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As filed with the Securities and Exchange Commission on April 30, 2010
Registration No. 333-165987
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 4
to
Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
CHARM COMMUNICATIONS INC.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
 
         
Cayman Islands   7311   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
26th Floor, Tower A, Oriental Media Center
4 Guanghua Road, Chaoyang District
Beijing 100026
People’s Republic of China
(86-10) 6581-1111
(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:
 
     
Chris K.H. Lin
Simpson Thacher & Bartlett LLP
35th Floor, ICBC Tower
3 Garden Road, Central
Hong Kong
(852) 2514-7600
  Chun Wei
Sullivan & Cromwell LLP
28th Floor
9 Queen’s Road Central
Hong Kong
(852) 2826-8688
 
 
 
 
Approximate date of commencement of proposed sale to the public:  as soon as practicable after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o ­ ­
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o ­ ­
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o ­ ­
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
           
            Offering Price per
           
      Amount to be
    Class A
    Proposed Maximum Aggregate
     
Title of Each Class of Securities to be Registered(1)(2)     Registered(2)(3)     Ordinary Share(3)     Offering Price(3)     Amount of Registration Fee(4)
Class A ordinary shares, par value US$0.0001 per share
    17,968,750     US$5.50     US$98,828,125     US$7,046
                         
(1)  American depositary shares evidenced by American depositary receipts issuable upon deposit of the Class A ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 (Registration No. 333-166134). Each American depositary share represents two Class A ordinary shares.
 
(2)  Includes (i) 15,625,000 Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and (ii) 2,343,750 Class A ordinary shares that may be purchased by the underwriters pursuant to an option to purchase additional Class A ordinary shares represented by American depositary shares. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.
 
(3)  Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
 
(4)  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, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.
 


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The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling shareholder may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
 
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 30, 2010
 
7,812,500 American Depositary Shares
 
(CHARM COMMUNICATIONS INC LOGO)
 
Charm Communications Inc.
 
Representing 15,625,000 Class A Ordinary Shares
 
 
 
 
This is an initial public offering of American depositary shares, or ADSs, of Charm Communications Inc., or Charm Communications. Charm Communications is offering 7,812,500 ADSs. Each ADS represents two Class A ordinary shares, par value US$0.0001 per share, of Charm Communications. The ADSs are evidenced by American depositary receipts, or ADRs.
 
Prior to this offering, there has been no public market for the ADSs or the Class A ordinary shares. We anticipate that the initial public offering price will be between US$9.00 and US$11.00 per ADS. Our ADSs have been approved for listing on the Nasdaq Global Market under the symbol “CHRM.”
 
The underwriters have an option to purchase up to 1,171,875 additional ADSs from the selling shareholder at the initial public offering price, less the underwriting discounts and commissions, to cover over-allotments of ADSs. We will not receive any of the proceeds from the sale of ADSs by the selling shareholder.
 
Investing in our ADSs involves risks. See “Risk Factors” beginning on page 13.
 
 
 
 
                                 
                Proceeds,
    Proceeds, Before
 
          Underwriting
    Before Expenses,
    Expenses, to the
 
    Initial Public
    Discounts and
    to Charm
    Selling
 
    Offering Price     Commissions     Communications     Shareholder  
 
Per ADS
  US$                US$                US$                US$             
Total
  US$                US$                US$                US$             
 
Delivery of the ADSs will be made on or about          , 2010.
 
Neither the United States Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
 
Credit Suisse
 
 
 
 
             
  Oppenheimer & Co.       Piper Jaffray  
 
The date of this prospectus is          , 2010


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 EX-23.1
 
 
 
 
You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
 
Until          , 2010 (25 days after the date of this prospectus), 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 dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


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PROSPECTUS SUMMARY
 
The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors” before deciding whether to buy our ADSs.
 
Our Business
 
We believe we are the leading domestic television advertising agency in China, according to a report commissioned by us and prepared by CTR, an independent market research firm based in China, as measured by the total value of successful bids of the prime-time advertising time for 2010 on China Central Television, or CCTV, which is generally regarded as the most coveted television advertising time in China. According to CCTV, we ranked first in terms of the total advertising spending for the advertisements we placed on behalf of clients on CCTV channels in each of the six consecutive years from 2004 to 2009. In addition, we believe that, with exclusive agency arrangements with two satellite television channels, Shanghai Dragon Television and Tianjin Satellite Television, and four programs on CCTV, we have established a leading television media investment management business in China. We (i) offer a broad range of television advertising agency services from planning and managing advertising campaigns to creating and placing advertisements, and (ii) engage in media investment management through identifying, securing and selling television advertising resources.
 
Advertising Agency and Branding and Identity Services
 
We place advertisements for our clients on a broad array of television channels, including CCTV and satellite and regional television channels and, on a smaller scale, on other media platforms, including Internet and out-of-home media. We derive our advertising agency revenues from the commissions paid by clients for the planning and placement of these advertisements and from the commissions and performance bonuses received from the television channels and other advertising media platforms on which we place the advertisements, and such commissions are generally calculated as a percentage of the total advertising spending by our clients. The total advertising spending for the advertisements we placed on behalf of the clients under our advertising agency business increased from US$188.8 million in 2007 to US$254.9 million in 2008 and to US$288.0 million in 2009.
 
We have established a diversified client base of Chinese companies that includes many of the leading brand names in China. Our clients include well-recognized brand names in China across many industries, such as China Telecom, PICC, Agricultural Bank of China, China CITIC Bank, Snowbeer, Yunnan Baiyao, C-Bons, Wahaha and Midea. In the aggregate, these nine clients accounted for approximately 16.8% and 18.1% of our total revenues in 2008 and 2009, respectively. Our clients also include emerging domestic leading brands, such as Bosideng, Lolo, Chery Automobile and Feihe Dairy, that have used our services to further build their brands nationally.
 
We have expertise in helping our clients secure prime-time advertising time on CCTV, which is generally regarded as the most coveted television advertising time in China. The prime-time advertising time on CCTV includes the advertising time during prime-time television programs and special events, and is sold pursuant to CCTV’s annual Golden-Time Public Auction process. According to CCTV, for each of the seven consecutive years from 2004 to 2010, we ranked first out of all advertising agencies for the total value of successful bids of the prime-time advertising time on CCTV. In each of the six consecutive years from 2004 to 2009, we also ranked first in terms of the total advertising spending for the advertisements we placed on behalf of clients on CCTV channels.
 
We distinguish ourselves from many of our domestic competitors with our ability to offer integrated advertising solutions to our advertising clients that cover a wide range of advertising agency services, including: (i) market research; (ii) branding strategies; (iii) creative design, development and production of advertisements; (iv) procurement of advertising media resources and placement of advertisements; (v) public relations; and (vi) overall management of advertising campaigns, all specifically tailored for the Chinese market. Furthermore, we utilize an information-based approach to understand the advertising industry through


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our database of market research data, ratings information and past campaign performance, as well as expert systems and algorithms that we have developed internally.
 
Media Investment Management
 
Under our media investment management business, we, through a series of exclusive agency arrangements, secure all or a portion of the advertising time and other advertising rights, which include soft advertising, such as sponsorship, on a specific television channel or television program and sell such advertising media resources. The total advertising spending for the advertisements that were placed on our advertising media resources increased from US$8.2 million in 2007 to US$79.3 million in 2008 and to US$87.3 million in 2009. Under this business, we recognize total advertising spending as our revenue. Through the media investment management business, we provide clients with access to our advertising media resources that we have secured on a network of television channels with targeted geographic coverage and viewership. We currently have exclusive agency arrangements with Shanghai Dragon Television and Tianjin Satellite Television to secure all or a portion of the advertising time on these satellite television channels, as well as with CCTV to secure advertising rights on several programs on CCTV.
 
We offer the satellite television channels with whom we have exclusive arrangements opportunities to attract the advertising spending from our blue-chip advertising clients. For example, after we started operating the exclusive arrangement with Tianjin Satellite Television on January 1, 2009, the number of brands for which advertising spending of more than RMB100,000 was placed on Tianjin Satellite Television increased to 531 in 2009 from 331 in 2008. We believe that this increase is partly attributable to the introduction of our clients to Tianjin Satellite Television in 2009. We also work with television channels and programs to help enhance the attractiveness of their programs, expand their viewer base and achieve higher ratings. As a result, we have established a network of media resources that we believe are attractive not only to our core client base but also new advertising clients.
 
We believe that there is a mutually beneficial relationship between our advertising agency and media investment management businesses. Our cross-selling of the advertising media resources from our media investment management business to blue-chip clients from our advertising agency business benefits both our clients and the television channels or programs, as the channels or programs can gain more blue-chip advertisers and our clients can have more targeted television advertising options. We believe that the media investment management business will also in turn help introduce to us more advertising clients that we can cross-sell our advertising agency services, and help increase the clients’ total advertising spending with us.
 
Joint Venture with Aegis Media
 
In January 2010, we formed a joint venture with international 4A advertising group Aegis Media to operate its brand “Vizeum” in China. Vizeum is an international media network and part of Aegis Group, one of the world’s leading marketing communications groups. We believe that our joint venture complements our existing businesses and provides us with an enhanced service platform that enables us to attract new advertising clients and expand our customer base. As part of the global network of Vizeum, our joint venture provides a platform for us to expand our services to domestic clients that value the services and expertise of international 4A advertising agencies, and serves as a gateway for our multinational and domestic clients seeking to advertise internationally. In addition, our collaboration with Aegis Media enables us to leverage the experience and expertise of Aegis Media to further enhance our capabilities in offering integrated marketing solutions, in particular, in digital and other new media platforms. We believe that our joint venture further distinguishes us from domestic and international 4A advertising agencies and enhances the competitiveness of our services.
 
The total amount of advertising spending for our advertising agency and media investment management businesses was US$197.0 million, US$334.2 million and US$375.3 million in 2007, 2008 and 2009, respectively. Overall, we generated total revenues of US$21.3 million, US$97.8 million and US$106.0 million in 2007, 2008 and 2009, respectively.


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Industry Background
 
China’s advertising market is one of the largest and fastest-growing advertising markets in the world. According to ZenithOptimedia, China had the largest advertising market in Asia Pacific excluding Japan, with an estimated total advertising expenditure of approximately US$20.3 billion in 2009. ZenithOptimedia projected that China’s advertising market will grow at a compounded annual growth rate, or CAGR, of 10.7% from US$20.3 billion in 2009 to US$27.5 billion in 2012 and will account for 34.5% of the total advertising expenditure in Asia Pacific excluding Japan by 2012. Growth of China’s advertising market as a whole and television advertising market is driven by the increase in household disposable income and consumption by urban residents in China, the current relatively low levels of advertising expenditure per capita compared to other countries, high public trust in television advertising and the critical role television plays for companies in China seeking to build their brand names.
 
According to a report commissioned by us and prepared by CTR, after deducting the estimated discounts generally given to advertisers advertising on various media platforms, television accounted for 74.3% of the total advertising spending in China in 2009 and is expected to account for 73.9% of the total advertising spending in China in 2012.
 
China’s television industry operates primarily at three administrative levels — national-, provincial- and city/county-level. CCTV is the single largest national-level television network in China in terms of market penetration, according to ZenithOptimedia. Given CCTV’s leading penetration and viewership share, CCTV attracts a significant share of television advertising spending in China. According to CCTV, prime-time advertising time revenues have historically accounted for a majority of the total advertising revenues of CCTV. In 2010, CCTV’s advertising revenues attributable to prime-time advertising time are expected to reach approximately RMB11.0 billion, based on CCTV auction data.
 
Provincial satellite television channels in China have grown in popularity and importance in recent years. Each of China’s 31 provinces, autonomous regions and directly administrated municipalities operates one provincial-level television station, each of which is allowed to operate one or more satellite channels. Provincial satellite television channels are characterized by relatively higher viewership levels in the provinces where they are based, while maintaining substantial nationwide coverage. These provincial satellite television channels have attracted an increasing number of advertisers in recent years, as they provide advertisers with a cost effective way of achieving nationwide coverage comparable to that of CCTV and the ability to target specific geographic market.
 
Our Competitive Strengths
 
We believe that the following strengths give us a competitive advantage and set us apart from our competitors:
 
  •  Leading domestic television advertising agency in China;
 
  •  Diversified client base of both blue-chip and emerging leading brands;
 
  •  Broad range of integrated and customized advertising agency solutions;
 
  •  Long-standing, collaborative relationship with CCTV supplemented with exclusive and non-exclusive agency arrangements with selected satellite television channels;
 
  •  Experience with managing television media resources;
 
  •  Strategic alliance with an international 4A advertising agency that provides an enhanced service platform; and
 
  •  Strong management team and professionals with industry expertise.


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Our Strategies
 
We believe that we are well-positioned to address the advertising demands of our clients by securing additional advertising media resources that offer wide coverage with strong viewership. Our goal is to be the leading integrated advertising services provider in China by implementing the following strategies:
 
  •  Expand and enhance our portfolio of television advertising media resources to further broaden coverage;
 
  •  Secure additional resources from new advertising media platforms;
 
  •  Strengthen capabilities to offer integrated advertising solutions; and
 
  •  Continue to expand our advertising customer base and budget allocation from our customers.
 
Our Challenges
 
Our ability to realize our business objectives and execute our strategies is subject to many risks and uncertainties, including risks and uncertainties relating to:
 
  •  our ability to expand our media investment management business by renewing, or entering into new, exclusive advertising agency agreements;
 
  •  our ability to generate sufficient revenues from our exclusive agency arrangements to produce the expected profits, particularly with respect to our exclusive agency arrangements with Shanghai Dragon Television and Tianjin Satellite Television that contain significant payment obligations;
 
  •  our ability to maintain and expand our business relationships with CCTV;
 
  •  our ability to respond to competitive pressures;
 
  •  our ability to attract and retain our senior management and key personnel;
 
  •  economic conditions and advertising trends in China, including adverse economic conditions that may result in declines in advertising spending;
 
  •  government controls and regulations in the television and advertising industries; and
 
  •  our corporate structure based on a series of contractual arrangements in order to comply with applicable PRC laws and regulations.
 
Please see “Risk Factors” and other information included in this prospectus for a detailed discussion of these and other risks and uncertainties that we face.
 
Corporate Structure
 
Our company, Charm Communications Inc., was formed under the laws of the Cayman Islands in January 2008 in preparation for this offering. Charm Communications Inc. holds all of the outstanding equity interest in Movie-Forward Ltd., a company incorporated under the laws of the British Virgin Islands in June 2007. Movie-Forward Ltd. in turn holds all of the outstanding equity interest in Charm Hong Kong Limited, a company incorporated under the laws of the Hong Kong Special Administrative Region, or Hong Kong, in June 2008. Charm Hong Kong Limited holds all of the outstanding equity interest in Nanning Jetlong Technology Co., Ltd., or Nanning Jetlong, a company established in October 2005 under PRC law as a wholly foreign owned enterprise. In connection with the formation of our joint venture with Aegis Media, we and Aegis Media have agreed that the control over Beijing Vizeum Advertising Co., Ltd., or Beijing Vizeum, be transferred to our company subsequent to the closing of the investment by Aegis Media in our company in January 2010. The legal ownership of all of the outstanding equity interests of Beijing Vizeum will be transferred to Posterscope (Hong Kong) Limited, or Posterscope, upon the receipt of applicable governmental approvals and completion of regulatory registrations. Concurrently, our subsidiary, Media Port Holdings Ltd., or Media Port, a company incorporated under the laws of the British Virgin Islands, will hold 60% of the outstanding equity interests in Posterscope.


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Other than Beijing Vizeum, in which we will effectively hold 60% of the outstanding equity interests upon the receipt of applicable PRC governmental approvals and completion of regulatory registrations, we operate our businesses in China through our affiliated consolidated entities due to PRC regulations that restrict foreign investments in the advertising industry. We have ten affiliated consolidated entities in China that operate our business, each of which is an entity duly formed under PRC law. These affiliated consolidated entities were established in the years set forth below:
 
     
Year of Establishment
 
Affiliated Consolidated Entities
 
2004
  Beijing Xingyang Advertising Co., Ltd.
2005
  Xinyang Heli Advertising Co., Ltd.
2006
  Xinxin Charm Advertising Co., Ltd.
Yida Charm Advertising Co., Ltd.
Shidai Charm Advertising Co., Ltd.
2007
  Ruiyi Youshi Advertising Co., Ltd.
Shanghai Haobangyang Advertising Co., Ltd.
Hubei Haobangyang Advertising Co., Ltd.
2008
  Qinghai XStars Media Co., Ltd.
Qinghai Charm Advertising Co., Ltd.
 
Beginning on March 28, 2008, Nanning Jetlong has entered into a series of contractual arrangements with each of the affiliated consolidated entities and their respective shareholders to govern our relationships with the affiliated consolidated entities and operate our business in China. These contractual arrangements allow us to effectively control the affiliated consolidated entities and to derive substantially all of the economic benefits from them. See “Our Corporate Structure — Contractual Arrangements.” Accordingly, we have consolidated their historical financial results in our financial statements in accordance with U.S. GAAP since the inception of these affiliated entities.


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The following diagram illustrates our corporate structure as of the date of this prospectus:
 
(CHART)
 
(1)  We and Aegis Media have agreed that the control over Beijing Vizeum be transferred to our company subsequent to the closing of the investment by Aegis Media in our company in January 2010. The legal ownership of all of the outstanding equity interests of Beijing Vizeum will be transferred to Posterscope, upon the receipt of applicable governmental approvals and completion of regulatory registrations. Concurrently, Media Port will hold 60% of the outstanding equity interests in Posterscope.


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Corporate Information
 
Our principal executive offices are located at 26th Floor, Tower A, Oriental Media Center, 4 Guanghua Road, Chaoyang District, Beijing 100026, People’s Republic of China. Our telephone number at this address is (86-10) 6581-1111 and our fax number is (86-10) 6583-0100. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, South Church Street, George Town, Grand Cayman KY1-1104, Cayman Islands, British West Indies. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
 
Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our principal website is www.charmgroup.cn. The information contained on our website is not a part of this prospectus.
 
Conventions Which Apply to This Prospectus
 
Except where the context otherwise requires, for purposes of this prospectus:
 
  •  “ADSs” refers to our American depositary shares, each of which represents two Class A ordinary shares, and “ADRs” refers to the American depositary receipts that evidence our ADSs;
 
  •  “Aegis Media” refers to Aegis Group plc and its affiliates;
 
  •  “affiliated consolidated entities” refers to Beijing Xingyang Advertising Co., Ltd., Hubei Haobangyang Advertising Co., Ltd., Qinghai Charm Advertising Co., Ltd., Qinghai XStars Media Co., Ltd., Ruiyi Youshi Advertising Co., Ltd., Shanghai Haobangyang Advertising Co, Ltd., Shidai Charm Advertising Co, Ltd., Xinxin Charm Advertising Co, Ltd., Xinyang Heli Advertising Co., Ltd., and Yida Charm Advertising Co, Ltd., all of which are companies organized under the laws of China. Substantially all of our advertising operations in China are conducted through our contractual arrangements with the affiliated consolidated entities, in which we do not own any equity interest. We have consolidated their financial results in our financial statements in accordance with U.S. GAAP;
 
  •  “China” or “PRC” refers to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan, Hong Kong and Macau;
 
  •  “RMB” or “Renminbi” refers to the legal currency of China; “$,” “dollars,” “US$” and “U.S. dollars” refer to the legal currency of the United States;
 
  •  “shares” or “ordinary shares” refers to our Class A ordinary shares, par value US$0.0001 per share and our Class B ordinary shares, par value US$0.0001 per share;
 
  •  “Series A preferred shares” refer to our Series A preferred shares, par value US$0.0001 per share, which are convertible and redeemable pursuant to their terms; and
 
  •  “we,” “us,” “our company,” “our” and “Charm Communications” refer to Charm Communications Inc., a Cayman Islands company, and its subsidiaries and, unless the context otherwise requires, our affiliated consolidated entities in China.
 
Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their option to purchase additional ADSs.


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THE OFFERING
 
Offering price We anticipate that the initial public offering price will be between US$9.00 and US$11.00 per ADS.
 
ADSs offered by us 7,812,500 ADSs
 
ADSs offered by the selling shareholder
1,171,875 ADSs
 
Total ADSs offered 8,984,375 ADSs
 
Ordinary shares Our share capital consists of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote on all matters subject to shareholders’ vote, and each Class B ordinary share is entitled to five votes on all matters subject to shareholders’ vote. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity that is not an affiliate (as defined in our amended and restated articles of association) of such holder, such Class B ordinary shares will be automatically and immediately converted into an equal number of Class A ordinary shares. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.
 
Class A Ordinary shares outstanding immediately after this offering
15,625,000 Class A ordinary shares
 
The number of Class A ordinary shares that will be outstanding immediately after this offering assumes the underwriters’ option to purchase additional ADSs is not exercised.
 
Class B ordinary shares outstanding immediately after this offering 62,500,000 Class B ordinary shares
 
The number of Class B ordinary shares that will be outstanding immediately after this offering:
 
• excludes Class B ordinary shares issuable upon the exercise of options to purchase our ordinary shares outstanding as of the date of this prospectus;
 
• excludes Class B ordinary shares reserved for future issuance under our 2008 share incentive plan; and
 
• assumes the underwriters’ option to purchase additional ADSs is not exercised.
 
The ADSs Each ADS represents two Class A ordinary shares, par value US$0.0001 per share. The ADSs will be evidenced by ADRs.
 
• The depositary will hold the ordinary shares underlying your ADSs. You will have the rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of our ADSs from time to time.


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• If we declare dividends on our Class A ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses.
 
• You may surrender your ADSs to the depositary in exchange for Class A ordinary shares underlying your ADSs. The depositary will charge you fees for any exchange.
 
• We may amend or terminate the deposit agreement without your consent. If an amendment becomes effective and you continue to hold your ADSs, you will be bound by the deposit agreement as amended.
 
To better understand the terms of the ADSs, you should carefully read the section of this prospectus entitled “Description of American Depositary Shares.” You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.
 
Over-allotment option The selling shareholder, Merry Circle Trading Limited, whose beneficial owner and sole director is He Dang, our chairman and chief executive officer, has granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to 1,171,875 additional ADSs.
 
Use of proceeds Our net proceeds from this offering are expected to be approximately US$69.7 million, assuming an initial public offering price of US$10.00 per ADS, the mid-point of the estimated initial public offering price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
We intend to use our net proceeds from this offering to expand our business, including acquiring additional advertising media resources on television channels and new media platforms for our media investment management business, and for other general corporate purposes. See “Use of Proceeds” for additional information.
 
We will not receive any of the proceeds from the sales of the ADSs by the selling shareholder.
 
Lock-up We have agreed with the underwriters to a lock-up of shares for a period of 180 days after the date of this prospectus. In addition, our directors and executive officers and our existing shareholders have also agreed with the underwriters to a lock-up of shares for a period of 180 days after the date of this prospectus. See “Underwriting.”
 
Listing Our ADSs have been approved for listing on the Nasdaq Global Market under the symbol “CHRM.” The ADSs or ordinary shares will not be listed on any other exchange or traded on any other automated quotation system.


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Risk factors See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in our ADSs.
 
Depositary JPMorgan Chase Bank, N.A.


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Our Summary Consolidated Financial Data
 
The following summary consolidated statement of operations data for the three years ended December 31, 2007, 2008 and 2009, and the summary consolidated balance sheet data as of December 31, 2007, 2008 and 2009 have been derived from our audited financial statements that are included elsewhere in this prospectus and that have been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm.
 
You should read the summary consolidated financial data in conjunction with those financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.
 
                         
    For the Year Ended December 31,
    2007   2008   2009
    (US$ in thousands, except share and
    per share data)
 
Condensed Consolidated Statement of Operations Data:
                       
Total revenues
    21,289       97,814       106,042  
Cost of revenues(1)
    7,842       68,072       72,163  
Gross profit
    13,447       29,742       33,879  
Operating expenses(1)
    3,055       11,829       16,539  
Operating profit
    10,392       17,913       17,340  
Income before income tax expense
    11,821       18,662       16,019  
Net income
    11,800       18,387       15,267  
Net income attributable to ordinary shareholders
    11,800       15,268       7,467  
Net income per share:
                       
Basic
    0.24       0.27       0.07  
Diluted
    0.24       0.27       0.07  
Shares used in computation of net income per share:
                       
Basic
    50,000,000       50,000,000       50,000,000  
Diluted
    50,000,000       50,406,264       52,011,348  
 
                                 
    As of December 31,
    2007   2008   2009   2009
                Pro forma
                (unaudited)(2)
    (US$ in thousands)
 
Condensed Consolidated Balance Sheet Data:
                               
Cash and cash equivalents
    36,476       60,823       54,737       54,737  
Total assets
    76,809       137,720       142,600       142,600  
Total liabilities
    57,613       74,545       61,897       61,897  
Series A convertible redeemable preferred shares
          51,776       59,576        
Redeemable ordinary shares held by Aegis Media
                      36,976 (3)
Total Charm Communications Inc. shareholders’ equity
    19,196       11,399       21,127       43,727  
 
 
(1) Includes share-based compensation expense as follows:
 
                         
    For the Year Ended December 31,
    2007   2008   2009
    (US$ in thousands)
 
Cost of revenues
          25       17  
Operating expenses
          1,785       2,267  
 
(2) Our pro forma balance sheet data as of December 31, 2009 have been derived from our audited consolidated financial statements as of December 31, 2009, and have been adjusted to give effect to (1) the redemption of 7,500,000 Series A preferred shares on January 20, 2010 for US$37.0 million and the issuance of 9,244,000 ordinary shares to Aegis Media at US$4.00 per share assumed to finance the redemption and (2) the


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automatic conversion of all of the remaining outstanding Series A preferred shares into 5,000,000 ordinary shares upon the completion of this offering using a conversion ratio of one Series A preferred share to one ordinary share as if the redemption and conversion had occurred as of December 31, 2009.
(3) Aegis Media had an option until July 1, 2010 to require us to repurchase all or a portion of the ordinary shares held by Aegis Media if we were in breach of our obligations under our joint venture with Aegis Media as a result of our failure to procure entry by specified clients into agreements with the joint venture by April 30, 2010 or the failure of such agreements to meet specified revenue targets. Since the redemption of these ordinary shares was outside of our control, these ordinary shares were not included in permanent equity. On April 16, 2010, we received a written acknowledgement from Aegis Media that we have fully satisfied our obligations to procure entry by specified clients into agreements with the joint venture and that such agreements met the specified revenue targets. The option of Aegis Media to redeem these ordinary shares has lapsed upon this acknowledgement. Therefore, these ordinary shares held by Aegis Media are no longer redeemable.
 
