
or as of September 30,
         2007             2008            2008            2009    
                (unaudited)     

Other Financial and Operating Data:

          

Company-owned brokerage services

          

Net revenues (in thousands of RMB)

   151,692      206,076    153,703    407,937

Average number of operating sales offices(1)

   143      279    296    233

Average monthly net revenues per operating sales office (in thousands of RMB)

   88.4      61.6    57.7    194.5

Mortgage management services

          

Net revenues (in thousands of RMB)

        10,650    7,903    22,467

Loan amount of referred mortgages (in thousands of RMB)

        1,879,500    1,369,000    4,171,000

Franchise services

          

Net revenues (in thousands of RMB)

   37,337      56,633    47,271    13,287

Number of regional sub-franchisors as of period end

   23      28    27    28

 

(1) Equals the sum of the number of operating sales offices that existed at the end of each month in the applicable period, divided by the number of months in such period.

 

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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 Information and Operating 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 are a leading comprehensive real estate services provider with the largest network of real estate sales offices in China. We are the exclusive franchisor in China for the CENTURY 21® brand, one of the world’s most recognized brands in the real estate industry. As of September 30, 2009, our CENTURY 21® China network covered 34 major cities with more than 1,000 sales offices, employed approximately 14,900 sales professionals and staff and maintained approximately 4.7 million property listings. In the first half of 2009, based on transaction volume, we ranked among the top three market leaders in over 90% of the cities in which we operate and were the market leader in more than 30% of those cities. We primarily focus on China’s fast-growing and highly fragmented secondary real estate market, which we expect to outgrow the primary market, especially in more economically prosperous cities.

We have significant experience providing professional services in the real estate services industry, and have experienced substantial net revenues growth in recent years. We entered the real estate services market in 2000 as a pioneer of the franchise model in China and, from our base in Beijing, have grown our network of sales offices, including our company-owned sales offices and franchised sales offices, to 34 cities. In late 2006, we launched our company-owned brokerage services business. We subsequently launched our mortgage management services which we began managing as a separate segment in 2008. We are now a market leader in Beijing and Shanghai in both of these business lines.

Factors Affecting Our Results of Operations

Our operating results are subject to general conditions typically affecting the real estate services industry, including changes in PRC government policies and laws with respect to real estate and real estate financing, mortgage interest rates, economic growth, seasonality, demographic changes and demand for residential property in China, particularly in the secondary market. In addition, our operating results may be affected by competition from other real estate services companies and increases in operating costs and expenses due to inflation and other factors. Unfavorable changes in any of these conditions could negatively affect our transaction volume and the transaction value of the properties for which we facilitate sales and otherwise adversely affect our results of operations. For a description of the factors affecting the Chinese real estate and real estate services industry, see “Our Industry.”

Our operating results are also affected by company-specific factors, including our revenue growth and ability to effectively manage our operating costs and expenses. We describe certain of these specific factors affecting our statement of operations below.

 

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Net Revenues. We generate revenue by providing company-owned brokerage services, mortgage management services and franchise services. Our net revenues are presented net of PRC business taxes, discounts and related surcharges. The following table sets forth the net revenues generated by each of our business lines, both as an amount and as a percentage of total net revenues for the periods indicated:

 

     For the Year Ended December 31,    For the Nine Months Ended September 30,
             2007                    2008                    2008                    2009        
     RMB    %    RMB    %    RMB    %    RMB    US$    %
                         (unaudited)                    
Net Revenues:    (in thousands, except for percentages)

Company-owned brokerage services

   151,692    80.2    206,076    75.4    153,703    73.6    407,937    59,761    91.9

Mortgage management services

   -    -    10,650    3.9    7,903    3.8    22,467    3,291    5.1

Franchise services

   37,337    19.8    56,633    20.7    47,271    22.6    13,287    1,946    3.0
                                            

Total net revenues

   189,029    100.0    273,359    100.0    208,877    100.0    443,691    64,998    100.0
                                            

Company-Owned Brokerage Services. Our company-owned brokerage services accounted for 80.2% and 75.4% of net revenues for the years ended December 31, 2007 and 2008, and 73.6% and 91.9% of net revenues for the nine months ended September 30, 2008 and 2009, respectively. Net revenues from our company-owned brokerage services grew substantially in 2008, after we made a strategic decision to expand our business into company-owned brokerage services in Shanghai and Beijing as these markets mature. We further expanded into Shenzhen in mid-2008 aiming to capture the growth potential in the secondary real estate market there. We expect that our company-owned brokerage services will continue to constitute the majority of our net revenues in future periods.

We generate revenue in our company-owned brokerage services primarily through commissions earned from home buyers, sellers, lessors and lessees, principally with respect to the middle to high grade residential properties in the secondary real estate market. We have also recently created new teams dedicated to the primary and commercial real estate sales markets and expect to generate additional revenue from these areas. Most of our agency contracts specifies a commission rate expressed as a percentage of sales or monthly rental price of a particular property. Commissions are generally payable upon the signing of a real estate sales and purchase agreement or rental agreement, at which time we recognize revenue.

Net revenues from our company-owned brokerage services are significantly affected by transaction volume, our commission rates and the average transaction value of the properties that we assist in selling, purchasing and leasing, as follows:

 

   

Transaction volume. Transaction volumes are largely affected by general real estate market conditions in China and local market conditions, our brand recognition, our network of company-owned sales offices and sales professionals, our ability to market and sell our services to a substantial number of purchasers, sellers and lessors of properties, our ability to obtain information on potential sales or rental leads, and the quality of our services. We have grown transaction volumes by increasing the number of company-owned sales offices and by increasing the productivity per existing sales office as measured by average monthly net revenues per operating sales office. We seek to drive our revenues in future periods by maximizing the productivity per existing sales office as we expand our network of company-owned sales offices. We typically experience a ramp-up period after opening a sales office for it to achieve break-even profitability. The length of the ramp-up period depends on various factors, such as the location of each office, the number of competitors and the maturity level of the relevant local market. In addition, we expect the length of this ramp-up period to decrease as the experience of our sales professionals grows, the number of our listings increases and we achieve greater economies of scale. Subject to market conditions, we intend to have at least 500 company-owned sales offices by the end of 2010.

 

   

Commission rates. Our commission rates are regulated by the PRC and provincial governments, which set maximum rates that vary from city to city. Commissions range up to an aggregate 3% of

 

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transaction value for sales and purchases, and up to one month’s rent in the case of rentals. The rates set by the PRC government have not changed significantly and therefore our commission rates have not changed materially during the two years ended December 31, 2008 or the nine months ended September 30, 2009.

 

   

Average transaction value. The average transaction value for the transactions in which we are involved varies based upon general real estate market conditions in China and local market conditions. Transaction values are impacted by government polices and laws with respect to real estate and real estate financing, bank lending policies and interest rates, and economic growth and demand for residential property in China (particularly in the secondary market), among other factors.

Mortgage Management Services. We began managing our mortgage management services as a separate segment in 2008. Our mortgage management services accounted for 3.9% of net revenues for the year ended December 31, 2008, and 3.8% and 5.1% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively.

We generate revenue in our mortgage management services primarily through commissions earned from commercial banks in consideration of our advisory services to home buyers and home owners and interim guarantee services to mortgage banks. These services principally consist of introducing home mortgage products made available by various commercial banks to home buyers and arranging property financing, valuation services and title transfers. The commissions we receive in consideration for providing such referral services are based upon the amount of the home mortgage entered into by the customer that we refer. In addition, as is customary in the real estate brokerage industry in Beijing, we provide interim guarantees to commercial banks with respect to the mortgage loans they extend to our customers prior to the registration of the mortgage of the property to the bank. We provide these mortgage management services in Beijing and Shanghai under the trade name of Kaisheng.

Revenues from our mortgage management services are significantly affected by transaction volume, commission rates and the average loan amount of the home mortgage sought by our customers. The number of persons seeking home mortgages in connection with the purchase of a property significantly impacts the number of applications for home mortgages for which we can advise or offer services. In this regard, we cross-sell our mortgage management services to clients of our company-owned sales offices. In 2009, a substantial majority of the transactions handled by our company-owned brokerage services in which mortgages were utilized made use of our mortgage management services.

Franchise Services. Our franchise services accounted for 19.8% and 20.7% of net revenues for the years ended December 31, 2007 and December 31, 2008 and 22.6% and 3.0% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively.

We generate revenue in our franchise services primarily by granting regional franchise rights for the CENTURY 21® brand in China to regional sub-franchisors in various cities. The regional sub-franchisors, in turn, are authorized to grant individual sales office franchise rights to franchisees in their cities. In consideration for such rights, we collect from each regional sub-franchisor an initial franchise fee and ongoing service fees based on the higher of a percentage of the franchisees’ gross income or a fixed monthly amount. Similarly, a regional sub-franchisor collects from its franchisees an initial franchise fee and ongoing service fees.

Revenues from our franchise services are significantly affected by the number of new regional sub-franchisors, the number of new franchisees and ongoing service fees.

 

   

Number of new regional sub-franchisors. Revenues from the initial franchise fees paid by new regional sub-franchisors upon joining the CENTURY 21® franchise have constituted the substantial majority of our revenue generated by our franchise services. The number of new regional

 

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sub-franchisors with whom we are able to enter into regional sub-franchisor agreements significantly impacts the initial franchise fees we generate in any particular period.

 

   

Number of new franchisees. Similarly, the number of new franchisees with whom we or our regional sub-franchisors are able to enter into franchise agreements significantly impacts the amount of initial franchise fees the regional sub-franchisor receives and, correspondingly, the franchise fees we are able to generate in any particular period.

 

   

Ongoing service fees. Ongoing service fees are based on the higher of a percentage of the franchisees’ gross income or a fixed monthly amount. Regional sub-franchisors generally agree on these percentages or fixed amounts at the outset of the franchise relationship with a third party, but increases or decreases in the percentage amount or the fixed amount would significantly impact the amount of franchise fees that we are able to generate in any period.

Commissions and other agent related costs. Our commissions and other agent related costs primarily include salaries, benefits and commissions paid to our sales professionals, other staff and management for company-owned brokerage services and, to a lesser degree, for mortgage management services and franchise services. Compensation for our sales professionals and managers consists of a fixed salary and benefit package, together with a variable incentive-based component that is expected to comprise a majority of the sales professional or manager’s compensation. We believe such a commission based system aligns the interests of our sales professionals with our interests, and allows us to control expenses if transaction volumes or property values decline. Commission and other agent related costs amounted to 43.8% and 55.4% of net revenues for the years ended December 31, 2007 and December 31, 2008 and 55.7% and 44.6% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively.

Operating costs. Our operating costs primarily include store rental, equipment and utility costs and ongoing service fees. These expenses primarily consist of leasing costs, for which we typically execute written leases with terms of up to five years, and costs associated with supporting each sales office, including computer, telephone, electricity, office supplies and related expenses. Ongoing service fees refer to the ongoing service, or royalty, fees, that we must pay in connection with our right to use the CENTURY 21® brand.

Operating costs amounted to 42.3% and 53.6% of net revenues for the years ended December 31, 2007 and December 31, 2008 and 53.1% and 19.2% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, in each case, respectively. The majority of these operating costs are incurred in relation to our company-owned brokerage services, which accounted for 90.2% and 90.5% of operating costs for the years ended December 31, 2007 and December 31, 2008 and 90.1% and 93.1% of operating costs for the nine months ended September 30, 2008 and September 30, 2009, in each case, respectively.

Selling, general and administrative expenses. Our selling, general and administrative expenses primarily include back office and support staff expenses for our company-owned sales offices, advertising and promotions and share-based compensation. Expenses related to back office and support staff primarily consist of compensation and benefits expenses for administrative personnel, including accounting, human resources, transaction support, legal, information technology, employee training, customer service and other similar functions. Advertising and promotions expenses primarily consist of marketing and advertising costs, including contributions to our National Advertising Fund, or NAF.

Selling, general and administrative expenses amounted to 50.0% and 37.7% of net revenues for the years ended December 31, 2007 and December 31, 2008 and 36.6% and 15.8% of net revenues for the nine months ended September 30, 2008 and 2009, respectively. Expenses relating to our company-owned brokerage services accounted for 50.5% and 51.3% of selling, general and administrative expenses for the years ended December 31, 2007 and December 31, 2008, respectively and 54.2% and 54.0% of selling, general and administrative expenses for the nine months ended September 30, 2008 and September 30, 2009, respectively. Expenses relating to franchise services accounted for 18.8% and 13.4% and 11.5% and 12.7% and non-allocated

 

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costs accounted for 30.7% and 29.9% and 28.6% and 25.7% of selling, general and administrative expenses for the years ended December 31, 2007 and 2008 and the nine months ended September 30, 2008 and 2009, respectively. Non-allocated costs consist primarily of costs and expenses associated with our headquarters. We expect that our selling, general and administrative expenses will increase in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business and with being a publicly traded company.

Share-based compensation expenses were RMB43,549 and RMB730,453 for the years ended December 31, 2007 and December 31, 2008 and RMB535,504 and RMB1,257,174 (US$184,169) for the nine months ended September 30, 2008 and September 30, 2009, respectively.

Taxation. We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands. Dividends from our PRC subsidiaries are subject to a withholding tax at the rate of 10% except Shenzhen CIR, whose dividends are subject to a withholding tax at the rate of 5%. Our current holding structure does not provide for any further treaty relief. Dividends from our Hong Kong subsidiary are exempt from withholding tax as long as after-tax profits are distributed.

Our subsidiaries in China are subject to business tax and related surcharges by various local tax authorities at rates ranging from 5.0% to 5.5% on gross revenues generated from providing real estate services.

Prior to January 1, 2008, pursuant to the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws, the enterprise income taxes of PRC entities were generally assessed at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax.

The CIT Law, under which foreign invested enterprises, or FIEs, and domestic companies would be subject to enterprise income tax at a uniform rate of 25%, became effective on January 1, 2008. In accordance with the CIT Law, there will be a transition period for enterprises that currently receive preferential tax treatments granted by relevant tax authorities. Enterprises subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the CIT Law.

IFM Beijing, Beijing Anxin and IFM SH are subject to the income tax rate of 33% for periods before 2008 and 25% thereafter in accordance with the CIT Law.

As Shanghai Ruifeng and Anshijie are both registered in Shanghai Pu Dong New Area and Shenzhen CIR is registered in Shenzhen special economic zone, they are subject to the preferential income tax rate of 15% according to the Foreign Investment and Foreign Enterprise Income Tax Law before 2008. From January 1, 2008 onwards, the income tax rate is increased progressively from 18% to 25% from 2008 to 2012, respectively, according to preferential treatments granted by the PRC central and local governments.

In October 2009, Beijing Huachuangxunjie Technology Co., Ltd, or Huachuang, obtained a Software Enterprise Certification which entitles it to exemption from corporate income tax for the first two years in which it has taxable income and a 50% reduction in corporate income tax for each of the following three years.

Under the CIT Law, dividends from our PRC subsidiaries out of earnings generated after January 1, 2008, are subject to a withholding tax which may be as high as 20%, although under the detailed implementation rules promulgated by the PRC tax authorities, the effective withholding tax is currently 10%. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax. Dividend payments are not subject to withholding tax in the British Virgin Islands or the Cayman Islands.

Under the CIT Law, enterprises established under the laws of foreign countries or regions and whose “de facto management bodies” are located within the PRC territory are considered PRC resident enterprises, and

 

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will be subject to the PRC enterprise income tax at the rate of 25% on their worldwide income. Under the implementation rules of the CIT Law, “de facto management bodies” are defined as the bodies that have material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. We cannot assure you that we will not be deemed to be a PRC resident enterprise under the PRC CIT Law and be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income. See “Risk Factors — Risks Related to Doing Business in China — Dividends payable to us by our PRC subsidiaries and gain on sale of our shares may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income and dividends distributed to our investors may be subject to PRC withholding taxes under the new CIT Law.”

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

     For the Year Ended December 31,     For the Nine Months Ended September 30,  
         2007             2008             2008             2009             2009      
     (RMB)     (RMB)    

(RMB)

    (RMB)     (US$)(1)  
                 (unaudited)              
    

(in thousands)

 

Revenue

          

Net revenues

   189,029      273,359      208,877      443,691      64,998   

Costs and Expenses

          

Commissions and other agent related costs

   (82,866   (151,550   (116,250   (197,978   (29,003

Operating costs

   (79,886   (146,457   (110,889   (85,183   (12,479

Selling, general and administrative expenses

   (94,471   (102,952   (76,456   (70,278   (10,295

Total costs and expenses

   (257,223   (400,959   (303,595   (353,439   (51,777

(Loss) / income from operations

   (68,194   (127,600   (94,718   90,252      13,221   

Interest income

   1,708      4,441      2,708      1,575      231   

Foreign currency exchange loss

   (5,485   (5,526   (4,458   (480   (70

(Loss) / income before income tax and share of associates’ losses

   (71,971   (128,685   (96,468   91,347      13,382   

Income tax

   (394   (2,076   (1,780   (2,821   (414

Share of associates’ losses

   (409   (1,126   (1,050   (193   (28
                              

Net (loss) / income

   (72,774   (131,887   (99,298   88,333      12,940   
                              

Non-controlling interest

   (1,347   (431   (431)             

Net (loss) / income attributable to IFM Investments Limited

   (74,121   (132,318   (99,729)      88,333      12,940   

 

(1) Translations of RMB amounts into U.S. dollars were made at a rate of RMB6.8262 to US$1.00, the noon buying rate for U.S. dollars in effect on September 30, 2009 in New York City for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York.

 

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Selected financial information and operational data relating to each of our business lines is set forth below for the periods indicated:

 

     For the Year Ended
December 31,
   For the Nine Months Ended
September 30,
           2007              2008            2008            2009    

Company-owned brokerage services

           

Net revenues (in thousands of RMB)

   151,692    206,076    153,703    407,937

Beijing

   62,666    75,543    50,196    187,077

Shanghai

   89,026    126,830    101,752    200,414

Shenzhen

      3,703    1,755    20,446

Average number of operating sales offices(1)

   143    279    296    233

Average monthly net revenues per operating sales office (in thousands of RMB)

   88.4    61.6    57.7    194.5

Mortgage management services

           

Net revenues (in thousands of RMB)

      10,650    7,903    22,467

Loan amount of referred mortgages (in thousands of RMB)

      1,879,500    1,369,000    4,171,000

Franchise services

           

Net revenues (in thousands of RMB)

   37,337    56,633    47,271    13,287

Number of regional sub-franchisors as of period end

   23    28    27    28

 

(1) Equals the sum of the number of operating sales offices that existed at the end of each month in the applicable period, divided by the number of months in such period.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Net revenues. Our net revenues increased RMB234.8 million, or 112.4%, from RMB208.9 million for the nine months ended September 30, 2008 to RMB443.7 million (US$65.0 million) for the nine months ended September 30, 2009, primarily due to a significant increase in net revenues generated by our company-owned brokerage services. Our net revenue growth was also partly attributable to the increase in net revenues from our mortgage management services and partially offset by a decrease of net revenues from our franchise services.

