F-1/A 1 a2201374zf-1a.htm F-1/A

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As filed to the Securities and Exchange Commission on December 10, 2010.

Registration No. 333-170682

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



AMENDMENT NO. 3
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



Lentuo International Inc.
(Exact name of registrant as specified in its charter)

Not Applicable
(Translation of Registrant's name into English)

Cayman Islands
(State or other jurisdiction of
incorporation or organization)
  5500
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification Number)



A-18 Huagong Road, Guangqumenwai
Chaoyang District, Beijing 100124
People's Republic of China
(86-10) 6778 3955
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)



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



Copies to:

Alan Seem, Esq.
Shearman & Sterling LLP
12th Floor East Tower, Twin Towers
B-12 Jianguomenwai Dajie
Beijing 100022, People's Republic of China
(86-10) 5922 8000

 

Benedict Tai, Esq.
Jones Day
3201 China World Tower 1
No 1 Jianguomenwai Avenue
Beijing 100004, People's Republic of China
(86-10) 5866 1111



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, 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 earliest effective registration statement for the same offering.    o

CALCULATION OF REGISTRATION FEE

 

Title of each class of
securities to be registered

  Amount to
be registered

  Proposed maximum
offering price
per unit

  Proposed maximum
aggregate
offering price(1)

  Amount of
registration fee

 

Ordinary shares, par value $0.00001 per share(2)(3)

  14,950,000   $5.00   $74,750,000   $5,348(4)

 

(1)
Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933.

(2)
Includes (i) ordinary shares represented by American depositary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public and (ii) ordinary shares represented by American depositary shares that may be purchased by the underwriters pursuant to an option to purchase additional ordinary shares represented by American depositary shares. The ordinary shares are not being registered for the purposes of sales outside of the United States.

(3)
American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-170780). Each American depositary share represents two ordinary shares.

(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 Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)   Dated December 10, 2010

 

Lentuo International Inc.

GRAPHIC

6,500,000 American Depositary Shares
Representing 13,000,000 Ordinary Shares

This is the initial public offering of our American depositary shares, or ADSs.

We are offering 6,500,000 ADSs. Each ADS represents two ordinary shares, par value US$0.00001 per share. The ADSs are evidenced by American depositary receipts, or ADRs.

Prior to this offering, there has been no public market for our ADSs or our ordinary shares. We expect that the public offering price will be between $8.00 and $10.00 per ADS. Our ADSs have been approved for listing on the New York Stock Exchange under the symbol "LAS."

Our business and an investment in our ADSs involve significant risks. These risks are described under the caption "Risk Factors" beginning on page 12 of this prospectus.

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


 
  PER ADS   TOTAL  

Public Offering Price

  $     $    

Underwriting Discounts and Commissions

  $     $    

Proceeds, before expenses, to Lentuo International Inc.

  $     $    


The underwriters may also purchase up to an additional 975,000 ADSs from us, at the public offering price, less the underwriting discount, within 30 days from the date of the prospectus to cover overallotments.

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on or about            , 2010.

 
   
   
Cowen and Company                    HSBC

Macquarie Capital

                        , 2010


GRAPHIC


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Table of Contents

Prospectus Summary  

  1

Risk Factors  

  12

Special Note Regarding Forward-Looking Statements  

  38

Use of Proceeds  

  39

Capitalization  

  40

Dilution  

  41

Dividend Policy  

  43

Exchange Rate Information  

  44

Enforceability of Civil Liabilities  

  45

Our Corporate Structure  

  47

Selected Consolidated Financial and Operating Data  

  51

Recent Developments  

  54

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

  55

Our Industry  

  84

Our Business  

  93

Management  

  114

Principal Shareholders  

  120

Related Party Transactions  

  122

Regulations  

  123

Description of Share Capital  

  132

Description of American Depositary Shares  

  141

Shares Eligible For Future Sale  

  151

Taxation  

  154

Underwriting  

  160

Expenses Related to This Offering  

  167

Legal Matters  

  168

Experts  

  168

Where You Can Find Additional Information  

  169

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

We have not undertaken any efforts to qualify this offering for offers to individual investors in any jurisdiction outside the United States. Therefore, individual investors located outside the United States should not expect to be eligible to participate in this offering.