Recent Developments
 
The following is a summary of our selected unaudited financial results for the three months ended March 31, 2010.
 
  •  Our total revenues for the three months ended March 31, 2010 were US$42.0 million, compared to US$24.3 million for the three months ended March 31, 2009. This increase in our total revenues was primarily due to an increase in revenues from our media investment management business as we (i) generated a greater amount of revenue from sales of advertising media resources we secured on satellite television channels and (ii) secured new advertising media resources on CCTV for 2010.
 
  •  Our gross profit for the three months ended March 31, 2010 was US$12.4 million, compared to US$4.1 million for the three months ended March 31, 2009. This increase in our gross profit primarily reflected the significant increase in gross profit generated from our media investment management business.
 
  •  Our operating profit for the three months ended March 31, 2010 was US$7.2 million, compared to US$0.6 million for the three months ended March 31, 2009. This increase in our operating profit primarily reflected the increase in our gross profit.
 
  •  Our net income for the three months ended March 31, 2010 was US$6.8 million, compared to US$0.8 million for the three months ended March 31, 2009. This increase in our net income primarily reflected the increase in our operating profit.
 
  •  Our net income attributable to ordinary shareholders for the three months ended March 31, 2010 was US$5.8 million. In determining our net income attributable to ordinary shareholders, we allocate a portion of our net income to the non-controlling interests in our joint venture with Aegis Media and accrete the redemption premium on our outstanding Series A convertible redeemable preferred shares.
 
Our financial results for the three months ended March 31, 2009 are set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Our Selected Quarterly Results of Operations” included elsewhere in this prospectus.
 
Our financial results for the three months ended March 31, 2010 may not be indicative of our results for future periods. Please refer to “Risk Factors — Risks Relating to Our Business — Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period in the future”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Our Results of Operations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Our Selected Quarterly Results of Operations” and other information included in this prospectus for information regarding trends and other factors that may affect our results of operations.


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RISK FACTORS
 
You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below and our consolidated financial statements and related notes, before making an investment in our ADSs. Any of the following risks and uncertainties could have a material adverse effect on our business, results of operations, financial condition and prospects. The market price of our ADSs could decline as a result of any of these risks and uncertainties, and you may lose all or part of your investment.
 
Risks Relating to Our Business
 
Our media investment management business may not produce the expected returns and may result in significant losses.
 
A significant part of our business has been our media investment management business, in which we typically act as the exclusive advertising agent for television channels or certain programs on them. In 2007, 2008 and 2009, our media investment business accounted for approximately 38.4%, 81.0% and 82.3% of our total revenues, and approximately 26.0%, 53.2% and 55.3% of our gross profit, respectively. In each of the nine years from 2002 to 2010, we secured all of the advertising time and other advertising rights during the special event on March 15, Consumers’ Day in China, on CCTV. In 2005 and 2006, we were the exclusive advertising agent for several drama series on certain channels of Beijing Television Station, the channels of which cover Beijing and its surrounding areas. We have significantly expanded our media investment management business in recent years by entering into exclusive advertising agency agreements with respect to additional satellite and regional television channels. We have entered into agreements with Shanghai Media Group, or SMG, and Tianjin Television Station, respectively, under which we secured a portion or all of the advertising time as well as other advertising rights on Shanghai Dragon Television and Tianjin Satellite Television, respectively, for a specified term. We are the exclusive advertising agent for the advertising time during the programs Yong Talk Show and Xiao Fei Zhu Zhang broadcasted on CCTV-3 and CCTV-2, respectively, for 2010, and Jin Ri Shuo Fa and Di Yi Shi Jian broadcasted on CCTV-1 and CCTV-2, respectively, for 2010 beginning in February 2010.
 
Under our agreements with television channels regarding our media investment management business, we are typically obligated to pay amounts to the television channels for the relevant advertising time and other advertising rights, regardless of whether we can sell such advertising time and rights, at what prices we sell such advertising time and rights and whether we receive payments from advertisers. For example, as of December 31, 2009, we were obligated under our agreements with television stations to make payments of approximately US$52.4 million in the aggregate for 2010. Subsequent to December 31, 2009, we entered into additional exclusive agency arrangements with certain television channels with aggregate payment obligations of an additional US$57.1 million due in 2010. We will need to sell a significant amount of advertising time and other advertising rights on these television channels in order to produce the profits we expect. If we fail to sell the advertising time and other advertising rights at desired prices, we may not realize the expected returns, and we will incur losses to the extent that our revenues from sales of such advertising time and rights are less than our payment obligations to the television channels plus our related operating expenses. As the payment obligations under our current exclusive agency arrangements are negotiated on an annual basis, our payment obligations to television stations typically last for one year unless the arrangements are renewed or renegotiated. In the future, we may enter into exclusive agency arrangements with payment obligations for more than one year, in which case we would be subject to the increased risk that we may not realize the expected returns or could incur losses. Furthermore, we may not be able to renew our existing exclusive agency arrangements or enter into new exclusive agency arrangements on attractive terms or at all. Consequentially, our results of operations, financial condition and business prospects would be materially and adversely affected.
 
We may not be able to enter into new, or renew the existing arrangements with television channels on commercially feasible terms, or at all.
 
Our exclusive advertising agency arrangements with respect to programs or events on television channels are typically for a limited term, without guarantee for renewal upon expiration. Currently, our agreement with SMG


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governing our exclusive agency arrangement with Shanghai Dragon Television has a one-year term expiring at the end of 2010, and our current agreement with Tianjin Television Station governing our exclusive agency arrangement with Tianjin Satellite Television expires at the end of 2011 but can be cancelled by us without further obligations or continued by us at a price that would be determined based on negotiation. In addition, our non-exclusive advertising agency arrangements are typically for a one-year term, without guarantee for renewal upon expiration. The agreements governing these arrangements may not be renewed upon expiration, and may be terminated prior to expiration if we commit a material breach or for other reasons. Since we do not have the protection of long-term agreements with television channels in connection with our media investment management business, we are subject to changes of policies or practices by the television channels that have signed those agreements with us, as well as other uncertainties that could result in the termination of, or other changes in, these agreements or arrangements. For example, we ceased to act as the exclusive advertising agent for several drama series on certain channels of Beijing Television Station in 2007 as Beijing Television Station decided to directly operate the advertising business relating to these drama series. As a result, our media investment management business suffered a significant decline in 2007. In addition, our exclusive arrangement with Hubei Satellite Television, which had an original three-year term expiring at the end of 2010, was terminated in February 2009. If we are unable to enter into new, or renew our exclusive and non-exclusive advertising agency arrangements with the television channels on commercially feasible terms or at all, our results of operations, financial condition and business prospects would be materially and adversely affected.
 
Although there are a large number of television channels in China, the television channels with the potential to become our business partners are limited. The television programs or events that are suitable candidates for our media investment management business are also limited. In addition, we face competition for these desirable television advertising resources. While we intend to continue to seek opportunities for acting as the exclusive or non-exclusive advertising agent for desirable television programs, events or channels, we may not be successful in obtaining and retaining these television advertising resources. As a result, we may not be able to successfully expand our media investment management business on commercially feasible terms or at all, which may have a material adverse effect on our results of operations and business prospects.
 
Our CCTV-related business has been, and is expected to continue to be, critical to our business and financial performance. Failure to maintain our relationship with CCTV would materially and adversely affect our business, results of operations, financial condition and prospects.
 
Our CCTV-related business has been, and is expected to continue to be, critical to our business and financial performance. Our revenue derived from our CCTV-related business, which includes our advertising agency business and media investment management business, amounted to US$17.5 million, or 17.8% of our total revenues, in 2008 and US$19.0 million, or 17.9% of our total revenues, in 2009. Our CCTV-related business accounted for approximately 43.0% and 43.5% of our total gross profit for 2008 and 2009, respectively. In particular, in our advertising agency business, we primarily derive revenues from representing advertising clients to place their advertisements on CCTV. Furthermore, we believe that our track record and performance in securing prime-time advertising time on CCTV have contributed, and may continue to contribute, significantly to our brand name and the development of our blue-chip client base of Chinese advertisers, which are expected to have a substantial impact on our overall business. Consequently, the continued success in our business depends on our ability to maintain our relationship with CCTV, which is subject to a number of risks, including the following:
 
  •  CCTV may change its sales method at any time as it wishes and without prior notice to us, including its annual public auction for prime-time advertising time. For example, CCTV has recently implemented an auction-based system for selling non-prime time advertising time beginning in 2010 on certain channels, which were previously sold at predetermined prices. If CCTV introduces new methods of sales that are materially different from the methods it is currently using, we may lose our competitive advantage for CCTV’s advertising time. It may take us a significant amount of time to develop expertise, if at all, in buying advertising time on CCTV under any new sales method.
 
  •  CCTV may begin to specify a limit on total advertising time that may be purchased by advertisers represented by one advertising agency in the future, in which case our growth potential would be


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  limited as we would not be able to represent our advertising clients to purchase more CCTV advertising time when we exceed the limit.
 
  •  CCTV has sole discretion to set and adjust the amount of sales commissions and performance bonuses it pays to advertising agencies in the future, and CCTV may decide to stop paying such sales commissions or performance bonuses in a large portion or altogether at any time. In 2008 and 2009, sales commissions and performance bonuses from CCTV in the aggregate accounted for 3.3% and 5.5%, respectively, of our total revenues.
 
  •  CCTV’s advertising time, particularly prime-time advertising time, is limited resources and are highly coveted by advertisers and advertising agencies. As a result, there is intense competition for such advertising time. In particular, we face intense competition for CCTV related advertising business from a number of domestic competitors, such as Walk-On Advertising Co., Ltd. (San Ren Xing) and Vision CN Communications Group (Tong Lu), which may have competitive advantages, such as significantly greater financial, marketing or other resources or stronger market reputation.
 
  •  We do not have a long-term agreement with CCTV with respect to our television agency business on CCTV. In addition, our agreements with CCTV with respect to our media investment management business are entered into annually or on an event-by-event basis. Therefore, CCTV has no contractual obligations to continue its relationship with us and may decide to terminate this relationship at any time on its own.
 
Any of these risks could result in a failure to maintain our relationship with CCTV or a significant decrease in our revenues, which in turn would have a material adverse effect on our business, results of operations, financial condition and prospects.
 
Our media consultancy services for television channels may not be effective.
 
We intend to provide, as part of our media investment management business, media consultancy services to television channels that are expected to help the television channels enhance the attractiveness of their programs, expand these programs’ viewer bases and achieve higher ratings, which, in turn, would help increase advertising revenues. However, the consultancy services we provide to these television channels may not produce the expected results for various reasons. It may take an extended period of time to synergize our strengths with their strengths, if at all, and disputes may arise between us and these television channels, which could harm our working relationships with these television channels. Further, our ability to influence the programming and other decisions of these television channels is limited under applicable PRC laws, rules and regulations and our agreements with them. Therefore, we may not be able to implement the changes that we favor with respect to the programming on these television channels and our media consultancy services may not be effective. As a result, our media consultancy services may not produce the intended results, which could have a material adverse effect on our relationships with the television channels, our results of operations and our business prospects.
 
We face intense competition in China’s advertising industry. If we do not compete successfully against our competitors, we may lose our market share and our business, results of operations, financial condition and prospects may be materially and adversely affected.
 
Competition in the advertising industry in China is intense. Key competitive considerations for retaining existing business and winning new business include our ability to obtain advertising time on CCTV, our ability to develop creative solutions that meet client needs, the scope, quality, effectiveness and cost of the services we offer, and our ability to efficiently serve clients on a broad geographic basis. The competition we face is primarily associated with the following:
 
  •  Chinese advertising companies.  Our competitors include Chinese advertising companies such as Walk-On Advertising Co. Ltd. (San Ren Xing), and Vision CN Communications Group (Tong Lu). We compete with them primarily for Chinese advertising clients and for access to highly demanded


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  advertising time in connection with our television agency business. We also compete with them for desirable television resources with respect to our media investment management business.
 
  •  Multinational advertising companies.  We also face increasing competition from multinational advertising companies, such as Publicis Groupe S.A., WPP Group Plc. and Dentsu Inc., that are members of the American Association of Advertising Agencies, or 4A advertising agencies. Most of the 4A advertising agencies operating in China, through their PRC subsidiaries or affiliates, offer a range of comprehensive advertising services to advertisers. We expect our competition with these multinational advertising companies to increase as these companies strive to increase their market share in the television advertising industry in China.
 
  •  Players in new advertising media.  The spread of the Internet and other new methods of communications have given rise to a number of new advertising media, such as media on public transportation systems and in-store media, that compete with companies in the television advertising industry like us for overall advertising spending in China.
 
Many of our existing and potential competitors may have competitive advantages, such as more established relationships with desirable advertising clients and television channels, significantly greater financial, marketing or other resources or stronger market reputation, or may be able to better implement similar or competing business models. Increased competition could reduce our profitability and result in a loss of market share. We cannot assure you that we will be able to successfully compete against new or existing competitors. We may not be able to maintain our existing clients or secure new clients if we fail to successfully respond to changes in the structure of the advertising industry and in business practices prompted by the intense competition. In addition, in connection the formation of our joint venture with Aegis Media, we have agreed to restrictions on the solicitation of clients and employees of Aegis Media or the joint venture. These restrictions could restrict our ability to recruit key personnel or expand our client base, which could limit our ability compete successfully against our competitors. Our failure to compete would result in a loss of market share and have a material adverse effect on our business, results of operations, financial condition and prospects.
 
We plan to secure media resources in new advertising media platforms. We may not be successful in that business due to our lack of experience and expertise with respect to those new media platforms and we may face many other risks and uncertainties.
 
As part of our strategy, we plan to secure media resources in new advertising media platforms, such as the Internet, mobile television and out-of-home media. We have traditionally not been engaged in advertising businesses involving those new media platforms and, as a result, we have little or no expertise and experience in operating these businesses. In addition, our expertise and experience in television advertising may not be readily applied to advertising businesses involving those new media platforms. In contrast, our existing and potential competitors may have competitive advantages, such as significantly greater financial, marketing or other resource or expertise and experience with respect to new advertising media platforms. As a result, we may not be able to successfully secure media resources in new advertising media platforms on favorable terms, or at all.
 
Furthermore, the market in China for advertising services involving some of those new media platforms is relatively new and its potential is uncertain. Our success in securing and managing media resources in new advertising media platforms depends on the acceptance of advertising on those new media platforms by our advertising clients and their continuing interest in such advertising as a component of their advertising strategies.
 
Implementing our plan to secure media resources in new advertising media platforms will also require us to:
 
  •  continue to identify and obtain media resources in those new media platforms that are attractive to advertisers;
 
  •  significantly expand our capital expenditures to pay for media resources;


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  •  obtain related governmental approvals; and
 
  •  expand the number of operations and sales staff that we employ.
 
We cannot assure you that we will be able to successfully secure media resources in new advertising media platforms or that the related business will generate new revenues to pay for any increased capital expenditures or operating costs. If we are unable to successfully implement our strategy relating to new advertising media platforms, or if such expansion does not otherwise benefit our business, our prospects and competitive position may be materially harmed and our business, financial condition and results of operations may be materially and adversely affected.
 
The recent global financial crisis and economic downturn have had, and may continue to have, a material adverse effect on our business, results of operations and financial condition.
 
The global financial crisis and economic downturn that unfolded in 2008 and continued in 2009 have adversely affected economies and businesses around the world, including those in China. In an economic downturn characterized by higher unemployment, lower corporate earnings, lower business investment and lower consumer spending, the demand for advertising services may be materially and adversely affected. In the past, advertising clients have responded to weakening economic conditions with reductions to their advertising budgets, which include discretionary components that are easier to reduce in the short term than other operating expenses. This pattern may recur in the future. Furthermore, any recovery of the advertising industry could lag that of the economy generally.
 
As a response to weakening economic conditions, some of our advertising clients reduced their advertising budgets and downsized or cancelled their advertising campaigns in 2008 and 2009, which has had a material adverse effect on the demand for our advertising services and, in turn, our business and results of operations. In addition, to the extent some of our advertising clients experience financial difficulties as a result of the changes in economic conditions, we may suffer reduced revenues and write-offs of accounts receivable, among others. If the current economic downturn continues, our business, results of operations and financial condition could continue to be materially and adversely affected.
 
We operate in the advertising industry in China, which is sensitive to and affected by changes in economic conditions and advertising trends.
 
Demand for advertising time and the resulting advertising spending by our clients are sensitive to and affected by changes in general economic conditions. Advertisers may reduce their advertising spending for a number of reasons, including:
 
  •  a general decline in economic conditions;
 
  •  a decline in the economic condition of industries where such advertisers operate;
 
  •  a decline in economic conditions in the regions that our exclusive advertising agency television channels primarily cover;
 
  •  their decision to shift advertising expenditures from television to other media; and
 
  •  a general decline in advertising spending in China.
 
A decrease in advertising spending by advertisers would reduce the demand for our services and the advertising time on our exclusive agency television channels and could materially impair our ability to generate revenues from our advertising business, which would have a material adverse effect on our results of operations and financial condition.
 
We do not have exclusive or long-term agreements with our advertising clients and we may lose their engagement if they are not satisfied with our services or for other reasons.
 
As is customary in the advertising industry in China, we do not have exclusive or long-term agreements with our advertising clients, who typically engage us on an annual or campaign-by-campaign basis. As a


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result, we must rely on high-quality services, industry reputation, media relationships and favorable pricing to attract and retain advertising clients. We seek to serve as an effective link between television channels and advertising clients and bring value to both. There is no assurance, however, that we will be able to maintain our relationships with current and future clients. Our advertising clients may elect to terminate their relationships with us if they are not satisfied with our services. In addition, companies conduct competitive reviews of their advertising and marketing services plans from time to time, typically on an annual basis. We lost clients accounts in the past and may lose client accounts in the future as a result of these annual reviews. If a substantial number of our advertising clients choose not to continue to purchase advertising services from us, we would be unable to generate sufficient revenues and cash flows to operate our business, and our results of operations and financial condition would be materially and adversely affected. Further, in recent years, an increasing number of advertisers have sought to consolidate their media service activities with a smaller number of advertising agencies to increase the efficiency of their advertising spending and to reduce costs. This trend may result in a decrease or slowed growth in the number of our advertising client accounts, and could have a negative impact on our market position and materially and adversely affect our business, results of operations, financial condition and prospects.
 
We depend substantially on the continuing efforts of our senior executives and key personnel, and our business and prospects may be severely disrupted if we lose their services.
 
Our future success depends on the continued services of the key members of our management team, in particular, the continued service of Mr. He Dang, our founder, chairman and chief executive officer. We rely on his experience in our business operations, as well as his business vision, management skills and working relationships with our employees, clients, television channels, particularly CCTV, and other media. We also rely on the continued service of the chief executive officer of our advertising agency business, Mr. Lee C.H. Li, who brings us substantial experience with respect to the advertising and media industry, including experience in both domestic advertising agencies and international 4A advertising agencies.
 
In addition, our ability to attract and retain key personnel, in particular, senior management and key personnel in creative design and production, media consultancy and management, sales and marketing, is a critical aspect of our competitiveness. Competition for these individuals could require us to offer higher compensation and other benefits in order to attract and retain them, which would increase our operating expenses and, in turn, could materially and adversely affect our results of operations and financial condition. We may be unable to attract or retain the personnel required to achieve our business objectives, and failure to do so could severely disrupt our business and prospects. The loss of any of our key employees could adversely affect our business or adversely impact the perception of us by our advertising clients, media and investors. Our business may also be severely disrupted as our senior executives may have to divert their attention to recruiting replacements for key personnel.
 
We do not maintain key-person insurance for members of our management team. If we lose the services of any senior management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects. Further, if any of our executive officers joins a competitor or forms a competing company, we may lose a significant number of our advertising clients, which could have a material adverse effect on our business and revenues. Although each of our executive officers has entered into an agreement with us that contains confidentiality and non-competition undertakings regarding their employment, disputes may arise between our executive officers and us, and, in light of uncertainties associated with the PRC legal system, these agreements may not be enforced in accordance with their terms.
 
Our joint venture with Aegis Media may not be successful and may not produce its intended benefits.
 
In January 2010, we formed a joint venture with international 4A advertising group Aegis Media to operate its brand “Vizeum” in China. Our joint venture is subject to various risks and may not be successful. We have no prior experience in operating such a joint venture, which is governed by a series of contractual arrangements that have not yet been tested in practice. If we are unable to address, in a timely and effective manner, operational, legal, cultural and other material differences that may arise between us and Aegis Media,


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or any other changes in the relationships between us and Aegis Media, the business of the joint venture could be significantly disrupted. Furthermore, until July 1, 2010, Aegis Media has an option to require us to repurchase all or a portion of the ordinary shares held by Aegis Media if we are in breach of our obligations under our joint venture as a result of our failure to procure entry by specified clients into agreements with the joint venture by April 30, 2010 or the failure of such agreements to meet specified revenue targets. On April 16, 2010, we received a written acknowledgement from Aegis Media that we have fully satisfied our obligations to procure entry by specified clients into agreements with the joint venture and that such agreements have met specified revenue targets.
 
In addition, we may not be able to realize intended benefits from the joint venture, including potential synergies from our alliance with Aegis Media, as a result of numerous factors, some of which are beyond our control. These factors include, among other things:
 
  •  unforeseen contingent risks or latent liabilities relating to the existing operations of Beijing Vizeum that may not become apparent until in the future;
 
  •  increase in competition in the PRC advertising industry;
 
  •  changes in advertising clients’ demand for, and perception of, our services;
 
  •  diversion of financial or management resources from our existing businesses; and
 
  •  potential loss of our control over the joint venture beginning in 2016 as a result of the right of Aegis Media to acquire from us a controlling interest.
 
If our joint venture with Aegis Media is not successful or does not produce its intended benefits, our business, results of operations, financial condition and prospects could be materially and adversely affected.
 
Acquisition is expected to be a part of our growth strategy, and could expose us to significant business risks.
 
To grow our business, we may pursue acquisition opportunities that are complementary to our business. However, we may not be able to identify and secure suitable acquisition opportunities. Our ability to consummate and integrate effectively any future acquisitions on terms that are favorable to us may be limited by the number of factors, such as the number of attractive acquisition targets, internal demands on resources and, to the extent necessary, our ability to obtain financing on satisfactory terms for larger acquisitions, as well as our ability to obtain necessary shareholder or governmental approvals.
 
Moreover, even if an acquisition candidate is identified, we may fail to enter into an acquisition or purchase agreement on commercially acceptable terms or at all due to the lack of cooperation from counterparties or for other reasons. The negotiation and completion of potential acquisitions, whether or not ultimately consummated, could also require significant diversion of management’s time and resources and lead to potential disruption of our existing business. Further, the expected synergies from future acquisitions may not actually materialize. In addition, future acquisitions could result in the incurrence of additional indebtedness, costs and contingent liabilities and may also expose us to potential risks, including risks associated with:
 
  •  the integration of new operations, services and personnel;
 
  •  unforeseen or hidden liabilities;
 
  •  ability to generate sufficient revenues to recover costs and expenses of the acquisitions; and
 
  •  potential loss of, or harm to, relationships with employees or clients.
 
Any of the above risks could significantly impair our ability to manage our business and materially and adversely affect our business, results of operations and financial condition.


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We receive a significant portion of our revenues from a few large clients, and the loss of one or more of these clients could materially and adversely impact our business, results of operations and financial condition.
 
We derive a significant portion of our revenues from a limited number of large advertising clients. For example, our ten largest advertising clients accounted for approximately 42.3%, 30.7% and 26.8% of our total revenues in 2007, 2008 and 2009, respectively. Our clients generally are able to reduce advertising and marketing spending or cancel an advertising campaign at any time for any reason. It is possible that our clients could reduce their advertising spending in a given period in comparison with historical patterns, and they could reduce their advertising spending for future periods. A significant reduction in advertising and marketing spending by our large clients, or the loss of one or more of our large clients, to the extent the loss in our revenues resulting from the loss of these clients is not replaced by new client accounts or increased business from existing clients, would lead to a substantial decline in our revenues, which could have a material adverse effect on our business, results of operations and financial condition.
 
Any dispute with television stations or other media companies could disrupt our business and materially and adversely affect our results of operations and financial condition.
 
We have no control over the television stations or other media companies on whose networks we place advertisements on behalf of our advertisers. Our agreements with SMG and with Tianjin Television Station governing our exclusive agency arrangements with Shanghai Dragon Television and Tianjin Satellite Television, respectively, allow us to provide input on the programming of these two television channels. However, these television channels retain the ultimate control over their programming. Disputes may arise between us and these television channels or other media companies from which we secure advertising time or other advertising rights relating to programming or other aspects of our business relationships with them. These disputes may not be resolved in our favor. These disputes may result in early termination, or suspension of the performance, of our exclusive advertising agency arrangements or other cooperation with the relevant television channels or other media companies. In some cases, we may have to rely on court proceedings to resolve the disputes between us and these television channels or other media companies. Any litigation will divert our resources and may result in judgment against us. If any dispute between us and these television channels or other media companies arises and is not properly resolved, our reputation could be harmed, our business operations could be disrupted and our results of operations and financial condition could be materially and adversely affected.
 