Company-Owned Brokerage Services. Net revenues from our company-owned brokerage services increased RMB254.2 million, or 165.4%, from RMB153.7 million for the nine months ended September 30, 2008 to RMB407.9 million (US$59.8 million) for the nine months ended September 30, 2009. This increase was primarily due to a substantial increase in the number of sale and purchase transactions in which we were involved from 4,396 for the nine months ended September 30, 2008 to 12,976 for the nine months ended September 30, 2009. We believe the increase in the number of transactions in which our company-owned brokerage services were involved was primarily attributable to a recovery in China’s real estate market. The increase in the number of transactions was also partially due to the number of transactions we brokered in Shenzhen, a market we entered in the second half of 2008. We have achieved this robust growth in sales volume despite a significant reduction in the number of operating sales offices in Beijing and Shanghai. In Beijing, we decreased from an average of 140 operating sales offices for the nine months ended September 30, 2008 to an average of 101 operating sales offices for the nine months ended September 30, 2009. In Shanghai, we decreased from an average of 148 operating sales offices for the nine months ended September 30, 2008 to an average of 109 operating sales offices for the nine months ended September 30, 2009. These decreases were primarily due to streamlining of our operations in response to the weakness of the real estate market in China in 2008.

Average commission rates remained relatively stable in the nine months ended September 30, 2009 compared to the same period in 2008. However, our average monthly net revenues per operating sales office in Beijing increased by RMB165,967 or 416.6%, from RMB39,838 for the nine months ended September 30, 2008 to RMB205,805 (US$30,149) for the nine months ended September 30, 2009, and our average monthly net revenues per operating sales office in Shanghai increased by RMB127,906, or 167.4%, from RMB76,390 for the nine months ended September 30, 2008 to RMB204,296 (US$29,928) for the nine months ended September 30,

 

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2009. We believe that these increases were primarily due to improved operational efficiency and the recovery of the real estate market in China during the first nine months of 2009.

Mortgage Management Services. Revenues from our mortgage management services increased RMB14.6 million, or 184.8%, from RMB7.9 million for the nine months ended September 30, 2008 to RMB22.5 million (US$3.3 million) for the nine months ended September 30, 2009, primarily due to a substantial increase in the number of home mortgages for existing homes that utilized our mortgage management services. For the nine months ended September 30, 2009, we provided services for home mortgages for existing homes with an aggregate loan amount of approximately RMB4.2 billion (US$615.3 million) as compared to RMB1.4 billion for the nine months ended September 30, 2008.

Franchise Services. Revenues from our franchise services decreased RMB34.0 million, or 71.9%, from RMB47.3 million for the nine months ended September 30, 2008 to RMB13.3 million (US$1.9 million) for the nine months ended September 30, 2009. This decrease resulted primarily because we did not grant any new regional sub-franchises in the nine months ended September 30, 2009 compared with the nine months ended September 30, 2008, during which period we recognized RMB35.5 million in initial franchise fees from seven newly granted regional sub-franchises. Since September 30, 2009, we have granted two additional regional sub-franchises.

Commissions and other agent related costs. Our commissions and other agent related costs accounted for 55.7% and 44.6% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively and increased RMB81.7 million, or 70.3%, from RMB116.3 million for the nine months ended September 30, 2008 to RMB198.0 million (US$29.0 million) for the nine months ended September 30, 2009, primarily due to RMB81.5 million net increase in costs associated with our company-owned brokerage services. This net increase was primarily due to a RMB95.7 million increase in commission expenses as a result of higher net revenues, and was partially offset by an RMB14.0 million decrease in non-commission, payroll and benefit expenses for our sales professionals as a result of the decrease in the number of company-owned sales offices and sales professionals in the nine months ended September 30, 2009.

Operating costs. Our operating costs accounted for 53.1% and 19.2% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively and decreased RMB25.7 million, or 23.2%, from RMB110.9 million for the nine months ended September 30, 2008 to RMB85.2 million (US$12.5 million) for the nine months ended September 30, 2009, primarily due to a decrease in operating costs for our company-owned brokerage services of RMB20.6 million, or 20.6%, from RMB99.9 million for the nine months ended September 30, 2008 to RMB79.3 million for the nine months ended September 30, 2009. This decrease was primarily due to an RMB11.8 million decrease in sales office rental costs as a result of a reduction of 78 average company-owned operating sales offices in Beijing and Shanghai, offset by the addition of 26 operating sales office in Shenzhen, RMB8.1 million decrease in other sales office related costs such as utilities and telecommunications, and depreciation and amortization expenses. Our operating costs attributable to franchise services also decreased by RMB5.8 million mainly due to a decrease in royalty payments due to Realogy as we did not recognize any initial franchise fee revenue from newly signed regional sub-franchisors during this period.

Selling, general and administrative expenses. Our selling, general and administrative expenses accounted for 36.6% and 15.8% of net revenues for the nine months ended September 30, 2008 and September 30, 2009, respectively and decreased RMB6.2 million, or 8.1%, from RMB76.5 million for the nine months ended September 30, 2008 to RMB70.3 million (US$10.3 million) for the nine months ended September 30, 2009, primarily due to a decrease of RMB8.9 million in marketing expenses as management replaced traditional advertising with internet based marketing for our company-owned brokerage services and franchise services. The overall decrease in selling, general and administrative expenses was partially offset by increases of RMB0.9 million in costs associated with our mortgage management services as a result of hiring additional staff.

 

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Interest income. Our interest income decreased RMB1.1 million, or 41.8%, from RMB2.7 million for the nine months ended September 30, 2008 to RMB1.6 million (US$0.2 million) for the nine months ended September 30, 2009, mainly as a result of a lower average cash balance maintained for the nine months ended September 30, 2009.

Foreign currency exchange loss. Our foreign currency exchange loss decreased RMB4.0 million, or 89.2%, from RMB4.5 million for the nine months ended September 30, 2008 to RMB0.5 for the nine months ended September 30, 2009 primarily as a result of the stabilization of the exchange rate between the Renminbi and the U.S. dollar.

Net Income. As a result of the foregoing, we had a net income of RMB88.3 million (US$12.9 million) for the nine months ended September 30, 2009 as compared to a net loss of RMB99.3 million for the nine months ended September 30, 2008.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net revenues. Our net revenues increased RMB84.4 million, or 44.6%, from RMB189.0 million for the year ended December 31, 2007 to RMB273.4 million for the year ended December 31, 2008, primarily due to an increase in net revenues generated by our company-owned brokerage services. Our net revenue growth was also partly attributable to the establishment of our mortgage management services business as a separately managed segment and growth in our franchise services revenue.

Company-Owned Brokerage Services. Net revenues from our company-owned brokerage services increased RMB54.4 million, or 35.9%, from RMB151.7 million for the year ended December 31, 2007 to RMB206.1 million for the year ended December 31, 2008. This increase was primarily due to a substantial increase in the number of sale and purchase transactions in which we were involved from 4,424 for the year ended December 31, 2007 to 6,312 for the year ended December 31, 2008. The increase in the number of transactions in which our company-owned brokerage services were involved was primarily attributable to an increase in the number of sales offices in Beijing and Shanghai. In Beijing we increased from an average of 68 operating sales offices for the year ended December 31, 2007 to an average of 128 operating sales offices for the year ended December 31, 2008. In Shanghai we increased from an average of 75 operating sales offices for the year ended December 31, 2007 to an average of 139 operating sales offices for the year ended December 31, 2008.

Average commission rates remained relatively stable in the year ended December 31, 2008 as compared to the year ended December 31, 2007. As a result of our rapid expansion and, we believe, the weakness of the real estate market in China in 2008, our average monthly net revenues per operating sales office in Beijing, decreased by RMB27,615, or 36.0%, from RMB76,797 for the twelve months ended December 31, 2007 to RMB49,182 for the twelve months ended December 31, 2008. Our average monthly net revenues per operating sales office in Shanghai decreased by RMB22,881, or 23.1%, from RMB98,918 for the twelve months ended December 31, 2007 to RMB76,037 for the twelve months ended December 31, 2008. Revenues from our company-owned brokerage services in Shenzhen were minimal during such periods as these operations were launched in 2008.

Mortgage Management Services. Revenues from our mortgage management services were RMB10.7 million for the year ended December 31, 2008. Our mortgage management services were not separately segmented until 2008 when we began marketing the services under the Kaisheng brand, concentrating on brokering mortgage loan services to customers both inside and outside our CENTURY 21® China network. For the year ended December 31, 2008, we provided services for home mortgages for existing homes with an aggregate loan amount of approximately RMB1.9 billion.

Franchise Services. Revenues from our franchise services increased by RMB19.3 million, or 51.7%, from RMB37.3 million for the year ended December 31, 2007 to RMB56.6 million for the year ended

 

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December 31, 2008. This growth was primarily attributable to an increase in the number of our newly-opened operating regional sub-franchisors in 2008 from three in the year ended December 31, 2007 to eight in the year ended December 31, 2008, resulting in an increase in the initial franchise fees recognized as revenue.

Commissions and other agent related costs. Our commissions and other agent related costs increased by RMB68.7 million, or 82.9%, from RMB82.9 million for the year ended December 31, 2007 to RMB151.6 million for the year ended December 31, 2008 primarily due to RMB69.1 million increase in costs associated with our company-owned brokerage services, RMB52.6 million, or 76.1%, of which was attributable to increased costs associated with non-commission, payroll and benefit expenses for our sales professionals as a result of the increase in company-owned sales offices in 2008 described under “– Net Revenues – Company-Owned Brokerage Services” above. This increase was also caused by an increased number of sales professionals and staff for our mortgage management services, which were managed as a separate segment beginning in 2008.

Operating costs. Our operating costs increased by RMB66.6 million, or 83.3%, from RMB79.9 million for the year ended December 31, 2007 to RMB146.5 million for the year ended December 31, 2008, principally due to an increase in operating costs for our company-owned brokerage services of RMB60.6 million, or 84.1%, from RMB72.0 million for the year ended December 31, 2007 to RMB132.6 million for the year ended December 31, 2008. This increase was primarily due to higher sales office rental costs of RMB43.1 million as a result of the addition of 136 company-owned average operating sales offices in Beijing, Shanghai and Shenzhen, RMB16.9 million increase in other sales office related costs such as utilities and telecommunications, and depreciation and amortization expense. Our operating costs attributable to franchise services increased by RMB4.4 million due to an increase in royalty payments to Realogy resulting from our increased initial franchise fee revenue. In addition, the operation of our mortgage management services as a separate segment resulted in costs of RMB1.6 million for the year ended December 31, 2008 being allocated to our mortgage management services.

Selling, general and administrative expenses. Our selling, general and administrative expenses increased by RMB8.5 million, or 9.0%, from RMB94.5 million for the year ended December 31, 2007 to RMB103.0 million for the year ended December 31, 2008, primarily due to RMB17.4 million increase in non-sales payroll costs associated with expansion of company-owned brokerage services and mortgage management services as we hired more back office supporting staff in these business segments, offset in part by RMB4.8 million decrease in advertising and promotion expenses as we changed from traditional print media to more internet based advertising, as well as RMB3.9 million decrease in other general and administrative expenses as we reduced consulting fees and professional fees.

Interest income. Our interest income increased by RMB2.7 million, or 160.0%, from RMB1.7 million for the year ended December 31, 2007 to RMB4.4 million for the year ended December 31, 2008, mainly as a result of our increased average cash balance during 2008 as compared with 2007.

Net loss. As a result of the foregoing, our net loss increased by RMB59.1 million, or 81.2%, from RMB72.8 million for the year ended December 31, 2007 to RMB131.9 million for the year ended December 31, 2008.

 

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The following table sets forth selected quarterly results of operations for the seven quarters ended September 30, 2009. We have prepared this financial information on the same basis as our audited consolidated financial statements. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.

 

    For Three Months Ended  
    March 31,
2008
    June 30,
2008
    September 30,
2008
    December 31,
2008
    March 31,
2009
    June 30,
2009
    September 30,
2009
 
    (RMB’000)     (RMB’000)     (RMB’000)     (RMB’000)     (RMB’000)     (RMB’000)     (RMB’000)  

Revenue

             

Net revenue

  58,912      75,497      74,468      64,482      98,236      165,948      179,507   

Costs and Expenses

             

Commissions and other agent related costs

  (32,614   (42,213   (41,423   (35,300   (46,763   (72,204   (79,011

Operating costs

  (32,004   (34,712   (44,173   (35,568   (25,450   (29,384   (30,349

Selling, general and administrative expenses

  (22,348   (24,944   (29,164   (26,496   (19,259   (22,468   (28,551

Total costs and expenses

  (86,966   (101,869   (114,760   (97,364   (91,472   (124,056   (137,911

(Loss) Income from operations

  (28,054   (26,372   (40,292   (32,882   6,764      41,892      41,596   

Interest income

  1,112      950      646      1,733      406      448      721   

Foreign currency exchange loss

  (2,205   (822   (1,431   (1,068   (337   (77   (66

(Loss) Income before income tax and share of associates’ losses

  (29,147   (26,244   (41,077   (32,217   6,833      42,263      42,251   

Income tax

  (558   (1,094   (128   (296   (301   (1,032   (1,488

Share of associates’ losses

  (833   (80   (137   (76   (97   (94   (2

Net (loss) income

  (30,538   (27,418   (41,342   (32,589   6,435      41,137      40,761   

Non-controlling interest

  (431                              

Net (loss) income attributable to IFM Investments Limited

  (30,969   (27,418   (41,342   (32,589   6,435      41,137      40,761   

Our Liquidity and Capital Resources

Through September 30, 2009, our principal sources of liquidity were cash generated from our operating activities, capital contributions and sale of preferred shares through private placements. Our net cash used in operating activities was approximately RMB38.7 million, RMB125.4 million for the years ended December 31, 2007 and 2008, respectively and the net cash provided by operating activities was approximately RMB97.5 million for the nine months ended September 30, 2009. Consequently, our accumulated deficit was RMB135.7 million, RMB268.0 million and RMB179.7 million as of December 31, 2007 and 2008 and as of September 30, 2009, respectively. Our cash and cash equivalents consist of cash on hand and liquid investments placed with banks and other financial institutions that are unrestricted as to withdrawal or use and have maturities of three months or less. We have no debt obligations. We expect to utilize a portion of our cash on hand to open and acquire company-owned sales offices in selected new markets as we grow our network of company-owned brokerage services. We currently anticipate that we will be able to meet our needs to fund operations for at least the next twelve months following this offering with operating cash flow and existing cash balances.

We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. If our 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 subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with accounting standards and regulations applicable to such subsidiaries. Under

 

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PRC law, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of our PRC subsidiaries with foreign investments is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation of these subsidiaries. In addition, dividend payments from our PRC subsidiaries could be delayed as such dividends may only be distributed upon completion of an annual audit of such subsidiary.

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

 

     For the Year Ended
December 31,
    For the Nine Months Ended
September 30,
 
         2007             2008             2008             2009             2009      
     (RMB)     (RMB)    

(RMB)

    (RMB)     (US$)  
                 (unaudited)              
     (in thousands)  

Net cash (used in) provided by operating activities

   (38,721   (125,376   (106,337   97,455      14,277   

Net cash (used in) investing activities

   (42,483   (38,446   (34,650   (8,915   (1,306

Net cash provided by (used in) financing activities

       307,830            13,272      8,189      (2,313   (339
                              

Effects of foreign exchange on cash and cash equivalents

   (5,915   (3,689   (4,842   (28   (4

Net increase (decrease) in cash and equivalents

   220,711      (154,239   (137,640   86,199      12,628   

Cash and cash equivalents at the beginning of the period

   110,505      331,216      331,216      176,977      25,926   

Cash and cash equivalents at the end of the period

   331,216      176,977      193,576      263,176      38,554   

Operating Activities

Our operating activities primarily comprise our company-owned brokerage services, mortgage management services and franchise services. The timing of when we collect our fees on all of the business lines may differ from when we recognize revenue, which may result in significant changes in certain of our related balance sheet items such as deferred revenue and accounts receivable. For example, we collected more funds up front in 2007 related to our franchise fees as compared to 2008, which affected our cash used in operating activities.

For the nine months ended September 30, 2009, cash generated from operating activities amounted to RMB97.5 million, primarily due to RMB88.3 million net income earned during the period and, to a lesser degree, to an increase of RMB43.9 million in accrued expenses and other current liabilities due to increase in commission and other agent related costs, operating costs and selling, general and administrative expenses. These increases were partially offset by an increase of RMB54.5 million in accounts receivable primarily due to an increase in sales volume.

For the nine months ended September 30, 2008, cash used in operating activities amounted to RMB106.3 million, primarily due to RMB99.3 million of net losses during the period and, to a lesser degree, to a decrease of RMB18.7 million in deferred revenue in our franchise services business associated with new regional

 

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sub-franchisors and an increase of RMB12.4 million in accounts receivable primarily due to an increase in sales volume.

All of our operating cash generated in 2007 and 2008 was used in our operating activities. Significant changes in operating assets and liabilities that impacted our cash used in our operating activities include an increase in prepaid expenses and other current assets of RMB20.3 million in 2007, compared with a decrease in prepaid expenses and other current assets of RMB8.8 million in 2008, and an increase in accrued expenses and other current liabilities of RMB28.7 million in 2007, compared with an increase in accrued expenses and other current liabilities of RMB0.2 million in 2008. As we continue to expand the scale of our business, our working capital requirements are expected to increase as well.

Investing Activities

Our investing activities primarily relate to our purchases and disposals of equipment and acquisition activities.

Net cash used in investing activities amounted to RMB8.9 million for the nine months ended September 30, 2009 primarily due to our purchase of property and equipment. Net cash used in investing activities amounted to RMB34.7 million for the nine months ended September 30, 2008, primarily due to (i) our purchase of property and equipment of RMB19.3 million, (ii) our payment for the acquisition of IFM SH for RMB10.9 million, and, to a lesser degree, to our purchase of intangible assets of RMB4.5 million in connection with the reacquisition of the CENTURY 21® franchise rights from a franchisee in Shenzhen.

Net cash used in investing activities amounted to RMB38.4 million for the year ended December 31, 2008, primarily due to (i) our purchase of property and equipment of RMB23.1 million and (ii) our payment for the acquisitions of IFM SH and City Integrated Residential Services (China) Limited for an aggregate RMB10.9 million, and, to a lesser degree, to our purchase of intangible assets of RMB4.5 million in connection with the reacquisition of the CENTURY 21® franchise rights from a franchisee in Shenzhen. See “Our Corporate History and Structure — Our Principal Subsidiaries.”

Net cash used in investing activities amounted to RMB42.5 million for the year ended December 31, 2007, solely due to our purchase of property and equipment.