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Conventions That Apply to This Prospectus

Unless otherwise indicated, references in this prospectus to:

"$" and "U.S. dollars" are to the legal currency of the United States;

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

"ADSs" are to our American depositary shares, each of which represents two ordinary shares;

"China" or the "PRC" are to the People's Republic of China, excluding, for the purpose of this prospectus, Taiwan and the special administrative regions of Hong Kong and Macau;

"shares" or "ordinary shares" are to our ordinary shares, par value $0.00001 per share; and

"RMB" and "Renminbi" are to the legal currency of China.

Unless the context indicates otherwise, "we," "us," "our company" and "our" refer to Lentuo International Inc., its predecessor entities and its consolidated subsidiaries and affiliated entities.

Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase additional ADSs.

This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the exchange rate as set forth on June 30, 2010 in the H.10 statistical release of the Federal Reserve Board, which was RMB6.7815 to $1.00. We make no representation that the Renminbi or dollar amounts referred to in this prospectus could have been or could be converted into dollars or Renminbi, as the case may be, at any particular rate or at all. See "Risk Factors—Risks Related to Doing Business in China—Fluctuations in exchange rates could result in foreign currency exchange losses." On December 3, 2010, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.6628 to $1.00.

The data contained in this prospectus related to China's automobile retail industry and our position in this industry is derived from the following sources: the China Automobile Dealers Association, a national trade association comprised of automobile dealers in China; the China Association of Automobile Manufacturers, a national trade association comprised of automobile manufacturers in China; New Beijing Daily, a daily newspaper with circulation in Beijing, China; and J.D. Power Asia Pacific, an international marketing information firm specializing in customer satisfaction research in the Asia-Pacific region. Our company is a member of the China Automobile Dealers Association and Mr. Hetong Guo, our founder and chairman, is a vice chairman of the China Automobile Dealers Association.

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Prospectus Summary

The following summary highlights selected information appearing elsewhere in this prospectus and should be read in conjunction with the more detailed information and financial statements appearing elsewhere in this prospectus. You should read the entire prospectus carefully, including our financial statements and the related notes and the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Our Business" before deciding whether to buy our ADSs.

Our Business

We are the largest non-state-owned automobile retailer in Beijing, China as measured by new vehicle sales revenues in 2009, according to the China Automobile Dealers Association, or the CADA. We operate six franchise dealerships, ten automobile showrooms, one automobile repair shop and one car leasing company in the Beijing metropolitan area, which is the largest automobile market among all cities in China in terms of annual new passenger vehicle registrations, according to the CADA. Three of our six dealerships are also among the leading dealerships in China for their respective brands as measured by individual dealership new vehicle sales volume.

We provide a "one-stop shop" experience for our customers by offering them a wide range of automobile products and services in each of our franchise dealerships, or 4S dealerships, as they are commonly known in China. "4S" stands for sales, spare parts, services and survey, and is understood to mean that our dealerships offer a full range of automobile retail services. We offer new passenger vehicles, auto parts and accessories for sale, as well as automobile repair and maintenance services, and provide a channel for vehicle manufacturers to gather customer feedback. We also offer our customers assistance with procuring automobile insurance and financing and other automobile-related services. In 2009, our new vehicle sales accounted for 91.0% of our total revenues, our automobile repair and maintenance service operations accounted for 8.7%, and our insurance and finance-related services and other operations accounted for 0.3%.

We have one dealership for each of six different brands and sell domestically manufactured or imported vehicles offered by joint ventures between foreign and Chinese automakers. These brands include FAW-Volkswagen, Audi, FAW-Mazda, Shanghai-Volkswagen, Toyota and Chang An-Mazda, representing some of the most popular mid-line and luxury brands in China.

According to the CADA, Shanghai-Volkswagen and FAW-Volkswagen were the two highest selling brands in China from 2007 to 2009 and Audi was the top selling luxury brand in China during the same period, in each case as measured by the number of vehicles sold. The top three brands of vehicles that we sell, which collectively represented approximately 75.8% of our new vehicle sales revenues in 2009, are Audi, FAW-Volkswagen and FAW-Mazda.