If we are unable to adapt to changing advertising trends and preferences of advertisers, television channels and viewers, we will not be able to compete effectively.
 
The market for television advertising requires us to continuously identify new advertising trends and the preferences of advertisers, television channels and viewers, which may require us to develop new features and enhancements for our services. Our consultants follow the television advertising market and new trends or developments with respect to or affecting television channels. We also conduct in-depth market research to analyze the effectiveness of the marketing and advertising campaigns of our advertising clients and to project the trends of the television advertising market in the near future. We may incur development and acquisition costs or to hire new managers or other personnel in order to keep pace with new market trends, but we may not have the financial and other resources necessary to fund and implement these development or acquisition projects or to hire suitable personnel. Further, we may fail to respond to changing market preferences in a timely fashion. If we cannot succeed in developing and introducing new services on a timely and cost-effective basis, the demand for our advertising services may decrease and we may not be able to compete effectively or attract advertising clients, which would have a material adverse effect on our business and prospects.
 
Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period in the future.
 
Advertising spending fluctuates during each year due to seasonal factors. For example, advertising spending in China generally tends to increase during the fourth quarter of each year. Our quarterly operating


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results are difficult to predict and may fluctuate significantly from period to period based on the seasonality of consumer spending, television programs and advertising trends in China or other factors. Factors that are likely to cause our operating results to fluctuate include:
 
  •  our ability to maintain and increase sales to existing advertising clients, attract new advertising clients and satisfy our clients’ demands;
 
  •  our ability to maintain and renew existing exclusive and non-exclusive agency television arrangements or enter into new arrangements with television channels;
 
  •  the frequency of our clients’ engagement of our services;
 
  •  programming of television channels and the occurrence of special events that are attractive to advertisers;
 
  •  the agency fees we charge for our agency business and the price we charge for advertising time that we have the exclusive right to sell;
 
  •  changes in our pricing strategies, or the pricing strategies of television channels or our competitors;
 
  •  effects of strategic alliances, potential acquisitions and other business combinations, and our ability to successfully and timely integrate them into our business;
 
  •  changes in government regulation of the television and advertising industries; and
 
  •  economic and geopolitical conditions in China and elsewhere.
 
Many of the factors discussed above are beyond our control, making it difficult to predict our quarterly results, which could cause the trading price of our ADSs to decline below investor expectations. You should not rely on our operating results for any prior period as an indication of our future results. If our revenues for a particular quarter are lower than we expect, we may be unable to reduce our operating expenses for that quarter by a corresponding amount, which would harm our operating results for that quarter relative to our operating results from other quarters.
 
Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and prospects.
 
We have entered into agreements to secure all of the advertising time as well as other advertising rights on Shanghai Dragon Television and Tianjin Satellite Television. As part of our expansion plan, we intend to significantly expand our media investment management business by entering into exclusive and non-exclusive agency arrangements with additional television channels in the future. The growth of our business will result in substantial demands on our management, operational and other resources. In particular, the management of our growth will require, among other things:
 
  •  our ability to synergize the strengths of our company and the television channels to enhance the attractiveness of the programming;
 
  •  our ability to attract more advertisers to the televisions and to increase advertising sales;
 
  •  continued constructive relationships with the television channels;
 
  •  our ability to develop and improve our existing administrative and operational systems;
 
  •  stringent cost controls and sufficient working capital;
 
  •  strengthening of financial and management controls; and
 
  •  hiring, training and retaining our personnel.
 
As we execute this growth strategy, we may incur substantial costs and expend substantial resources. We may not be able to manage our current or future operations effectively and efficiently or compete effectively


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in new markets that we may enter. If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.
 
We may need additional capital and we may not be able to obtain it at acceptable terms or at all, which could adversely affect our liquidity and financial condition.
 
We believe that our current cash and cash equivalents, cash flow from operations and the net proceeds from this offering will be sufficient to meet our anticipated cash needs for capital expenditures for the foreseeable future. We may, however, require additional cash due to changed business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or convertible debt securities could result in 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 and liquidity.
 
Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
 
  •  investors’ perception of, and demand for, securities of advertising agencies;
 
  •  conditions of the U.S. and other capital markets in which we may seek to raise funds;
 
  •  our future results of operations, financial condition and cash flows;
 
  •  PRC governmental regulation of the television or advertising industries in China;
 
  •  economic, political and other conditions in China; and
 
  •  PRC governmental policies relating to foreign currency borrowings.
 
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds that are necessary for our operations on terms favorable to us could have a material adverse effect on our liquidity and financial condition. Without additional capital, we may not be able to:
 
  •  further develop or enhance our services;
 
  •  expand operations through exclusive and non-exclusive agency arrangements with additional television channels;
 
  •  hire, train and retain employees;
 
  •  market our services; or
 
  •  respond to competitive pressures or unanticipated capital requirements.
 
Our failure to protect our intellectual property rights could have a negative impact on our business.
 
We believe our brand, trade names, trademarks and other intellectual property are critical to our success. The success of our business depends substantially upon our continued ability to use our brand, trade names and trademarks to increase brand awareness and to further develop our brand. The unauthorized reproduction of our trade names or trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill. In addition, our proprietary information, which has not been patented or otherwise registered as our property, is a component of our competitive advantage and our growth strategy.
 
Monitoring and preventing the unauthorized use of our intellectual property is difficult. The measures we take to protect our brand, trade names, trademarks and other intellectual property rights may not be adequate to prevent their unauthorized use by third parties. In addition, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. To our knowledge, the relevant authorities in China historically have not protected intellectual property rights to the same extent as the United States. If we are unable to adequately protect our brand, trade names, trademarks


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and other intellectual property rights, we may lose these rights and our business may suffer materially. Further, unauthorized use of our brand, trade names or trademarks could cause brand confusion among advertisers and harm our reputation as a provider of high quality and comprehensive advertising services. If our brand recognition decreases, we may lose advertisers and fail in our expansion strategies, and our business, results of operations, financial condition and prospects could be materially and adversely affected.
 
We may be, or may be joined as, a defendant in litigation brought against our clients by third parties, our clients’ competitors, governmental or regulatory authorities or consumers, which could result in judgments against us and materially disrupt our business.
 
From time to time, we may be, or may be joined as, a defendant in litigation brought against our clients by third parties, our clients’ competitors, governmental or regulatory authorities or consumers. These actions could involve claims alleging, among other things, that:
 
  •  advertising claims made with respect to our clients’ products or services are false, deceptive or misleading;
 
  •  our clients’ products are defective or injurious and may be harmful to others; or
 
  •  marketing, communications or advertising materials created for our clients infringe on the proprietary rights of third parties.
 
The damages, costs, expenses and attorneys’ fees arising from any of these claims could have an adverse effect on our business, results of operations, financial condition and prospects to the extent that we are not adequately indemnified by our clients. In any case, our reputation may be negatively affected by these allegations.
 
We rely on computer software and hardware systems in our operations, the failure of which could adversely affect our business, results of operations and financial condition.
 
We are dependent upon our computer software and hardware systems in designing our advertisements and keeping important operational and market information. In addition, we rely on our computer hardware for the storage, delivery and transmission of data. Any system failure that causes interruptions to the input, retrieval and transmission of data or increase in the service time could disrupt our normal operations. Although we have a disaster recovery plan that is designed to address the failures of our computer software and hardware systems, we may not be able to effectively carry out this disaster recovery plan or restore our operations within a sufficiently short time frame to avoid business disruptions. Any failure in our computer software or hardware systems could decrease our revenues and harm our relationships with advertisers, television channels and other media companies, which in turn could have a material adverse effect on our business, results of operations and financial condition.
 
We do not maintain business liability or disruption, litigation or property insurance, and any business liability or disruption, litigation or property damage we experience might result in substantial costs to us and the diversion of our resources.
 
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business disruption, business liability or similar business insurance products. We have determined that the risks of disruption or liability from our business, the loss or damage to our property, including our facilities, equipment and office furniture, the cost of obtaining insurance coverage for these risks and the difficulties associated with obtaining such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption, litigation or property insurance coverage for our operations in China. Any occurrence of an uninsured loss or damage to property, or litigation or business disruption may result in substantial costs to us and the diversion of our resources, which could have an adverse effect on our operating results.


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We may become a passive foreign investment company, which could result in adverse United States federal income tax consequences to U.S. investors.
 
Based upon the past and projected composition of our income and valuation of our assets, including any goodwill, we do not believe we were a passive foreign investment company, or PFIC, for our taxable year ended December 31, 2009 and we do not expect to become one in the future, although there can be no assurance in this regard. If, however, we were a PFIC, such characterization could result in adverse United States federal income tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, our U.S. investors will become subject to increased tax liabilities under United States federal income tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for United States federal income tax purposes if either: (i) 75% or more of our gross income in a taxable year is passive income, or (ii) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which includes cash) is at least 50%. The calculation of the value of our assets will be based, in part, on the then market value of our ADSs, which is subject to change. We cannot assure you that we were not a PFIC for 2009 or that we will not be a PFIC for any future taxable year. As the determination of PFIC status requires extensive factual investigation, including ascertaining the fair market value of our assets on a quarterly basis and the character of each item of income we earn, this determination, although ultimately legal in nature, is beyond the scope of legal counsel’s role and, accordingly, our U.S. counsel expresses no opinion with respect to our PFIC status.
 
If we fail to establish and maintain effective internal control over financial reporting, we may not be able to accurately and timely report our financial results or prevent fraud and, as a result, investor confidence and the trading price of our ADSs may be adversely impacted.
 
Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a management assessment of, and an attestation by our independent registered public accounting firm to, the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2011. During the assessment process that we will undertake for compliance with Section 404, we may identify material weaknesses or other deficiencies in our internal control over financial reporting that we may not be able to remediate in time to meet the deadline imposed by Section 404, and our management may conclude that our internal control over financial reporting is not effective. In addition, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may determine that our internal control over financial reporting is not effective or it may decline to attest to the effectiveness of our internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could increase the risk of material misstatements in our financial statements and cause failure to meet our financial and other reporting obligations, which would likely cause investors to lose confidence in our reported financial information and lead to a significant decline in the trading price of our ADSs.
 
We are subject to risks relating to the nature of China’s advertising industry, including frequent and sudden changes in advertising proposals.
 
The nature of the advertising business in China is such that sudden changes in advertising proposals and actual advertisements are frequent. In China, television stations remain responsible for the content of advertisements, and as a result, television stations may reject or recommend changes to the content of advertisements. We strive to minimize problems related to work for clients by encouraging the conclusion of basic written agreements, but we are exposed to the risk of unforeseen incidents or disputes with advertising clients. In addition, similar to other companies in our industry in the PRC where relationships between advertising clients within a particular industry and advertising companies are not typically exclusive, we are currently acting for multiple clients within a single industry in a number of industries. If this practice in China


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were to change in favor of exclusive relationships and if our efforts to respond to this change were ineffective, our business, results of operations and financial condition could be materially and adversely affected.
 
China regulates media content extensively and we may be subject to government actions based on the advertising content we design for advertising clients or services we provide to them.
 
PRC advertising laws and regulations require advertisers, advertising operators and advertising distributors, including businesses such as ours, to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable laws, rules and regulations. Violation of these laws, rules or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may revoke a violator’s license for advertising business operations.
 
Our business includes assisting advertising client in designing and producing advertisements, as well as executing their advertising campaign. We act as agent for our clients in dealings with television channels, such as CCTV, or other media on whose platform our clients want to display their advertisements. Under our agreements with television stations, such as CCTV, we are typically responsible for the compliance with applicable laws, rules and regulations with respect to advertising content that we provide to the media. In addition, some of our advertising clients provide completed advertisements for us to display on the television channels. Although these advertisements are subject to internal review and verification of these media, their content may not fully comply with applicable laws, rules and regulations. Further, for advertising content related to special types of products and services, such as alcohol, cosmetics, pharmaceuticals and medical procedures, we are required to confirm that our clients have obtained requisite government approvals, including operating qualifications, proof of quality inspection of the advertised products and services, government pre-approval of the content of the advertisement and filings with the local authorities. We endeavor to comply with such requirements, including by requesting relevant documents from the advertising clients and employing qualified advertising inspectors who are trained to review advertising content for compliance with applicable PRC laws, rules and regulations. However, we cannot assure you that violations or alleged violations of the content requirements will not occur with respect to our operations. If the relevant PRC governmental agencies determine the content of the advertisements that we represent violated any applicable laws, rules or regulations, we could be subject to penalties. Although our agreements with our clients normally require them to warrant the fairness, accuracy and compliance with relevant laws and regulations of their advertising content and agree to indemnify us for violations of these warranties, these contractual remedies may not cover all of our losses resulting from governmental penalties. Violations or alleged violations of the content requirements could also harm our reputation and impair our ability to conduct and expand our business.
 
Risks Relating to Our Corporate Structure
 
If the PRC government determines that the agreements that establish the structure for operating our China business otherwise do not comply with applicable PRC laws, rules and regulations, we could be subject to severe penalties.
 
The PRC government requires any foreign entities that invest in the advertising services industry to have at least two years of direct operations in the advertising industry outside of China. We have not directly operated any advertising business outside of China and therefore, we currently do not qualify under PRC regulations to directly provide advertising services. We are a Cayman Islands company and a foreign legal person under PRC laws. Accordingly, our subsidiary, Nanning Jetlong Technology Co., Ltd., or Nanning Jetlong, is currently ineligible to apply for the required licenses for providing advertising services in China. Our advertising business is currently provided through our contractual arrangements with our affiliated consolidated entities in China. Each of the affiliated consolidated entities is currently owned by individual shareholders, who are PRC citizens, and holds the requisite licenses to provide advertising services in China. Their shareholders are set forth in “Our Corporate Structure.” Our affiliated consolidated entities directly operate our advertising services in China, purchase advertising time from television channels and sell


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advertising time to advertisers. We have been and are expected to continue to be dependent on affiliated consolidated entities to operate our advertising service business. We do not have any equity interest in any of the affiliated consolidated entities but substantially control their operations and receive the economic benefits and bears economic risks of them through a series of contractual arrangements. For more information regarding these contractual arrangements, see “Our Corporate Structure.”
 
There are uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of our contractual arrangements with the affiliated consolidated entities. We have also been advised by our PRC counsel that the structure for operating our business in China (including our corporate structure and contractual arrangements with the affiliated consolidated entities) complies, and after the completion of this offering will continue to comply, with all applicable existing PRC laws, rules and regulations, and does not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations. However, we cannot assure you that the PRC regulatory authorities will not adopt any new regulation to restrict or prohibit foreign investment in advertising business through contractual arrangement in the future, or will not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations.
 
If we, any of the affiliated consolidated entities or any of their current or future subsidiaries are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
 
  •  revoking the business licenses of such entities;
 
  •  discontinuing or restricting the conduct of any transactions among our PRC subsidiary and affiliated consolidated entities;
 
  •  imposing fines, confiscating the income of the affiliated consolidated entities or our income, or imposing other requirements with which we or our PRC subsidiary and affiliated consolidated entities may not be able to comply;
 
  •  requiring us or our PRC subsidiary and affiliated consolidated entities to restructure our ownership structure or operations; or
 
  •  restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.
 
The imposition of any of these penalties could preclude us from operating our business, which would have a material adverse effect on our financial condition and results of operations.
 
We rely on contractual arrangements with our affiliated consolidated entities in China, and their shareholders, for our business operations, which may not be as effective in providing operational control or enabling us to derive economic benefits as through ownership of controlling equity interest.
 
We rely on and expect to continue to rely on contractual arrangements with our affiliated consolidated entities in China and their respective shareholders to operate our advertising services business. These contractual arrangements may not be as effective in providing us with control over the affiliated consolidated entities as ownership of controlling equity interests would be in providing us with control over, or enabling us to derive economic benefits from the operations of, the affiliated consolidated entities. If we had direct ownership of the affiliated consolidated entities, we would be able to exercise our rights as a shareholder to (i) effect changes in the board of directors of those entities, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level, and (ii) derive economic benefits from the operations of the affiliated consolidated entities by causing them to declare and pay dividends. However, under the current contractual arrangements, as a legal matter, if any of the affiliated consolidated entities or any of their shareholders fails to perform its, his or her respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies


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available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective. For example, if shareholders of an affiliated consolidated entity were to refuse to transfer their equity interests in such affiliated consolidated entity to us or our designated persons when we exercise the purchase option pursuant to these contractual arrangements, we may have to take a legal action to compel them to fulfill their contractual obligations.
 
If (i) the applicable PRC authorities invalidate these contractual arrangements for violation of PRC laws, rules and regulations, (ii) any affiliated consolidated entity or its shareholders terminate the contractual arrangements or (iii) any affiliated consolidated entity or its shareholders fail to perform their obligations under these contractual arrangements, our business operations in China would be materially and adversely affected, and the value of your ADSs would substantially decrease. Further, if we fail to renew these contractual arrangements upon their expiration, we would not be able to continue our business operations unless the then current PRC law allows us to directly operate advertising businesses in China.
 
In addition, if any affiliate consolidated entity or all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of the affiliated consolidated entities undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, our ability to generate revenues and the market price of your ADSs.
 
All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our operating entities and we may be precluded from operating our business, which would have a material adverse effect on our financial condition and results of operations.
 
Aegis Media may have potential conflicts of interest with us and our joint venture.
 
The interests of Aegis Media may conflict with the interests of our company and our joint venture. When conflicts of interest arise, Aegis Media may not act in the best interests of our company or the joint venture and a conflict of interest may not be resolved in favor of us or the joint venture. As one of the world’s leading marketing communications groups, Aegis Media is an international provider of advertising services, including those provided by its other operations in China, which may directly or indirectly compete with us or the joint venture. Although, in connection with the formation of the joint venture, Aegis Media has agreed to restrictions on the solicitation of clients and employees of ours or the joint venture, these restrictions may not be sufficient or effective to prevent Aegis Media from competing against us or the joint venture, and we and Aegis Media may disagree as to whether particular business opportunities belong to us, the joint venture or Aegis Media. In addition, Aegis Media may breach these restrictions. If we cannot resolve any conflicts of interest or disputes between Aegis Media and us or the joint venture, we would have to rely on legal proceedings, the outcome of which is uncertain and, as a result, our business may be disrupted and our results of operations, financial condition and prospects could be materially and adversely affected.
 
The nominee shareholders of the affiliated consolidated entities may have potential conflicts of interest with us.
 
Mr. He Dang and Ms. Qingmei Bai, the nominee shareholders of the affiliated consolidated entities, are the legal shareholders of those entities. Their interests as shareholders of the affiliated consolidated entities and the interests of our company may conflict. We cannot assure you that when conflicts of interest arise, any or all of these individuals will act in the best interests of our company or that any conflict of interest will be resolved in our favor. In addition, these individuals may breach or cause the affiliated consolidated entities that they beneficially own to breach or refuse to renew the existing contractual arrangements, which will have a


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material adverse effect on our ability to effectively control the affiliated consolidated entities and receive economic benefits from them. If we cannot resolve any conflicts of interest or disputes between us and any of the shareholders of the affiliated consolidated entities, we would have to rely on legal proceedings, the outcome of which is uncertain and which could be disruptive to our business.
 
The contractual arrangements with the affiliated consolidated entities may be subject to scrutiny by the PRC tax authorities and may result in a finding that we owe additional taxes or are ineligible for tax exemption, or both, which could substantially increase our taxes owed and thereby reduce our net income.
 
Under applicable PRC laws, rules and regulations, arrangements and transactions among related parties may be subject to audits or challenges by the PRC tax authorities. We are not able to determine whether any of our transactions with our affiliated consolidated entities and their respective shareholders will be regarded by the PRC tax authorities as arm’s length transactions because, based on our knowledge, the PRC tax authorities have not issued a ruling or interpretation on how to determine an arm’s length transaction in this context. The relevant tax authorities may determine that our contractual relationships with our affiliated consolidated entities and their respective shareholders were not entered into on an arm’s length basis. If any of the transactions we have entered into among our wholly owned subsidiary in China and any of the affiliated consolidated entities and their respective shareholders are determined by the PRC tax authorities not to be on an arm’s length basis, or are found to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, the PRC tax authorities may adjust the profits and losses of such affiliated consolidated entity and assess more taxes on it. In addition, the PRC tax authorities may impose late payment fees and other penalties to such affiliated consolidated entity for under-paid taxes. Our results of operations may be adversely and materially affected if the tax liabilities of any of the affiliated consolidated entities increase or if it is found to be subject to late payment fees or other penalties.
 
We may rely on dividends and other distributions on equity paid by our wholly owned subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business.
 
We are a holding company, and we may rely on dividends and other distributions on equity paid by Nanning Jetlong, our subsidiary in China, for our cash requirements, including the funds necessary to service any debt we may incur. If Nanning Jetlong incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements Nanning Jetlong currently has in place with the affiliated consolidated entities in a manner that would materially and adversely affect the ability of Nanning Jetlong to pay dividends and other distributions to us. Further, relevant PRC laws, rules and regulations permit payments of dividends by Nanning Jetlong only out of its retained earnings, if any, determined in accordance with accounting standards and regulations of China. Under PRC laws, rules and regulations, Nanning Jetlong is also required to set aside a portion of its net income each year to fund specific reserve funds. In addition, the statutory general reserve fund requires annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends until the cumulative fund reaches 50% of the registered capital. As a result of these PRC laws, rules and regulations, Nanning Jetlong is restricted from transferring a portion of its net assets to us whether in the form of dividends, loans or advances. Any limitation on the ability of our subsidiary to pay dividends 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.


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Risks Relating to Doing Business in China
 
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.
 
Since substantially all of our business operations are conducted in China, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
 
  •  the degree of government involvement;
 
  •  the level of development;
 
  •  the growth rate;
 
  •  the control of foreign exchange;
 
  •  access to financing; and
 
  •  the allocation of resources.
 
While the Chinese economy has grown significantly in the past three decades, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on our operations. For example, our results of operations and financial condition may be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
 
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. In light of the global financial crisis and economic downturn, which also have a significant adverse impact on the Chinese economy beginning in September 2008, the PRC government began taking a series of measures to stimulate the Chinese economy. We cannot assure you that these measures will be effective. In addition, other economic measures, as well as future actions and policies of the PRC government, could also materially affect our liquidity and access to capital and our ability to operate our business. Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
 
Uncertainties with respect to the PRC legal system could limit the protections available to you and us.
 
The PRC legal system is a civil law system based on written statutes. Unlike in the common law system, prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. We conduct all of our business through our subsidiary and affiliated consolidated entities established in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract.


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However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of Chinese administrative and court proceedings and the level of legal protection we enjoy in China than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, customers and suppliers. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.
 
The effectiveness of the share pledges in our equity pledge agreements with our affiliated consolidated entities in China and their nominee shareholders is uncertain under the PRC Property Rights Law.
 
Under the equity pledge agreements among Nanning Jetlong, our affiliated consolidated entities in China and their respective shareholders, these shareholders have pledged all of their equity interests in the affiliated consolidated entities to Nanning Jetlong to secure the performance of the obligations by each affiliated consolidated entity and its shareholders under the contractual arrangements. According to the PRC Property Rights Law, which became effective as of October 1, 2007, a share pledge is not effective without being registered with the relevant local industry and commerce bureau. We have successfully registered those equity pledges with relevant local industry and commerce bureaus, except for the share pledges of Shanghai Haobangyang Advertising Co., Ltd. and Hubei Haobangyang Advertising Co., Ltd. Our share pledges may be deemed ineffective before they are registered under the PRC Property Rights Law, and we may not be able to successfully enforce the share pledges, if prior to such registration, the affiliated consolidated entities and their shareholders breach their respective obligations under the contractual arrangements that established our operations in China.
 
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds from this offering to make loans or additional capital contributions to our PRC subsidiary.
 
In utilizing the proceeds from this offering, as an offshore holding company of our PRC subsidiary, we may make loans to our PRC subsidiary and affiliated consolidated entities, or we may make additional capital contributions to our PRC subsidiary. Any loans to our subsidiary or affiliated consolidated entities in China are subject to PRC regulations and approvals. For example:
 
  •  loans by us to Nanning Jetlong cannot exceed statutory limits and must be registered with the PRC State Administration of Foreign Exchange, or SAFE, or its local branch; and
 
  •  loans by us to domestic PRC enterprises, including our affiliated consolidated entities, must be approved by the relevant government authorities and must also be registered with the SAFE or its local branch.
 
We may also determine to finance Nanning Jetlong by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce, or the MOC, or its local counterpart. Because the affiliated consolidated entities are domestic PRC enterprises, we are not likely to finance their activities by means of capital contributions due to regulatory issues relating to foreign investment in domestic PRC enterprises, as well as the licensing and other regulatory issues. We cannot assure you that we can obtain the required government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to Nanning Jetlong or any of the affiliated consolidated entities. If we fail to receive such registrations or approvals, our ability to use the proceeds from this offering and to fund our operations in China would be negatively affected which would adversely and materially affect our liquidity and our ability to expand our business.


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PRC regulations relating to offshore investment activities by PRC residents may increase our administrative burden and restrict our overseas and cross-border investment activity. If our shareholders fail to make any required applications and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.
 
The SAFE issued a public notice in October 2005, or the SAFE notice, requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose company.” PRC residents who are shareholders of offshore special purpose companies established before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. The SAFE notice further requires amendment to the registration in the event of any significant changes with respect to the offshore special purpose company, including an initial public offering by such company. Our shareholder who is a PRC citizen, Mr. He Dang, has registered with the local SAFE branch as required by the SAFE notice and has amended such registration to reflect recent developments of our company and our PRC subsidiary, particularly the establishment of the contractual arrangements between Nanning Jetlong and our affiliated consolidated entities in China. Our current and future beneficial owners who are PRC citizens will be required to register with local SAFE branches and to amend their registrations to reflect recent developments with respect to our company and our PRC subsidiary. The failure of our beneficial owner to amend his SAFE registrations in a timely fashion pursuant to the SAFE notice or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital to our PRC subsidiary, limit the ability of our PRC subsidiary to distribute dividends to our company or otherwise materially and adversely affect our business.
 