Financing Activities

Our financing activities primarily consist of capital contributions and issuance and sale of our preferred shares to investors.

Net cash used in financing activities amounted to RMB2.3 million for the nine months ended September 30, 2009 as a result of a net repayment of certain related party loans. Net cash provided by financing activities amounted to RMB8.2 million for the nine months ended September 30, 2008, primarily due to the RMB16.2 million gross proceeds from the issuance of our Series B preferred shares to Realogy and partially offset by an RMB8.0 million net repayment of certain related party loans.

Net cash provided by financing activities amounted to RMB13.3 million for the year ended December 31, 2008, primarily due to the RMB16.2 million in net proceeds from our issuance of our Series B preferred shares to Realogy and partially offset by RMB2.9 million in net repayments of certain related party loans.

Net cash provided by financing activities amounted to RMB307.8 million for the year ended December 31, 2007, primarily due to the RMB325.0 million in proceeds from our issuance of our Series B preferred shares to GL Asia Mauritius II Cayman Limited as well as proceeds received from our issuance of

 

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Series A preferred shares to Goldman Sachs Strategic Investments, and partially offset by RMB15.3 million in repayments of certain short-term borrowings, and RMB1.9 million in net repayments of certain related party loans.

We incurred RMB4.1 million, RMB42.5 million, RMB23.1 and RMB8.9 million of capital expenditures for the years ended December 31, 2006, 2007 and 2008 and the nine months ended September 30, 2009, respectively. We incurred these capital expenditures primarily in our company-owned brokerage services in connection with the establishment of brokerage stores, and financed these expenditures principally through the issuance of preferred shares.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2008:

 

Contractual Obligations

(in thousands of RMB)

   Total    Less than
1 year
   1 – 3
years
   3 – 5
years
   More than
5 years

Operating Lease

              

    Obligations

   125,533    56,303    60,375    8,855    -

Minimum Service

              

    Fees

   11,104    683    1,366    1,366    7,689
                        

Total

   136,637    56,986    61,741    10,221    7,689
                        

Operating Leases

Our operating lease agreements are principally for our administrative offices and real estate brokerage sales offices. These leases have expiration dates, the latest of which is in 2015.

Minimum Service Fees

Pursuant to the master sub-franchise agreement entered into with Realogy, we are required to pay an annual minimum service fee to Realogy for the licensing of the CENTURY 21® brand. The minimum annual service fee is the greater of US$100,000 (approximately RMB683,000) or an amount calculated by multiplying US$500 (approximately RMB3,000) by the number of sales offices in our CENTURY 21® franchise network, to be adjusted for inflation or deflation.

Long-term Deposits Payable

We receive security deposits from franchisees which are recorded as long-term deposits payable. These deposits are refundable at the end of the franchise agreement period if the franchisees do not breach the franchise agreements. The long-term deposits payable as of September 30, 2009 were RMB8.9 million.

Off-Balance Sheet Commitments and Arrangements

As is customary in the mortgage management industry in Beijing, we provide interim guarantees to commercial banks in respect of the mortgage loans they extend to property buyers. An interim guarantee covers the period beginning when the bank disburses the mortgage loan to the property buyer and ending when the mortgage registration certificate is issued to the bank by the applicable property registry, which typically takes one to six months. The fair value of the interim guarantees as of December 31, 2007 and 2008 and as of September 30, 2009 was immaterial.

If a bank fails to obtain the mortgage registration certificate or the property buyer defaults on his payment obligations during the term of an interim guarantee, we may be required to pay the amount of the

 

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delinquent mortgage payments or any measurable loss suffered by the bank exceeding the payment already made by the buyer and the amount recoverable from the property.

Under PRC rules, the maximum financed portion of the purchase price of a property is 80%, which helps reduce our risk exposure. To further mitigate our risk exposure, we usually:

 

   

conduct certain background and credit checks on property buyers and reject less credit-worthy mortgage applications;

 

   

assist in applying for buyers’ title documents, and issue a guarantee in a transaction only after a notice specifying the proposed date for collecting the title document has been issued by the applicable property registry; and

 

   

actively participate in the process of banks’ applying for mortgage registration certificates.

The contingent guarantee obligation in connection with our provision of interim guarantees was RMB143.9 million and RMB227.8 million as of December 31, 2007 and 2008, respectively, and RMB829.3 million as of September 30, 2009. This increase during the nine months ended September 30, 2009 was primarily due to a substantial increase in the number of home mortgages for existing homes that utilized our mortgage management services. We have not experienced any losses associated with our interim guarantees for the years ended December 31, 2007 and 2008. We have accrued RMB0.5 million for the nine months ended September 30, 2009 for the estimated loss associated with our interim guarantees.

Other than the contingent liabilities discussed above and the obligations set forth in the preceding section, 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 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 research and development services with us.

Internal Control Over Financial Reporting

When preparing our consolidated financial statements for the years ended December 31, 2007 and 2008, we noted one material weakness in our internal control over financial reporting relating to a lack of sufficient resources to perform period-end financial reporting procedures, to address complex accounting issues under US GAAP and to prepare and review financial statements and related disclosures under US GAAP. This material weakness resulted in adjustments to the Group’s consolidated financial statements for the years ended December 31, 2007 and 2008. A material weakness is defined in PCAOB Standards and Related Rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Following the identification of this material weakness, we have expended additional resources from our management team and additional expenses to implement and maintain effective controls and procedures to remedy this material weakness and any additional weaknesses we may identify in our internal control over financial reporting in the future. In addition, we have hired and will continue to hire more staff for financial reporting and analysis and an external consultant to strengthen our control procedures over financial statement reviews for external reporting. Furthermore, we have expanded our training programs to our new and existing accounting staff on US GAAP financial statement preparation and reporting.

We plan to take additional measures to improve our internal control over financial reporting. These measures include (i) establishing an audit committee to oversee the accounting and financial reporting processes

 

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as well as external and internal audits of our company, (ii) hiring additional qualified professionals with relevant experience for our finance and accounting department, (iii) providing additional accounting and financial reporting training for our existing personnel, and (iv) increasing the level of interaction among our management, audit committee, independent registered public accounting firm and other external advisors. However, the process of designing and implementing an effective financial reporting system represents a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations.

We believe that the actions we have taken to date have enhanced the reliability and effectiveness of our internal control over financial reporting as of the date of this prospectus. However, our independent registered public accounting firm has not evaluated the effectiveness of the measures we have taken to improve our internal control over financial reporting since such material weakness was noted in connection with the recently completed 2007 and 2008 audits. We cannot assure you that the measures we have taken to date or any measures we take in the future will be sufficient to remediate the material weakness reported by our independent registered public accounting firm and to avoid potential future material weaknesses. See “Risk Factors—When preparing our consolidated financial statements for the years ended December 31, 2007 and 2008, we noted one material weakness in our internal control over financial reporting. If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately report our financial results on a timely basis may be impaired, which could adversely impact investor confidence and the market price of our ADSs.”

Inflation

Inflation in China has not materially impacted our results of operations in recent years. According to the National Bureau of Statistics of China, the change of consumer price index in China was 4.8% and 5.9% in 2007 and 2008, respectively.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with US GAAP, appearing elsewhere in this prospectus. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that our accounting policies with respect to revenue recognition, allowance for doubtful accounts, property and equipment, goodwill and intangible assets, impairment of long-lived assets, share-based compensation, and income taxes represent critical accounting policies that reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

 

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Revenue Recognition

We recognize revenue where there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Revenues are recorded, net of sales related taxes and discounts.

Company-Owned Brokerage Services

Our company-owned brokerage services business earns most of its revenue from brokerage commissions from secondary real estate property sales, purchases and leasing transactions, referral and service fees of mortgage loan transactions to our mortgage management services segment, and to a lesser extent brokerage commissions from primary real estate property sales and purchase transactions. This commission income is recorded as revenue upon meeting the revenue recognition criteria described above, including the signing of a real estate sales and purchase agreement or rental agreement, the mortgage loan fund being disbursed by banks to the customers, and developers’ confirmation of successful sales of a primary real estate property. All revenue amounts are net of any sales discounts that management estimates based on current circumstances at the time of the sale and historical experience of anticipated subsequent discounts granted to customers.

Deferred revenues are recognized when payments are received in advance of revenue recognition.

Mortgage Management Services

We provide mortgage management services, many of which are provided in connection with our company-owned brokerage services business. We also provide interim financial guarantees to banking institutions in Beijing for a period ranging from approximately one to six months while government-owned property registries process and release the relevant mortgage pledge documents to such institutions.

The mortgage management services income is recognized on a net basis when the mortgage loan funds are disbursed by banks to the customers. The financial guarantee revenue is recognized when the respective mortgage pledge documents are collateralized by the banking institutions. We have not experienced any losses associated with the interim financial guarantees for the fiscal years ended December 31, 2007 and 2008 and we have accrued RMB0.5 million for estimated losses associated with our interim financial guarantees for the nine months ended September 30, 2009.

Franchise Services

We recognize our franchise services revenue as earned. Franchise revenue includes initial franchise fees, which are generally non-refundable and recognized as revenue when all material services or conditions relating to the initial franchise fee have been substantially performed and we have fulfilled all of our commitments and obligations (generally when a franchisee commences its operation under the CENTURY 21® brand). Our commitments and obligations related to earning the initial franchise fee include providing training and assessing the franchisees’ qualifications for commencement of operations. Franchise revenue also consists of ongoing service fees received from our franchisees. The ongoing service fees received are primarily based on a percentage of the franchisees’ gross income or a fixed monthly amount. The ongoing service fees are accrued as the underlying franchisee revenue is earned. On an ongoing basis, the services we provide to our franchisees include the license to use or sub-franchise CENTURY 21® brand and system, training services, and the right to participate in and benefit from the marketing campaigns using our NAF as well as information technology and back office support.

We also collect marketing fees from our franchisees and utilize such fees to fund advertising campaigns on behalf of our franchisees (known as National Advertising Fund, or NAF). Management fee income of NAF is recognized in proportion to the NAF that had been spent during the reporting period.

 

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Allowance for doubtful accounts

We accrue for allowances for doubtful accounts for receivable balances that are unlikely to be collected based on management analysis and estimates. This analysis is based on an assessment of our historical experience with particular customers or franchisees and the age of certain receivable balances, which may indicate that such receivables are no longer fully collectible. If the financial condition of our customers and franchisees were to deteriorate, resulting in an impairment of their ability to make payments, or if such customers or franchisees decided not to pay us, additional allowances could be required that would materially impact our financial position and results of operations.

We have adopted a provisioning policy for doubtful debts for our receivable balances based on the historical experience of the recoverability of the receivables. For the periods presented, our provision based on historical bad debts is approximately 2% of net revenue. The appropriateness of our provisioning is assessed on an ongoing basis based on our actual experience. In addition, we also make specific bad debt provisions for problem account receivable balances (e.g. for certain franchisees). Established reserves have historically been sufficient, and are based on aging, specific customer circumstances, historical experience and current knowledge of the related political and economic environments. It is possible, however, that the accuracy of the management’s estimation process could be impacted by unforeseen circumstances.

Allowances for doubtful accounts charged to selling, general and administrative expenses were RMB4.5 million, RMB5.2 million for the years ended December 31, 2007 and 2008, respectively. The allowance for doubtful accounts ending balance of RMB2.3 million, RMB3.6 million as of December 31, 2007 and 2008, respectively, represents a net ending balance after actual write-offs during the year. Accounts receivable related to company-owned brokerage services fees and franchise services fees are stated net of such allowance balances at the end of year. For the nine months ended September 30, 2009, allowances for doubtful accounts charged to selling, general and administrative expenses were RMB8.1 million, and the ending balance of the allowance for doubtful accounts was RMB6.3 million as of September 30, 2009.

Property and equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives:

 

Computers and software    5 years
Furniture, fixtures and equipment    5 years
Vehicles    5 years
Leasehold improvements    Shorter of lease term or useful lives of assets

Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of the property and equipment, are expensed as incurred. Judgment is required to determine the estimated useful lives of assets and changes in these estimates and assumptions could materially impact our financial position and results of operations.

Gains and losses from the disposals of property and equipment are included in loss from operations.

Goodwill and indefinite-lived intangible assets

Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts allocated to other intangible assets. Other intangible assets represent the rights to use and sub-franchise the CENTURY 21® brand in the PRC for 14.5 to 25 years. In addition, intangible assets also represent the customer relationships and real estate listing databases acquired through business combinations consummated in 2006 and 2008. We amortize intangible assets over their estimated useful lives on a straight-line basis.

We test goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis, or more frequently, if facts and circumstances warrant a review. We make

 

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judgments about goodwill whenever events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. The timing of an impairment test may result in charges to our statements of operations in our current reporting period that could not have been reasonably foreseen in prior periods. Application of an impairment test of goodwill requires judgment, including the identification of reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units and estimating the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value of each reporting unit, which could trigger impairment. More conservative assumptions of the anticipated future benefits from these reporting units could result in impairment charges, which would decrease net income and result in lower asset values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values. See Note 2(j) “Goodwill and indefinite-lived intangible assets” in the Consolidated Financial Statements for additional information.

Impairment of long-lived assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we assess the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition where the fair value is lower than the carrying value, measurement of an impairment loss is recognized in the statements of operations for the difference between the fair value, using the expected future discounted cash flows, and the carrying value of the assets. Determination of recoverability is based on estimates and changes in these estimates and assumptions could materially impact our financial position and results of operations. No impairment of long- lived assets was recognized for years ended December 31, 2007 and 2008 and the nine months ended September 30, 2009, respectively.

Share-based Compensation

We use a fair-value based method to account for share-based compensation. Accordingly, share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees’ requisite service period. For options that were granted with performance conditions which vest subsequent to our initial public offering, share-based compensation expenses would be recognized upon the offering using the graded-vesting method. Share-based compensation for the remaining options granted with service conditions are recognized, net of a forfeiture rate, over the requisite service period of the award, which is the vesting term, based on the fair value of the award on the grant date. Total compensation cost in 2007 and 2008 was RMB43,549 and RMB730,453, respectively and was RMB535,504 and RMB1,257,174 for the nine months ended September 30, 2008 and September 30, 2009. We did not issue any share-based awards prior to 2007. Determining the value of our share-based compensation expense in future periods requires the input of highly subjective assumptions, including the expected life of the share-based payment awards, estimated forfeitures and the price volatility of the underlying shares. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share based compensation expense could be materially different in the future. For example, as of September 30, 2009, approximately US$0.6 million of total unrecognized compensation costs related to unvested share options, which were expected to be recognized over a weighted-average period of 2.0 years. In addition, upon the completion of our initial public offering, approximately US$1.5 million of share-based compensation costs were expected to be recognized over a period of one year.

Determining the fair value of options requires making complex and subjective judgments. In assessing the fair value of the options we have granted, we considered the following principal factors:

 

   

The nature of our business and the contracts and agreements relating to our business;

 

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The global economic outlook in general and the specific economic and competitive elements affecting our business;

 

   

The nature and prospects of our industry in China;

 

   

The growth of our operations; and

 

   

Our business risks.

In determining the fair value of our ordinary shares on each grant date, we relied in part on a valuation report prepared by an independent valuer based on data we provided. The valuation report provided us with guidelines in determining the fair value, but the final determination as to the fair value of our share awards was made by our management. To determine the fair value of our ordinary shares, the three generally accepted approaches were considered: the cost, market and income approaches. While useful for certain purposes, the cost approach is generally not considered applicable to the valuation of companies which are a going concern, as it does not capture the future earning potential of the business. Given that our current stage of development is different from those of other publicly listed companies in the same industry, comparability of peer companies’ financial metrics and the relevance of the market approach were considered low. In view of the above, we considered the income approach to be the most appropriate method to derive the fair values of our ordinary shares.

For the income approach, we utilized a discounted cash flow, or DCF, analysis based on our management’s best estimates of projected cash flows as of each of the valuation dates. The projected cash flows include among other things, an analysis of projected revenue growth, gross margins, effective tax rates, capital expenditures and working capital requirements. The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. The assumptions used in deriving the fair value of our ordinary shares are consistent with our business plan. These assumptions include: no material changes in the existing political, legal, fiscal and economic conditions in China; our ability to recruit and retain competent management, key 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. The discount rates reflect the risks management perceived as being associated with achieving the forecasts and were derived by using the Capital Asset Pricing Model, after taking into account systematic risks and company-specific risks. Using this method, we determined the appropriate discount rates to be 22.5%, 23.0%, 23.5%, 22.5%, 21.5%, 21.5%, and 21.5% as of July 16, 2007, December 17, 2007, February 21, 2008, August 11, 2008, February 2, 2009, July 20, 2009, and August 20, 2009, respectively.

We also applied discounts for lack of marketability or, DLOM, to our equity value to reflect the fact that there is no ready public market for our shares as we are a closely held private company. When determining the DLOM, the Black-Scholes option model was used. Under this method, the cost of a put option that could be used to hedge the price change before a privately held share can be sold, is considered as a basis to determine the appropriate discount factor for lack of marketability. Based on the analysis, DLOM of 23% was used for the valuation of our ordinary shares as of each of the option grant date in 2007, 2008, and DLOM of 23%, 17% and 19% was used for the valuation of our ordinary shares as of the option grant date on February 2, 2009, July 20, 2009 and August 20, 2009, respectively.

 

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Valuation Assumptions: The company estimated the fair value of stock options using Black-Scholes Option Pricing valuation model. The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing valuation model with the following weighted-average assumptions:

 

   2007    2008    Nine months ended
September 30, 2009

Expected volatility

   43.90% - 48.30%    48.30% - 53.30%    70.50% - 75.40%

Risk-free interest rate

   4.43% - 5.49%    3.27% - 4.13%    3.09% - 3.76%

Dividend yield

   0.00%    0.00%    0.00%

Expected term (in years)

   3.4 - 4.8    3.2 - 3.5    3.1 - 3.5

Weighted average fair value of options granted (US$)

   0.11    0.09    0.32

Expected Term: Due to insufficient historical information, giving consideration to the contractual terms of the stock-based awards, we adopted the simplified method for estimating the expected term to represent the period that our stock-based awards are expected to be outstanding.

Expected Volatility: The fair value of share-based payments made through the year ended December 31, 2007 and 2008 and the nine months ended September 30, 2009 was valued using the Black-Scholes Option Pricing valuation method with a volatility factor based on the historical stock prices of comparable companies.

Expected Dividend: The Black-Scholes Option Pricing valuation model calls for a single expected dividend yield as an input. We have not declared or paid any cash dividends on its capital stock, and we do not anticipate any dividend payments on its ordinary shares in the foreseeable future.

Risk-Free Interest Rate: We base the risk-free interest rate used in the Black-Scholes Option Pricing valuation method on the implied yield currently available on China treasury bonds constant maturities with an approximate equivalent remaining term.