The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering. Any requirement to obtain prior CSRC approval could delay, or create uncertainties regarding, this offering, and our failure to obtain this approval, if required, could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs.
 
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated a regulation entitled Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the SPV Regulation. The SPV Regulation provides that an offshore special purpose vehicle, or SPV, formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of the SPV’s securities on an overseas stock exchange. The applicability of the SPV Regulation with respect to CSRC approval is unclear. On September 21, 2006, the CSRC issued a clarification that sets forth the criteria and process for obtaining any required approval from the CSRC.
 
Our PRC counsel, Commerce & Finance Law Offices, has advised us that:
 
  •  the CSRC approval requirement applies to SPVs that acquired equity interests in PRC companies through share exchanges and using cash and seek overseas listing; and
 
  •  based on their understanding of the current PRC laws, rules and regulations, including the SPV Regulation, and the fact that our wholly owned PRC subsidiary was established by foreign direct investment, rather than through a merger or acquisition, prior to September 8, 2006, the effective date of the SPV Regulation, the SPV Regulation does not require that we obtain prior CSRC approval for the listing and trading of our ADSs on the Nasdaq Global Market.
 
However, if the CSRC subsequently determines that its prior approval is required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations, limit our operating privileges, delay or restrict sending the proceeds from this offering into China, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you


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engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that such settlement and delivery may not occur.
 
We cannot predict when the CSRC may promulgate additional rules or other guidance, if at all. If implementing rules or guidance is issued prior to the completion of this offering and consequently we conclude that we are required to obtain CSRC approval, this offering will be delayed until we obtain CSRC approval, which may take several months or longer. Moreover, implementing rules or guidance, to the extent issued, may fail to resolve current ambiguities under the SPV Regulation. Uncertainties and/or negative publicity regarding the SPV Regulation could have a material adverse effect on the trading price of our ADSs.
 
The approval of the MOC may be required in connection with the establishment of our contractual arrangements with the affiliated consolidated entities. Our failure to obtain this approval, if required, could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs.
 
The SPV Regulation also provides that an offshore SPV formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals shall obtain the approval of the MOC prior to the listing and trading of the SPV’s securities on an overseas stock exchange. The applicability of the SPV Regulation with respect to MOC approval is unclear.
 
Our PRC counsel, Commerce & Finance Law Offices, has advised us that MOC approval is not required in connection with:
 
  •  the establishment of Nanning Jetlong, our wholly owned PRC subsidiary, because the equity interest in Nanning Jetlong was established by Jetlong Technology Limited, our wholly owned Marshall Islands subsidiary, prior to September 8, 2006, the effective date of the SPV Regulation; or
 
  •  the contractual arrangements beginning in March 2008 entered into between Nanning Jetlong and our affiliated consolidated entities.
 
However, if the MOC subsequently determines that its prior approval was required for our contractual arrangements with the affiliated consolidated entities, we may face regulatory actions or other sanctions from the MOC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on us and the affiliated consolidated entities, limit our operations, delay or restrict sending the proceeds from this offering into China, or take other actions. These regulatory actions could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.
 
Governmental control of currency conversion may affect the value of your investment.
 
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all our revenues in Renminbi. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency-denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, may be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, approval from the SAFE or its local branch is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also exercise its discretion to restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.


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Fluctuations in exchange rates of the Renminbi could materially affect our reported results of operations.
 
The exchange rates between the Renminbi and the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old 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 foreign currencies. This change in policy has resulted in a significant appreciation of the Renminbi against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
 
As we may rely on dividends and other fees paid to us by our subsidiary and affiliated consolidated entities in China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we received from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In addition, since our functional and reporting currency is the U.S. dollar while the functional currency of our subsidiary and affiliated consolidated entities in China is Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would have a positive or negative effect on our reported financial results, which may not reflect any underlying change in our business, results of operations or financial condition.
 
Dividends we receive from our subsidiary located in the PRC may be subject to PRC withholding tax.
 
The PRC Enterprise Income Tax Law, or the EIT Law, provides that a maximum income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within the PRC, and the State Council of the PRC has reduced such rate to 10% through the implementation regulations. We are a Cayman Islands holding company and substantially all of our income may be derived from dividends we receive from our subsidiary located in the PRC. Thus, dividends paid to us by our subsidiary in China may be subject to the 10% income tax if we are considered as a “non-resident enterprise” under the EIT Law. If we are required under the EIT Law to pay income tax for any dividends we receive from our subsidiary in China, it would materially and adversely affect the amount of dividends, if any, we may pay to our shareholders and ADS holders.
 
We may be deemed a PRC resident enterprise under the EIT Law and be subject to the PRC taxation on our worldwide income.
 
The EIT Law also provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise. To our knowledge, there is a lack of clear guidance regarding the criteria pursuant to which the PRC tax authorities will determine the tax residency of a company under the EIT Law. As a result, neither we nor our PRC counsel can be certain as to whether we will be subject to the tax applicable to resident enterprises or non-resident enterprises under the EIT Law. If we are treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations, although dividends distributed from our PRC


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subsidiary to us could be exempt from Chinese dividend withholding tax, since such income is exempted under the EIT Law to a PRC resident recipient.
 
Dividends payable by us to our foreign investors and gain on the sale of our ADSs or ordinary shares may become subject to taxes under PRC tax laws.
 
Under the EIT Law and implementation regulations issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC. If we are considered a PRC “resident enterprise,” 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 EIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises,” 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.
 
We face risks related to natural disasters and health epidemics in China, which could have a material adverse effect on our business and results of operations.
 
Our business could be materially and adversely affected by natural disasters or the outbreak of health epidemics in China. For example, in May 2008, Sichuan Province suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. In particular, in assisting with emergency responses and disaster relief, broadcasting time, including advertisement broadcasting time, on many television channels was re-arranged during the period following the earthquake. As a result, we experienced disruptions of our advertising placement and loss of our advertising time purchased without being fully compensated. Our exclusive agency arrangements typically do not contain compensation clauses favorable to us in cases of natural disasters or other force majeures events. In addition, in the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza and severe acute respiratory syndrome. Since May 2009, outbreaks of H1N1 influenza, or swine flu, have been reported in Hong Kong and throughout China. Any future natural disasters or health epidemics in the PRC could have a material adverse effect on our business and results of operations.
 
The implementation of the PRC Labor Contract Law may significantly increase our operating expenses and adversely affect our business and results of operations.
 
On June 29, 2007, the PRC National People’s Congress enacted the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law formalizes workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions and provides for specific standards and procedure for the termination of an employment contract. In addition, the Labor Contract Law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases, including in cases of the expiration of a fixed-term employment contract. As there has been little guidance as to how the Labor Contract Law will be interpreted and enforced by the relevant PRC authorities, there remains substantial uncertainty as to its potential impact on our business and results of operations. The implementation of the Labor Contract Law may significantly increase our operating expenses, in particular our personnel expenses, as the continued success of our business depends significantly on our ability to attract and retain qualified personnel. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law may also limit our ability to effect these changes in a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations.


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Risks Relating to 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. Our ADSs have been approved for listing on the Nasdaq Global Market. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.
 
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. An active trading market for our ADSs may not develop and the market price of our ADSs may decline below the initial public offering price.
 
The market price for our ADSs may be volatile which could result in a loss to you.
 
The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors, including the following:
 
  •  announcements of competitive developments;
 
  •  regulatory developments in China affecting us, our clients or our competitors;
 
  •  announcements regarding litigation or administrative proceedings involving us;
 
  •  actual or anticipated fluctuations in our quarterly operating results;
 
  •  changes in financial estimates by securities research analysts;
 
  •  changes in the economic performance or market valuations of other advertising companies;
 
  •  addition or departure of our executive officers;
 
  •  release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and
 
  •  sales or perceived sales of additional ordinary shares or ADSs.
 
In addition, the securities market has 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 have a material adverse effect on the market price of our ADSs.
 
Since the initial public offering price is substantially higher than our net tangible book value per share, you will incur immediate and substantial dilution.
 
If you purchase our ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$6.32 per ADS, representing the difference between our pro forma as adjusted net tangible book value per ADS as of December 31, 2009, after giving effect to this offering and the assumed initial public offering price of US$10.00 per ADS, the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon completion of this offering.


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Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.
 
Sales of our ADSs or ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have 15,625,000 Class A ordinary shares and 62,500,000 Class B ordinary outstanding, including 15,625,000 Class A ordinary shares represented by 7,812,500 ADSs. All ADSs 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. The remaining ordinary shares outstanding after this offering will be available for sale upon the expiration of certain lock-up arrangements entered into among us, the underwriters and other shareholders as further described under “Underwriting” and “Shares Eligible for Future Sale.” In addition, ordinary shares that certain option holders will receive when they exercise their share options will not be available for sale until the expiration of any relevant lock-up periods, subject to volume and other restrictions that may be applicable under Rule 144 and Rule 701 under the Securities Act. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.
 
Anti-takeover provisions in our memorandum and articles of association may discourage a third party from offering to acquire our company, which could limit your opportunity to sell your ADSs at a premium.
 
Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.
 
For example, our board of directors will have the authority, without further action by our shareholders, to issue preference shares in one or more series and to fix the powers and rights of these shares, 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. Preference shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues preference shares, the market price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected.
 
Our dual-class ordinary share structure with different voting rights could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
 
Our amended and restated memorandum and articles of association, which will be effective upon the completion of this offering, provide for a dual-class ordinary share structure. Upon the completion of this offering, our ordinary shares will be re-classified into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. See “Description of Share Capital — Ordinary Shares.”
 
Class B ordinary shares will consist of the ordinary shares held by our shareholders prior to the completion of this offering and any ordinary shares issued upon the exercise of options granted under our 2008 share incentive plan. Each Class A ordinary share will be entitled to one vote on all matters subject to shareholders’ vote, and each Class B ordinary share will be entitled to five votes on all matters subject to shareholders’ vote. We will issue Class A ordinary shares represented by our ADSs in this offering. Due to the disparate voting rights attached to these two classes of ordinary shares, our existing shareholders will have significant voting rights over matters requiring shareholder approval, including the election and removal of directors and certain corporate transactions, such as mergers, consolidations and other business combinations. This concentrated control could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.


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We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.
 
Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law (as amended) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that 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 precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. Furthermore, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. As a result, our public shareholders may have more difficulties in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a Delaware company.
 
Judgments obtained against us by our shareholders may not be enforceable.
 
We are a Cayman Islands company and substantially all of our assets are located outside of the United States. All of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to bring an action in the United States against us or against these individuals in the event that you believe that your rights have been violated under U.S. securities law or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands or the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and the PRC, see “Enforceability of Civil Liabilities.”
 
We have not determined a specific use for a portion of our net proceeds from this offering and we may use these proceeds in ways with which you may not agree.
 
We have not determined a specific use for a portion of our net proceeds of this offering. Our management will have considerable discretion in the application of these proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the 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 ADS price. The net proceeds from this offering may also be placed in investments that do not produce income or lose value.
 
Holders of ADSs must act through the depositary to exercise their rights as shareholders of our company.
 
Holders of our ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement for the ADSs. Under our amended and restated memorandum and articles of association, the minimum notice period required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be


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responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.
 
The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.
 
Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote, unless:
 
  •  we have failed to timely provide the depositary with our notice of meeting and related voting materials;
 
  •  we have instructed the depositary that we do not wish a discretionary proxy to be given;
 
  •  we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting; or
 
  •  a matter to be voted on at the meeting would have a material adverse impact on shareholders.
 
The effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
 
You may be subject to limitations on transfers of your ADSs.
 
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
 
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.
 
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless either both the rights and any related securities are registered under the Securities Act, or the distribution of them to ADS holders is exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
 
In addition, the depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive any such distribution.


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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
 
You can identify these forward-looking statements by words or phrases such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “likely to,” “may,” “plan,” “will” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include:
 
  •  our growth strategies, including, among other things, our plans to expand and enhance our portfolio of television advertising media resources to further broaden coverage, secure additional resources from new advertising media platforms, strengthen capabilities to offer integrated advertising solutions and continue to expand our advertising customer base and budget allocation from our customers;
 
  •  our plans and expectations with respect to our strategic alliance and joint venture with Aegis Media;
 
  •  our future business development, results of operations and financial condition;
 
  •  expected changes in our revenues and certain cost or expense items;
 
  •  our ability to manage the expansion of our operations;
 
  •  changes in general economic and business conditions in China; and
 
  •  trends and competition in the advertising industry in China.
 
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. 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 that includes this prospectus with the understanding that our actual future results may be materially different from what we expect. You should not rely upon forward-looking statements as predictions of future events.
 
Other sections of this prospectus include additional factors that could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from this offering of approximately US$69.7 million, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of US$10.00 per ADS, the midpoint of the initial public offering price range set forth on the cover of this prospectus. We will not receive any of the proceeds from the sale of ADSs by the selling shareholder. A US$1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) our net proceeds from this offering by US$7.3 million, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.
 
We intend to use the net proceeds from this offering to expand our business, including our media investment management business, and for other general corporate purposes. In particular, we intend to devote approximately US$50.0 million to the operation and expansion of our media investment management business, including acquiring additional advertising media resources on television channels and new media platforms. We may also use the remaining portion of the net proceeds we receive from this offering for potential acquisitions, although we are not currently negotiating any acquisition transaction. We do not intend to use the net proceeds from this offering to repay the promissory note in the amount of US$19.6 million, nor to pay the unpaid dividend of RMB137.1 million declared by our affiliated consolidated entities, in each case owed to Mr. He Dang, our chairman and chief executive officer. We intend to use our cash on hand and cash provided by the operating activities of our affiliated consolidated entities, respectively, to meet these obligations after the completion of this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
 
The foregoing represents our current intentions to use and allocate the net proceeds of this offering based upon our present plans and business conditions. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.
 
Pending use of the net proceeds, we intend to hold our net proceeds in demand deposits or invest them in interest-bearing government securities.
 
In utilizing the proceeds from this offering, as an offshore holding company, we are permitted, under PRC laws and regulations, to provide funding to our PRC subsidiary only through loans or capital contributions and to our affiliated consolidated entities only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our subsidiary and affiliated consolidated entities in China or make additional capital contributions to our subsidiary in China to fund their capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors — Risks Relating to Doing Business in China — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds from this offering to make loans or additional capital contributions to our PRC subsidiary.”


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DIVIDEND POLICY
 
Our affiliated consolidated entities declared dividends of approximately RMB180.1 million in March 2008, of which RMB43.0 million was paid in August 2009. We, however, have no present plan to declare and pay any additional dividends on our ordinary shares or ADSs in the near future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our board of directors may deem relevant.
 
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiary in China, which in turn rely on the payments received from our affiliated consolidated entities in China pursuant to the contractual arrangements between our PRC subsidiary and these entities. Current PRC laws, rules and regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our subsidiary in China is required to set aside a certain amount of its accumulated after-tax profits each year, if any, to fund statutory reserves. These reserves may not be distributed as cash dividends. Further, if our subsidiary in China incurs debt on its own behalf, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.
 
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 ordinary shares, if any, will be paid in U.S. dollars.


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CAPITALIZATION
 
The following table sets forth our capitalization as of December 31, 2009:
 
  •  on an actual basis;
 
  •  on a pro forma basis to reflect additionally: (1) the redemption of 7,500,000 Series A preferred shares on January 20, 2010 for US$37.0 million and the issuance of 9,244,000 ordinary shares to Aegis Media at US$4.00 per share assumed to finance the redemption; and (2) the automatic conversion of all of the remaining outstanding Series A preferred shares into 5,000,000 Class B ordinary shares upon the completion of this offering at a conversion ratio of one Series A preferred share to one ordinary share as if the redemption and conversion had occurred as of December 31, 2009. Aegis Media had an option until July 1, 2010 to require us to repurchase all or a portion of the ordinary shares held by Aegis Media if we were in breach of our obligations under our joint venture with Aegis Media as a result of our failure to procure entry by specified clients into agreements with the joint venture by April 30, 2010 or the failure of such agreements to meet specified revenue targets. Since the redemption of these ordinary shares was outside of our control, these ordinary shares would not have been included in permanent equity had they been issued and outstanding as of December 31, 2009.
 
  •  on a pro forma as adjusted basis to reflect additionally: (1) the repurchase of 4,890,000 ordinary shares from Mr. He Dang for a promissory note of US$19.6 million on January 20, 2010; and (2) the issuance of 3,146,000 ordinary shares to Aegis Media at US$4.00 per share (in addition to the 9,244,000 ordinary shares issued to Aegis Media referred to above); and (3) the written acknowledgement from Aegis Media that we have fully satisfied our obligations to procure entry by specified clients into agreements with the joint venture and that such agreements met the specified revenue targets. The option of Aegis Media to redeem these ordinary shares has lapsed upon this acknowledgement. Therefore, these ordinary shares held by Aegis Media are no longer redeemable, and therefore classified in the shareholders’ equity.
 
  •  on a pro forma as adjusted after the offering basis to reflect the above plus the sale of 15,625,000 Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$10.00 per ADS, the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.
 
You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                                 
    As of December 31, 2009
                Pro forma
            Pro forma
  as adjusted
    Actual   Pro forma   as adjusted   after offering(4)
    (US$ in thousands)
 
Dividend payable
    20,086       20,086       20,086       20,086  
Promissory note
                      19,560       19,560  
Series A convertible redeemable preferred shares:
                               
US$0.0001 par value per share, 17,500,000 shares
authorized, 12,500,000 shares issued and outstanding
    59,576                    
Redeemable ordinary shares held by Aegis Media
          36,976              
Equity:
                               
Ordinary shares(1)
US$0.0001 par value per share, 187,500,000 shares authorized, 50,000,000 shares issued and outstanding,
    5       6 (2)     6 (3)     8  
Additional paid-in capital
    (1,974 )     20,625       50,625       120,291  
Retained earnings
    23,031       23,031       23,031       23,031  
Accumulated other comprehensive income
    65       65       65       65  
                                 
Total Charm Communications Inc. shareholders’ equity
    21,127       43,727       73,727       143,395  
                                 
Total capitalization
    100,789       100,789       113,373       183,041  
                                 


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(1) Upon the completion of this offering, all of our ordinary shares will be re-classified into Class A ordinary shares, which will be entitled to one vote per share, and Class B ordinary shares, which will be entitled to five votes per share. The Class B ordinary shares will consist of ordinary shares held by our shareholders prior to the completion of this offering and any ordinary shares issued upon the exercise of options granted under our 2008 share incentive plan.
(2) 55,000,000 ordinary shares issued and outstanding on a pro forma basis.
(3) 62,500,000 ordinary shares issued and outstanding on a pro forma as adjusted basis.
(4) A US$1.00 increase (decrease) in the assumed initial public offering price of US$10.00 per ADS would increase (decrease) each of additional paid-in capital, total equity and total capitalization by US$7.3 million, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.


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DILUTION
 
If you invest in our ADSs, your investment will be diluted for each ADS you purchase to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the pro forma as adjusted net tangible book value per ordinary share.
 
Our net tangible book value as of December 31, 2009 was approximately US$80.7 million, or US$1.61 per ordinary share and US$3.22 per ADS. Net tangible book value represents the amount of our total assets, minus the amount of our total liabilities and intangible assets. Dilution is determined by subtracting pro forma as adjusted net tangible book value per ordinary share, after giving effect to (1) the redemption of 7,500,000 Series A preferred shares; (2) the issuance of 12,390,000 ordinary shares to Aegis Media; (3) the repurchase of 4,890,000 ordinary shares from Mr. He Dang; (4) the automatic conversion of all of the remaining outstanding Series A preferred shares into our ordinary shares upon the completion of this offering; and (5) the proceeds from this offering, from the assumed initial public offering price per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
Without taking into account any other changes in net tangible book value after December 31, 2009, other than to give effect to (1) the redemption of 7,500,000 Series A preferred shares; (2) the issuance of 12,390,000 ordinary shares to Aegis Media; (3) the repurchase of 4,890,000 ordinary shares from Mr. He Dang; (4) the automatic conversion of all of the remaining outstanding Series A preferred shares into our ordinary shares upon the completion of this offering; and (5) our sale of the ADSs offered in this offering at the assumed initial public offering price of US$10.00 per ADS, the midpoint of the estimated initial public offering price range, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2009 would have increased to US$143.4 million, or US$1.84 per ordinary share and US$3.68 per ADS after the offering. This represents an immediate increase in net tangible book value of US$0.66 per ordinary share and US$1.32 per ADS to the existing shareholder and an immediate dilution in net tangible book value of US$3.16 per ordinary share and US$6.32 per ADS to investors purchasing ADSs in this offering.
 
The following table illustrates such per ordinary share dilution:
 
         
Estimated initial public offering price per ordinary share
  US$ 5.00  
Net tangible book value per ordinary share as of December 31, 2009
  US$ 1.61  
Pro forma as adjusted net tangible book value per ordinary share as of December 31, 2009 giving effect to: (1) the redemption of 7,500,000 Series A preferred shares; (2) the issuance of 12,390,000 ordinary shares to Aegis Media; (3) the repurchase of 4,890,000 ordinary shares from Mr. He Dang; and (4) the automatic conversion of all of the remaining outstanding Series A preferred shares into our ordinary shares upon the completion of this offering
  US$ 1.18  
Increase in pro forma as adjusted net tangible book value per ordinary share attributable to this offering
  US$ 0.66  
Pro forma as adjusted net tangible book value per ordinary share after the offering
  US$ 1.84  
Amount of dilution in net tangible book value per ordinary share to new investors in this offering
  US$ 3.16  
Amount of dilution in net tangible book value per ADS to new investors in this offering
  US$ 6.32  
 
A US$1.00 increase (decrease) in the assumed initial public offering price of US$10.00 per ADS would increase (decrease) our pro forma as adjusted net tangible book value after the offering by US$7.3 million, or by US$0.10 per ordinary share and by US$0.20 per ADS, and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$0.40 per ordinary share and US$0.80 per ADS, assuming no changes 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 estimated offering expenses payable by us. The pro forma information discussed above is illustrative only. Our net tangible book


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value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.
 
The following table summarizes, on a pro forma as adjusted basis, the number of ordinary shares purchased from us as of December 31, 2009, the total consideration paid to us and the average price per ordinary share and ADS paid by existing investors and by new investors purchasing ordinary shares evidenced by ADSs in this offering at the assumed initial public offering price of US$10.00 per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
                                                 
                Total Consideration     Average
    Average
 
    Ordinary Shares Purchased     Amount
          Price Per
    Price Per
 
 
  Number     Percent     (in thousands)     Percent     Ordinary Share     ADSs  
 
Existing shareholders
    62,500,000 (1)     80.0 %   US$ 50,631       39.3 %   US$ 0.81     US$ 1.62  
New investors
    15,625,000       20.0       78,125       60.7     US$ 5.00     US$ 10.00  
                                                 
Total
    78,125,000       100.0 %   US$ 128,756       100.0 %                
                                                 
 
 
(1) Reflects (i) the redemption of 7,500,000 Series A preferred shares; (ii) the issuance of 12,390,000 ordinary shares to Aegis Media; (iii) the repurchase of 4,890,000 ordinary shares from Mr. He Dang; and (iv) the automatic conversion of all of the remaining outstanding Series A preferred shares into our ordinary shares upon the completion of this offering.
 
A US$1.00 increase (decrease) in the assumed initial public offering price of US$10.00 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$7.8 million, US$7.8 million and US$0.20, 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 estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
The foregoing discussion and tables do not include the impact of any exercise of outstanding share options. As of December 31, 2009, there were 6,845,333 ordinary shares issuable upon exercise of outstanding options at a weighted average exercise price of US$1.64 per share, and there were 654,667 ordinary shares reserved for future issuance under our 2008 share incentive plan. To the extent that any of these options are exercised, there will be further dilution to new investors.


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EXCHANGE RATE INFORMATION
 
Our functional and reporting currency is the U.S. dollars. Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated into the U.S. dollar at the exchange rates at the balance sheet date. Transactions in currencies other than the U.S. dollars during the year are converted into U.S. dollars at the applicable exchange rates prevailing at the first day of the month when the transactions occurred.
 
The financial records of Nanning Jetlong and our affiliated consolidated entities are maintained in the Renminbi, which is their functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average exchange rate for the relevant periods. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income in the statement of shareholders’ equity.
 
A number of Renminbi-denominated figures used in this prospectus are accompanied with U.S. dollar translations. Translations from Renminbi to U.S. dollars were made at the noon buying rate for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise indicated, all translations from Renminbi to U.S. dollars were made at the rate of RMB6.8259 to U.S.$1.00, the noon buying rate as of December 31, 2009. On April 9, 2010, the exchange rate was RMB6.8229 to US$1.00. No representation is made that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all.
 
The following table sets forth exchange rate information between U.S. dollars and Renminbi for the periods indicated.
 
                                 
    Noon Buying Rate
Period
  Period End   Average(1)   Low   High
    (RMB per US$1.00)
 
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
    6.8259       6.8295       6.8470       6.8176  
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
    6.8268       6.8269       6.8295       6.8258  
February
    6.8258       6.8285       6.8330       6.8258  
March
    6.8258       6.8262       6.8270       6.8254  
April (through April 9)
    6.8229       6.8250       6.8263       6.8229  
 
 
Source: The Board of Governors of the Federal Reserve System
 
(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
 
The People’s Bank of China issued a public notice on July 21, 2005 increasing the exchange rate of the Renminbi against the U.S. dollar by approximately 2% to RMB8.11 per US$1.00. Further to this notice, the PRC government has reformed its exchange rate regime by adopting a managed floating exchange rate regime based on market supply and demand with reference to a portfolio of currencies. Under this new regime, the Renminbi is no longer pegged to the U.S. dollar. This change in policy has resulted in a significant appreciation of the Renminbi against the U.S. dollar.