Estimated Pre-vesting Forfeitures: When estimating forfeitures, we consider both voluntary and company termination behavior.

The grant date, number of options granted, exercise price, fair value and intrinsic value of the options granted to date (based on the mid-point of the estimated range of the initial public offering price), giving effect, in each case to our 10-for-1 share split, are set forth below.

 

      Grant date    Number of
options granted
   Exercise
price
   Fair value of
ordinary shares
   Intrinsic Value

1

   16 Jul 07    39,800,000    i) US$0.11

ii) US$0.13

   i) US$0.11

ii) US$0.11

   i) US$0.54

ii) US$0.52

2

   17 Dec 07    5,500,000    US$0.13    US$0.13    US$0.52

3

   20 Feb 08    1,700,000    US$0.12    US$0.12    US$0.53

4

   11 Aug 08    3,000,000    US$0.08    US$0.08    US$0.57

5

   2 Feb 09    200,000    US$0.13    US$0.13    US$0.52

6

   20 July 09    700,000    US$0.32    US$0.32    US$0.33

7

   20 Aug 09    2,500,000    US$0.33    US$0.33    US$0.32

Income Taxes

We currently have deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, all of which are available to reduce future taxes payable in our significant tax jurisdictions. The largest component of our deferred tax assets are operating loss carryforwards generated by our PRC subsidiaries due to their historical operating losses. In assessing whether such deferred tax assets can be

 

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realized in the future, we need to make judgments and estimates on the ability of each of our PRC subsidiaries to generate taxable income in future years. To the extent that we believe that it is more likely than not that some portion or the entire amount of deferred tax assets will not be realized, we established a valuation allowance to offset the deferred tax assets. As of December 31, 2007 and 2008, we recognized a total valuation allowance of RMB16.5 million and RMB46.8 million, respectively. As of September 30, 2009, a total valuation allowance of RMB27.5 million was recognized against deferred tax assets. If we subsequently determine that all or a portion of the carryforwards are more likely than not to be realized, the valuation allowance will be released, which will result in a tax benefit in our consolidated statements of operations.

Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest rates for our outstanding debt and the interest income generated by excess cash invested in liquid investments with original maturities of three months or less. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase in interest rates, however, may raise the cost of any debt we incur in the future. In addition, our future interest income may be lower than expected due to changes in market interest rates. With respect to cash and cash equivalents as of December 31, 2008, a 10% decrease in interest rates would have decreased our interest income for the year then ended from RMB4.4 million to RMB4.0 million. In addition, with respect to cash and cash equivalents as of September 30, 2009, a 10% decrease in interest rates would have decreased our interest income for the nine months period then ended from RMB1.6 million to RMB1.4 million.

Foreign Exchange Risk

Substantially all of our revenues and most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash and cash equivalents denominated in U.S. dollars as a result of our past issuances of preferred shares through a private placement and proceeds from this offering. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. 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 foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of approximately 18.3% of the RMB against the U.S. dollar from December 31, 2005 to December 31, 2008. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. To the extent that we need to convert U.S. dollars we receive from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Assuming we were to convert the net proceeds received in this offering into the RMB, a 1.0% increase in the value of the RMB against the U.S. dollar would decrease the amount of the RMB we receive by RMB7.5 million. Cash and cash equivalents of the Group include aggregate amounts of US$11.7 million, US$7.8 million and US$1.9 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. A 1.0% increase in the value of the RMB against the U.S. dollar would decrease the amount of the RMB by RMB0.8 million, RMB0.5 million and RMB0.1 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. We have U.S. dollar

 

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payables of US$9.6 million, US$10.7 million and US$9.6 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. A 1.0% increase in the value of the RMB against the U.S. dollar would increase the payable amount by RMB0.3 million, RMB0.7 million and RMB0.7 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.

Recent Accounting Pronouncements

In June 2009, the FASB issued authoritative guidance to eliminate the exception to consolidate a qualifying special-purpose entity, change the approach to determining the primary beneficiary of a variable interest entity and require companies to more frequently re-assess whether they must consolidate variable interest entities. Under the new guidance, the primary beneficiary of a variable interest entity is identified qualitatively as the enterprise that has both (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. We will adopt this guidance at the beginning of our fiscal year 2010 and we do not expect the adoption of this guidance will have material impact on our consolidated financial statements.

In August 2009, the FASB issued guidance on Fair Value Measurements and Disclosures—Measuring Liabilities at Fair Value. The objective of the new guidance is to provide clarification for the fair value measurement of liabilities, specifically providing clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, a reporting entity is required to measure fair value using certain prescribed techniques. Techniques highlighted include using 1) the quoted price of the identical liability when traded as an asset, 2) quoted prices for similar liabilities or similar liabilities when traded as assets, or 3) another valuation technique that is consistent with the principles of fair value measurements. The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. Finally, the guidance clarifies that both a quoted price in an active market for the identical liability and the quoted price for the identical liability when traded as an asset in an active market when no adjustment to the quoted price of the asset are required are Level 1 fair value measurements. We will adopt this guidance at the beginning of its fiscal year 2010, and we do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.

In October 2009, the FASB issued an accounting standard update to revenue recognition relating to multiple-deliverable revenue arrangements. This update modifies the fair value requirements of existing accounting guidance by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence or VSOE, and third-party evidence or TPE, 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. This update requires expanded qualitative and quantitative disclosures and is effective for fiscal years beginning on or after June 15, 2010. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. We are currently evaluating the impact, if any, that the adoption of this update will have on our consolidated financial statements.

 

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OUR INDUSTRY

The Economy of the PRC

The PRC economy has grown significantly since the PRC government introduced economic reforms in the late 1970s. This growth has accelerated since China entered the World Trade Organization in 2001. The chart below shows the growth of China’s GDP from 2002 to 2008:

LOGO

Source: CEIC Data Company, Ltd., or CEIC

Despite the recent financial crisis China’s real GDP growth in 2009 is expected to be not less than 8%. Major cities in China have grown rapidly in recent years, with GDP per capita in Beijing, Shanghai and Shenzhen considerably higher than the national average. The following table sets forth nominal GDP per capita for Beijing, Shanghai, Shenzhen and the national average from 2002 through 2008:

 

Nominal GDP per capita (in RMB)

   2002    2003    2004    2005    2006    2007    2008    Compound
Annual
Growth
Rate
 
                       

Beijing

   30,840    34,892    41,099    45,444    50,467    58,204    63,029    12.7

Shanghai

   35,329    39,128    46,338    51,529    57,695    66,367    73,124    12.9

Shenzhen

   46,388    54,545    59,271    60,801    69,450    79,645    89,814    11.6

National Average

   9,398    10,542    12,336    14,053    16,165    19,524    22,698    15.8

 

Source: CEIC

PRC Real Estate Sector

Governmental Reforms in the Real Estate Sector

The PRC real estate sector remained part of a centrally planned economy until the late 1980s, when the Chinese government initiated reforms to transition real property ownership to a market-oriented system. A constitutional amendment instituted in 1988 allowed Chinese citizens to transfer long-term land use rights in China. This legislative amendment opened the real estate sector to private ownership of real properties and commenced the development of a private real estate market in China.

The PRC government promulgated rules in 1994 requiring companies to establish housing purchase benefit plans for their urban employees. Jointly funded by employers and employees, these plans provided substantial financial assistance to employees for home purchases. The PRC government ended its practice of

 

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allocating and exchanging housing units for its urban population in 1998. In 1999, to further stimulate the housing market, commercial banks began offering mortgage loans to individual property buyers and extended the maximum mortgage term to 30 years and the maximum financed portion of the purchase price of a property to 80%.

Key Drivers of the PRC Real Estate Sector

China’s economic growth, together with an increase in disposable incomes, a rise in urbanization levels, the emergence of a mortgage lending market and government housing reforms, have driven the expansion of China’s real estate market. Housing reforms continue to encourage private ownership of properties. The chart below sets forth urban disposable income per capita and the urbanization rate in China from 2002 through 2008:

 

LOGO

Source: CEIC

Although China has experienced rapid growth in urban disposable incomes and urbanization rates in recent years, China still has substantial potential for growth compared to more developed countries. The chart below shows per capita disposable incomes and urbanization rates in China, Hong Kong and selected developed countries in 2008:

 

LOGO

Source: CEIC; Euromonitor

Primary Residential Property Market in the PRC

The PRC primary residential property sector has grown significantly in recent years, with increased real estate investment, higher sales volumes and rising average sales prices. The growth of the primary residential

 

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property market has contributed to an increase in home inventory. The table below shows selected data for the primary residential property market in China from 2002 to 2008.

 

     2002    2003    2004    2005    2006    2007    2008    Compound
Annual
Growth
Rate
 

Investment in residential property development (in billions of RMB)

   523    678    884    1,086    1,364    1,801    2,208    27.1

GFA of primary residential properties sold (in millions of square meters)

   237    298    397    496    554    701    559    15.4

Sales revenue from primary residential properties (in billions of RMB)

   496    654    1,036    1,456    1,729    2,557    2,042    26.6

ASP of primary residential properties (RMB per square meter)

   2,092    2,197    2,608    2,937    3,119    3,645    3,567    9.3

 

 

Source: CEIC

Secondary Residential Property Market in the PRC

The secondary residential property market has also grown significantly since the PRC government commenced reforming the real estate sector. Transaction volumes in secondary residential property markets generally grow in line with an increase in home stocks, as more properties are sold and the turnover rate for existing homes rises. The chart below sets forth the total residential property transaction volume in Beijing from 2003 through November 2009:

LOGO

 

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Secondary residential property transaction volumes in Beijing and Shanghai have increased consistently since 2007, and have recently surpassed primary residential property transaction volumes in those cities. The charts below set forth secondary residential property transaction volumes, the ratio of secondary to primary residential market sales in Beijing and Shanghai from 2007 through November 2009:

 

LOGO

Source: Beijing Housing Construction Technology Center

 

LOGO

Source: Shanghai Jansen Media and Shanghai Youwin Real Estate Information Service

 

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The chart below shows the average selling price of secondary residential properties in Beijing and Shanghai from the beginning of 2008 through November 2009:

 

LOGO
Source: China Index Academy

We believe the chart above demonstrates the resilience in pricing of the secondary residential property market, where, despite the global financial crisis and a downturn in the economy, secondary residential property pricing in Beijing and Shanghai has been relatively stable since 2008 through November 2009.

During 2008, transaction volumes in the PRC residential property market, both primary and secondary, weakened due to domestic monetary tightening and the global financial crisis. In 2009, the PRC government’s economic stimulus plans, together with improved sentiment in the residential property market, have contributed to a strong recovery in secondary residential property transaction volumes. Secondary residential property transaction volumes in Beijing and Shanghai increased 276% and 132%, respectively, in the eleven months ended November 30, 2009 compared to the same period in 2008.

Secondary residential property transaction volumes in Beijing and Shanghai have been relatively resilient and generally outperformed the growth rate of primary transaction volumes in recent years. The charts below set forth the rolling annual growth rates in primary and secondary residential property transaction volumes in Beijing and Shanghai from December 2008 to November 2009:

 

LOGO

Source: Beijing Housing Construction Technology Center

 

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LOGO

Source: Shanghai Jansen Media and Shanghai Youwin Real Estate Information Service

The PRC residential property markets, particularly in less developed areas, remain relatively nascent. Recent sales have consisted primarily of newly developed residential properties, with secondary residential property transactions representing a relatively small portion of total residential property sales. In contrast, in developed countries, secondary residential property transactions typically represent a majority of total residential property sales. The chart below illustrates the secondary to primary residential property transaction ratio in the United States and key cities in China for the first six months of 2009:

 

LOGO

Source: National Association of Realtors; U.S. Census Bureau; CEIC; Beijing Housing Construction
Technology Center; Shanghai Jansen Media and Shanghai Youwin Real Estate Information Service

The secondary to primary residential property transaction ratio for the first six months of 2009 was 1.94 times and 1.30 times for Shanghai and Beijing, respectively. According to CEIC, based on gross floor area, the secondary to primary residential property transaction ratio for the first six months of 2009 was 0.26 times in China. Because the secondary component of a residential property market typically grows as the market matures, transaction volumes in secondary residential property markets in China are expected to increase as the PRC economy develops, just as secondary markets grew in the United States and other developed regions as their economies matured. Secondary residential property markets in China are already more developed in the more economically prosperous cities such as Beijing, Shanghai and Shenzhen, whose economies have grown faster

 

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than those of other regions in China. As the economies of those cities and other regions of China continue to develop, secondary residential property markets are expected to grow throughout the country.

PRC Real Estate Services Sector

Emergence and Growth of Real Estate Services Companies in China

The real estate services industry in China has become increasingly specialized as it has grown in size and complexity. This industry includes primary brokerage services, secondary brokerage services, mortgage management services and leasing services.

Primary Residential Property Brokerage Services

Primary residential property brokerage services include the brokering of sales of new homes built by property developers and related services. In China, primary residential sales have been driven principally by economic development, which led to rapid urbanization and a resulting increase in land development and gentrification. The primary residential brokerage services market in China is highly competitive and fragmented, with market participants ranging from companies with a national presence to local companies handling projects on an ad hoc basis.

Secondary Residential Property Brokerage Services

Secondary residential property brokerage services include the brokering of existing home sales and leases and related services. The secondary residential property brokerage market in China emerged in 1998, as the central government introduced market-oriented policies to replace the state-planned system for urban housing. The PRC government promulgated the Provisions on the Administration of Urban Real Estate Services in 1996, as revised in 2001, which established the regulatory framework for the industry. As the primary real estate market has grown, China’s secondary real estate market has expanded significantly. As a result, the number of secondary real estate brokerages has increased dramatically in China’s more developed cities.

The PRC government did not heavily regulate the secondary real estate market during its early stages of development, when brokerages frequently engaged in activities such as misappropriation of funds and price arbitrage. In 2006, the Ministry of Construction and the People’s Bank of China jointly issued the Circular Concerning Strengthening the Management of Real Estate Brokerage Services and Regulating the Trading Settlement Capital Account, which introduced regulations that required escrow accounts for home purchases and prohibited price arbitrage.

In addition, local governmental authorities in charge of construction, land resources and other areas regulate the secondary residential property brokerage industry. As a result, regulations governing this sector typically vary across different regions. For example, the maximum commission rate that real estate brokers can charge in Beijing, Shanghai and Shenzhen is 2.8%, 2.0% and 3.0%, respectively, while the maximum commission rate set by the central government is 3.0%.

Since the establishment of the regulatory framework for secondary real estate brokerage services, the ratio of brokered to non-brokered secondary residential property transactions in China’s developed cities has increased significantly. According to the Beijing Housing Construction Technology Center and Shanghai Jansen Media Co., Ltd., in June 2009 the percentage of total secondary residential property transactions conducted through a brokerage was approximately 67.7% in Beijing and 85.2% in Shanghai. In comparison, according to China Index Academy, approximately 60% of secondary property transactions nationally were conducted through brokerages in June 2009, and this national percentage is expected to grow to 80% over the next few years.

 

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An important aspect of China’s secondary residential property brokerage services industry is the predominance of open listings. Under the open listing system, property listings can be marketed simultaneously by multiple agents. In contrast, property listings in certain other countries, such as the United States, are made on an exclusive basis, which means that they can only be marketed by an exclusive agent. This has led to the emergence of Multiple Listing Services in the United States, where members can pool listings into a centralized system to attract more buyers while maintaining their exclusive listings.

However, due to the predominance of the open listing system in China, brokerages rarely share listing information with their competitors. As a result, larger brokerages are typically more attractive to home buyers, home sellers and sales professionals. For example, home buyers are granted access to a larger listing database, which provides a greater opportunity to find quality homes at reasonable prices. Similarly, home sellers may receive better services from a larger pool of sales professionals, who compete with each other to find the best terms for their customers. Finally, sales professionals can take advantage of more extensive listing databases and better brand recognition and awareness. As a result, large-scale players in the real estate brokerage industry enjoy economies of scale and have a competitive advantage over their smaller counterparts. This ultimately reduces market fragmentation. For instance, Centaline Property Agency Limited and Midland Holdings Limited dominate the secondary residential property brokerage market in Hong Kong, which also operates on an open listing system.

The secondary residential property brokerage industry in China is currently highly fragmented and extremely competitive due to low barriers of entry for smaller players. As of July 2009, 173,560 property brokerage companies and 247,812 property agents were registered with the China National Institute of Real Estate Appraisers and Brokers, with a total of over one million property agents industry-wide. We believe that industry consolidation will become an increasingly prevalent trend, as brokerages with larger networks of stores, stronger brand names and higher standards of professional service increase their market share. The chart below shows China’s top ten secondary real estate brokerage networks in the first half of 2009, as ranked by the China Index Academy based on a number of factors, including the number of cities in which they operate and their total number of stores:

 

Ranking

  

Company

  Number of Cities Entered    Number of 
Sales Offices
1    Century 21   34    > 1,000
2    Centaline   23    539
3    5i5j   8    600
4    Home Link   3    450
5    Hopefluent   4    200
6    MyTopHome   9    200
7    E-House   4    113
8    Midland   7    350
9    Shi-hua Real Estate   2    108
10    Hanyu Property   1    80

 

 

Source: China Index Academy

 

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Mortgage Management Services

Mortgage management services include the provision of advisory, execution and similar services related to mortgage products. The residential mortgage sector in China has grown rapidly in recent years. The total amount of outstanding residential mortgages in China has increased significantly, from RMB825 billion as of December 31, 2002 to RMB2.98 trillion as of December 31, 2008, representing a compound annual growth rate of 23.9%. The chart below shows the amounts of outstanding residential mortgages in China from 2002 to 2008:

 

LOGO

Source: CEIC

As the residential mortgage market increases in size and sophistication, specialized mortgage management agents are becoming important channels for commercial banks to distribute their real estate financing products. In addition, mortgage management services are becoming increasingly associated with secondary real estate brokerage companies with large distribution networks, strong brand names and professional service standards.

The PRC government has imposed stringent regulations on the residential mortgage sector, including a minimum down payment requirement of 20% for first mortgages, which increases for subsequent mortgages. Additionally, PRC commercial banks providing residential mortgages place strong emphasis on client investigation and risk control. As a result, the residential mortgage sector in China has a relatively low non-performing loan ratio. According to the China Banking Regulatory Commission, the non-performing loan ratio of residential mortgages in China was approximately 0.91% in 2008.

 

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OUR BUSINESS

Overview

We are a leading comprehensive real estate services provider with the largest network of real estate sales offices in China. We are the exclusive franchisor in China for the CENTURY 21® brand, one of the world’s most recognized brands in the real estate industry. As of September 30, 2009, our CENTURY 21® China network covered 34 major cities with more than 1,000 sales offices, employed approximately 14,900 sales professionals and staff and maintained approximately 4.7 million property listings. In the first half of 2009, based on transaction volume, we ranked among the top three market leaders in over 90% of the cities in which we operate and were the market leader in more than 30% of those cities. We primarily focus on China’s fast-growing and highly fragmented secondary real estate market, which we expect to outgrow the primary market, especially in more economically prosperous cities.