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ENFORCEABILITY OF CIVIL LIABILITIES
 
We were incorporated in the Cayman Islands to enjoy some advantages associated with being a Cayman Island exempted company, such as:
 
  •  political and economic stability;
 
  •  an effective judicial system;
 
  •  a favorable tax system;
 
  •  the absence of exchange control or currency restrictions; and
 
  •  the availability of professional and support services.
 
However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:
 
  •  the Cayman Islands has a less developed body of securities laws as compared to the United States and provide significantly less protection to investors; and
 
  •  Cayman Islands companies may not have standing to sue before the federal courts of the United States.
 
Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be subject to arbitration.
 
All of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
 
We have appointed CT Corporation System of 111 Eighth Avenue, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.
 
Maples and Calder, our counsel as to Cayman Islands law, and Commerce & Finance Law Offices, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:
 
  •  recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or
 
  •  entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
 
Maples and Calder has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, and which was neither obtained in a manner nor is of a kind enforcement of which is contrary to natural justice or the public policy of the Cayman Islands, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.
 
Commerce & Finance Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law (revised in 2007). PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions; provided that the foreign judgments do not violate the basic principles of laws of the PRC or its sovereignty, security, or social and public interest. Currently, there is no mutual agreement with respect to the recognition and enforcement of a judgment regarding civil cases between China and the United States.


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OUR CORPORATE STRUCTURE
 
Our History
 
Our company, Charm Communications Inc., was formed under the laws of the Cayman Islands in January 2008 in preparation for this offering. Charm Communications Inc. holds all of the outstanding equity interest in Movie-Forward Ltd., a company incorporated under the laws of the British Virgin Islands in June 2007. Movie-Forward Ltd. in turn holds all of the outstanding equity interest in Charm Hong Kong Limited, a company incorporated under the laws of Hong Kong in June 2008. Charm Hong Kong Limited holds all of the outstanding equity interest in Nanning Jetlong Technology Co., Ltd., or Nanning Jetlong, a company established in October 2005 under PRC law as a wholly foreign owned enterprise. We and Aegis Media have agreed that the control over Beijing Vizeum, be transferred to our company subsequent to the closing of the investment by Aegis Media in our company in January 2010. The legal ownership of all the outstanding equity interests of Beijing Vizeum will be transferred to Posterscope upon the receipt of applicable governmental approvals and completion of regulatory registrations. Concurrently, our subsidiary, Media Port, a company incorporated under the laws of the British Virgin Islands, will hold 60% of the outstanding equity interests in Posterscope.
 
Other than Beijing Vizeum, in which we will effectively hold 60% of the outstanding equity interests upon the receipt of applicable governmental approvals and completion of regulatory registrations, we operate our business in China through our affiliated consolidated entities due to PRC regulations that restrict foreign investments in the advertising industry. We have ten affiliated consolidated entities in China that operate our businesses, each of which is an entity duly formed under PRC law. These affiliated consolidated entities were established in the years set forth below:
 
     
Year of Establishment
 
Affiliated Consolidated Entities
 
2004:
  Beijing Xingyang Advertising Co., Ltd.
2005:
  Xinyang Heli Advertising Co., Ltd.
2006:
  Xinxin Charm Advertising Co., Ltd.
Yida Charm Advertising Co., Ltd.
Shidai Charm Advertising Co., Ltd.
2007:
  Ruiyi Youshi Advertising Co., Ltd.
Shanghai Haobangyang Advertising Co., Ltd.
Hubei Haobangyang Advertising Co., Ltd.
2008:
  Qinghai XStars Media Co., Ltd.
Qinghai Charm Advertising Co., Ltd.
 
Beginning on March 28, 2008, Nanning Jetlong has entered into a series of contractual arrangements with each of the affiliated consolidated entities and their respective shareholders to govern our relationships with the affiliated consolidated entities and operate our business in China. These contractual arrangements allow us to effectively control the affiliated consolidated entities and to derive substantially all of the economic benefits from them. See “— Contractual Arrangements.” Accordingly, we have consolidated their historical financial results in our financial statements in accordance with U.S. GAAP since the inception of these affiliated entities.
 
Our Corporate Structure
 
The following diagram illustrates our corporate structure as of the date of this prospectus:


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(CHART)
(1)  We and Aegis Media have agreed that the control over Beijing Vizeum be transferred to our company subsequent to the closing of the investment by Aegis Media in our company in January 2010. The legal ownership of all of the outstanding equity interests of Beijing Vizeum will be transferred to Posterscope, upon the receipt of applicable governmental approvals and completion of regulatory registrations. Concurrently, Media Port will hold 60% of the outstanding equity interests in Posterscope.


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Contractual Arrangements
 
Under applicable PRC laws, rules and regulations, to invest in the advertising industry, foreign investors must have at least two years of direct operations in the advertising industry as their core businesses outside of the PRC. We are a Cayman Islands company and a foreign legal person under PRC laws and we have not directly operated any advertising business outside of China. Therefore, we do not qualify under PRC regulations to directly own equity interest in advertising services providers. Accordingly, our subsidiary, Nanning Jetlong, is ineligible to apply for the required licenses for providing advertising services in China. Our advertising business is operated through contractual arrangements with our affiliated consolidated entities. These contractual arrangements enable us to exercise effective control over these entities and receive substantially all of the economic benefits from them.
 
Agreements that Transfer Economic Benefits to Us
 
Trademark, Trade Name and Domain Name License Agreements.  Under the trademark, trade name and domain name license agreements between Nanning Jetlong and each of the affiliated consolidated entities, Nanning Jetlong grants a non-exclusive license to use its trademark, trade name and domain name to the affiliated consolidated entities, in exchange for a quarterly license fee calculated based on each affiliated consolidated entity’s profit in the corresponding quarter. Nanning Jetlong is entitled to adjust the license fees in its sole discretion. The trademark, trade name and domain name license agreements remain in effect until the expiration of the trademark, trade name and domain name.
 
Exclusive Technology Support Agreements.  Under the exclusive technical support agreements between Nanning Jetlong and each of the affiliated consolidated entities, Nanning Jetlong will provide technology services and consulting services to the affiliated consolidated entities, in exchange for a quarterly service fee based on a predetermined formula. Nanning Jetlong is entitled to adjust the service fees in its sole discretion. The term of each exclusive technology support agreement is twenty years from the effective date thereof, and the agreement will be automatically renewed for an additional twenty years upon expiration unless Nanning Jetlong gives prior written notice to the affiliated consolidated entities not to renew the agreements.
 
Agreements that Provide Us with Effective Control
 
Option and Cooperation Agreements.  With respect to each affiliated consolidated entity, Nanning Jetlong, the affiliated consolidated entity and the nominee shareholders of the affiliated consolidated entity, have entered into an option and cooperation agreement. Pursuant to the option and cooperation agreement, Nanning Jetlong has an exclusive option to purchase, or to designate other persons to purchase, to the extent permitted by applicable PRC laws, rules and regulations, all or part of the equity interest in the affiliated consolidated entity from the nominee shareholders. The purchase price for the entire equity interest shall be the minimum price permitted by applicable PRC laws, rules and regulations. Each shareholder of the affiliated consolidated entity agreed to pay the purchase price received from Nanning Jetlong to the affiliated consolidated entity after Nanning Jetlong exercised its option. The term of the option and cooperation agreement is twenty years from the effective date thereof, and the agreement will be automatically renewed for an additional twenty years upon expiration until the completion of the transfer of all of the equity interest provided therein.
 
Voting Rights Agreements.  The nominee shareholders of each affiliated consolidated entity have signed a voting rights agreements, pursuant to which the nominee shareholders have granted Nanning Jetlong, or a person designated by Nanning Jetlong, the right to exercise all of the voting rights as shareholders of the affiliated consolidated entity. The voting rights agreements will remain in effect until all of the equity interests in affiliated consolidated entities have been transferred to Nanning Jetlong pursuant to the option agreements described above.
 
Equity Pledge Agreements.  With respect to each affiliated consolidated entity, Nanning Jetlong, the affiliated consolidated entity and the nominee shareholders of the affiliated consolidated entity have entered into an equity pledge agreement. Under the equity pledge agreement, the nominee shareholders have pledged their respective equity interests in the affiliated consolidated entity to Nanning Jetlong to secure the


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obligations of the affiliated consolidated entity under its trademark, trade name and domain name license agreement and the exclusive technology support agreement with Nanning Jetlong. In addition, the nominee shareholders agreed not to transfer, sell, pledge, dispose of or create any encumbrance on their equity interests in the affiliated consolidated entity. The affiliated consolidated entity covenants that without prior consent of Nanning Jetlong, it will not distribute any dividends. The equity pledge agreement will expire two years after the affiliated consolidated entity has fully performed its obligations under its trademark, trade name and domain name license agreement and the exclusive technical support agreement with Nanning Jetlong.
 
In the opinion of Commerce & Finance Law Offices, our PRC legal counsel:
 
  •  the reorganization to establish our corporate structure, including the shareholding structure of each of our affiliated consolidated entities incorporated in the PRC, has not been challenged by any court, governmental agency or body or any other regulatory authorities in the PRC, and there are no legal, arbitration, governmental or other proceedings, including, without limitation, governmental investigations or inquiries, pending before or threatened or contemplated by any PRC government agency in respect of our corporate structure;
 
  •  the reorganization to establish our corporate structure, including the shareholding structure of each of our affiliated consolidated entities incorporated in the PRC, has been carried out and completed in compliance with all applicable PRC laws, rules and regulations and our current corporate structure is in compliance with all applicable PRC laws, rules and regulations and does not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations;
 
  •  the contractual arrangements between Nanning Jetlong and our affiliated consolidated entities as described in this prospectus will not result in any violation of PRC laws, rules or regulations currently in effect, and are valid, binding and enforceable obligations of each of the contractual parties, except that the pledges under the equity pledge agreements by and among Nanning Jetlong, the affiliated consolidated entities and their respective shareholders will not become enforceable until they are registered with the relevant government authorities; and
 
  •  the business operations of Nanning Jetlong and our affiliated consolidated entities, as described in this prospectus, are in compliance with existing PRC laws, rules and regulations in all material respects.
 
Our PRC legal counsel has also advised us that there are uncertainties regarding the interpretation and application of PRC laws, rules and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities will not take a view that is contrary to the above opinion of our PRC legal counsel. Our PRC legal counsel has further advised that if a PRC government authority determines that our corporate structure, the contractual arrangements or the reorganization to establish our current corporate structure violates any applicable PRC laws, rules or regulations, the contractual arrangements will become invalid or unenforceable, and we could be subject to severe penalties and required to obtain additional governmental approvals from the PRC regulatory authorities. See “Risk Factors — Risks Relating to Our Corporate Structure — If the PRC government determines that the agreements that establish the structure for operating our China business otherwise do not comply with applicable PRC laws, rules and regulations, we could be subject to severe penalties” and “— Risks Relating to Doing Business in China — Uncertainties with respect to the PRC legal system could limit the protections available to you and us.”


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SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
 
The following selected condensed consolidated statement of operations data for the three years ended December 31, 2007, 2008 and 2009, and the selected condensed consolidated balance sheet data as of December 31, 2007, 2008 and 2009 have been derived from our audited financial statements that are included elsewhere in this prospectus and that have been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm. The following selected consolidated financial data as of and for the years ended December 31, 2006 and 2005 have been derived from our audited financial statements not included in this prospectus.
 
You should read the selected consolidated financial data in conjunction with those financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.
 
                                         
    For the Year Ended December 31,  
    2005     2006     2007     2008     2009  
    (US$ in thousands, except share and per share data)  
 
Condensed Consolidated Statement of Operations Data:
                                       
Revenues:
                                       
Media investment management
    14,639       15,312       8,182       79,266       87,275  
Advertising agency
    5,214       8,311       9,420       13,592       15,301  
Branding and identity services
    1,558       3,321       3,687       4,956       3,466  
                                         
Total revenues
    21,411       26,944       21,289       97,814       106,042  
                                         
Cost of revenues:
                                       
Media investment management
    11,850       12,678       4,685       63,443       68,538  
Advertising agency
    516       878       1,084       1,769       2,057  
Branding and identity services
    1,150       1,596       2,073       2,860       1,568  
                                         
Total cost of revenues
    13,516       15,152       7,842       68,072       72,163  
                                         
Gross profit
    7,895       11,792       13,447       29,742       33,879  
                                         
Selling and marketing expenses
    2,402       2,539       2,583       8,368       10,979  
General and administrative expenses
    371       437       472       3,461       5,560  
                                         
Total operating expenses
    2,773       2,976       3,055       11,829       16,539  
                                         
Operating profit
    5,122       8,816       10,392       17,913       17,340  
                                         
Interest income
    5       124       232       665       575  
Impairment on investments in non-marketable equity securities
                            (1,940 )
Realized gain from sales of equity securities
                1,103       111        
Other income (loss)
                94       (27 )     44  
                                         
Income before income tax expense
    5,127       8,940       11,821       18,662       16,019  
Income tax expense
                21       275       752  
                                         
Net income
    5,127       8,940       11,800       18,387       15,267  
                                         
Net income attributable to ordinary shareholders
    5,127       8,940       11,800       15,268       7,467  
Net income per share:
                                       
Basic
    0.10       0.18       0.24       0.27       0.07  
Diluted
    0.10       0.18       0.24       0.27       0.07  
Shares used in computation of net income per share:
                                       
Basic
    50,000,000       50,000,000       50,000,000       50,000,000       50,000,000  
Diluted
    50,000,000       50,000,000       50,000,000       50,406,264       52,011,348  
Share-based compensation expenses during the year included in:
                                       
Cost of revenues
                      25       17  
Selling and marketing expenses
                      1,254       1,481  
General and administrative expenses
                      531       786  
 


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    As of December 31,  
    2005     2006     2007     2008     2009     2009  
                                  Pro forma
 
                                  (unaudited)(1)  
    (US$ in thousands)  
 
Condensed Consolidated Balance Sheet Data:
                                               
Cash and cash equivalents
    3,608       10,108       36,476       60,823       54,737       54,737  
Total assets
    17,693       31,830       76,809       137,720       142,600       142,600  
Total liabilities
    16,685       23,843       57,613       74,545       61,897       61,897  
Series A convertible redeemable preferred shares
                      51,776       59,576        
Redeemable ordinary shares held by Aegis Media
                                  36,976 (2)
Total Charm Communications Inc. shareholders’ equity
    1,008       7,987       19,196       11,399       21,127       43,727  
 
 
(1) Our pro forma balance sheet data as of December 31, 2009 have been derived from our audited consolidated financial statements as of December 31, 2009, and have been adjusted to give effect to (1) the redemption of 7,500,000 Series A preferred shares on January 20, 2010 for US$37.0 million and the issuance of 9,244,000 ordinary shares to Aegis Media at US$4.00 per share assumed to finance the redemption and (2) the automatic conversion of all of the remaining outstanding Series A preferred shares into 5,000,000 ordinary shares upon the completion of this offering using a conversion ratio of one Series A preferred share to one ordinary share as if the redemption and conversion had occurred as of December 31, 2009.
(2) Aegis Media had an option until July 1, 2010 to require us to repurchase all or a portion of the ordinary shares held by Aegis Media if we were in breach of our obligations under our joint venture with Aegis Media as a result of our failure to procure entry by specified clients into agreements with the joint venture by April 30, 2010 or the failure of such agreements to meet specified revenue targets. Since the redemption of these ordinary shares was outside of our control, these ordinary shares are not included in permanent equity. On April 16, 2010, we received a written acknowledgement from Aegis Media that we have fully satisfied our obligations to procure entry by specified clients into agreements with the joint venture and that such agreements met the specified revenue targets. The option of Aegis Media to redeem these ordinary shares has lapsed upon this acknowledgement. Therefore, these ordinary shares held by Aegis Media are no longer redeemable.

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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 Condensed Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events may 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 believe we are the leading domestic television advertising agency in China, according to a report commissioned by us and prepared by CTR, as measured by the total value of successful bids of the prime-time advertising time for 2010 on CCTV, which is generally regarded as the most coveted television advertising time in China. According to CCTV, we ranked first in terms of the total advertising spending for the advertisements we placed on behalf of clients on CCTV channels in each of the six consecutive years from 2004 to 2009. In addition, we believe that, with exclusive agency arrangements with two satellite television channels, Shanghai Dragon Television and Tianjin Satellite Television, and four programs on CCTV, we have established a leading television media investment management business in China. We (i) offer a broad range of television advertising agency services from planning and managing advertising campaigns to creating and placing advertisements, and (ii) engage in media investment management through identifying, securing and selling television advertising resources.
 
We derive our revenues from three operating segments: (i) media investment management, (ii) advertising agency and (iii) branding and identity services. The financial results of our joint venture with Aegis Media will be included in our advertising agency business segment beginning in 2010.
 
Our advertising agency business places advertisements for our clients on a broad array of television channels, including CCTV and satellite and regional television channels, and on other media platforms, including Internet and out-of-home media. We derive our advertising agency revenues from the commissions paid by clients for planning and placing advertisements and from the sales commissions and performance bonuses received from the television channels and other advertising media platforms on which we place the advertisements. We account for our advertising agency revenues on a net basis. The total advertising spending for the advertisements we placed on behalf of our clients increased from US$254.9 million in 2008 to US$288.0 million in 2009, which drove the increase in our advertising agency revenues from US$13.6 million in 2008 to US$15.3 million in 2009.
 
Our media investment management business secures all or a portion of the advertising time and other advertising rights, which include soft advertising such as sponsorship, on a specific television channel or program. We derive our media investment management revenues from selling the advertising media resources that we have acquired to advertisers. We account for our media investment management revenues on a gross basis because we acquire the advertising media resources in advance at a predetermined price and bear the inventory risk of being a principal in acquiring the advertising media resources from the television stations. We also have the ability to establish the prices that we charge for selling these advertising media resources to our clients. The growth in our media investment management business after 2008 when we began to secure the advertising media resources on satellite television channels has been one of the primary drivers for the increase in our total revenues.
 
We also work with television channels that we have secured under our media investment management business to help enhance the attractiveness of their programs, expand their viewer base and achieve higher ratings. We do not receive any direct compensation for providing these services to the television stations, but we believe that our efforts may help increase the price that we can charge for selling our advertising media resources under our media investment business.


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Our branding and identity services business provide our advertising clients with creative design, development and production of advertisements and marketing consulting services. We derive our branding and identity revenues primarily from the production fees we charge our clients to produce advertisements or from the monthly retainer fees we charge for providing consulting services to help manage the overall advertising strategy of our clients.
 
As we believe that our clients have served as one of our primary growth drivers, we have focused on providing a broad range of integrated advertising solutions to our clients. We have endeavored to capture a greater portion of the total advertising spending of each of our clients by forming long-term relationships with our clients and cross-selling other services and advertising media resources to our clients when we believe that we can further the advertising campaigns of our clients. Our diversified client base includes well-recognized brand names in China across many industries, such as China Telecom, PICC, Agricultural Bank of China, China CITIC Bank, Snowbeer, Yunnan Baiyao, C-Bons, Wahaha and Midea. Our clients also include emerging domestic leading brands, such as Bosideng, Lolo, Chery Automobile and Feihe Dairy, that have used our services to further build their brands nationally.
 
Our total revenues have increased significantly to US$106.0 million in 2009 from US$97.8 million in 2008 and US$21.3 million in 2007.
 
Factors Affecting Our Results of Operations
 
Our business, results of operations and financial condition are significantly affected by a number of factors and trends, including:
 
Our ability to renew existing and enter into new exclusive agency arrangements to secure more advertising media resources on television channels
 
In connection with our media investment management business, we secure desirable advertising media resources consisting of advertising time and other advertising rights typically on an exclusive basis. By selling these coveted advertising media resources to advertisers directly, we can generate more business from our existing advertising clients and attract new advertising clients. We have focused our growth strategy on our media investment management business because this business provides us with the potential to generate substantial revenues from sales of our advertising media resources, which we have secured at predetermined costs. We currently have exclusive agency arrangements with respect to advertising rights on Shanghai Dragon Television and Tianjin Satellite Television. We have also secured all the advertising time during the programs Yong Talk Show and Xiao Fei Zhu Zhang broadcasted on CCTV-3 and CCTV-2, respectively, for 2010, and Jin Ri Shuo Fa and Di Yi Shi Jian broadcasted on CCTV-1 and CCTV-2, respectively, for 2010 beginning in February 2010. If, after expiration, we are unable to renew or enter into new exclusive agency arrangements with respect to advertising rights on Shanghai Dragon Television, Tianjin Satellite Television or CCTV programs on attractive terms or at all, our growth strategy, results of operations, financial condition and business prospects would be materially and adversely affected. We will continue to explore and pursue opportunities to renew existing and enter into additional exclusive agency arrangements with other television channels and our ability to secure desirable advertising media resources will affect our results of operations.
 
Our ability to sell our advertising media resources we secure under our exclusive agency arrangements at favorable prices
 
Under our media investment management business, we sell advertising media resources that we have secured. As part of the exclusive agency arrangements, we also provide advice to television channels in order to improve the attractiveness of the programs broadcasted on these television channels, maximize the viewer base and increase average ratings, which will help increase the demand for the advertising media resources and consequently allow us to increase our revenues, our ability to generate sufficient revenues from the sale of these advertising media resources to cover the costs of acquiring such advertising media resources will affect our results of operations. We plan to leverage our high-quality client base in selling the advertising media resources that we have secured, and our ability to cross-sell such advertising time and rights will affect our


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media investment management revenues. Our ability to maximize the sales revenues for the advertising media resources that we secure will affect our future results of operations.
 
Our ability to respond to changes in sales methods of CCTV and other television channels
 
In general, our advertising agency business receives commissions that are calculated as a percentage of the total advertising spending successfully placed by us for our advertising clients. Our advertising agency business specializes in securing prime-time advertising time on CCTV through its annual public auction. Television channels, including CCTV, may change their sales methods at any time as they wish and without prior notice to us. If CCTV introduces new sales methods that are materially different from the methods it is currently using, we may lose our competitive advantage for CCTV’s advertising time. Our ability to adapt to future trends to continue to place advertisements on television channels for our clients and secure exclusive advertising rights will affect our business prospects, results of operations and financial condition.
 
The commission rates from our advertising clients and the sales commission rates from the television channels
 
The level of competition in the television advertising industry in China has increased substantially in recent years as many domestic and international advertising service providers have commenced or expanded operations in the PRC television advertising market, which could affect the commissions we receive from our advertising clients. However, the average sales commission rates from the television channels have increased during recent years slightly due to competition among television channels but we cannot ascertain whether this trend will continue. We plan to continue our strategy of maintaining our strong position with respect to CCTV’s prime-time advertising time. We believe that our successful track record and future performance in securing coveted advertising time on CCTV will help us further enhance our brand name and expand our blue-chip client base of Chinese advertisers, which may help maintain our commission rates and performance bonuses. The future trends of our commission rates from our advertising clients and sales commissions rates from the television channels will affect our business prospects and future results of operations.
 
Other factors
 
Demand for our services and, as a result, growth in our revenues are driven by overall advertising spending in China, which is influenced by the pace of overall economic growth. We expect that the overall economic growth in China will contribute to an increase in advertising spending by international and domestic brand names looking to reach a growing consumer market. The global financial crisis and economic downturn in 2008 and 2009 adversely affected economies and businesses around the world, including those in China. We believe that, as the Chinese economy recovers from the adverse effects of the global financial crisis, advertising spending will increase in both urban areas and smaller cities in China. However, if the global or Chinese economy does not fully recover from the recent financial crisis or another economic downturn occurs, our business, results of operations and financial condition could continue to be materially and adversely affected. See “Risk Factors — Risks Relating to Our Business — The recent global financial crisis and economic downturn have had, and may continue to have, a material adverse effect on our business, results of operations and financial condition.”
 
Aside from fluctuations in the level of advertising spending resulting from changes in the overall economic and market conditions in China, our revenues are affected by seasonal fluctuations in consumer spending that also affect the level of advertising spending over time in China. The first and second quarters of each year are expected to be slower seasons for the Chinese advertising industry in general. As a result, our quarterly results of operations may fluctuate significantly from period to period.
 
In January 2010, we formed a joint venture with international 4A advertising group Aegis Media to operate its brand “Vizeum” in China. Prior to the establishment of the joint venture, Beijing Vizeum primarily served international customers such as Nikon, Carlsberg and Mango, while our existing businesses primarily focused on providing advertising services to blue-chip Chinese companies. As part of the global network of Vizeum, our joint venture provides a platform for us to expand our services to domestic clients that value the


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services and expertise of international 4A advertising agencies and serves as a gateway for our domestic clients seeking to advertise internationally, which enables us to further customize our strategies to address the differing needs of clients. As a result, we believe that our joint venture complements our existing businesses and provides us with an enhanced service platform that enables us to attract new advertising clients and expand our customer base. See — “Business — Our Competitive Strengths — Strategic alliance with an international 4A advertising agency that provides an enhanced service platform.” We do not expect the joint venture to contribute significantly to our results of operations in the near term.
 
In addition to the factors discussed above, our reported results are also affected by the fluctuations in the value of the Renminbi against the U.S. dollar because our reporting currency is the U.S. dollar while the functional currency of our subsidiary and affiliated consolidated entities in China, which operate substantially all of our business, is the Renminbi. In 2007 and 2008, the Renminbi appreciated against the U.S. dollar by approximately 6.5% and 6.5%, respectively, and in 2009, the Renminbi depreciated against the U.S. dollar by approximately 0.1%. The fluctuation of the Renminbi against the U.S. dollar contributed to the fluctuation in our net income reported in U.S. dollar terms in 2007, 2008 and 2009, respectively. For additional information relating to the fluctuations in the value of the Renminbi against the U.S. dollar, see “Exchange Rate Information,” “Risk Factors — Risks Relating to Doing Business in China — Fluctuations in exchange rates of the Renminbi could materially affect our reported results of operations” and “— Quantitative and Qualitative Disclosure About Market Risk — Foreign Exchange Risk.”
 
Revenues
 
We generated revenues of US$21.3 million, US$97.8 million and US$106.0 million in 2007, 2008 and 2009, respectively. We derive revenues from our three operating segments: media investment management, advertising agency and branding and identity services. The following table sets forth a breakdown of our revenues by our three operating segments:
 
                                                 
    For the Year Ended December 31,  
    2007     2008     2009  
          % of Total
          % of Total
          % of Total
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues  
    (US$ in thousands, except percentages)  
 
Revenues:
                                               
Media investment management
    8,182       38.4 %     79,266       81.0 %     87,275       82.3 %
Advertising agency
    9,420       44.2 %     13,592       13.9 %     15,301       14.4 %
Branding and identity services
    3,687       17.4 %     4,956       5.1 %     3,466       3.3 %
                                                 
Total revenues
    21,289       100.0 %     97,814       100.0 %     106,042       100.0 %
                                                 
 
Media Investment Management.  Our media investment management revenues increased to US$87.3 million in 2009 from US$79.3 million in 2008 and US$8.2 million in 2007. Under our media investment business, we enter into agreements to secure all or a portion of the advertising time and other advertising rights, which include soft advertising such as sponsorship on television channels, specific television programs and special television events. We derive our media investment management business revenues from the sale of advertising time and other advertising rights that we have secured pursuant to these agreements to advertisers directly or through their agencies. We account for media investment management business revenues and related costs on a gross basis. As we plan to explore and secure additional advertising media resources in China pursuant to exclusive agency arrangements, we expect our media investment management business revenues to continue increasing in the near future and accounting for a large portion of our total revenues.
 
Advertising Agency.  Our advertising agency revenues increased to US$15.3 million in 2009 from US$13.6 million in 2008 and US$9.4 million in 2007. We derive our advertising agency revenues from representing advertising clients to place their advertisements on television channels, primarily CCTV. We account for advertising agency revenues on a net basis. Our advertising agency specializes in securing prime-time advertising time on CCTV through the annual bidding process. In general, we receive commissions which are calculated as a percentage of the total advertising spending placed by us for our advertising clients.


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We also receive sales commissions from the television channels calculated as a percentage of the total advertising spending that we place on the television channels on behalf of our advertising clients. While we receive sales commissions from the television channels where we place advertisements on behalf of our clients, CCTV has historically accounted for the vast majority of the sales commissions that we have received. In addition to the sales commissions, CCTV also pays a performance bonus to advertising agencies that qualify as one of its top ten advertising agencies for a calendar year. CCTV ranks the top ten advertising agencies based primarily on the aggregate value of advertisements placed on CCTV channels.
 
We received sales commissions and performance bonuses from CCTV in each of 2007, 2008 and 2009. In the aggregate, the sales commissions and bonuses from CCTV accounted for approximately 10.9%, 3.3% and 5.5% of our total revenues in 2007, 2008 and 2009, respectively. However, CCTV and the other television stations have sole discretion in setting and adjusting the future amount of the sales commissions and performance bonuses they pay to advertising agencies at any time. See “Risk Factors — Risks Relating to Our Business — Our CCTV-related business has been, and is expected to continue to be, critical to our business and financial performance. Failure to maintain our relationship with CCTV would continue to materially and adversely affect our business, results of operations, financial condition and prospects.”
 
We expect our advertising agency revenues to increase in the near future as we expand our television agency business, but we anticipate our advertising agency revenues to decrease as a percentage of our total revenues because our media investment management business is expected to grow at a faster pace than our advertising agency business.
 
Branding and Identity Services.  Our branding and identity revenues amounted to US$3.5 million in 2009 compared to US$5.0 million in 2008 and US$3.7 million in 2007. We derive our branding and identity services revenues from providing creative design and production management services for the development of an advertisement. We account for the total amount of payments we receive from advertising clients for such services we provide to them as our branding and identity services revenues.
 
Cost of Revenues
 
Our total cost of revenues amounted to US$7.8 million, US$68.1 million and US$72.2 million in 2007, 2008 and 2009, respectively. We account for our cost of revenues separately for our three operating segments. The following table sets forth a breakdown of our cost of revenues by our three operating segments for the periods indicated:
 
                                                 
    For the Year Ended December 31,  
    2007     2008     2009  
          % of Total
          % of Total
          % of Total
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues  
    (US$ in thousands, except percentages)  
 
Cost of revenues:
                                               
Media investment management
    4,685       22.0 %     63,443       64.9 %     68,538       64.6 %
Advertising agency
    1,084       5.1 %     1,769       1.8 %     2,057       1.9 %
Branding and identity services
    2,073       9.7 %     2,860       2.9 %     1,568       1.5 %
                                                 
Total cost of revenues
    7,842       36.8 %     68,072       69.6 %     72,163       68.0 %
                                                 
 
Media Investment Management.  The cost of revenues for our media investment management business increased from US$4.7 million in 2007 to US$63.4 million in 2008 and US$68.5 million in 2009. For our media investment management business, we enter into exclusive advertising agency agreements to secure all or a portion of the advertising time and other advertising rights on television channels, specific television programs and special events. Our cost of revenues for our media investment management business primarily consists of the media costs that we must pay to secure the advertising time and other advertising rights under the exclusive agency arrangements and related business taxes and surcharges. Pursuant to our strategy to secure significant television advertising media resources in China by entering into exclusive agency arrangements with satellite television channels, we have entered into exclusive agency arrangements to secure a


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portion or all of the advertising time and other advertising rights on Shanghai Dragon Television and Tianjin Satellite Television. As a result, we expect our cost of revenues for our media investment management business to account for a large portion of our total cost of revenues.
 
Advertising Agency.  The cost of revenues for our advertising agency business increased from US$1.1 million in 2007 to US$1.8 million in 2008 and US$2.1 million in 2009. The cost of revenues for our advertising agency business primarily consists of salaries and benefits for our advertising agency professionals and related business taxes and surcharges. We account for our advertising agency revenues on a net basis. Accordingly, our cost of revenues for our advertising agency business has remained a relatively small percentage of our advertising agency revenues. While we expect our advertising agency revenues to increase in the near future, we anticipate that our cost of revenues for this business segment will remain relatively small as a percentage of our total cost of revenues.
 
Branding and Identity Services.  The cost of revenues for our branding and identity services business increased from US$2.1 million in 2007 to US$2.9 million in 2008, and decreased to US$1.6 million in 2009. The cost of revenues for our branding and identity services business primarily consists of the production costs for the advertisements that we design and related business taxes and surcharges. It also includes the costs of salaries and benefits for our branding and identity professionals. The amount of the cost of our revenues for our branding and identity services decreased from 2008 to 2009, due to the corresponding decrease in revenues from our branding and industry services.
 
Business taxes and surcharges include the 5.0% business tax and 3.5% surcharges that our PRC subsidiary and affiliated consolidated entities must pay for revenues earned from services provided in China. Business taxes and surcharges are levied on our revenues net of our media costs. We incurred business taxes and surcharges in connection with the business operations of our affiliated consolidated entities in China in 2007, 2008 and 2009. Starting in March 2008, as a result of the establishment of the contractual arrangements between Nanning Jetlong, our wholly owned PRC subsidiary, and our affiliated consolidated entities, we incurred business taxes and surcharges on fees paid by our affiliated consolidated entities to Nanning Jetlong under these contractual arrangements. The purpose of these contractual arrangements is to allow Nanning Jetlong to receive substantially all of the economic benefits from the affiliated consolidated entities, which led to the levy of the business taxes and surcharges.
 
Gross Profit
 
The following table sets forth our gross profit by our operating segments for the periods indicated.
 
                               
    For the Year Ended December 31,    
    2007       2008       2009    
    (US$ in thousands, except percentages)    
Gross profit:
                             
Media investment management
    3,497         15,823         18,737    
Advertising agency
    8,336         11,823         13,244    
Branding and identity services
    1,614         2,096         1,898    
                         
Total gross profit
    13,447         29,742         33,879    
                         
 
Our gross profit increased to US$33.9 million in 2009 from US$29.7 million in 2008 and US$13.4 million in 2007.
 
Media Investment Management.  The gross profit from our media investment management business increased significantly from 2007 to 2008 and 2009, primarily as a result of the change in our strategy beginning in 2008 to enter into exclusive agency arrangements with satellite television stations. We expect our gross profit from our media investment management business to increase in future periods as we continue to expand the amount of advertising media resources secured under exclusive agency arrangements.


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Advertising Agency Business.  The gross profit from our advertising agency business increased from 2007 to 2008 and 2009 due to increases in our advertising agency revenues, which were driven by an increase in the total advertising spending for advertisements we placed for our clients. The gross profit from our advertising agency business may increase to the extent we continue to receive more engagements from our clients to place advertisements on a variety of television stations and other advertising platforms and these engagements lead to an overall increase in the total advertising spending placed by our clients.
 
Branding and Identity Services.  The gross profit from our branding and identity services have fluctuated as a result of changes in revenue from branding and identity services. As a substantial portion of our cost of revenues for our branding and identity services is directly tied to the number and type of advertisements that we create and produce for our clients, our cost of revenues for our branding and identity services has also fluctuated together with revenues from our branding and identity services.
 
Operating Expenses
 
Our operating expenses consist of selling and marketing expenses and general and administrative expenses. The following table sets forth our operating expenses, divided into their major categories by amount and as a percentage of total revenues for the periods indicated.
 
                                                 
    For the Year Ended December 31,  
    2007     2008     2009  
          % of Total
          % of Total
          % of Total
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues  
    (US$ in thousands, except percentages)  
 
Total revenues
    21,289       100.0 %     97,814       100.0 %     106,042       100.0 %
Gross profit
    13,447       63.2 %     29,742       30.4 %     33,879       32.0 %
                                                 
Operating expenses:
                                               
Selling and marketing expenses
    2,583       12.2 %     8,368       8.6 %     10,979       10.4 %
General and administrative expenses
    472       2.2 %     3,461       3.5 %     5,560       5.2 %
                                                 
Total operating expenses
    3,055       14.4 %     11,829       12.1 %     16,539       15.6 %
                                                 
 
Selling and Marketing.  Our selling and marketing expenses primarily consist of salaries and benefits for our sales staff, marketing and promotional expenses and business development expenses. We also account for the cost of procuring market research and data from third party industry sources as selling and marketing expenses because we routinely use such research and data in connection with our selling and marketing activities. Selling and marketing expenses accounted for approximately 12.2%, 8.6% and 10.4% of our total revenues in 2007, 2008 and 2009, respectively. We expect the amount of our selling and marketing expenses to increase as an absolute amount in the near future with the expansion of our business in general. However, we expect the amount of our selling and marketing expenses to remain stable as a percentage of our total revenues in the near future, as we expect the benefits of our economies of scale and increased total revenues from our continued growth to be largely offset by (i) the increase in our personnel related expenses to strengthen our service capabilities to offer integrated services, in particular, building a team of professionals to develop our Internet advertising agency business and (ii) the ramp-up of our joint venture with Aegis Media.
 
General and Administrative.  Our general and administrative expenses primarily consist of salaries and benefits for management, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance and utilities. General and administrative expenses accounted for approximately 2.2%, 3.5% and 5.2% of our total revenues in 2007, 2008 and 2009, respectively. We expect our general and administrative expenses to increase as an absolute amount in the near future as we incur additional costs in connection with the expansion of our business in general and our operations as a publicly traded company, which include costs related to improving and maintaining our internal control over financial reporting and complying with our reporting obligations. However, we expect the amount of our general and administrative expenses to decrease as a percentage of our total revenues in the near future as we expect the


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benefits of our economies of scale and increased total revenues from our continued growth to only be partially offset by the increased expenses as of result of being a public company.
 
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. Our intermediate holding company incorporated in the British Virgin Islands is not subject to income or capital gains taxes, or withholding taxes on dividend payments. Under the PRC EIT Law, which has been effective since January 1, 2008, and related implementing rules, dividends paid from our PRC subsidiary are subject to a withholding tax at 10%. This new dividend withholding tax, however, will only be levied on our PRC subsidiary in respect of profits earned in 2008 onwards. Profits distributed after January 1, 2008 but related to financial results generated in the year ended December 31, 2007 and prior years will not be subject to dividend withholding tax. The dividend withholding tax rate can be lower than 10% subject to tax treaties between China and foreign countries or regions.
 
Our subsidiary and affiliated consolidated entities in China are subject to business taxes and related surcharges by various local tax authorities at a rate of 8.5% on our revenues net of our media costs. In addition, our subsidiary and affiliated consolidated entities in China were generally subject to the standard enterprise income tax rate, which was 33% prior to December 31, 2007.
 
Under the EIT law, PRC enterprises that were subject to a 33% enterprise income tax rate are subject to a 25% enterprise income tax rate commencing January 1, 2008.
 
Under the EIT Law, enterprises that are established under the laws of foreign countries or regions and whose “de facto management bodies” are located within the PRC territory may be deemed by the PRC tax authorities as PRC resident enterprises, and will be subject to the PRC enterprise income tax at the rate of 25% on their worldwide income. Under the detailed implementation rule of the EIT Law, “de facto management bodies” is defined as the bodies that have material and overall management and control over the business, personnel, accounts and assets of the enterprise. Although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise. To our knowledge, there is a lack of clear guidance regarding the criteria pursuant to which the PRC tax authorities will determine the tax residency of a company under the EIT Law. As a result, neither we nor our PRC counsel can be certain as to whether we will be subject to the tax applicable to resident enterprises or non-resident enterprises under the EIT Law. If we and our offshore holding companies are considered to be PRC resident enterprises, we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income. In such cases, however, there is no guarantee that the preferential treatments to PRC tax residents will automatically apply to us, such as the withholding tax exemption on dividends between PRC resident companies.
 
Critical Accounting Policies
 
We prepare our financial statements in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among other things, assets and liabilities, contingent assets and liabilities and net revenues and expenses. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from what we expect. This is especially true with some accounting policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our audited consolidated financial statements because they involve the greatest reliance on our management’s judgment.
 
Revenue Recognition
 
Our revenues are derived from three operating segments: media investment management, advertising agency and branding and identity services.


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Media Investment Management
 
We derive media investment management revenues from the sale of advertising time or other advertising rights that we secure under our media investment management business. The revenues for these sales are recognized when the related advertisement time or right is utilized by the client.
 
We evaluate our media investment management contracts to determine whether to recognize our revenues on a gross basis or net of the costs of obtaining the associated time slots from the television stations. Our determination is based upon an assessment as to whether we act as a principal or agent when providing our services. We have concluded that we act as principal in media investment management business. Factors that support our conclusion mainly include:
 
  •  we secure the advertising media resources from television channels and, as a result, we bear the risk of ownership and are exposed to the risk that we may not be able to sell the purchased resources;
 
  •  we are able to establish the prices charged to our customers; and
 
  •  we are obligated to pay the television stations regardless of the collection from the advertising customers, and, as a result, we bear the delivery and billing risks for the revenues generated with respect to our services.
 
Based on these factors, we believe that recognizing revenues from media investment management business on a gross basis is appropriate.
 
Advertising Agency
 
We derive advertising agency revenues from commissions received for assisting advertising clients in obtaining advertisement time on television stations, primarily CCTV. In general, the commissions received are based on a percentage of the cost of the advertising time purchased by the client. The commission revenues are recognized as revenues when the related advertising time is utilized by the client, and such revenue recognition does not involve high degree of estimation and judgment.
 
We evaluate our advertising agency contracts to determine whether to recognize our revenues on a gross basis or net of the costs of obtaining the associated time slots from the television stations. Our determination is based upon an assessment as to whether we act as a principal or agent when providing our services. We have concluded that we act as an agent in advertising agency business. Factors that support our conclusion mainly include:
 
  •  we are not the primary obligor in the related arrangements;
 
  •  we place orders on behalf of the advertising customers, and, as a result, we do not have general inventory risk;
 
  •  we are not able to independently establish prices charged to the advertising customers because such prices are established and negotiated on the basis of the amount charged by television stations;
 
  •  we cannot change the specifications of the services we will be rendering; and
 
  •  we are not able to control the selection of our content suppliers.
 
Based on these factors, we believe that recognizing revenues from our advertising agency business on a net basis is appropriate.
 
We also receive sales commissions from television stations, primarily CCTV, equal to a percentage of the aggregate advertising spending for qualifying advertising time purchased and utilized by advertising clients we represent. The sales commissions and performance bonuses we received from television stations may be subject to adjustment. We accrue and recognize commission revenues when we estimate that the amounts of commissions are probable and reasonably estimable. These estimations are based on our past experience and various performance factors set by television stations. Actual amounts of commissions that we will receive


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from the television stations could differ from our estimations. Historically, the adjustments to our estimations for the actual amounts of commissions have not been material.
 
We may also receive a performance bonus from CCTV for qualifying as one of its top ten advertising agencies for a calendar year. We recognize revenues equal to the amount of the performance bonus earned only when we are notified of the bonus amount by CCTV. However, CCTV and the other television stations have sole discretion in setting and adjusting the amounts of sales commissions and performance bonuses to be paid to advertising agencies.
 
Branding and Identity Services
 
We derive branding and identity services revenues by providing creative design and production management services for the development of advertisements and marketing consulting services. These types of revenues do not involve significant estimates and judgment.
 
Non-Monetary Transactions
 
We recognize revenues from non-monetary transactions in which we exchange advertising time slots for equity interests based on the estimated fair value of those equity securities received for services rendered since the fair values of non-marketable equity securities are more readily determinable. Determination of the fair value of those equity securities involves judgment concerning such factors as weighted average cost of capital, or WACC, growth rate, marketability discount and significant adverse effect on the fair value of the investments. Some of the factors require our significant judgment, while, for others, we typically refer to industry benchmarks. Results could differ significantly with different levels of assumptions or factors.
 
Impairment on Investments in Non-Marketable Securities
 
We periodically review the investments for other-than-temporary impairment. Determination of whether the impairment is other-than-temporary and measurement of an impairment loss involve management’s judgment on a number of factors. These factors include, but not limited to, determination of fair value of the investment, as discussed above, and whether the impairment is either temporary or other-than-temporary, which involves judgment as to the severity and duration of the decline below fair value. During the year ended December 31, 2009, an other-than-temporary impairment of US$1.9 million for the investments in non-marketable securities was recognized.
 
Allowance for Doubtful Accounts
 
We regularly evaluate the collectability of our accounts receivable. We maintain allowances for doubtful accounts when we believe there is a risk to the collectability of accounts receivable. We review the aging analysis of accounts receivable and make an assessment of the collectability of specific customer accounts, including evaluating the credit worthiness and financial condition of our customers and considering our historical experience with bad debts. Actual collections of the accounts receivable could differ significantly from the original estimates. Allowance for doubtful accounts as of December 31, 2009 was US$1.2 million.
 
Taxation
 
Uncertainties exist with respect to how the PRC’s EIT Law applies to our overall operations and, more specifically, with regard to tax residency status. The EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered to be residents for PRC income tax purposes if their place of effective management or control is within the PRC. The implementation rules under the EIT Law provide that non-resident legal entities will be considered to be PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting or properties, among others, occur within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, for the purposes of preparing our financial statements, we have assumed that our legal entities organized outside of the PRC will not be treated as residents for purpose of the EIT Law. If one or


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more of our legal entities organized outside of the PRC were characterized as PRC tax residents, our results of operations could be materially and adversely affected.
 
Share-Based Compensation
 
Our share-based payment transactions with directors, employees and consultants are measured based on the grant date fair value of the equity instrument we issued and recognized as compensation expense over the requisite service period based on a graded vesting attribution method, with a corresponding impact reflected in additional paid-in capital.
 
In 2008 and 2009, we granted options to purchase our ordinary shares to our directors, employees and consultants. See “Management — 2008 Share Incentive Plan.”
 
The table below sets forth certain information concerning options granted to our directors, employees and consultants on the dates indicated.
 
                                     
    Number of Ordinary
          Fair Value of
    Fair Value of
     
    Shares Underlying
    Option Exercise
    Options at
    Ordinary
     
Grant Date
  Options Granted     Price Per Share     Date of Grant     Shares     Type of Valuation
          (US$/Share)     (US$/Share)     (US$/Share)      
 
April 8, 2008
    6,162,300       1.00       1.43-1.51       2.35     Contemporaneous
July 7, 2008
    750,000       3.15       1.19-1.31       3.35     Contemporaneous
September 2, 2008
    136,000       3.15       1.26       3.29     Contemporaneous
January 15, 2009
    750,000       3.15       0.66       2.02     Contemporaneous
November 1, 2009
    1,078,000       3.40       1.82-1.91       4.00     (1)
April 9, 2010
    730,000       3.40       2.62-2.70       5.00     (2)
 
 
(1) The fair value of ordinary shares was determined based on an arm’s length transaction in which we issued ordinary shares to a third party for cash.
 
(2) The fair value of ordinary shares was determined based on the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus.
 
In determining the fair value of our stock options as of April 8, 2008, July 7, 2008, September 2, 2008 and January 15, 2009, we relied on a valuation report prepared by American Appraisal China Limited, or AAC, an independent third-party appraisal firm, based on data we provided. The management determined the fair value of the options to purchase our ordinary shares by using the Black-Scholes option pricing model.
 
The assumptions used to determine the fair value of the options at the relevant grant dates were as follows:
 
                                                 
    April 8, 2008   July 7, 2008   September 2, 2008   January 15, 2009   November 1, 2009   April 9, 2010
 
Risk-free interest rate
    2.76%-3.44%       4.08%-4.64%       4.42%       3.6%       2.24%-2.68%       2.08%-2.56%  
Expected dividend yield
    0%       0%       0%       0%       0%       0%  
Expected volatility
    0.50-0.52       0.419-0.435       0.427       0.583       0.540-0.607       0.546-0.580  
Expected term (in years)
    1.50-2.66 years       2.91-3.58 years       3.58 years       3.56 years       2.75-3.74 years       3.02-3.58 years  
                         
Fair value of share option
    US$1.43-US$1.51       US$1.19-US$1.31       US$1.26       US$0.66       US$1.82-US$1.91       US$2.62-US$2.70  
 
As we did not have historical share option exercise experience, we estimated the expected term based on vesting term of the awards, estimated post vesting termination behavior and exercise behavior of employees in comparable companies. The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the options. The risk-free interest rate was estimated based on the yield to


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maturity of China international government bonds with a maturity period close to the expected term of the options. The dividend yield was estimated based on its expected dividend policy over the expected term of the options. We are required to estimate forfeitures at the time of grant and record share-based compensation expenses only for those awards that are expected to vest. If actual forfeitures differ from these estimates, we may need to revise those estimates used in subsequent periods.
 
If factors change and we employ different assumptions for estimating share-based compensation expenses in future periods or if we decide to use a different valuation model, our share-based compensation in future periods may differ significantly from what we have recorded in prior periods and could materially affect our operating income, net income and net income per share.
 
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, which are characteristics not present in our option grants. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair value of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may be significantly different from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based compensation awards, such as employee share options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair value originally estimated on the grant date and reported in our financial statements. Alternatively, values that are significantly higher than fair values originally estimated on the grant date and reported in our financial statements may be realized from these instruments.
 
There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.
 
A further input into the Black-Sholes model is the fair value of our ordinary shares at the date of the grant. As a private company with no quoted market in our ordinary shares we need to estimate the fair value of our ordinary shares at the relevant grant dates. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of each grant.
 
In determining the fair values of our ordinary shares as of each option grant date other than November 1, 2009, a combination of (i) the discounted cash flow, or DCF, method of the income approach and (ii) the market approach was used. We believed that both the DCF method and the market approach are appropriate in appraising our equity value, and did not believe that one approach is more appropriate than the other. Therefore, equal weighting was assigned to the market approach and the income approach.
 
For the income approach, we utilized DCF analysis based on our projected cash flow and our management’s best estimation as of the valuation dates. The projected cash flow and estimation include, among other things, 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 operation; and no material deviation in industry trends and market conditions from economic forecasts. These assumptions are inherently uncertain and subjective. The risks associated with achieving our forecasts were assessed in selecting the appropriate discount rates which had been determined to be 19%, 18%, 17.5% and 17.5% as of April 8, 2008, July 7, 2008, September 2, 2008 and January 15, 2009, respectively. The discount rate were based on estimated market required rate of return for investing in our company, which were derived by using the Capital Asset Pricing Model, a method that market participants commonly use to price securities. The change in WACC was the combined result of the changes in the risk-free rate, industry-average correlated relative volatility coefficient beta, equity risk premium, size of our company, scale of our business and our ability in achieving forecast projections.


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For the market approach, we considered the market profile and performance of twelve guideline companies engaged in advertising industry and used such information to derive market multiples. We then calculated the following two multiples for the guideline companies, enterprise value to sales multiple, or EV/ Sales, and enterprise value to earnings before interest and tax, or EV/ EBIT. Due to the different growth rates, profit margins and risk levels between us and the guideline companies, we made price multiple adjustments.
 
Discount for lack of marketability, or DLOM, was also applied 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 discount for lack of marketability, the Black Scholes option model was used. Under the option-pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the discount for lack of marketability. Based on the analysis, DLOM of 16%, 15%, 15% and 15% was used for valuation of our ordinary shares, as of April 8, 2008, July 7, 2008, September 2, 2008 and January 15, 2009, respectively.
 