We operate under three different but closely related business lines: company-owned brokerage services, mortgage management services and franchise services. We have deployed a unique business model that has allowed us to rapidly scale our company-owned operations by leveraging the in-depth market knowledge and human capital developed from our franchise network.

We started our franchise services business in 2000 and have rapidly expanded our franchise network and our brand. Our franchise services business grants regional franchise rights for the CENTURY 21® brand to regional sub-franchisors in China who, in turn, open their own sales offices or grant third parties the right to open sales offices within their region. We generate revenue from our franchise services by collecting initial franchise fees and ongoing service fees from these regional sub-franchisors. Our franchise network has provided us with valuable information to gauge market maturity and identify potential opportunities to establish and grow our company-owned brokerage services business. Until we launched our company-owned brokerage services business in 2006, we generated our net revenues solely from our franchise services business. We started our company-owned brokerage services business in Beijing and Shanghai in 2006 and in Shenzhen in 2008, and have quickly expanded our company-owned sales office network in these cities through organic growth and acquisitions of sales offices owned by third parties. As of September 30, 2009, we had approximately 280 company-owned sales offices, representing approximately 26.1% of our CENTURY 21® China network. Our company-owned brokerage services business owns and operates regional sub-franchisors and sales offices in the CENTURY 21® China network. We generate revenue from our company-owned brokerage services primarily through commissions earned from home buyers, sellers, lessors and lessees. In 2008 and the nine months ended September 30, 2009, our company-owned sales offices contributed approximately 75.4% and 91.9% respectively, of our total net revenues.

In 2008, we launched our independent mortgage management services in Beijing and Shanghai, providing services to customers both inside and outside our CENTURY 21® China network. Our mortgage management services business provides mortgage advisory services to home buyers and home owners and interim guarantee services to commercial banks. We generate revenue from our mortgage management services primarily through commissions earned from commercial banks in consideration of our advisory services and interim guarantee services. Our mortgage management services business is well positioned to take advantage of referrals from our extensive network of company-owned sales offices. In the first nine months of 2009, a substantial majority of the transactions handled by our company-owned brokerage services in which mortgages were utilized made use of our mortgage management services. We have provided services for home mortgages with an aggregate loan amount of approximately RMB6.1 billion since we launched our mortgage management service business through September 30, 2009. Our contingent guarantee obligation associated with our interim guarantees as of September 30, 2009 was RMB829.3 million.

Our rapid growth is supported by our information systems and training programs. Our information systems provide real-time and in-depth management and sales information, support our network of sales offices,

 

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and drive our marketing efforts. We strongly believe in training members of our management team, who are generally required to complete quarterly training courses. Additionally, all of our sales professionals are required when they join us to complete training courses that we conduct in-house, and are also required to complete monthly refresher or new skills courses.

We have experienced substantial growth since we commenced operations in 2000. Our total net revenues increased from RMB38.4 million in 2006 to RMB273.4 million in 2008, representing a compound annual growth rate of 166.8%, and from RMB208.9 million in the nine months ended September 30, 2008 to RMB443.7 million in the same period in 2009, representing an increase of 112.4%. After incurring net losses of RMB72.8 million and RMB131.9 million for the years ended December 31, 2007 and 2008, respectively, we became profitable during the nine month period ended September 30, 2009 with a net income of RMB88.3 million (US$12.9 million). We have received numerous awards and recognitions for our service quality and business achievements, including the “Highly Appraised Franchisor Award” by the China Chain Store and Franchise Association in 2008 and 2009, “Prominent Real Estate Services Provider” by Sina.com in 2008, and “Most Reputable Real Estate Services Provider” by Sohu.com in 2009.

Our Strengths

We believe that the following strengths differentiate us from our competitors and have enabled us to capture a leading position in the rapidly growing real estate services industry in China:

We leverage one of the world’s most recognized real estate service brands to drive our leadership in China

With more than 130,000 sales professionals in approximately 8,500 sales offices worldwide, the CENTURY 21® brand is one of the world’s most recognized real estate service brands. As the exclusive franchisor of the CENTURY 21® brand in China, we benefit from our brand’s association with trust, professionalism, efficiency and quality of service.

We have successfully adapted this well-established global brand for the China market, leveraging our in-depth knowledge of the real estate market in China, decade-long track record and consistent service quality to create a leading real estate service network. In the first half of 2009, based on transaction volume, we ranked among the top three market leaders in over 90% of the cities in which we operate and were the market leader in more than 30% of those cities.

We believe a strong brand in our industry appeals to:

 

   

customers, who trust our credibility, efficiency and service quality;

 

   

franchisees, who are attracted to the customer recognition, systems and professionalism that our brand represents; and

 

   

sales professionals, who are drawn to the long-term career prospects at our company and potential for growth.

We believe that the widespread appeal of our brand and our reputation as a market leader paves the way for sustained business expansion and will help solidify premium market position. We have gained recognition and acclaim in our industry, including the “Highly Appraised Franchisor Award” by China Chain Store and Franchise Association in 2008 and 2009, “Prominent Real Estate Services Provider” by Sina.com in 2008, and “Most Reputable Real Estate Services Provider” by Sohu.com in 2009.

We have a unique business model that allows us to rapidly scale our distribution network and expand our product and service offerings

With more than 1,000 sales offices across 34 cities and approximately 14,900 sales professionals and staff, we have the largest real estate brokerage network in China as a result of our unique business model. By

 

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franchising to reputable and capable regional sub-franchisors, we have outpaced our competitors in building our brand and network nationally with minimal capital investment. Our franchise network allows us to gather valuable market knowledge to gauge market maturity, build our human capital and identify potential acquisition opportunities to expand our company-owned sales offices. We encourage our regional sub-franchisors to grow their own sales offices within their franchise network and where possible invest directly in our sub-franchisors to help facilitate their growth.

We open or acquire company-owned sales offices in selected new markets when such markets mature. We believe these strategies allow us to rapidly scale our company-owned brokerage services business, lower investment risks, shorten payback periods and significantly improve investment returns. For example, for the first nine months of 2009, our company-owned sales offices in Beijing contributed an average of approximately RMB205,805 of net revenues per month, compared to our franchised sales offices in Beijing which contributed an average of approximately RMB5,263 of net revenues per month.

We believe our national distribution platform and strong brand will allow us to distribute more products and services through our network, which will further drive our net revenues and margin growth. For example, since we launched our mortgage management services business, we have provided services for home mortgages with an aggregate loan amount of approximately RMB6.1 billion up to September 30, 2009.

We are the leader in the faster growing and more sustainable secondary real estate brokerage market

We are the largest secondary property broker in China as ranked by China Index Academy based on the number of cities in which we compete, our sales office count, the number of sales professionals in our network and our transaction volume. The secondary real estate brokerage market in China has become more active in recent years as the market has matured, and we expect secondary sales and leasing volume to outgrow primary sales volume over the long term. This process is consistent with the development of more mature markets such as the United States and Hong Kong. We believe this trend has reached an inflection point in the more economically prosperous cities such as Beijing and Shanghai, where secondary to primary sales volume ratio was 1.30 times and 1.94 times, respectively for all residential property sales during the first six months of 2009, compared with the U.S. ratio of 13.15 times, and the Hong Kong ratio of 5.16 times. As a result, we are well positioned to benefit from the growth in the secondary sales and leasing market in these cities and other cities in China as they mature.

We utilize our nationwide network to maintain a growing database of property listings that draws new customers and provides opportunities for future growth

We actively maintain a large and growing property listing database. Over the last three years, the total number of listings under our franchise network has risen from approximately 1.0 million in August 2006 to approximately 4.7 million as of September 30, 2009. Since the establishment of our company-owned sales offices in Beijing and Shanghai in 2006, we have grown the number of listings in our company-owned sales offices in Beijing and Shanghai to over 1.7 million as of September 30, 2009, which represent approximately 36% of the 4.7 million existing secondary residential units that we have targeted for listing.

This extensive listing database represents an important asset to our business. The predominance of the open listing system in China means that a broker generally only has access to properties listed within his company’s own system. Thus, prospective buyers or tenants are attracted to our network because of the broad range of listings in our network, which in turn drives more home owners to list their properties on our network. In addition, we actively follow up on our listings with marketing efforts by our sales professionals to generate potential leads and transactions. We believe that we will be able to increase our market share and drive our future growth through our continuous efforts to update and expand our property listings database.

 

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We have developed world class, standardized information systems and training programs to support the scalability of our business model

Since 2000, we have developed and enhanced our proprietary information systems, which are centrally coordinated through our headquarters. We believe that these information systems are critical to allow us to maintain and manage our rapid growth across regions and product lines.

In order to ensure operational efficiency, performance and revenue contribution, we maintain the following systems:

 

   

Sales Information System, which can be accessed by our sales professionals on a real-time basis and facilitates information sharing among our sales professionals efficiently. It also allows us to effectively monitor the activities of our sales professionals;

 

   

Human Resource and Commission Information System, which monitors performance of our sales professionals and allows us to analyze their sales output. This also provides us with a transparent mechanism to determine compensation packages to motivate and retain our sales professionals and staff; and

 

   

Training programs, which include off-line and online training programs. As with other companies in the sector, we have relatively high turnover among our sales professionals, and these programs allow us to continuously provide consistent, systematic and effective training to our new and existing sales professionals and staff.

In order to protect our brand, reputation and business model, we maintain the following risk management systems:

 

   

A two-tiered franchise structure, whereby reputable regional sub-franchisors are granted regional franchise rights and remain responsible for supervising their respective regional businesses;

 

   

A rigorous screening process to select prospective regional sub-franchisors;

 

   

A proven legal structure to ensure that our sub-franchisors and franchisees strictly adheres to our franchise guidelines; and

 

   

Supervisory systems to ensure quality of service and monitoring of sales professionals.

We believe these systems facilitate our growth by allowing us to replicate our systems across business lines and geographies. For example, we have successfully integrated the acquisition of new company-owned sales offices into our business by leveraging the adaptability of our systems, which are consistent among our company-owned sales offices and franchised sales offices.

We have an experienced and stable management team

We have an experienced and stable management team, led by our Chairman, Mr. Donald Zhang, and our Vice Chairman, Mr. Harry Lu, who co-founded the company in 2000. Mr. Zhang and Mr. Lu are US-educated Chinese entrepreneurs who have strategically set out our business model and have extensive experience in the development and operation of the CENTURY 21® system. As industry leaders, they have played important roles in helping shape and improve the real estate services industry in China. For example, Mr. Lu is currently the Deputy General Secretary of China National Institute of Real Estate Appraisers and Brokers, the leading institution which sets the policies and standards of the real estate brokerage market in China.

Our senior management team consists of experts who have an in-depth understanding of China’s real estate service industry and substantial experience in the real estate brokerage, franchise and mortgage sectors in China. Most members of our core management team have participated in China’s real estate services industry

 

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since its inception and have been with us since our formation. We believe that the quality and depth of our management team have underpinned our success, allowed us to attract investments from top-tier investors such as Goldman Sachs Strategic Investments, and will drive our future growth and leadership in the China real estate services market.

Our Strategies

Our aim is to further strengthen our leadership as China’s largest real estate service provider, through the following strategies:

Strengthen our distribution network

We intend to further strengthen our distribution network through the following two-pronged strategy:

 

   

Company-owned sales offices: We intend to increase the number of company-owned sales offices in our core markets of Beijing, Shanghai and Shenzhen. Additionally, we intend to expand into new markets once they reach certain levels of maturity and local conditions are favorable, by entering into joint venture arrangements with our existing or new regional sub-franchisors or acquiring third party sales offices. Subject to market conditions, we intend to have at least 500 company-owned sales offices by the end of 2010.

 

   

Franchised sales offices: We intend to continue to leverage our franchise system to expand our network and brand name, and to help us identify new markets in which to build our company-owned brokerage services business. We intend to continue to partner with reputable and capable companies as our regional sub-franchisors to expand our national footprint.

Expand existing product lines

Through our independent mortgage management services business, we aim to build the leading real estate financial service business in China, to serve customers both inside and outside our CENTURY 21® franchise network. Given the geographic scope of the secondary sales market (unlike the primary market, which is focused on specific buildings or developments), our distribution network is the “point-of-sale” and therefore the ideal place to introduce additional products and services to our customers, including insurance and financing products. In 2009, a substantial majority of the transactions utilizing mortgage services that are handled by our company-owned sales offices used our mortgage management services. We plan to extend our presence to other parts of China in line with the expansion of our company-owned brokerage services business.

We also intend to leverage our extensive distribution network to selectively expand our presence in the primary real estate sales market and the commercial real estate sales and leasing market to complement our leadership in the secondary real estate market. In particular, we have recently built new teams dedicated to the primary and commercial real estate sales markets. We will devote efforts to utilize these cross-selling opportunities across our internal business functions to produce additional revenue streams capitalizing on our existing customer network.

We also intend to utilize our comprehensive database of property listings and information developed through our business and market research efforts to create marketable products that can be sold to our customers.

Enhance brand awareness

We strive to continuously enhance the appeal of our brand to customers, franchisees and sales professionals through effective and systematic marketing campaigns, focusing on the mid- to high-end market. We will continue to utilize the National Advertising Fund to promote our CENTURY 21® franchise networks

 

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and enhance brand awareness. In addition, we plan to further expand our marketing team and increase the scale and frequency of our marketing efforts.

We are also committed to utilizing the internet to expand our brand and to drive potential customers to our brokerage network. For the nine-month period ended September 30, 2009, our sales offices have generated significant traffic through our internet advertising efforts.

Furthermore, we plan to provide comprehensive and in-depth market information on a real time basis to premium customers, commercial banks and real estate developers. We believe our circulation of valuable information to these industry players will inspire further confidence in our professionalism and enhance our brand recognition.

Invest in human capital management

Human capital, including approximately 14,900 sales professionals and staff, constitutes our most important resource. Recruiting and retaining quality management, sales professionals and other staff is crucial to our continued expansion and success as a market leader in the real estate services industry.

We believe that the CENTURY 21® brand, systems and business platform appeal to potential employees looking for long term career prospects. To attract and retain both management and sales professionals of high caliber, we plan to further improve our human resource systems for more accurate assessment of employee performance and enhance our compensation and incentive structure.

We intend to implement a wide variety of training programs, offered to the sales professionals and staff of both our company-owned sales offices and franchised sales offices, on real estate market knowledge, sales practices and techniques and in-house IT training. We plan to further devote efforts to increase the number and enhance the effectiveness of courses available through our training programs and E-learning system, an online training system developed and operated by our in-house human resources management team.

Our Nationwide Network

We operate the largest network of real estate sales offices in China under the CENTURY 21® brand. As of September 30, 2009, our CENTURY 21® China network covered 34 major cities with more than 1,000 sales offices, employed approximately 14,900 sales professionals and staff and maintained approximately 4.7 million property listings.

 

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The map below shows the cities covered by CENTURY 21® franchise network as of September 30, 2009:

LOGO

The table below sets forth a summary of the number of sales offices, sales professionals and staff and property listings in our CENTURY 21® franchise network, as of September 30, 2009:

 

     Sales Offices      Sales Professionals
and Staff
     Property Listings

Beijing

                       183                      2,897              1,073,210

Shanghai

   158      2,568      1,058,125

Hangzhou

   82      1,238      328,923

Chengdu

   66      738      216,698

Jinan

   59      680      282,554

Wuhan

   60      681      220,666

Shenzhen

   27      370      302,459

Others

   439      5,737      1,215,262
                  

Total

   1,074      14,909      4,697,897
                  

Our Services

We operate under three different but closely related business lines: company-owned brokerage services, mortgage management services and franchise services. We have deployed a unique business model that has allowed us to rapidly scale our company-owned operations by leveraging the in-depth market knowledge and human capital developed from our franchise network.

Company-owned Brokerage Services

As of September 30, 2009, we directly own 280 CENTURY 21® sales offices strategically located in Beijing, Shanghai and Shenzhen, cities in China with among the highest number of secondary market real estate transactions per year. We primarily focus on China’s fast-growing and highly fragmented secondary real estate market, which we expect to outgrow the primary market, especially in more economically prosperous cities. As of September 30, 2009, we had 4,399 sales professionals and staff in our company-owned sales offices. In 2008

 

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and the nine months ended September 30, 2009, such offices were involved in 6,312 and 12,976 sale and purchase transactions and net revenues from our company-owned brokerage services business represented approximately 75.4% and 91.9% of our total net revenues, respectively.

The table below sets forth the number of our company-owned sales offices and sales professionals and staff in each city as of September 30, 2009:

 

     Company-
owned Sales
Offices
   Sales Professionals
and Staff

Beijing

                   129                2,091

Shanghai

   124    1,938

Shenzhen

   27    370
         

Total

   280    4,399
         

Historically, we have developed our company-owned brokerage services business through organic growth and acquisitions of sales offices owned by third parties. We established Beijing Anxin, the operator of our company-owned sales offices in Beijing, in 2006. In Shanghai and Shenzhen, we acquired the sales offices operated by two pre-existing local players with sufficient local expertise in 2006 and 2008, respectively. After such acquisitions, we started to develop our company-owned brokerage services business locally with the assistance of the local management team.

Through our company-owned brokerage services business, we participate in sales and leasing transactions primarily with respect to middle to high grade residential properties in the secondary real estate market. Our services include property listing, advisory services and transaction negotiation and documentation. When we assist the seller in a real estate transaction, our sales professionals assist the seller in pricing the property and preparing it for sale, advertise the property (including on websites), introduce and promote the property to prospective buyers, and assist the seller in sale negotiations.

When we assist the buyer in a real estate transaction, our sales professionals generally help the buyer locate specific properties that meet the buyer’s personal and financial specifications, show properties to the buyer, assist the buyer in negotiating transaction terms and executing the transaction. We also promote our mortgage management services to our customers to provide the increased convenience of one-stop real estate brokerage services. We also participate in real estate sales and leasing transactions with respect to properties in the primary and commercial real estate markets.

We operate our company-owned brokerage services business under the CENTURY 21® franchise network. Each of our company-owned sales offices enters into a franchise agreement with one of our two wholly owned regional sub-franchisors. Under this arrangement, our company-owned sales offices are required to pay intra-group royalties to our regional sub-franchisors, who in turn, pay royalties to us. See “— Our Services — Franchise Services” for more information on our CENTURY 21® franchise network and operations.

Mortgage Management Services

We began operating our independent mortgage management services as a separate segment in 2008 in Beijing and Shanghai, under the independent brand of Kaisheng. Our mortgage management services include comprehensive advisory services in connection with the selection and procurement of mortgage products offered by commercial banks. Our experienced mortgage consultants promote and introduce various mortgage products, and advise home buyers or home owners in the selection of the appropriate mortgage product based on each mortgagor’s individual needs. We also have a call center in Shanghai to promote our mortgage management services business directly to our customers.

As an important aspect of the one-stop real estate brokerage services available within the CENTURY 21® franchise network, our mortgage management services can be accessed at our closing centers,

 

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providing a convenient, one-stop option to home buyers and home owners as well as a prime platform for commercial banks to offer their products and services. In 2009, a substantial majority of the transactions utilizing mortgage services that are handled by our company-owned sales offices made use of our mortgage management services. We also provide mortgage management services to customers outside of our CENTURY 21® China network.

For our mortgage management services, we primarily generate commissions from the commercial banks whose mortgage products we promote. As of September 30, 2009 we had established advisory relationships with 11 commercial banks, such as Bank of China and Industrial and Commercial Bank of China. In some cases, we provide mortgage management services to property owners who need mortgages on their existing properties to obtain consumer loans for acquisition of additional properties and charge commissions based on our services. We provided services for home mortgages with an aggregate loan amount of approximately RMB1.9 billion and RMB4.2 billion in 2008 and the nine months ended September 30, 2009, respectively. Based on the secondary residential property transaction volumes in Beijing and Shanghai for 2008, we estimate that we provided mortgage management services for 6.18% and 1.45% of the home mortgages in Beijing and Shanghai, respectively.

As is customary in the mortgage management industry in Beijing, we provide interim guarantees to commercial banks in respect of the mortgage loans they extend to property buyers. An interim guarantee covers the period beginning when the bank disburses the mortgage loan to the property buyer and ending when the mortgage registration certificate is issued to the bank by the applicable property registry, which typically takes one to six months.

If a bank fails to obtain the mortgage registration certificate or the property buyer defaults on his payment obligations during the term of an interim guarantee, we may be required to pay the amount of the delinquent mortgage payments or any measurable loss suffered by the bank exceeding the payment already made by the buyer and the amount recoverable from the property.

Under the PRC rules, the maximum financed portion of the purchase price of a property is 80%, which helps reduce our risk exposure. To further mitigate our risk exposure, we usually:

 

   

conduct certain background and credit checks on property buyers and reject less credit-worthy mortgage applications;

 

   

assist in applying for buyers’ title documents, and issue a guarantee in a transaction only after a notice specifying the proposed date for collecting the title document has been issued by the applicable property registry; and

 

   

actively participate in the process of banks’ applying for mortgage registration certificates.

As of December 31, 2007 and 2008 and September 30, 2009, the contingent guarantee obligations of our company with respect to the provision of interim guarantee was RMB143.9 million, RMB227.8 million and RMB829.3 million, respectively. As of September 30, 2009, we had not been required to pay any amounts with respect to our interim guarantee services since we commenced this business.

Franchise Services

Our franchise network consists of three levels of franchise rights. First, through IFM Co., our wholly owned subsidiary, we are the exclusive franchisor for the CENTURY 21® brand in China. IFM Co. in-turn grants the right to franchise the CENTURY 21® brand within specific geographical regions to sub-franchisors whom we refer to as regional sub-franchisors. The geographical scope of a regional sub-franchisor is generally limited to a particular city, although a few have rights to multiple cities. We own certain of the regional sub-franchisors.

The regional sub-franchisors then either open their own sales offices or grant to independent operators the right to open sales offices within the sub-franchisor’s region. The sales offices owned by us are referred to as

 

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company-owned sales offices while those owned by third parties are referred to as franchised sales offices or franchisees. As part of our strategy of expanding our network and CENTURY 21® brand recognition, in addition to owning and operating our company-owned sales offices, we seek to increase the number of franchisees.

As of September 30, 2009, we had 28 regional sub-franchisors with established franchise networks in 34 cities in China with a total of 794 franchised sales offices employing approximately 10,500 sales professionals and staff. The table below sets forth the number of the franchised sales offices in our CENTURY 21® franchise network, as of September 30, 2009:

     Franchise
Sales Offices
   Sales Professionals
and Staff

Hangzhou

                   82                1,238

Chengdu

   66    738

Jinan

   59    680

Beijing*

   54    806

Wuhan

   60    681

Zhengzhou

   59    825

Tianjin

   43    616

Qingdao

   44    485

Shijiazhuang

   37    737

Shanghai*

   34    630

Kunming

   19    226

Shenyang

   24    371

Others*

   213    2,477
         

Total

   794    10,510
         

 

* We wholly own the regional sub-franchisors for Beijing, Shanghai and Shenzhen. We also own 10%, 15% and 10% of the equity of regional sub-franchisors in Xiamen Shijitonghe Real Estate Consultant Co. Ltd, or Xiamen, Shandong Jinan Sanlian Real Estate Brokerage Co., Ltd., or Shandong, and Shaanxi Lide Industry Investments Co. Ltd, or Xian.

We are the largest real estate brokerage franchisor in China based on the number of sales offices operating under the CENTURY 21® brand, and the only real estate franchisor with a national footprint.

Pursuant to the franchise agreements we entered into with the entities in our CENTURY 21® franchise network, we primarily generate revenue from our franchise services business in two ways. First, each regional sub-franchisor pays us an initial sub-franchising fee in consideration of entering into the regional sub-franchise agreement. Second, each regional sub-franchisor pays us ongoing service fees based on its revenue from the sales offices within its respective region, subject to minimum service fee requirements. The regional sub-franchisors generate revenue through an initial franchise fee and ongoing service fees from each sales office established in their regional network.

In addition to generating revenue from our regional sub-franchisors, we leverage the geographic breadth and local market expertise of our CENTURY 21® franchise network to increase our brand recognition and market share as well as to accumulate market information and local expertise in the geographic regions where we see the business potential for future expansion of our company-owned brokerage services.

Our Franchising Process and Franchise Services

Our franchising process involves conducting market surveys and identifying target regions or locations, identifying potential regional sub-franchisors, and negotiating and signing franchise agreements. Since 2000, we have become more efficient in developing our CENTURY 21® franchise network. Based on our research and analysis of the real estate market in China, we believe that approximately 100 cities in China meet our criteria to develop our CENTURY 21® franchise network.

The selection of regional sub-franchisors in target regions is of critical importance to the development of the CENTURY 21® franchise network. We identify suitable partners in regions where we plan to develop a

 

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franchise network. An evaluation committee consisting of key members of our senior management team is in charge of reviewing and selecting regional sub-franchisors in new regions. Major criteria for the evaluation process include reputation, financial strength, commitment and industry vision, demonstrated industry and local expertise as well as internal control capability.

After our regional sub-franchisor enters into our network, we start to provide our franchise services, which primarily include the license to use or sub-franchise CENTURY 21® brand and system, training services, and the right to participate in and benefit from the marketing campaigns using NAF as well as information technology and back office support.

As part of our ongoing monitoring and supervision of a regional sub-franchisor’s performance, we generally require our regional sub-franchisor to (1) comply with a uniform franchise policy and procedure adopted for the region, (2) use our standardized franchise agreement with the franchisees within the region, (3) meet certain performance criteria, including the development of a certain number of franchised sales offices, (4) abstain from engaging in any other real estate brokerage business similar to ours or investing in any franchised sales offices, or other real estate brokerage, consulting or valuation businesses, unless otherwise agreed by us and (5) obtain our consent prior to any transfer of more than 5% of its equity interest. We also have the right to terminate the regional sub-franchise agreement in the event that the regional sub-franchisor materially breaches its obligations under the agreement.

Our Information Systems

We supervise and manage our operations and provide information and back-office support to our franchise network through our proprietary information systems, which primarily include Sales Information System, or SIS and Human Resource and Commission Information System, or HCIS. We maintain certain backup and disaster recovery systems for critical functions of our SIS and HCIS. Our in-house information technology team, with the support from third party outsourcing firms, have developed, maintained and regularly upgraded our information systems, including the following:

 

   

Sales Information System. Embedded with comprehensive information collection, categorization, storage, processing and analysis modules, our SIS is our core back-office platform to provide day-to-day informational and operational support to our franchise network. Our SIS provides listing and customer information management as well as sales office and network management support:

 

  ¡  

Listing and customer information. Listing and customer information is uploaded or updated to our SIS on a real-time basis through terminals available to individual sales professionals in our franchise network, whether through our company-owned brokerage sales offices or franchised sales offices. Information updating is one of the key functions performed by the sales professionals in our franchise network. The management team of each sales office actively reviews the accuracy of the listing information, and supervises the sales professionals in obtaining updates in connection with individual listings in our SIS on a real-time basis. As such, when providing services to customers, the sales professionals are able to use the information exchange and analytical modules to retrieve the most up-to-date information available at their respective levels of information access authority. As of September 30, 2009, we had approximately 4.7 million property listings in our system. We encourage information sharing and cooperation among sales offices or sales professionals. As a result, for the nine months ended September 30, 2009, a substantial majority of successful brokerage transactions completed by our company-owned sales offices in Beijing and Shanghai involved more than one sales professional.

 

  ¡  

Management support. Our SIS is also designed to allow our management teams to supervise and manage our operations. The comprehensive analytical tools and multi-

 

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dimensional supervising modules available in our SIS have become an important part of our strategic decision-making process. As financial and operational data and reports are periodically prepared and presented on a real-time basis, we can swiftly capture significant market and operational trends, or any abnormal occurrence. Our SIS also provides information security supervision services.

Our SIS is designed to allow flexibility with respect to database structure, analytical functions, information points and information access authority, and to enhance adaptability for specific geographic regions to accommodate local customs. Listing and customer information are shared at different levels of access authority based on the specific needs of individual sales offices. Given the different ownership structure of the sales offices in our franchise network, various information sharing structures and access authorities are available to our sales offices.

 

   

Human Resource and Commission Information System. Our HCIS is our core human resource and commission management platform. It monitors performance and manages sales professional commissions, a key component of the compensation structure for our sales professionals based on individual performance. Through information exchange with our SIS, our HCIS allows us to accurately track the performance of each sales professional and credit commissions based on information relating to such sales professional’s performance and contribution in particular brokerage transactions. Apart from commission management, our HCIS provides services relating to human resources, such as employee management, organization structure and transaction tracing.

Marketing and Brand Promotion

Marketing and brand promotion is an important part of building our CENTURY 21® franchise network in China. We primarily finance our marketing campaigns and activities for brand promotion through our NAF to which all regional sub-franchisors and franchisees within the CENTURY 21® franchise network in China make monthly contributions. The contributions made to our NAF, net of amounts retained for regional promotion as discussed below, amounted to RMB7.1 million, RMB10.6 million and RMB5.5 million in 2007 and 2008 and the nine months ended September 30, 2009, respectively. Our marketing committee, which consists of key management members in charge of marketing from each of our regional franchise networks, is responsible for directing and supervising the use of the fund. We receive a 15% management fee for our administration of the fund. To promote the CENTURY 21® brand in regional markets, each regional sub-franchisor retains 30% of its annual contribution to maintain an advertising fund for brand promotion in the local market. We have the policy to apply all contributions to our NAF each year to the marketing campaigns and activities for brand promotion during the relevant year. For major marketing campaigns we hire external marketing professionals to assist our in-house marketing team.

We have adopted an integrated approach to promote the CENTURY 21® brand:

 

   

Internet, newspapers and publications. We have advertising cooperation arrangements with many Chinese national and regional consumer media outlets, including major newspapers, publications such as China Real Estate Business and Sanlian Life Week Magazine and major internet real estate portals such as SouFun.com.

 

   

Conferences and exhibitions. We organize an annual CENTURY 21® China Convention, during which we invite all of the sales professionals in the CENTURY 21® China network as well as major market players in the real estate industry. During the convention, we present awards to top-performing sales professionals in recognition of their achievements during the year. We also actively participate in other real estate conferences, exhibitions and trade shows.

 

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Airplane advertising. We promote the CENTURY 21® brand through our in-flight videos on Air China and Shanghai Airlines.

In addition to our brand building efforts, each sales office may choose to spend certain amounts on marketing property listings through the internet. Through our cooperation arrangement with major internet real estate portals such as SouFun.com, each sales office may promote property listings to advance potential customers’ direct access to such listings and responsible sales professionals. Our sales offices have generated significant traffic through our internet advertising efforts.

Competition

Company-owned Brokerage Services. The real estate brokerage industry is highly competitive in China, particularly in the metropolitan areas in which our company-owned brokerage services businesses operate, such as Beijing, Shanghai and Shenzhen. In addition, the industry has low capital commitment requirements for small operations, lowering the barriers to entry for new participants, especially participants pursuing alternative methods of marketing real estate, such as internet-based listing services. However, significant capital commitments would be required to compete on a regional or national basis. Companies compete for brokerage business primarily on the basis of the services offered, reputation and brand recognition, personal contacts, local expertise and brokerage commission rates. We primarily compete with Centaline (China) Property Consultants Limited in the Beijing, Shanghai and Shenzhen markets for secondary market real estate brokerage business, and to a lesser extent, E-house (China) Holdings Limited in these cities for primary real estate brokerage business. We also compete with regional competitors in each of the regions where we own and operate sales offices.

Mortgage Management Services. Our mortgage management services business covers both the Beijing and Shanghai regions in contrast to our competitors who typically cover a single region. We compete with in-house mortgage management teams of our competitors in the brokerage businesses and in some regions specific competitors including Beijing Houze Investment and Guarantee Company Limited in Beijing and Shanghai Haoyonghang Investment Management Company Limited in Shanghai.

Franchise Services. We compete primarily with regional and local real estate brokerage brand franchisors. In addition, other international real estate brand franchisors, such as Coldwell Banker, have entered or plan to enter into the China market. A real estate broker may choose to affiliate with a regional chain or choose not to affiliate with a franchisor but to remain independent. We believe that competition for the sale of franchises in the real estate brokerage industry is based principally upon the perceived value and quality of the brand, the types of services offered to franchisees, the availability of financing, and the fees the franchisees must pay.

The ability of our real estate brokerage franchisees to compete is important to our prospects for growth. The ability of an individual franchisee to compete may be affected by the quality of its sales professionals, the location of its office, the services provided to its sales professionals, the number of competing offices in the vicinity, its affiliation with a recognized brand name, community reputation, brokerage commission rate and other factors. A franchisee’s success may also be affected by general, regional and its local economic conditions.

Employees and Training

We recruit sales professionals for our company-owned sales offices based on their education, qualification, experience and personality. We recruit on an as-needed basis. Most new recruits undergo a probation period before they are formally hired. We had 842, 4,462, 2,990 and 4,654 employees as of

 

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December 31, 2006, 2007 and 2008 and September 30, 2009, respectively. The following table sets forth the number of our full-time employees by area of responsibility as of the dates indicated:

 

      As of December 31,    As of
September 30,
      2006    2007    2008    2009

Company management

   14    27    42    46

Sales professionals

   595    3,707    2,318    3,770

Other employees

   233    728    630    838
                   

Total

   842    4,462    2,990    4,654
                   

We review the performance of our sales professionals on a periodic basis. We also have our own accreditation system for experienced sales professionals, including those sales professionals at our franchisees. We pay our sales professionals and managers a combination of salaries and sales commissions and pay salaries to all other employees. All our sales professionals and staff are entitled to welfare and benefits as required under PRC laws.

We maintain a comprehensive training system that combines our training programs and our E-learning system, an online learning system developed and operated by our in-house training team. Our training programs and E-learning system are available not only to the sales professionals and staff in our company-owned sales offices, but also to sales professionals and staff in all the sales offices in our CENTURY 21® franchise network. The courses in our training system include those developed in-house as well as the training courses provided by Realogy. Our training courses cover topics including new-hire training, ethics, brokerage business, sales techniques, information technology, management skills and finance and legal training.

 

   

Training programs. Through various training programs we sponsor, we have an aggregate of 52 courses in the forms of orientation, lecture, seminar or workshop for newly-recruited and experienced sales professionals. We also have 26 management courses for management teams of entities in our CENTURY 21® franchise network to improve and strengthen their management skills. As of September 30, 2009, we had 405 tutors providing training events in all regions where we have sales offices.

 

   

E-learning system. We started to promote our E-learning online training system in 2008, which currently offers 117 different online courses to sales professionals and staff both in our company-owned sales offices and franchisees. Our E-learning training system provides courses, examinations, analytical and review toolkits and learning forums to our sales professionals and staff. Additionally, regional franchise networks are able to develop their own training courses through the E-learning system.

Intellectual Property

The CENTURY 21® brand name, including related intellectual property, which we are authorized to use under our master sub-franchise agreement with Realogy, contributes to our competitive advantage in the real estate services market. We also rely on our Sales Information System and Human Resource and Commission Information System, each of which is copyright protected, and our training system that combines our training programs and our E-learning system to manage our business operations. See “—Our Information Systems” and “—Employees and Training.” Since commencement of our operations, our company-owned brokerage and franchise services businesses have significantly relied on the CENTURY 21® brand name, our proprietary information systems and our training system. To protect our intellectual property, we rely on a combination of trade secrets and copyright laws in China as well as imposing procedural and contractual confidentiality and invention assignment obligations on our sales professionals and staff, contractors and others. The built-in security functions and access authorization mechanisms in our franchise systems also help protect our confidential information.

 

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We offer our mortgage management services under the trade name of Kaisheng in Beijing and Shanghai. We are in the process of registering our trademark for our mortgage management services in China.

Facilities

Our headquarters are located in Beijing, China, where we lease approximately 1,700 square meters of corporate office space. As of September 30, 2009, our company-owned sales offices in Beijing, Shanghai and Shenzhen occupied an aggregate of approximately 30,000 square meters of leased space. We consider our corporate office space adequate for our current operations, and we expect that we are able to find new office spaces at reasonable rental rates if we open new company-owned sales offices.

Compliance and Legal Proceedings

Our operations in China are regulated by the Ministry of Commerce, the State Administration of Foreign Exchange, the Ministry of Housing and Urban-Rural Development, the Ministry of Land and Resources, the State Administration for Industry and Commerce and their respective local counterparts. See “Regulations” for further details on the regulations promulgated by such bodies. Historically, we have not incurred any material costs in complying with these regulations.

We are subject to various legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We have occasionally, and in each case, successfully, resorted to litigation against certain of our regional sub-franchisors with whom we have terminated our sub-franchise relationship for the sub-franchisor’s material breach of the regional sub-franchise agreement. In addition, we have successfully litigated against third parties who have infringed the CENTURY 21® trademark. We are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have a material and adverse effect on our business, financial condition or results of operations.

 

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OUR CORPORATE HISTORY AND STRUCTURE

We became the exclusive franchisor of the CENTURY 21® brand in China on March 22, 2000 through IFM Company Limited, or IFM Co., a Cayman Islands company controlled by one of our founders, Mr. Donald Zhang. See “Our Relationship with Realogy and Related Party Transactions.” Since then, we have worked to build the CENTURY 21® brand and our franchise network of CENTURY 21® sales offices in China.