The option-pricing method was used to allocate equity value of our company to preferred and ordinary shares, taking into account the guidance prescribed by the American Institute Certified Public Accounts (AICPA) Audit and Accounting Practice Aid on Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. This method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. The volatility of our shares was estimated based on historical volatility of comparable listed companies’ shares. Had we used different estimates of volatility, the allocations between preferred and ordinary shares would have been different.
 
The fair value of the ordinary shares underlying the options increased from US$2.35 per share for the April 8, 2008 grants to US$3.35 per share for the July 7, 2008 grants, and US$3.29 per share for the September 2, 2008 grants. We believe the general increase in the fair value of the ordinary shares from April 1, 2008 to September 30, 2008 was primarily attributable to the following factors:
 
  •  We were planning for our initial public offering;
 
  •  In June 2008, we negotiated with CCTV for the 2008 Olympics advertising resources, and these resources contributed significant revenue and net profit during the Olympics period. We also strengthened the soft advertising cooperation with CCTV-5;
 
  •  We continued to bolster our management and sales and marketing functions by recruiting key employees. The headcount also increased from 198 as of March 31, 2008 to 262 as of June 30, 2008, and 307 as of September 30, 2008;
 
  •  In February 2008, we entered into exclusive agency arrangements with Shanghai Dragon Television. Under these arrangements, we purchased all of the advertising time and other advertising rights on Shanghai Dragon Television for the whole 2008 starting from April 2008, and we also strengthened the sales and marketing team and recruited key employees as mentioned above. In addition, we helped Shanghai Dragon Television design certain programs to make them more attractive, which resulted in a significant improvement of the ranking of Shanghai Dragon Television among satellite television channels;
 
  •  Our results of operations and financial position improved significantly since April 8, 2008;
 
  •  In July and August 2008, we issued Series A preferred shares for net proceeds of US$48.7 million, which was a milestone in the Company’s history as it was our first round of financing. The achievement of such a milestone means that the uncertainty and risk perceived by investors in achieving our business plan was reduced. Accordingly, the discount rate, which is based on the market participant’s required rate of return, was lowered which resulted in an increase in our overall equity value and hence an increase in the estimated fair value of our ordinary shares. The issuance price of the Series A preferred


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  shares was higher than the fair value of our ordinary shares because the liquidation preference and redemption rights associated with the Series A preferred shares provide more downside protection to the holders of our Series A preferred shares than holders of our ordinary shares.
 
The fair value of the ordinary shares was determined to be US$2.02 as of January 15, 2009. The decrease in fair value was primarily due to the then-current market and general economic conditions. The global financial markets experienced significant disruptions beginning in September 2008. The Chinese economy had also slowed down significantly since the fourth quarter of 2008 which could have caused our clients to reduce their advertising budgets, which would have had a negative impact on our business, operating results and financial condition.
 
The fair value of the ordinary shares was determined to be US$4.00 as of November 1, 2009 and January 20, 2010. We believe the increase in the fair value of the ordinary shares from US$2.02 as of January 15, 2009 to US$4.00 as of November 1, 2009 and January 20, 2010 was primarily due to the following factors:
 
  •  We strengthened our senior management team in 2009, in line with the business expansion and growth;
 
  •  We continued to strengthen our sales and marketing teams. The headcount of our sales and marketing teams increased from 187 as of December 31, 2008 to 204 as of December 31, 2009. Meanwhile, we reorganized and streamlined our sales and marketing teams in an effort to provide better professional services to our clients;
 
  •  Due to the recovery of general economic conditions, our clients increased their advertising budgets in the second half of 2009, which had a positive impact on our business, results of operations and financial condition; and
 
  •  In general, the global financial markets recovered during 2009. Market sentiment towards China-based publicly-traded companies improved during that period, which resulted in an overall appreciation in the market value of their shares. For example, the Hang Seng China Enterprises Index that tracks the performance of various China-based stocks on the Hong Kong Stock Exchange generally increased during 2009 and closed at 7,042.36 on January 15, 2009, 12,769.36 on October 30, 2009 and 12,282.09 on January 20, 2010. The NASDAQ China Index also generally increased in 2009 and closed at 102.99 on January 15, 2009, 159.99 on October 30, 2009 and 178.65 on January 20, 2010.
 
Since January 20, 2010, we believe the following factors have contributed to the increase in the fair value of our ordinary shares from US$4.00 as of November 1, 2009 and January 20, 2010 to US$5.00, the mid-point of the estimated initial offering price range shown on the front cover of this prospectus.
 
  •  We entered into two new exclusive contracts with respect to two CCTV television programs on January 30, 2010. Under the exclusive arrangements, we purchased all of the advertising time on these two CCTV programs from February 1, 2010 to December 31, 2010. We have also been recruiting sales and marketing staff and allocating the necessary resources for these new advertising media resources since January 30, 2010;
 
  •  During the period from January 20, 2010 to February 11, 2010, our sales and marketing team secured a greater amount of advertising placement revenues than previously anticipated by our management. As a result, we have already confirmed a significant portion of our forecasted advertising placement revenues for the remainder of 2010. In addition, the total number of our advertisers has increased more than previously anticipated by our management since January 20, 2010;
 
  •  On January 20, 2010, we formed a joint venture with international 4A advertising group Aegis Media to operate its brand “Vizeum” in China. Vizeum is an international media network and part of Aegis Group, one of the world’s leading marketing communications groups. We believe that our joint venture complements our existing businesses and provides us with an enhanced service platform that enables us to attract new advertising clients and expand our customer base. As part of the global network of Vizeum, our joint venture provides a platform for us to expand our services to domestic clients that value the services and expertise of international 4A advertising agencies, as well as a gateway for our


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  multinational and domestic clients seeking to advertise internationally. In addition, our collaboration with Aegis Media enables us to leverage the experience and expertise of Aegis Media to further enhance our capabilities in offering integrated marketing solutions, in particular, in digital and other new media platforms. We believe that our joint venture further distinguishes us from domestic and international 4A advertising agencies and enhances the competitiveness of our services;
 
  •  On January 20, 2010, we issued ordinary shares to Aegis Media for gross proceeds of US$49.6 million, which was a significant milestone in the development of our advertising agency business. Aegis Media has appointed one director to serve on our board of directors and is involved in our management and decision making process. Aegis Media is one of the world’s leading marketing communications companies, and we believe its participation in the management and decision-making process of our company will contribute significant value to us;
 
  •  We have further strengthened our financial reporting, accounting, internal control and budgeting processes. In anticipation of this offering, we have strengthened our corporate governance by forming an audit committee, a compensation committee and a corporate governance and nominating committee and adopted a code of business conduct and ethics and an insider trading policy. We will also be required to comply with Section 404 of the Sarbanes-Oxley Act in 2011. As a result, we have implemented, and will continue to implement, a number of internal control policies and measures; and
 
  •  The initial public offering will create a public market for our Class A ordinary shares, which will eliminate the discount previously applied for the lack of marketability.
 
Our Selected Quarterly Results of Operations
 
The following table presents our selected unaudited quarterly results of operations for the eight quarters in the period from January 1, 2008 to December 31, 2009. This information should be read together with our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements for the quarters presented on the same basis as our audited consolidated financial statements. The unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. The historical quarterly results presented below are not necessarily indicative of the results that may be expected for any future quarters or periods.
 
                                                                 
    For the Three Months Ended  
    March 31,
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
    December 31,
 
    2008     2008     2008     2008     2009     2009     2009     2009  
 
Revenues
                                                               
Media investment management
    14,635       19,010       21,687       23,934       20,084       17,858       25,056       24,277  
Advertising agency
    1,932       2,638       5,427       3,595       3,519       3,155       3,573       5,054  
Branding and identity services
    1,644       940       908       1,464       655       828       672       1,311  
                                                                 
Total revenues
    18,211       22,588       28,022       28,993       24,258       21,841       29,301       30,642  
                                                                 
Cost of revenues
                                                               
Media investment management
    15,740       15,489       16,157       16,057       19,338       14,019       18,666       16,515  
Advertising agency
    312       406       571       480       497       397       512       651  
Branding and identity services
    1,181       617       324       738       277       509       253       529  
                                                                 
Total cost of revenues
    17,233       16,512       17,052       17,275       20,112       14,925       19,431       17,695  
                                                                 
Gross profit
    978       6,076       10,970       11,718       4,146       6,916       9,870       12,947  
                                                                 
Operating expenses
                                                               
Selling and marketing expenses
    998       1,945       2,608       2,817       2,545       2,622       2,454       3,358  
General and administrative expenses
    253       633       1,053       1,522       1,020       863       1,955       1,722  


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    For the Three Months Ended  
    March 31,
    June 30,
    September 30,
    December 31,
    March 31,
    June 30,
    September 30,
    December 31,
 
    2008     2008     2008     2008     2009     2009     2009     2009  
 
Total operating expenses
    1,251       2,578       3,661       4,339       3,565       3,485       4,409       5,080  
Operating profit
    (273 )     3,498       7,309       7,379       581       3,431       5,461       7,867  
Interest income
    53       47       116       449       171       125       129       150  
Impairment on investments in non-marketable equity securities
                                        (1,940 )      
Realized gain from sales of equity securities
    111                                            
Other income (loss)
          (36 )     9             44                    
                                                                 
Income before income tax expense
    (109 )     3,509       7,434       7,828       796       3,556       3,650       8,017  
Income tax expense
    (2 )     50       111       116       39       174       180       359  
                                                                 
Net income
    (107 )     3,459       7,323       7,712       757       3,382       3,470       7,658  
                                                                 
Share-based compensation expenses during the related periods included in:
                                                               
Cost of revenues
          8       7       10       1       1       1       14  
Selling and marketing expenses
          354       437       463       453       334       247       447  
General and administrative expenses
          172       166       193       196       195       186       209  
 
Our business is affected by seasonal trends. In particular, our total revenues are typically greater in the third and fourth quarters of each year compared to the first two quarters of each year due to the seasonal trends of the advertising industry in China. Clients typically allocate a relatively larger advertising budget to the third and fourth quarters of each year. Our cost of revenues fluctuates from quarter to quarter mainly due to changes in the cost of the advertising media resources that we secure pursuant to exclusive arrangements during a particular period. Our sales and marketing expenses are typically greater in the fourth quarter of each year because of activities that we organize annually in the fourth quarter to promote our advertising media resources and advertising services. Other factors that may cause our quarterly operating results to fluctuate include, among others, changes in general economic conditions in China, overall advertising spending of advertisers, the availability and pricing of advertising time slots and the impact of unforeseen events.
 
Results of Operations
 
Selected Consolidated Financial Information
 
The following table sets forth selected consolidated operating income information for the relevant periods:
 
                                                 
    For the Year Ended December 31,  
    2007     2008     2009  
          % of Total
          % of Total
          % of Total
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues  
    (US$ in thousands, except share and per share data and percentages)  
 
Revenues:
                                               
Media investment management
    8,182       38.4 %     79,266       81.0 %     87,275       82.3 %
Advertising agency
    9,420       44.2 %     13,592       13.9 %     15,301       14.4 %
Branding and identity services
    3,687       17.4 %     4,956       5.1 %     3,466       3.3 %
                                                 
Total revenues
    21,289       100.0 %     97,814       100 %     106,042       100.0 %
                                                 

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    For the Year Ended December 31,  
    2007     2008     2009  
          % of Total
          % of Total
          % of Total
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues  
    (US$ in thousands, except share and per share data and percentages)  
 
Cost of revenues:
                                               
Media investment management
    4,685       22.0 %     63,443       64.9 %     68,538       64.6 %
Advertising agency
    1,084       5.1 %     1,769       1.8 %     2,057       1.9 %
Branding and identity services
    2,073       9.7 %     2,860       2.9 %     1,568       1.5 %
                                                 
Total cost of revenues
    7,842       36.8 %     68,072       69.6 %     72,163       68.0 %
                                                 
Gross profit
    13,447       63.2 %     29,742       30.4 %     33,879       32.0 %
                                                 
Selling and marketing expenses
    2,583       12.2 %     8,368       8.6 %     10,979       10.4 %
General and administrative expenses
    472       2.2 %     3,461       3.5 %     5,560       5.2 %
                                                 
Total operating expenses
    3,055       14.4 %     11,829       12.1 %     16,539       15.6 %
                                                 
Operating profit
    10,392       48.8 %     17,913       18.3 %     17,340       16.4 %
                                                 
Interest income
    232       1.1 %     665       0.7 %     575       0.5 %
Impairment on investments in non-marketable equity securities
                            (1,940 )     (1.8 %)
Realized gain from sales of equity securities
    1,103       5.2 %     111       0.1 %            
Other income
    94       0.4 %     (27 )           44        
                                                 
Income before income tax expense
    11,821       55.5 %     18,662       19.1 %     16,019       15.1 %
Income tax expense
    21       0.1 %     275       0.3 %     752       0.7 %
                                                 
Net income
    11,800       55.4 %     18,387       18.8 %     15,267       14.4 %
                                                 
Net income per share:
                                               
Basic
    0.24               0.27               0.07          
Diluted
    0.24               0.27               0.07          
Shares used in computation of net income per share:
                                               
Basic
    50,000,000               50,000,000               50,000,000          
Diluted
    50,000,000               50,406,264               52,011,348          
 
Year Ended 2009 Compared to Year Ended 2008
 
Total Revenues.  Our total revenues increased by 8.4% to US$106.0 million in 2009 from US$97.8 million in 2008. The increase in the revenues from our media investment management and advertising agency business was partially offset by a decrease in our branding and identity services revenues.
 
  •  Our media investment management revenues increased by 10.1% to US$87.3 million in 2009 from US$79.3 million in 2008 primarily due to our continued efforts to secure attractive advertising media resources and cross-sell such media assets to our clients. In particular, the amount of advertising media assets that we secured on satellite television stations increased in 2009 as we entered into exclusive agency arrangements with Tianjin Satellite Television. The revenues from our exclusive agency arrangement with Tianjin Satellite Television were partially offset by the decrease in revenues from our exclusive agency arrangement with Shanghai Dragon Television, which was due to a decrease in purchases of advertising time and other advertising rights as a result of our shift in focus on selling such advertising time and rights allocated to domestic clients. In particular, revenues from our exclusive agency arrangement with Shanghai Dragon Television decreased by 29.6% from 2008 to 2009, while our exclusive agency arrangement with Tianjin Satellite Television commenced in 2009 and therefore

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  did not generate any revenues in 2008. Our prior exclusive agency arrangement with Hubei Satellite Television, which had an original three-year term expiring at the end of 2010, was terminated in February 2009 without penalty. In respect of Hubei Satellite Television, we did not recognize any revenues in 2008 and recognized less than US$0.2 million of revenue in 2009. Therefore, the termination of our exclusive agency arrangement with Hubei Satellite Television did not have a material effect on our results of operations.
 
  •  Our advertising agency revenues increased by 12.6% to US$15.3 million in 2009 from US$13.6 million in 2008, primarily due to the increase in the average value of advertisements we placed on behalf of our advertising clients and, to a lesser extent, the increase in the volume of advertisements we placed. We also attribute the increase in revenues from our advertising agency business to a slight general increase in the commissions that we receive from television stations and clients for the placement of advertisements. Due to an increase in competition in 2009, there has been a slight increase in the average rebates and commissions from television stations in the PRC advertising industry, but we cannot ascertain whether this trend will continue.
 
  •  Our branding and identity services revenues decreased by 30.1% to US$3.5 million in 2009 from US$5.0 million in 2008 primarily due to the general decline in the overall economy in China as a result of the global financial crisis. We believe that such decline adversely impacted the budget of our clients allocated to the creation of the advertisements. In particular, we created and produced fewer advertising campaigns for our clients in 2009 than in 2008.
 
Cost of Revenues.  Our cost of revenues increased by 6.0% to US$72.2 million in 2009 from US$68.1 million in 2008.
 
  •  Our cost of revenues for our media investment management business increased by 8.0% to US$68.5 million in 2009 from US$63.4 million in 2008, primarily due to an increase in the cost of advertising media assets that we have secured under our exclusive agency arrangements. In particular, the cost of securing the advertising media resources increased from 2008 to 2009, which more than offset a refund of US$3.7 million in connection with advertising time slots withdrawn from Shanghai Dragon Television due to the Sichuan earthquake in May 2008, which was recorded as a reduction in costs of revenues in 2009. We also secured advertising time on another satellite television station, Tianjin Satellite Television, under an exclusive agency arrangement. Our cost of securing advertising time on Shanghai Dragon Television decreased by 37.7% from 2008 to 2009 because we purchased less advertising time and other advertising rights from Shanghai Dragon Television as a result of our shift in focus on selling such advertising time and rights allocated to domestic clients, while our exclusive agency arrangement with Tianjin Satellite Television commenced in 2009 and therefore did not incur any cost of revenues in 2008.
 
  •  Our cost of revenues for our advertising agency business increased by 16.3% to US$2.1 million in 2009 from US$1.8 million in 2008. The increase in the cost of our revenues for our advertising agency business is primarily due to an increase in salaries and benefits as a result of a general expansion in our advertising agency business team.
 
  •  Our cost of revenues for our branding and identity services business decreased by 45.2% to US$1.6 million in 2009 from US$2.9 million in 2008 primarily due to the fact that we produced a fewer number of advertisements for our clients in 2009, and as a result, the corresponding production costs decreased during this period.
 
Gross Profit.  As a result of the foregoing, our overall gross profit increased by 13.9% to US$33.9 million in 2009 from US$29.7 million in 2008. Our gross margin increased to 32.0% in 2009 from 30.4% in 2008.
 
  •  Our media investment management business generated a gross profit of US$18.7 million in 2009, representing a gross margin of 21.5%, and US$15.8 million in 2008, representing a gross margin of 20.0%. Since we account for our media investment management revenues on a gross basis, we realize a lower gross margin from this business compared to our advertising agency business. The gross margin


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  for our media investment management business increased in 2009 primarily because we recognized the refund of US$3.7 million in connection with advertising time slots withdrawn from Shanghai Dragon Television due to the Sichuan earthquake in May 2008, which was recorded as a reduction in cost of revenues in 2009.
 
  •  Our advertising agency business generated a gross profit of US$13.2 million in 2009, representing a gross margin of 86.6%, and US$11.8 million in 2008, representing a gross margin of 87.0%. Since we account for our advertising agency revenues on a net basis, we realize a higher gross margin for this business than our other businesses.
 
  •  Our branding and identity business generated a gross profit of US$1.9 million in 2009, representing a gross margin of 54.8%, and US$2.1 million in 2008, representing a gross margin of 42.3%. The increase in gross profit is primarily due to the fact that our cost of revenues decreased at a faster pace than the decrease in our revenues for our branding and identity services business. We produced a fewer number of advertisements for our clients in 2009.
 
Operating Expenses.  Our operating expenses increased significantly by 39.8% to US$16.5 million in 2009 from US$11.8 million in 2008.
 
  •  Our selling and marketing expenses increased significantly by 31.2% to US$11.0 million in 2009 from US$8.4 million in 2008 primarily due to an increase in employees engaged in selling and marketing activities, which led to increases in cash compensation expenses, share-based compensation expenses, office rental expenses and miscellaneous office expenses.
 
  •  Our general and administrative expenses increased significantly by 60.6% to US$5.6 million in 2009 from US$3.5 million in 2008, primarily as a result of an allowance for doubtful accounts we recognized in the amount of US$1.2 million in 2009. The increase in general and administrative expenses was also attributable to an increase in the personnel cost of our management and administrative staff and related expenses as we expanded our operations. Moreover, our share-based compensation expense as a result of granting stock options to our general and administrative personnel was US$0.8 million in 2009, compared to US$0.5 million in 2008.
 
Operating Profit.  As a result of the foregoing, our operating profit decreased by 3.2% to US$17.3 million in 2009 from US$17.9 million in 2008.
 
Interest Income.  Our interest income decreased by 13.5% to US$0.6 million in 2009 from US$0.7 million in 2008 primarily because average cash balance was lower in 2009 than in 2008.
 
Impairment on Investments in Non-marketable Equity Securities.  In 2009, we recognized an impairment on investments in non-marketable equity securities of US$1.9 million, compared to nil in 2008. The impairment charges in 2009 related to our investments in equity securities in two PRC cost-method investees, which we acquired in 2008 as a result of our entry into non-monetary transactions whereby we exchanged advertising time slots on one of our exclusive television channels for non-marketable equity securities in the two entities. See “— Liquidity and Capital Resources — Non-Monetary Transactions” below.
 
Net Income.  As a result of the foregoing, our net income decreased by 17.0% to US$15.3 million in 2009 from US$18.4 million in 2008.
 
Year Ended 2008 Compared to Year Ended 2007
 
Total Revenues.  Our total revenues increased significantly by 359.5% to US$97.8 million in 2008 from US$21.3 million in 2007.
 
  •  Our media investment management revenues increased significantly by 868.8% to US$79.3 million for 2008 from US$8.2 million for 2007, primarily due to an increase in revenue from our exclusive agency arrangement with Shanghai Dragon Television, which became effective on January 1, 2008. Prior to 2008, our media investment management revenues were derived from advertising resources on CCTV that we secured pursuant to exclusive agency arrangements. However, beginning in 2008, our media


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  investment management resources also included those from our exclusive agency arrangements with satellite television stations.
 
  •  Our advertising agency revenues increased by 44.3% to US$13.6 million in 2008 from US$9.4 million in 2007. The increase in advertising agency revenues was primarily due to an increase in the total advertising spending for the advertisements we placed on behalf of our advertising clients. The advertisements we placed on behalf of our clients on CCTV during the Olympics period contributed significantly to our advertising agency revenue. In particular, the total spending for advertisements we placed on behalf of our clients increased by 35.0% in 2008.
 
  •  Our branding and identity services revenues increased by 34.4% to US$5.0 million in 2008 from US$3.7 million in 2007 due to an increase in the number of engagements we received from a greater number of advertising clients to provide creative design and production management services to create their advertisements as we continued to develop our branding and identity business.
 
Cost of Revenues. Our cost of revenues increased significantly by 768.0% to US$68.1 million in 2008 from US$7.8 million in 2007.
 
  •  Our cost of revenues for our media investment management business increased significantly by 1254.2% to US$63.4 million in 2008 from US$4.7 million in 2007, primarily due to the exclusive agency arrangement with Shanghai Dragon Television, which commenced on January 1, 2008 and our exclusive agency arrangements with Hubei Satellite Television, which commenced on January 1, 2008 and was terminated on February 3, 2009.
 
  •  Our cost of revenues for our advertising agency business increased by 63.2% to US$1.8 million in 2008 from US$1.1 million in 2007 due to a general expansion in our advertising agency business and an increase in the number of our employees engaged in this business.
 
  •  Our cost of revenues for our branding and identity services business increased by 38.0% to US$2.9 million in 2008 from US$2.1 million in 2007 primarily due to an increase in our costs of production as a result of the increase in the number of advertisements that we created and produced for our advertising clients 2008.
 
Gross Profit. As a result of the foregoing, our overall gross profit increased by 121.2% to US$29.7 million in 2008 from US$13.4 million in 2007. Our gross margin decreased to 30.4% in 2008 from 63.2% in 2007 primarily due to the decrease in the gross margin of our media investment management business.
 
  •  Our media investment management business generated a gross profit of US$15.8 million in 2008, representing a gross margin of 20.0%, and US$3.5 million in 2007, representing a gross margin of 42.7%. Since we account for our media investment management revenues on a gross basis, we realize a lower gross margin from this business compared to our advertising agency business. The gross margin for our media investment management business decreased in 2008 because our exclusive agency arrangement with Shanghai Dragon Television, which represented the most significant portion of our media investment management revenues, generated a relatively lower gross margin compared to the television programs on CCTV that we had secured pursuant to exclusive arrangements in 2007.
 
  •  Our advertising agency business generated a gross profit of US$11.8 million in 2008, representing a gross margin of 87.0%, and US$8.3 million in 2007, representing a gross margin of 88.5%. Since we account for our advertising agency revenues on a net basis, we realize a higher gross margin for this business than our other businesses.
 
  •  Our branding and identity services business generated a gross profit of US$2.1 million in 2008, representing a gross margin of 42.3%, and US$1.6 million in 2007, representing a gross margin of 43.8%.


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Operating Expenses. Our operating expenses increased significantly by 287.2% to US$11.8 million in 2008 from US$3.1 million in 2007.
 
  •  Our selling and marketing expenses increased significantly by 224.0% to US$8.4 million in 2008 from US$2.6 million in 2007 primarily due to an increase in our sales related expenses and an increase in personnel expenses related to the expansion of our media investment management business. As a result of our exclusive agency arrangements with satellite television channels, including Shanghai Dragon Television, which commenced on January 1, 2008, we employed a greater number of direct sales personnel to sell the advertising media resources we acquired on these television channels. In addition, we incurred a share-based compensation expense of US$1.3 million in 2008 as a result of granting stock options to our selling and marketing personnel, while such cost was nil in 2007.
 
  •  Our general and administrative expenses increased significantly by 633.3% to US$3.5 million for 2008 from US$0.5 million in 2007, primarily as a result of an increase in the personnel cost of our management and administrative staff and related expenses as we expanded our operations. In addition, we incurred a share-based compensation expense of US$0.5 million in 2008 as a result of granting stock options to our general and administrative personnel, while such cost was nil in 2007.
 
Operating Profit. As a result of the foregoing, our operating profit increased by 72.4% to US$17.9 million in 2008 from US$10.4 million in 2007.
 
Interest Income. Our interest income increased by 186.6% to US$0.7 million in 2008 from US$0.2 million in 2007, as our average cash balances in our interest bearing accounts were higher in 2008 due to the US$48.7 million in total proceeds we received from the issuance of our Series A preferred shares in 2008.
 
Realized Gain from Sales of Equity Securities and Other Income. In 2008, we realized a gain of US$0.1 million from the sale of equity securities. We do not intend to engage in the trading of equity securities in public markets in the future.
 
Net Income. As a result of the foregoing, our net income increased by 55.8% to US$18.4 million in 2008 from US$11.8 million in 2007.
 