We underwent a reorganization and introduced Goldman Sachs Strategic Investments (Asia) L.L.C., or Goldman Sachs Strategic Investments, as an investor to develop our company-owned brokerage services business in 2006. In connection with the reorganization, we incorporated IFM Investments Limited, our company in the Cayman Islands on November 30, 2005 to be the holding company of our various subsidiaries, including IFM Co. In consideration for the contribution of all issued and outstanding shares of IFM Co., our founders received all of the issued and outstanding shares of our company. On August 24, 2006, which is the effective date of our reorganization, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 200,000,000 Series A preferred shares to Goldman Sachs Strategic Investments for US$22.0 million. After this investment, we began to develop our company-owned brokerage services business. In October 2006, we incorporated Beijing Anxin to develop our company-owned sales offices in Beijing. In the same month, we also acquired 14 sales offices from a third party in Shanghai through Shanghai Ruifeng to develop our company-owned brokerage services business in Shanghai. In 2008, we began managing our mortgage management services in Beijing and Shanghai as a separate segment.

On October 19, 2007, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 105,253,600 Series B preferred shares to GL Asia Mauritius II Cayman Limited, for US$40.0 million. On February 21, 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 6,113,670 Series B preferred shares to Realogy, for approximately US$2.3 million.

As part of our reorganization, Xinye, a PRC wholly-owned foreign enterprise controlled by our founders, Mr. Donald Zhang and Mr. Harry Lu, agreed to transfer its 51% equity interests in IFM SH, 11.15% equity interests in IFM Beijing, 10% equity interests in Xiamen, 15% equity invest in Shandong and 10% equity interests in Xian, to us. Xinye completed its transfer of the Shandong interests to us on December 4, 2006, the IFM SH interests on December 4, 2008, the IFM Beijing interests on August 12, 2008, the Xiamen interests on December 26, 2008 and the Xian interests on February 9, 2009.

On January 4, 2010, we effected a share split whereby all of our issued and outstanding 26,000,000 ordinary shares of par value US$0.01 per share, 20,000,000 Series A preferred shares of par value US$0.01 per share and 11,136,727 Series B preferred shares of par value US$0.01 per share were divided into 260,000,000 ordinary shares of US$0.001 par value per share, 200,000,000 Series A preferred shares of par value US$0.001 per share and 111,367,270 Series B preferred shares of par value US$0.001 per share, respectively, and the number of our authorized shares was increased from 101,374,676 to 1,013,746,760.

 

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The following diagram illustrates our anticipated shareholding and corporate structure with our principal subsidiaries immediately following this offering(1):

LOGO

 

(1) Represents economic ownership of our Class A and Class B ordinary shares. Immediately prior to this offering, IFM Overseas Partners, Goldman Sachs Strategic Investments, GL Asia Mauritius II and Realogy each owned 52.1%, 28.4%, 18.4% and 1.1%, respectively, of our ordinary shares.
(2) Consists of 61,108,179 Class A ordinary shares and 64,893,563 Class B ordinary shares, which have substantially the same rights as Class A ordinary shares except that they are not entitled to vote as further described in “Description of Shares Capital—Classes of shares.”

Our Principal Subsidiaries

Company-owned brokerage services

We operate our company-owned brokerage services business through the following subsidiaries:

 

  ¡  

Beijing Anxin, incorporated on October 19, 2006, is the subsidiary established to own and operate our company-owned sales offices in Beijing.

 

  ¡  

Shanghai Ruifeng, incorporated on September 28, 2006, is the subsidiary established to own and operate our company-owned sales offices in Shanghai. We acquired 14 sales offices from a third party in Shanghai through Shanghai Ruifeng to develop our company-owned brokerage services business in Shanghai in October 2006.

 

  ¡  

Shenzhen CIR, incorporated on September 15, 2005, is the subsidiary that owns and operates our company-owned sales offices in Shenzhen. We acquired Shenzhen CIR from a third party to develop our company-owned brokerage services business in Shenzhen in July 2008.

 

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Franchise services

We operate our franchise services business through the following subsidiaries:

 

  ¡  

IFM Co., incorporated on October 4, 1999, holds the exclusive franchise rights for the CENTURY 21® brand in China.

 

  ¡  

IFM Beijing, incorporated on March 1, 2000, is the exclusive agent of IFM Co. to sub-franchise the CENTURY 21® network in China in its own name on behalf of IFM Co.

 

  ¡  

IFM BJ Broker, incorporated on May 27, 2008, is our regional sub-franchisor in Beijing.

 

  ¡  

IFM SH, incorporated on September 29, 2002, is our regional sub-franchisor in Shanghai and Shenzhen.

Mortgage management services

We operate our mortgage management services business through the following subsidiaries:

 

  ¡  

MMC BJ, incorporated on August 13, 2007, was established to own and operate our mortgage management services in Beijing.

 

  ¡  

MMC SH, incorporated on April 8, 2008, was established to own and operate our mortgage management services in Shanghai.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth our current directors, director appointees and executive officers, their ages as of the date of this prospectus and the positions held by them. The business address for each of our directors, director appointees and executive officers, is 26/A, East Wing, Hanwei Plaza, No.7 Guanghua Road, Chaoyang District, Beijing 100004, People’s Republic of China.

 

Name

  

Age

    

Position

Donald Zhang

   55      Chairman, Chief Executive Officer

Harry Lu

   43      Vice Chairman, President

Kevin Cheng Wei

   42      Director and Chief Financial Officer

Kevin Yung

   35      Director Appointee and Executive Vice President (1)

Weiping Zhang

   55      Director and Vice President

Jennifer Tang

  

42

     Director

Qiang Chai

   48      Independent Director

Liang Pei

  

41

     Independent Director

Conor Chiahung Yang

  

46

     Independent Director Appointee (1)

Lihong Ma

   37      Legal & HR Vice President

Hao Wang

   39      Vice President & General Manager of Franchise Services Business Unit

Qifeng Tan

   32      Deputy General Manager of Company-owned Brokerage Services Business Unit

Sheng Kang

   36      General Manager of Beijing Kaishengjinglue Guarantee Co. Limited

Wang Yui Fung

   40      General Manager of Beijing Anxin

Hau Piu Ip

   35      General Manager of Shanghai Ruifeng

 

(1) Messrs. Kevin Yung and Conor Chiahung Yang have accepted our appointment to be the directors of our company, effective upon the completion of this offering.

Mr. Donald Zhang is one of our co-founders. In addition to founding our company, Mr. Zhang has served as our director and chairman since 2000 and our chief executive officer since 2009. Prior to assuming his role with our company, Mr. Zhang founded Maxpro International Enterprises, Inc. and has served as its chairman and chief executive officer since it was founded in 1992. Maxpro is an import and export and real estate investments company. From 1982 to 1986, Mr. Zhang served as an assistant manager in the procurement department of China National Offshore Oil Corporation. Mr. Zhang received his bachelor’s degree from the University of International Business and Economics in Beijing and a master’s degree in International Trade from Webster University in Missouri. Mr. Zhang is a brother-in-law of Mr. Harry Lu.

Mr. Harry Lu is one of our co-founders. In addition to founding our company, Mr. Lu has served as our director and vice chairman since 2000 and president since 2008. From 1995 to 1999, Mr. Lu served as the general manager of the PRC Region of Maxpro International Enterprises, Inc., managing the China aspects of Maxpro’s import and export and real estate investments business. From 1992 to 1995, he served as the export manager of China National Pharmaceutical and Healthcare Product Import & Export Co., Ltd. Mr. Lu currently serves as the deputy general secretary of the China National Institute of Real Estate Appraisers and Brokers, the policy and standard setting institute of the real estate market in China. Mr. Lu received his bachelor’s degree from Beijing Institute of Technology and his master’s degree from Rutgers Business School, State University of New Jersey. Mr. Lu is a brother-in-law of Mr. Donald Zhang.

Mr. Kevin Cheng Wei has served as our director since November 2008. He joined us as our chief financial officer in December 2007. Prior to joining us, from 2006 to 2007, Mr. Wei served as the chief financial

 

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officer of Solarfun Power Holdings Co., Limited, a leading Chinese solar company listed on NASDAQ. From 2005 to 2006, Mr. Wei was the chief financial officer of an on-line advertising agency in China. Mr. Wei was the chief audit executive of LG Philips Displays International Ltd. from 2003 to 2005, where he was responsible for managing global internal audit coverage and risk management. From 1999 to 2003, he was Asia Pacific regional corporate audit manager with Altria Corporate Services Inc., including one year at Nabisco Inc. prior to its acquisition by Kraft Foods. Prior to Altria, from 1991 to 1999, Mr. Wei worked with KPMG LLP and Deloitte Touche LLP. Mr. Wei graduated from Central Washington University, where he received his Bachelor of Science degree (cum laude) with a double major in accounting and management information systems.

Mr. Kevin Yung will serve as our director upon the completion of this offering. He has served as our executive vice president since 2009. From 2007 to 2009, Mr. Yung was a partner at China Renaissance, a local financial advisory firm based in Beijing. From 2006 to 2007, Mr. Yung was a vice president with the Special Situations Group of Morgan Stanley. From 2003 to 2006, Mr. Yung was a vice president with the Special Situations Group of Citigroup Capital Markets Asia. From 1998 to 2003, Mr. Yung was an associate with the Real Estate Principal Investing Group of Morgan Stanley in New York, Tokyo and Hong Kong. From 1996 to 1998, Mr. Yung was an analyst with the Real Estate Investment Group at J.P. Morgan in New York. Mr. Yung received his bachelor's degree in finance and economics from Babson College.

Mr. Weiping Zhang has served as our director since 2006 and vice president since 2002. From 2004 to 2007, he was senior vice president of IFM Beijing. From 2002 to 2004, he was deputy general manager for IFM SH. He was the representative of Maxpro International Enterprises, Inc. Beijing office from 1993 to 2002. Maxpro is an import and export and real estate investments company. From 1992 to 1993, Mr. Zhang was the Assistant General Manager of Hong Kong Donglong Company. Mr. Zhang received his bachelor’s degree from Beijing Foreign Language Institute.

Ms. Jennifer Tang has served as our director since 2009. Ms. Tang joined Avenue Asia Singapore Pte Ltd in 2006 and serves as its managing director and head of its legal department. From 2000 to 2006, Ms. Tang held various positions with Hutchinson Whampoa Limited, including serving as group senior legal counsel of Hutchison Telecommunications International Ltd, a public company listed on the New York Stock Exchange and the Stock Exchange of Hong Kong. Ms. Tang received her bachelor’s degree in commerce and a bachelor’s degree in law from the University of New South Wales. She is currently admitted as a solicitor in New South Wales and Hong Kong.

Mr. Qiang Chai has served as our independent director since January 2010. Mr. Chai also served as vice president and secretary general of China National Institute of Real Estate Appraisers and Brokers since 1999. From 1992 to 1999, he was the director of the Real Estate and Residence Research Institute and deputy chief economist of the Policy Research Center of the Ministry of Housing and Urban-Rural Development of PRC. From 1985 to 1992, Mr. Chai was chief and deputy director of the Urban Economic Research Office of Urban-Rural Development Economic Institute. Mr. Chai received his bachelor’s degree in engineering from Wuhan University of Technology, and his master’s degree and doctor’s degree in economics from the graduate school of China Academy of Social Sciences.

Mr. Liang Pei has served as our independent director since January 2010. Mr. Pei has served as the secretary general of China Chain Store & Franchise Association since 2002 and an independent director of Fujian New Hua Du Supercenter Co., Ltd. since 2007. From 1992 to 2002, he worked as an official with Ministry of Internal Trade. Mr. Pei received his bachelor’s degree in commerce and economics and doctor’s degree in business administration, both from Renmin University of China.

Mr. Conor Chiahung Yang will serve as our independent director upon the completion of this offering. Mr. Yang is the chief financial officer of AirMedia Group Inc. (Nasdaq:AMCN), and has served in that role since March 2007. Prior to joining AirMedia, he was the chief executive officer of Rock Mobile Corporation from 2004 to February 2007. From 1999 to 2004, Mr. Yang served as the chief financial officer of the Asia Pacific region for CellStar Asia Corporation. Mr. Yang was an executive director of Goldman Sachs (Asia) L.L.C. from

 

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1997 to 1999. Mr. Yang was a vice president of Lehman Brothers Asia Limited from 1994 to 1996 and worked at Morgan Stanley Asia from 1992 to 1994. Mr. Yang received his MBA degree from University of California, Los Angeles in 1992 and his bachelor’s degree from Fu Jen University in Taiwan in 1985.

Ms. Lihong Ma has served as our legal and HR vice president since 2008. From 2007 to 2008, she was an associate of DLA Piper UK LLP. From 2006 to 2007, and from 2001 to 2004, she was an attorney of Dacheng Law Offices. From 2004 to 2006, Ms. Ma was the head of the legal department of the Beijing office of CapitaLand (China) Investment Co., Ltd. From 1996 to 2000, she was a translator of the Beijing office of Hong Kong Dragon Airlines Limited. From 1995 to 1996, she was a teacher of the training center of Beijing Automobile Industry Group. Ms. Ma received her bachelor’s degree from China University of Politics Science and Law and her master’s degree from Peking University School of Law. Ms. Ma is qualified for PRC Bar.

Mr. Hao Wang has served as the vice president and general manager of our franchise services business unit since 2009. Mr. Wang joined us in 2001 and served as franchise sales manager and franchise sales director of IFM Beijing and the general manager of IFM SH. From 1999 to 2001, he was the general manager of American Haohua Investment Consultant Company. From 1995 to 1999, Mr. Wang was the manager of the marketing division of China Pacific Insurance (Group) Co., Ltd. Mr. Wang received his bachelor’s degree from the Fine Art College of Shanghai University and his EMBA degree from the University of Texas at Arlington.

Mr. Qifeng Tan has served as the deputy general manager of our company-owned brokerage services business unit, executive director of Shenzhen CIR and general manager of Beijing Huachuang Xunjie Technology Co., Limited since 2009. From 2006 to 2009, he was the deputy general manager of Shanghai Ruifeng. From 2001 to 2006, he was project manager of the finance department, franchise manager of the franchise department and manager of the business expansion department of IFM Beijing. Mr. Tan received his associate’s degree from Xi’an Polytechnic Institute and is currently attending the EMBA program at China Central Technology University.

Mr. Sheng Kang has served as the general manager of Beijing Kaishengjinglue Guarantee Co. Limited since 2007. From 2006 to 2007, he was the general manager of Beijing Weijia Anjie Investment Guarantee Co., Ltd. From 2002 to 2006, he was the finance service and trading management director of 5i5j Real Estate Co., Ltd. From 2000 to 2002, Mr. Kang was the deputy general manager of Dongfang Hengji Real Estate Consulting Co., Ltd. of Dongli Group. From 1999 to 2000, he was the project deputy manager of China Xin Xing Construction Development Co., Ltd. Mr. Kang received his bachelor’s degree from Wuhan University of Hydraulic and Electrical Engineering and his master’s degree from Tsinghua University.

Mr. Wang Yui Fung has served as the general manager of Beijing Anxin since 2008. From 2005 to 2008, he was the general manager of Midland Realty Consulting (Shanghai) Co., Ltd. From 2004 to 2005, he was a sales manager at Hanyu Property Agency Co. Limited. From 2003 to 2004, he was regional manager of Nanjing Centaline Property Consultants Ltd. Mr. Fung received his secondary school degree from Moral Training English College in Hong Kong.

Mr. Hau Piu Ip has served as the general manager of Shanghai Ruifeng since 2009. He was a director and general manager of Shanghai Hopefluent Real Properties Consulting Co. Limited since 2007. From 1997 to 2006, he was the senior director of Centaline Property Agency Limited. Mr. Ip received his bachelor’s degree from Liverpool John Moores University and his master’s degree from Tongji University and United Business Institutes of Belgium.

Employment Agreements

We have entered into employment agreements with each of our executive officers. We may terminate an executive officer’s employment for cause, at any time, without remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty to a felony, negligent or dishonest acts to our detriment or

 

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misconduct or a failure to perform agreed duties. An executive officer may terminate the employment at any time upon advance written notice. Furthermore, we may terminate an executive officer’s employment at any time without cause, in which case, we will continue to make the base salary payment and certain benefits to the executive officer within a severance period in accordance with the employment agreement. Except for the foregoing, the officer is not entitled to any severance payments upon the termination of the employment for any reason.

Each executive officer has agreed to hold in strict confidence any trade secrets or confidential information of our company. Each officer also agrees to faithfully and diligently serve our company in accordance with the employment agreement and the guidelines, policies and procedures of our company approved from time to time by our board of directors.

Board of Directors

Our board of directors will consist of 9 directors upon completion of this public offering. A director is not required to hold any shares in the company by way of qualification. A director may, subject to any separate requirement for audit committee approval under applicable law or the listing rules of the New York Stock Exchange, and unless disqualified by the chairman of the relevant board meeting, vote with respect to any contract or transaction in which he or she is materially interested provided the nature of the interest is disclosed prior to its consideration and any vote on such contract or transaction. The directors may exercise all the powers of the company which are not, by the Companies Law or its amended and restated articles of association, required to be exercised by shareholders, including the power to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever outright or as security for any debt, liability or obligation of the company or of any third party.

Committees of the Board of Directors

We have established an audit committee under the board of directors. We have adopted a charter for the audit committee, and its members and functions are described below.

Audit Committee

Our audit committee consists of Conor Chiahung Yang, Liang Pei and Kevin Yung. Conor Chiahung Yang and Liang Pei satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. In addition, Conor Chiahung Yang and Liang Pei meet the “independence” standards under Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Conor Chiahung Yang is the chair of our audit committee. Our audit committee will consist solely of independent directors that satisfy New York Stock Exchange and SEC requirements within one year of our initial public offering. The purpose of the audit committee is to assist our board of directors with its oversight responsibilities regarding: (i) the integrity of our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of our internal audit function and independent auditor. The audit committee will be responsible for, among other things:

 

   

appointing the independent auditors and pre-approving all audit and non-audit services permitted to be performed by the independent auditors;

 

   

reviewing with the independent auditors any audit problems or difficulties and management’s response;

 

   

discussing the annual audited financial statements with management and the independent auditors;

 

   

reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; and

 

   

meeting separately and periodically with management and the independent auditors.

Duties of Directors

Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care

 

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and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended from time to time. A shareholder has the right to seek damages if a duty owed by our directors is breached.

The functions and powers of our board of directors include, among others:

 

   

convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;

 

   

declaring dividends and distributions;

 

   

appointing officers and determining the term of office of officers;

 

   

exercising the borrowing powers of our company and mortgaging the property of our company; and

 

   

approving the transfer of shares of our company, including the registering of such shares in our share register.

Interested Transactions

A director may, subject to any separate requirement for audit committee approval under applicable law or the listing rules of the New York Stock Exchange, and unless disqualified by the chairman of the relevant Board meeting, vote in respect of any contract or transaction in which he or she is interested, provided that the nature of the interest of any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote in that matter.

Terms of Directors and Officers

Pursuant to our amended and restated memorandum and articles of incorporation to be adopted with effect following this offering, our board of directors will be divided into three classes. The members of each class will serve staggered three-year terms. Upon expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of the shareholders in the year in which their respective terms expire. Immediately after the consummation of the offering, the classes will be composed as follows:

Donald Zhang, Kevin Yung and Liang Pei will be Class I directors, whose terms will expire at the first annual meeting of shareholders following this offering.

Harry Lu, Kevin Cheng Wei and Qiang Chai will be Class II directors, whose terms will expire at the second annual meeting of shareholders following this offering; and

Weiping Zhang, Jennifer Tang and Conor Chiahung Yang will be Class III directors, whose terms will expire at the third annual meeting of shareholders following this offering;

Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our company.

Except as otherwise provided by law, vacancies on our board may be filled by the affirmative vote of a majority of the directors then in office, or by shareholders. A director elected by the board to fill a vacancy shall hold office only until our next annual general meeting and shall then be eligible for re-election as a director in the class where such vacancy existed.

Compensation of Directors and Executive Officers

For the year ended December 31, 2008, we paid an aggregate of approximately RMB9.3 million in cash compensation to our executive officers, and we did not pay any cash compensation to our non-executive

 

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directors. In addition, for the year ended December 31, 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we granted 2,300,000 options to our executive officers and directors to purchase ordinary shares of our company at an average exercise price at US$0.09 per share. These options expire five years after their dates of grant, and the aggregate number of ordinary shares underlying these options is 2,300,000. The total amount set aside or accrued by us to provide pension, retirement or similar benefits for our executive officers and directors for the year ended December 31, 2008 was approximately RMB0.5 million.

Stock Incentive Plan

Stock Incentive Plan. On August 18, 2006, we adopted a stock incentive plan, or the plan, which has been amended on October 19, 2007 and February 1, 2008, to provide additional incentive to those officers, employees, directors, consultants and other service providers of our Group, in order to strengthen the commitment of such persons to our Group, motivate such persons to faithfully and diligently perform their duties and to attract and attain competent and dedicated persons whose efforts will result in the long-term growth and profitability of our Group. The plan permits us to grant five types of awards: incentive stock options, nonqualified stock options, restricted shares, restricted share units and other awards. As of the date of the prospectus, the ordinary shares reserved for issuance under our plan represented 8.48% of our equity interest on a fully-diluted basis and the plan provides for proportional adjustment of such reserved shares in the event of adjustments to the conversion price of the preferred shares. As of September 30, 2009, after giving effect to our 10-for-1 share split effected January 4, 2010, we had outstanding 43.80 million options to purchase ordinary shares of our company exercisable at a weighted average exercise price at US$0.13 per share and the aggregate number of ordinary shares underlying these options is 43.80 million. These options generally expire five years after their dates of grant. See Note 17 “Share-Based Compensation” in the Consolidated Financial Statements for additional information.

Plan Administration. Our board of directors, or a committee designated by our board or directors, will administer the plan. The committee or the full board of directors, as appropriate, will determine the provisions and terms and conditions of granting awards under the plan.

Award Agreement. Options and other awards granted under our plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each grant. In addition, the award agreement may also provide that securities granted are subject to certain lock-up period following the effective date of a registration statement filed by us under the Securities Act, if so requested by us or any representative of the underwriters in connection with any registration of the offering of any of our securities.

Eligibility. We may grant awards to employees, directors and consultants of our company or any of our related entities, which include our subsidiaries or any entities in which we hold a substantial ownership interest.

Term of the Awards. The term of each award grant shall be stated in the relevant award agreement, provided that the term shall not exceed 10 years from the date of the grant.

Vesting Schedule. In general, the plan administrator determines, or the relevant award agreement specifies, the vesting schedule.

Transfer Restrictions. Awards granted under the plan may not be transferred in any manner by the grantee other than by will or the laws of succession and may be exercised during the lifetime of the grantee only by the grantee.

Termination of the Plan. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law. However, no such action may (i) impair the rights of any grantee unless agreed by the grantee and the plan administrator or (ii) affect the plan administrator’s ability to exercise the powers granted to it under our plan.

 

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PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information with respect to beneficial ownership of our ordinary shares as of the date of this prospectus, by:

 

   

each of our directors and executive officers;

 

   

each person known to us to own beneficially more than 5.0% of our ordinary shares; and

 

   

each of the selling shareholders.

 

     Ordinary Shares
Beneficially Owned Prior
to This Offering
    Ordinary Shares Sold in
This Offering(1)
    Ordinary Shares
Beneficially Owned
After This Offering(1)
 

Name

   Number(2)    Percent(2)     Number(2)    Percent(2)     Number(2)    Percent(2)  
Directors and Executive Officers:                

Donald Zhang(4)

   260,000,000    52.1   -    -      260,000,000    37.9

Harry Lu(5)

   52,000,000    10.4   -    -      52,000,000    7.6

Kevin Cheng Wei

   *    *      -    -      *    *   

Kevin Yung(a)

   -    -      -    -      -    -   

Weiping Zhang

   -                    -      -    -      -    -   

Jennifer Tang

   -    -      -    -      -    -   

Qiang Chai

   -    -      -    -      -    -   

Liang Pei

   -    -      -    -      -    -   

Conor Chiahung Yang(a)

   -    -      -    -      -    -   

Lihong Ma

   *    *      -    -      *    *   

Hao Wang

   -    -      -    -      -    -   

Qifeng Tan

   -    -      -    -      -    -   

Sheng Kang

   *    *      -    -      *    *   

Wang Yui Fung

   *    *      -    -      *    *   

Hau Piu Ip

   -    -      -    -      -    -   
                                 
All Directors and Executive Officers as a group(6)    264,353,676    52.5   -    -      264,353,676    38.3
                                 
5% and above Shareholders and Selling Shareholders:                
IFM Overseas
Partners L.P.
(7)
   260,000,000    52.1   -    -      260,000,000    37.9
Goldman Sachs Strategic Investments (Asia) L.L.C.(8)    141,611,117    28.4   15,609,375    3.1   126,001,742    18.4
GL Asia Mauritius II Cayman Limited(9)    120,909,335    24.2   46,828,125    9.4   74,081,210    10.8

 

Notes:

* Upon exercise of all options granted, the individual or the entity would beneficially own less than 1% of our outstanding ordinary shares.
(a) Messrs. Kevin Yung and Conor Chiahung Yang have accepted our appointment to be the directors of our company, effective upon the completion of this offering.

 

(1) Assumes that the underwriters do not exercise the option to purchase additional ADSs. If the underwriters exercise their option to purchase the additional ADSs in full, IFM Overseas Partners L.P., Goldman Sachs Strategic Investments (Asia) L.L.C. and GL Asia Mauritius II Cayman Limited will each sell ADSs representing 7,804,695, 10,926,555 and 18,731,250 ordinary shares, or 20.8%, 29.2% and 50.0%, respectively, of the additional ADSs offered by the selling shareholders. If the underwriters exercise their option to purchase additional ADSs only in part, IFM Overseas Partners L.P. will sell up to 7,804,695 ADSs, and GL Asia Mauritius II Cayman Limited and Goldman Sachs Strategic Investments (Asia) L.L.C. will sell 63.2% and 36.8%, respectively, of any remaining additional ADSs for which the underwriters exercise their option to purchase.

 

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(2) Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person or the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days of this offering, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person. The calculation of the number of shares also assumes the conversion of all of our outstanding preferred shares into ordinary shares upon the completion of this offering. Percentage of beneficial ownership of each listed person prior to this offering is based on 498,842,277 ordinary shares outstanding as of the date of this prospectus, including 238,842,277 ordinary shares convertible from our outstanding preferred shares. Percentage of beneficial ownership of each listed person after the offering is based on 686,154,777 ordinary shares outstanding immediately after the closing of this offering.
(4) Includes 260,000,000 Class A ordinary shares beneficially held by Donald Zhang through IFM Overseas Partners L.P.
(5) Includes 52,000,000 of the 260,000,000 Class A ordinary shares held by IFM Overseas Partners L.P. and corresponds to a 20% limited partner interest held in IFM Overseas Partners L.P. by Harry Lu.
(6) Includes (i) 260,000,000 Class A ordinary shares beneficially held by Donald Zhang and Harry Lu through IFM Overseas Partners L.P., and (ii) 4,353,676 Class A ordinary shares underlying share options held by our directors and executive officers as a group that are exercisable within 60 days after the date of this prospectus.
(7) Includes 260,000,000 Class A ordinary shares held by IFM Overseas Partners L.P. IFM Overseas Limited, a corporation incorporated under the laws of the Cayman Islands that acts as the general partner of IFM Overseas Partners L.P. and exercises investment control over the Class A ordinary shares held by this entity. Maxpro International Enterprises, Inc., a New York corporation, owns 100% of the equity interest in IFM Overseas Limited. Donald Zhang owns 100% of the equity interest in Maxpro International Enterprises, Inc. IFM Holding Company Limited and Harry Lu, each a limited partner of IFM Overseas Partners L.P., hold 80% and 20% of the partnership interest in IFM Overseas Partners L.P., respectively. IFM Holding Company Limited is a corporation incorporated under the laws of Cayman Islands, and is 100% owned by Maxpro International Enterprises, Inc..
(8) Includes 61,108,179 Class A ordinary shares and 80,502,938 Class B ordinary shares issuable upon conversion of the 200,000,000 Series A preferred shares held by Goldman Sachs Strategic Investments (Asia) L.L.C. Goldman Sachs Strategic Investments (Asia) L.L.C. is an indirectly wholly-owned subsidiary of The Goldman Sachs Group, Inc., which is a bank holding company whose shares are listed on the New York Stock Exchange. The address of Goldman Sachs Strategic Investments (Asia) L.L.C. is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, USA.
(9) Includes 91,893,513 Class A ordinary shares issuable upon conversion of the 105,253,600 Series B preferred shares. Also includes 29,015,822 ordinary shares, the estimated number of shares to be transferred by IFM Overseas Partners L.P. to GL Asia Mauritius II Cayman Limited, a Cayman Islands exempted company, upon exchange of the secured exchangeable note issued by IFM Overseas Partners L.P. to GL Asia Mauritius II Cayman Limited. The exchangeable note can be exchanged at the option of GL Asia Mauritius II Cayman Limited for such ordinary shares at any time at least 55 days after the offering. The exchange price is based on the fair market value of the shares at the time of the exchange. The estimated number of exchange shares into which the exchangeable note may be exchanged is based on an exchange price of US$9.75 per ADS, the mid-point of the estimated range of the initial public offering price shown on the cover of this prospectus. GL Asia Mauritius II Cayman Limited is owned 50% by Avenue Asia International, Ltd. and 50% by GL Asia Mauritius II, LLC, but all of GL Asia Mauritius II Cayman Limited’s beneficial interest in the above shares has been allocated solely to GL Asia Mauritius II, LLC. GL Asia Mauritius II, LLC is owned by Avenue Asia Investments, L.P., Avenue Asia Special Situations Fund III, L.P. and Avenue Asia Special Situations Fund IV, L.P., but all of GL Asia Mauritius II, LLC’s beneficial interest in the above shares has been allocated solely to Avenue Asia Special Situations Fund IV, L.P., a Cayman Islands exempted limited partnership. The general partner of Avenue Asia Special Situations Fund IV, L.P. is Avenue Asia Capital Partners IV, Ltd., a Cayman Islands exempted company. The sole shareholder of Avenue Asia Capital Partners IV, Ltd. is Avenue Asia Capital Partners IV, LLC, a Delaware limited liability company. The managing member of Avenue Asia Capital Partners IV, LLC is GL Asia Partners IV, LLC, a Delaware limited liability company, which is controlled by Marc Lasry and Sonia Gardner. Voting and investment power of shares held by GL Asia Mauritius II Cayman Limited may be exercised by Avenue Asia Capital Partners IV, Ltd. or Avenue Asia Capital Management, L.P., a Delaware limited partnership. The general partner of Avenue Asia Capital Management, L.P. is Avenue Asia Capital Management GenPar, LLC, a Delaware limited liability company, which is controlled by Marc Lasry and Sonia Gardner. Mr. Lasry and Ms. Gardner disclaim beneficial ownership with respect to the above shares except to the extent of their pecuniary interest therein. The address of GL Asia Mauritius II Cayman Limited is 2nd Floor Anchorage Centre, Georgetown, Grand Cayman, Cayman Islands.

As of the date of this prospectus, none of our outstanding ordinary shares or preferred shares are held by record shareholders in the United States. Certain holders of our preferred shares have represented to us that they are affiliated with a registered broker-dealer. Based on their representations, we believe that at the time of the purchase of our preferred shares, each of these holders purchased our preferred shares in the ordinary course of business, and had no agreements or understandings, directly or indirectly, with any person to distribute the shares. None of our existing shareholders has different voting rights from other shareholders after the closing of this offering. We are not aware of any arrangement that may at a subsequent date, result in a change of control of our company.

 

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OUR RELATIONSHIP WITH REALOGY AND RELATED PARTY TRANSACTIONS

Our Relationship with Realogy

In March 2000, IFM Company Limited, or IFM Co. entered into an international master sub-franchise agreement with Cendant Global Services B.V., a subsidiary of Cendant Corporation, the entity from which Realogy was spun off in 2006. Cendant Global Services B.V. assigned its rights under the master sub-franchise agreement to a subsidiary of Realogy which, in turn, assigned such rights to Realogy. IFM Co. became the exclusive franchisor of the CENTURY 21® brand and system in China for a term of 25 years, extendable at IFM Co.’s election for additional terms of 25 years upon payment of renewal fees of US$4.5 million for each renewal, to be adjusted for inflation or deflation. Under the agreement, IFM Co. is authorized to establish, operate and promote the CENTURY 21® network in China by using and sublicensing the CENTURY 21® brand and system owned by Realogy, which includes: (i) the trade names, trademarks, service marks, slogans, logos or other indicia relating to the CENTURY 21® franchise network; and (ii) the standard franchise agreement, sales tools and brochures, real estate products, programs, services and franchise/sub-franchise plans. Pursuant to our restructuring in 2005, our company was incorporated in the Cayman Islands and IFM Co. became our wholly owned subsidiary.

Under the master sub-franchise agreement, we are required to comply with certain franchise policies adopted by Realogy, as amended from time to time. The master sub-franchise agreement sets out certain terms pursuant to which we are required to operate our franchise services business, including the form of regional sub-franchise agreements to be entered into with regional sub-franchisors and the service fees payable to Realogy. The master sub-franchise agreement also provides that Realogy must approve and has a right of first refusal with respect to any sale or transfer of more than 25% of our equity interest, or any series of transactions resulting in sales or transfer of more than 49% of our equity interest. Realogy has approved this offering and has waived any right of first refusal it may have with respect to this offering. In addition, Realogy agreed not to, during the term of the agreement, license any other parties to sublicense the CENTURY 21® brand and system to operate real estate brokerages in China.

Upon entering into the master sub-franchise agreement, we paid Realogy an initial franchise fee. Apart from the initial franchise fee, we are required to pay certain ongoing service fees to Realogy, based on revenues generated from initial franchise fees and ongoing service fees collected from our regional sub-franchisors or direct franchisees. The master sub-franchise agreement also includes a minimum annual fee requirement, and to the extent that the service fees payable within a certain year are lower than such minimum amount, we are required to make additional payment to reach the minimum fee requirement. In the years ended December 31, 2007 and 2008 and the nine months ended September 30, 2009, the service fees which were paid or to be paid to Realogy amounted to RMB6.1 million, RMB10.5 million and RMB2.3 million, respectively.

Either party has the right to terminate the master sub-franchise agreement if the other party materially breaches the master sub-franchise agreement. Additionally, Realogy has the right to terminate the master sub-franchise agreement in the event that (1) we assign our rights and obligations without Realogy’s approval, (2) we fail to honor Realogy’s right of first refusal in connection with the assignment, or (3) we become insolvent. Within two years after the master sub-franchise agreement terminates or expires, we may not engage in the real estate brokerage franchise business, subject to certain exceptions. See “Risk Factors—We do not own the CENTURY 21® brand and our right to use the CENTURY 21® brand is subject to risks and limitations” for further discussion of the risks associated with this agreement and our reliance thereon.

On June 30, 2002, IFM Co. entered into a cooperation agreement with Beijing International Franchise Management Company Limited, or IFM Beijing, an entity controlled by our founders, Mr. Donald Zhang and Mr. Harry Lu. IFM Beijing then became the exclusive agent of IFM Co. to sub-franchise the CENTURY 21® brand and system in China on behalf of IFM Co. IFM Beijing is obliged to pay Realogy the service fees payable by IFM

 

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Co. under the master sub-franchise agreement. We became the controlling shareholder of IFM Beijing in October 2006.

On February 21, 2008, after giving effect to our 10-for-1 share split effected January 4, 2010, we issued 6,113,670 Series B preferred shares to Realogy for approximately RMB16.2 million.

Related Party Transactions

Reorganization

We underwent a reorganization in 2006 in connection with our private placement of Series A preferred shares to Goldman Sachs Strategic Investments (Asia) L.L.C., or Goldman Sachs Strategic Investments. Our reorganization went effective on August 24, 2006. As part of our reorganization, Beijing Xinye Jiayuan Real Estate Consulting Service Co., Ltd., or Xinye, a PRC wholly-owned foreign enterprise controlled by our founders, Mr. Donald Zhang and Mr. Harry Lu, agreed to transfer its 51% equity interests in IFM SH, 11.15% equity interests in IFM Beijing, 10% equity interests in Xiamen, 15% equity interests in Shandong and 10% equity interests in Xian, to us. Xinye completed its transfer of the IFM SH interests to us on December 4, 2008, the IFM Beijing interests on August 12, 2008, the Xiamen interests on December 26, 2008, the Shandong interests on December 4, 2006 and the Xian interests on February 9, 2009. See “Our Corporate History and Structure.”

Related Party Loans and other Payments

We have entered into certain loan arrangements in the past with certain of our related parties, including some of our directors, our associate companies, Xinye, a PRC wholly-owned foreign enterprise controlled by Mr. Donald Zhang, our chairman and CEO, and Mr. Harry Lu, our vice chairman and president, and Maxpro International Enterprises Inc., or Maxpro, a New York corporation owned by Mr. Donald Zhang.

The following table sets forth the amounts due to and from those related parties which are controlled by our shareholders as of December 31, 2007, 2008 and September 30, 2009. On September 22, 2009, the amounts due from/to Xinye and Maxpro were fully settled. On the same day, an advance of approximately RMB5.9 million was made to Maxpro which is due on demand. On November 30, 2009, this remaining amount due from Maxpro was fully settled in cash.

 

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