Liquidity and Capital Resources
 
Our primary sources of liquidity have historically been cash generated from our operations. As of December 31, 2009, we had approximately US$54.7 million in cash and cash equivalents. Our cash and cash equivalents generally consist of cash on hand. We expect to require cash to fund our ongoing business needs, particularly media payments due to the television channels with which we have entered into exclusive advertising agency agreements, payments to directors and other service providers for the production of advertisements and salary and benefits and material costs and expenses. Other cash needs include primarily the working capital for our daily operations and securing advertising media resources under our media investment management business.
 
We expect to use cash generated in our media investment management business to make payments under our exclusive agency arrangements with respect to advertising rights on two satellite television channels, Shanghai Dragon Television and Tianjin Satellite Television, and four programs on CCTV. As of December 31, 2009, we were obligated under our agreements with television stations to make payments of approximately US$52.4 million in the aggregate for 2010. Subsequent to December 31, 2009, we entered into additional exclusive agency arrangements with certain television channels with aggregate payment obligations of an additional US$57.1 million due in 2010. Under our exclusive agency arrangements, we use cash to pay for the advertising time and other advertising rights in advance, and we generate cash from selling these advertising media resources to advertisers. If we fail to generate enough cash from the sales of these advertising media resources to meet our payment obligations to the television channels, our liquidity, financial condition and results of operations would be adversely affected. See “Risk Factors — Risk Relating to Our Business — Our media investment management business may not produce the expected returns and may result in significant losses.” As we continue to expand our media investment management business, we expect an increase in our cash needs. However, we expect to generate revenues as we sell the advertising time and other advertising


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rights secured under the exclusive agency arrangements and expect these revenues to largely offset the cost of revenues incurred under these exclusive agency arrangements. In addition, we do not expect our joint venture with Aegis Media to have a material effect on our liquidity in 2010 as the joint venture is expected to generate cash from its operations that will adequately address its cash requirements.
 
Our affiliated consolidated entities declared dividends of approximately RMB180.1 million in March 2008, of which RMB43.0 million was paid in August 2009. Our affiliated consolidated entities plan to pay the remaining amount of RMB137.1 million from cash provided by their operating activities. Our consolidated affiliated entities expect to pay this unpaid dividend to Mr. He Dang within 36 months after the completion of this offering. While the unpaid dividend is payable upon the demand of Mr. He Dang, we currently expect Mr. He Dang to request payment of RMB99.0 million of the unpaid dividend in 2010 and the remaining RMB38.1 million in one or more payments by the end of 2013. However, neither we nor any of our consolidated affiliated entities has entered into any written arrangements with respect to the payment of this unpaid dividend. We will use cash to repay the promissory note in the principal amount of US$19.6 million due on January 20, 2011, with an annual interest rate of 4.75%, issued to Mr. He Dang in connection with the investment by Aegis Media. The holder of the promissory note may demand acceleration of the payment of the outstanding principal amount and accrued interest at any time after the completion of this offering. Until July 1, 2010, Aegis Media has an option to require us to repurchase all or a portion of the ordinary shares held by Aegis Media if we are in breach of our obligations under our joint venture as a result of our failure to procure entry by specified clients into agreements with the joint venture by April 30, 2010 or the failure of such agreements to meet specified revenue targets. On April 16, 2010, we received a written acknowledgement from Aegis Media that we have fully satisfied our obligations to procure entry by specified clients into agreements with the joint venture and that such agreements have met specified revenue targets. We believe that our cash and cash equivalents, anticipated cash flow from operations and the proceeds from the sale of our Series A preferred shares to Chaview Investment Limited in August 2008 and the investment by Aegis Media in our company and related transactions in January 2010 will be sufficient to meet our anticipated cash needs at least through 2011.
 
The following table sets forth a summary of our cash flows for the periods indicated:
 
                         
    For the Year Ended December 31,  
    2007     2008     2009  
    (US$ in thousands)  
 
Net cash provided by (used in) operating activities
    23,413       (25,837 )     750  
Net cash provided by (used in) investing activities
    956       (947 )     (485 )
Net cash provided by (used in) financing activities
    258       48,725       (6,308 )
Effect of changes in exchange rate
    1,741       2,406       (43 )
Net increase/decrease in cash and cash equivalents
    26,368       24,347       (6,086 )
Cash and cash equivalents at the beginning of the year
    10,108       36,476       60,823  
Cash and cash equivalents at the end of the year
    36,476       60,823       54,737  
 
Operating Activities
 
Net cash provided by operating activities consists primarily of our net income adjusted by non-cash adjustments such as depreciation of fixed assets, as well as changes in current assets and liabilities such as accounts receivable and accounts payable. Our net cash provided by operating activities amounted to US$23.4 million in 2007 and our net cash used in operating activities amounted to US$25.8 million in 2008, respectively. Despite an increase in our net income for 2008, our net cash provided by operating activities decreased significantly in 2008. In 2008, we used cash in operating activities instead of generating cash from operating activities as a result of a significant increase in accounts receivable of US$24.7 million in 2008, combined with a decrease in accounts payable of US$28.1 million, which was partially offset by an increase in advances from customers of US$13.1 million. We attribute the increase in accounts receivable and prepaid expenses primarily to the expansion of our media investment management business, which generally provides longer payment terms to our clients in order to conform to the longer payment terms generally offered by


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satellite television channels in China, compared with CCTV channels. The increase in prepaid expenses was due to the requirement that we pay in advance in order to secure advertising media resources pursuant to exclusive agency arrangements. The decrease in accounts payable was primarily due to a shortening of the average payment terms in our advertising agency business, as certain television channels required payment from advertising agencies within a shorter time frame in 2008. We also attribute a portion of the decrease in net cash provided by operating activities in 2008 to an increase in non-monetary transactions for the reasons described below.
 
Our net cash provided by operating activities was US$0.8 million in 2009 compared to net cash used in operating activities of US$25.8 million in 2008, primarily as a result of a decrease in accounts receivable, as we received payments from our clients for services we provided, and a smaller decrease in accounts payable for the media cost paid to television channels. However, in 2009, we also used significantly more cash for prepaid expenses in connection with purchasing advertising media assets on behalf of our clients.
 
Non-Monetary Transactions
 
We acquired minority non-marketable equity interests in two PRC companies in March and May 2008, respectively, in each case in exchange for advertising time slots that we secured on a satellite television channel. As a result, we recognized total revenues of US$3.5 million and US$0.2 million under non-monetary transactions with respect to the above two investments in 2008 and 2009, respectively. We valued our non-marketable equity interests in those two companies at US$1.9 million as of December 31, 2009, compared to US$3.8 million as of December 31, 2008. In 2009, we recorded impairment loss of US$1.9 million on those investments. We do not intend to enter into similar transactions in the future. See Note 5 to our consolidated financial statements included elsewhere in this prospectus.
 
Investing Activities
 
Net cash used in investing activities largely reflects our capital expenditures, which consists of purchases of fixed assets, such as computers and other office equipment. Our net cash used in investing activities amounted to US$0.9 million and US$0.5 million in 2008 and 2009, respectively. The decrease of net cash used in investing activities is primarily due to the decrease in the acquisition of fixed assets in 2009. In 2007, we had net cash provided by investing activities of US$956,000 due to a one-time investment gain we realized from the purchase and sale of equity securities. In 2007, we subscribed for shares of a company that completed its initial public offering in China, and sold the securities in 2007 for a capital gain. We expect our net cash used in investing activities to increase in the near future as we continue to expand our business, but we do not expect the increase to have a material impact on our future liquidity or cash position.
 
Financing Activities
 
In 2007, we had net cash provided by financing activities of US$0.3 million, which consisted of capital contributions from our shareholder. In 2008, we had net cash provided by financing activities of US$48.7 million, which consisted of proceeds from the issuance of our Series A preferred shares. In 2009, we had net cash used in financing activities of US$6.3 million, which primarily consisted of partial payment of previously declared dividend to our shareholder.
 
In addition, we generated a net increase in cash of US$8.2 million from financing activities in January 2010 as a result of the investment by Aegis Media. However, we will use cash to repay the promissory note in the principal amount of US$19.6 million due on January 20, 2011, with an annual interest rate of 4.75%, issued to Mr. He Dang in connection with the repurchase of his shares as part of the transactions with Aegis Media. The holder of the promissory note may demand acceleration of the payment of the outstanding principal amount and accrued interest at any time after the completion of this offering.


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Contractual Obligations and Commercial Commitments
 
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2009. Other than such obligations and the contractual obligations described below, we had no other contractual obligations or commercial commitments as of December 31, 2009:
 
                                         
    Payments Due by Period
        Less than
          More than
    Total   1 Year   1-3 Years   3-5 Years   5 Years
    (US$ in thousands)
 
Operating lease obligations
    1,933       737       756       440        
Purchase obligations
    52,445       52,445                    
                                         
Total
    54,378       53,182       756       440        
                                         
 
Our purchase obligations as of December 31, 2009 consisted of our payment obligations under our exclusive agency arrangements with certain television stations. Subsequent to December 31, 2009, we entered into additional exclusive agency arrangements with certain television channels with aggregate payment obligations of an additional US$57.1 million due in 2010. We currently have exclusive agency arrangements with respect to advertising rights on Shanghai Dragon Television and Tianjin Satellite Television, as well as on four programs on CCTV.
 
Off-Balance Sheet Commitments and Arrangements
 
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, 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.
 
Quantitative and Qualitative Disclosure About Market Risk
 
Foreign Exchange Risk
 
The value of the Renminbi 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 Renminbi 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 policy of pegging the value of the Renminbi to the U.S. dollar. Under that policy, the Renminbi was permitted to fluctuate within a band against a basket of certain foreign currencies. As a result, the Renminbi appreciated against the U.S. dollar by 17.5% from July 21, 2005 to December 31, 2009. There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar.
 
We use the U.S. dollar as our functional and reporting currency for our financial statements. All transactions in currencies other than the U.S. dollar during the year are re-measured at the exchange rates prevailing on the respective relevant dates of such transactions. Monetary assets and liabilities existing at the balance sheet date denominated in currencies other than the U.S. dollar are re-measured at the exchange rates prevailing on such date. Exchange differences are recorded in our consolidated income statement. The financial records of our PRC subsidiary and affiliated consolidated entities are maintained in local currency, the Renminbi, which is their functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of accumulated other


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comprehensive income in the statement of shareholders’ equity and comprehensive income. Transaction gains and losses are recognized in the statements of operations in other income (expenses).
 
Fluctuations in exchange rates also affect our balance sheet. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount that we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of paying dividends on our ordinary shares or ADSs or for other business purposes, depreciation of the Renminbi against the U.S. dollar would have a negative effect on the corresponding U.S. dollar amount available to us. Considering the amount of our cash and cash equivalents as of December 31, 2009, a 1.0% change in the exchange rates between the Renminbi and the U.S. dollar would result in an increase or decrease of approximately US$0.5 million to our total cash and cash equivalents.
 
Interest Rate Risk
 
We do not have any outstanding long-term or short-term loans. Our exposure to interest rate risk primarily relates to 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, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.
 
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.
 
Newly Adopted Accounting Pronouncements
 
Effective January 1, 2009, we adopted an authoritative pronouncement issued by the Financial Accounting Standards Board, or FASB on business combinations. The guidance retains the fundamental requirements that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations, but requires a number of changes, including changes in the way assets and liabilities are recognized and measured as a result of business combinations. It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. We have applied this guidance to business combinations completed since January 1, 2009.
 
On January 1, 2009, we adopted an authoritative pronouncement issued by the FASB regarding interim disclosures about fair value of financial instruments. The pronouncement requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements of publicly traded companies. The pronouncement also requires those disclosures in summarized financial information at interim reporting periods. The adoption of this pronouncement did not have any significant impact on our financial condition or results of operations.
 
Effective January 1, 2009, we adopted an authoritative pronouncement issued by the FASB regarding recognition and presentation of other-than-temporary impairments. The pronouncement amends the other-than-temporary impairment pronouncement in U.S. GAAP for debt securities to make the pronouncement more operational, and improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in financial statements. The adoption of this pronouncement did not have any significant impact on our financial condition or results of operations. Effective April 1, 2009, we adopted authoritative pronouncement issued by the FASB regarding determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The pronouncement provides clarification on estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction that


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is not orderly. The pronouncement emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under the then current market conditions. The adoption of this pronouncement did not have any significant impact on our financial condition or results of operations.
 
Effective July 1, 2009, we adopted the new Accounting Standards Codification, or the ASC, as issued by the FASB. The ASC has become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities and provides that all such pronouncement carries an equal level of authority. The ASC is not intended to change or alter existing GAAP. The ASC is effective for interim and annual periods ending after September 15, 2009. The adoption of the ASC did not have any significant impact on our financial condition or results of operations.
 
Recently Issued Accounting Pronouncements Not Yet Adopted
 
On June 12, 2009, the FASB issued an authoritative pronouncement, which changes how a company determines whether an entity should be consolidated when such entity is insufficiently capitalized or is not controlled by the company through voting (or similar rights). The determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design and the company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The pronouncement retains the scope of the previously issued pronouncement but adds entities previously considered qualifying special purpose entities, or QSPEs, since the concept of these entities was eliminated by the FASB. The pronouncement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009. We do not expect the adoption of this pronouncement to have a significant effect on our financial condition or results of operations.
 
On September 23, 2009, the FASB issued an authoritative pronouncement regarding revenue arrangements with multiple deliverables. This pronouncement was issued in response to practice concerns related to the accounting for revenue arrangements with multiple deliverables under existing pronouncement. Although the new pronouncement retains the criteria from exiting pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the previous separation criterion under existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. The new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement (1) prospectively to new or materially modified arrangements after the pronouncement’s effective date or (2) retrospectively for all periods presented. Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also do the following in the period of adoption: (1) retrospectively apply this pronouncement as of the beginning of that fiscal year and (2) disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. We do not expect the adoption of this pronouncement to have a significant effect on our financial condition or results of operations.
 
In January 2010, the FASB issued an authoritative guidance on accounting for distributions to shareholders with components of stock and cash. The objective of this new guidance is to clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not considered a stock dividend for purposes of accounting treatment of equity and earnings per share. This new guidance is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. We do not expect the impact, if any, of this standard on our consolidated financial statements to be significant.
 
In January 2010, the FASB issued an authoritative guidance to clarify the scope of accounting and reporting for decreases in ownership of a subsidiary. The objective of this guidance is to address


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implementation issues related to changes in ownership provisions. This guidance clarifies that decreases in ownership provisions within the overall guidance on consolidation apply to:
 
  •  A subsidiary or group of assets that is a business or nonprofit activity.
 
  •  A subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture.
 
  •  An exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity (including equity method investee or joint venture).
 
This guidance clarifies that the decrease in ownership provisions within the overall guidance on consolidation does not apply to the following transactions even if they involve businesses:
 
  •  Sales in substance of real estate.
 
  •  Conveyances of oil and gas mineral rights.
 
This guidance also expands disclosure requirements for the deconsolidation of a subsidiary or derecognition of a group of assets. This guidance is effective in the period in which an entity adopts the authoritative guidance on noncontrolling interests in consolidated financial statements. If an entity has previously adopted the guidance on noncontrolling interests in consolidated financial statements, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. Retrospective application to the first period that an entity adopted the guidance on noncontrolling interests in consolidated financial statements is required. We are currently assessing the impact, if any, of this standard on our consolidated financial statements.


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OUR INDUSTRY
 
China Advertising Industry
 
Overview
 
According to ZenithOptimedia, China has the largest advertising market in Asia Pacific excluding Japan, as measured by total advertising expenditure, with an estimated advertising expenditure of approximately US$20.3 billion in 2009, accounting for 32.3% of the total estimated advertising expenditure in Asia Pacific excluding Japan in that year. ZenithOptimedia projected that the advertising market in China would be one of the fastest growing in the world, with a compounded annual growth rate, or CAGR, of 10.7% from US$20.3 billion in 2009 to US$27.5 billion in 2012, compared to 0.6% in the United States and negative 0.4% in Japan in the same period. In 2012, China is projected to account for 34.5% of the total advertising expenditure in Asia Pacific excluding Japan. The following chart sets forth the size of China’s overall advertising market from 2006 to 2012:
 
(CHART)
 
 
Source: Advertising Expenditure Forecasts (December 2009), ZenithOptimedia
 
The following table highlights historical and estimated advertising spending and 2009-2012 CAGRs of the ten countries with the highest advertising spending in the world in 2009:
 
                                                                     
        Top Ten Countries by Advertising Spending Globally (US$ in millions)  
                                                  ’09-’12
 
        2006     2007     2008     2009E     2010E     2011E     2012E     CAGR  
 
1
  United States     173,434       177,653       170,218       148,315       144,408       146,654       150,879       0.6%  
2
  Japan     46,419       46,763       44,947       41,163       39,837       39,897       40,709       −0.4%  
3
  Germany     26,404       27,628       27,540       24,852       24,490       25,164       26,057       1.6%  
4
  China     14,590       16,642       18,895       20,291       22,411       24,744       27,511       10.7%  
5
  UK     22,145       23,554       22,810       19,794       19,403       19,611       19,940       0.2%  
6
  France     14,474       14,928       14,946       13,533       13,746       14,194       14,580       2.5%  
7
  Brazil     7,784       9,742       11,563       11,679       13,062       13,836       15,027       8.8%  
8
  Italy     12,645       13,042       12,684       10,935       10,954       11,306       11,741       2.4%  
9
  Australia     8,831       9,832       10,177       9,636       9,866       10,207       10,534       3.0%  
10
  Canada     8,637       9,105       9,545       8,657       8,869       9,160       9,503       3.2%  
    Worldwide     456,770       484,973       489,422       438,889       442,622       459,523       481,154       3.1%  
 
 
Source: Advertising Expenditure Forecasts (December 2009), ZenithOptimedia


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Driven by economic growth.  The growth of China’s advertising market is driven in part by the rapid increase in household disposable income and consumption of urban residents in China. The National Bureau of Statistics of China reported that the annual disposable income per capita of urban households in China increased from RMB8,472 in 2003 to RMB17,175 in 2009, representing a CAGR of 12.5%.
 
Room for sustained growth.  We believe the advertising market in China has the potential for considerable and sustained growth due to the current relatively low levels of advertising expenditure per capita and advertising expenditure as a percentage of gross domestic product, or GDP, in China compared to other countries.
 
The following table sets forth the advertising expenditure per capita and as a percentage of GDP in the countries and regions listed below for 2008.
 
                 
    Advertising
  Advertising
    Expenditure per
  Expenditure as
    Capita (US$)   % of GDP
 
China
    14.1       0.44  
Hong Kong
    470.5       1.52  
Japan
    353.1       0.92  
South Korea
    166.2       0.86  
Taiwan
    66.9       0.37  
UK
    372.5       0.85  
USA
    546.1       1.19  
 
 
Source: Advertising Expenditure Forecasts (December 2009), ZenithOptimedia
 
According to a report commissioned by us and prepared by CTR, after deducting the estimated discounts generally given to advertisers advertising on various media platforms, television accounted for 74.3% of the total advertising spending in China in 2009 and is expected to account for 73.9% of the total advertising spending in China in 2012.
 
The following table sets forth the television advertising spending as a percentage of total advertising spending in China from 2007 to 2012:
 
         
    Television
    Advertising
    Spending as % of
    Total Advertising
Year
  Spending
 
2007
    74.1 %
2008
    73.5 %
2009
    74.3 %
2010E
    73.8 %
2011E
    73.8 %
2012E
    73.9 %
 
 
Source: Market Research Report on China’s Television Advertising Market (January 2010), CTR
 
China’s Television Industry
 
Overview
 
According to the 2009 China TV Rating Yearbook published by the Communications University of China, China has the largest television audience in the world with approximately 1,236 million viewers in 2008. The television penetration of households in China was 97.9% in 2008, with an average of 1.32 television sets in each household.
 
Television is one of the most important media formats in China. According to the 2009 China TV Rating Yearbook, people in China watched an average of approximately three hours of television each day in 2008.


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Television Broadcasting Landscape
 
All of the television stations based in China are controlled by the PRC government and are subject to stringent regulations. China’s television industry currently operates primarily at three administrative levels, namely national-, provincial- (including autonomous regions and directly administered municipalities) and city/county-level. Television coverage in China primarily consists of satellite television, terrestrial television and cable television.
 
According to the 2009 China TV Rating Yearbook, China had 277 television stations, including CCTV, provincial television stations and city/county-level television stations as of the end of 2008. CCTV operates the most viewed national television station with 15 satellite channels, most of which have 24-hour nationwide broadcasting. In 2008, China had 46 satellite television channels operated by provincial-level television stations and television stations of some cities in China. Below is a diagram of the relationship between the various levels of television stations in China.
 
(DIAGRAM OF RELATIONSHIP BETWEEN TV CHANNELS)


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Satellite television channels in China are received by a local television operator and then transmitted to homes via terrestrial or cable television signals. Pursuant to relevant PRC policies, at least one local broadcasting network in each region in China is required to relay transmission of CCTV-1, thus transmitting CCTV-1 signals to virtually every Chinese household that has a television. Other CCTV and provincial satellite television channels must enter into arrangements with terrestrial or cable broadcasting networks in different regions in China to achieve nationwide coverage. Below is a table of the top 20 satellite channels in China ranked by their penetration rates in 2008.
 
                 
          Penetration
 
Rank
   
Channel
  (%)  
 
  1     CCTV-1     97.1  
  2     CCTV-2     86.9  
  3     CCTV-7     85.3  
  4     CCTV-4     83.6  
  5     CCTV-3     83.3  
  6     CCTV-5     83.1  
  7     CCTV-6     82.9  
  8     CCTV-8     81.9  
  9     CCTV Children     80.8  
  10     CCTV News     79.7  
  11     Shandong Satellite TV     78.5  
  12     CCTV-10     78.2  
  13     Anhui Satellite TV     78.2  
  14     Jiangsu Satellite TV     77.8  
  15     CCTV-11     76.9  
  16     Zhejiang Satellite TV     75.6  
  17     Sichuan Satellite TV     75.3  
  18     Hunan Satellite TV     75.3  
  19     Shanghai Dragon TV     71.7  
  20     China Education-1     69.5  
 
 
Source: 2009 China TV Rating Yearbook
 
Despite high penetration of provincial satellite television channels in China, CCTV satellite channels generally enjoy higher market shares based on viewership levels. CCTV satellite channels accounted for seven of the top ten channels by market share in China for 2009.
 
                 
        2009
 
        Market
 
        Share
 
Rank
 
Channel
  (%)  
 
 
1
    CCTV-1     5.8  
 
2
    Hunan Satellite TV     3.5  
 
3
    CCTV-6     3.4  
 
4
    CCTV-3     3.2  
 
5
    CCTV-8     2.9  
 
6
    CCTV-5     2.3  
 
7
    Jiangsu Satellite TV     2.1  
 
8
    Zhejiang Satellite TV     2.1  
 
9
    CCTV-4     2.0  
 
10
    CCTV-News     1.7  
 
11
    CCTV-2     1.5  
 
12
    CCTV-Children     1.5  
 
13
    Beijing Satellite TV     1.5  
 
14
    Anhui Satellite TV     1.3  
 
15
    CCTV-10     1.2  
 
16
    Jiangxi Satellite TV-1     1.1  
 
17
    CCTV-12     1.1  
 
18
    Shanghai Dragon TV     1.0  
 
19
    Shandong Satellite TV     1.0  
 
20
    Liaoning Satellite TV     1.0  
 
21
    Chongqing Satellite TV     1.0  
 
22
    Sichuan Satellite TV     0.9  
 
23
    Tianjin Satellite TV     0.9  
 
24
    CCTV-7     0.8  
 
25
    Hubei Satellite TV     0.7  
 
26
    Heilongjiang Satellite TV     0.7  
 
27
    Henan Satellite TV-1     0.6  
 
28
    Yunnan Satellite TV-1     0.6  
 
29
    Shenzhen Satellite TV-1     0.5  
 
30
    Fujian Satellite TV     0.5  
 
31
    Guangxi Satellite T     0.5  
 
32
    Jilin Satellite TV     0.5  
 
33
    Hebei Satellite TV     0.5  
 
34
    CCTV-11     0.5  
 
35
    Guizhou Satellite TV     0.5  
 
36
    Guangdong Satellite TV     0.4  
 
37
    Shaanxi Satellite TV     0.3  
 
38
    Shanxi Satellite TV     0.3  
 
39
    Inner Mongolia Satellite TV     0.3  
 
40
    The Travel Channel     0.2  
 
41
    CCTV-Music     0.2  
 
42
    Tibet-2 (Chinese)     0.1  
 
43
    Qinghai Satellite TV     0.1  
 
44
    Ningxia Satellite TV     0.1  
 
45
    Gansu Satellite TV     0.1  
 
46
    Xinjiang-1 (Chinese)     0.1  
 
47
    CCTV-9     0.0  
 
 
Source: CSM research


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Television Viewership Trends
 
According to the 2009 China TV Rating Yearbook, Chinese viewers watched an average of approximately three hours of television each day in 2008. The average viewership during the prime-time advertising time reached approximately 46% in 2008.
 
China Central Television
 
CCTV is the single largest national television network in China in terms of market penetration, with its channels accounting for all of China’s top ten television channels by penetration in 2008. Its channels also have the largest market shares based on viewership levels, accounting for nine of China’s top ten television channels in 2008. Below is a list of CCTV channels and their content focus.
 
     
Channel
 
Content Focus
 
CCTV-1
  Mixed Programming
CCTV-2
  Economy
CCTV-3
  Arts
CCTV-4
  International (Mandarin)
CCTV-5
  Sports
CCTV-6
  Movies
CCTV-7
  Children / Military / Agriculture
CCTV-8
  Drama
CCTV-9
  International (in English)
CCTV-10
  Science and Education
CCTV-1