We market our various services under the "Lentuo" brand, which has created strong brand awareness in the market we serve. We believe that providing high quality customer service is the key to our success in the automobile retail industry. Automobile manufacturers place a high priority on customer satisfaction in the evaluation of dealership performance and award key incentives, such as purchase rebates, to dealerships based on their customer satisfaction ratings. We have designed our operations with the aim of delivering consistent, high quality customer service and establishing long-lasting customer relationships. We have been well recognized by our customers and industry peers for our outstanding customer service.

Our business has grown significantly over the past three years. Our revenues increased from RMB1,656.8 million in 2007 to RMB1,879.3 million in 2008 and RMB2,341.5 million ($345.3 million) in 2009, representing a compound annual growth rate, or CAGR, of 18.9%. We grew our net income from RMB34.5 million in 2007 to RMB76.5 million in 2008 and RMB128.7 million ($19.0 million) in 2009, representing a CAGR of 93.0%. Our revenues and net income in the six months ended June 30, 2010 were RMB1,312.8 million ($193.6 million)

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and RMB67.4 million ($9.9 million), respectively, representing an increase of 21.0% and 35.0%, respectively, over the same period in 2009.

Industry Background

According to China Association of Automobile Manufacturers, or CAAM, and Ward's Automotive Group, or Ward's, China's automobile industry has experienced significant growth over the past several years, resulting in China surpassing the United States as the world's largest automobile market in 2009. According to CAAM, total new automobile sales volumes, including passenger and commercial vehicles, during 2009 were 13.6 million units, representing a 45.5% growth rate over 2008 and a CAGR of 23.7% from 2006 to 2009. According to CAAM, 10.3 million, or 75.7%, of the 13.6 million total automobile sales for 2009 were passenger vehicle sales, positioning China as the world's largest passenger vehicle market. China's passenger vehicle unit sales grew by 52.8% from 2008 to 2009 and had a CAGR of 25.9% from 2006 to 2009. According to the CADA, China's automobile market is expected to grow 10.3% from 2009 to 2010 and reach 20.0 million units by 2015.

According to the CADA, the Beijing metropolitan area is the largest automobile retail market among all cities in China as measured by annual new passenger vehicle registrations. According to the CADA, Beijing's passenger vehicle market grew 50.1% in 2009 over 2008, with 519,000 new passenger vehicle registrations. According to the CADA, for the year ending December 31, 2010, Beijing's passenger vehicle market is expected to grow 9.6% year over year, with 569,000 new passenger vehicles expected to be registered.

According to CAAM, China's automobile after-sales market, which consists of the repair and maintenance market and the accessories market, has grown at a CAGR of 27.3% from 2000 to 2008 and is expected to grow in the future as the automobile ownership in China continues to grow. China's used passenger car market has also experienced substantial growth and continues to demonstrate strong growth potential. According to the CADA, approximately 2.0 million used passenger vehicles were sold in 2009, representing approximately 21.4% growth over 2008. The volume of used passenger vehicle sales is expected to reach approximately 2.4 million units in 2010 and 3.5 million units in 2012, according to the CADA.

In China, 4S dealerships provide the dominant platform for passenger vehicle sales and are highly fragmented. According to the CADA, as of December 31, 2009, there were approximately 13,000 4S dealerships in China, among which approximately 10,000 4S dealerships were selling passenger vehicles. According to the CADA, 177 passenger vehicle dealerships, or approximately 1.7% of all 4S passenger vehicle dealerships in China, had annual revenues of RMB500.0 million ($73.7 million) or above as of the end of 2009. According to the CADA, there were 8,962 4S passenger dealerships, or approximately 85.8% of all 4S passenger vehicle dealerships in China, that had less than RMB100.0 million ($14.7 million) in annual revenues as of the end of 2009.

Our Strengths and Strategies

We believe that the following competitive strengths have contributed to our success and differentiate us from our competitors:

Leading automobile dealership group in Beijing, with industry-leading individual dealership performance. We are the largest non-state-owned automobile dealership group in Beijing, China as measured by new vehicle sales in 2009, according to the CADA. We believe that our leading position in China's largest automobile retail market gives us an advantage in enhancing our reputation among, and forming long-term relationships with, automobile manufacturers, which we believe will significantly benefit our future growth in Beijing and in other regional markets we may enter in the future. As measured by individual dealership new vehicle sales volume, our FAW-Volkswagen dealership ranked first in 2007 and 2008 and second in 2009 among over 300 FAW-Volkswagen dealerships in China; our FAW-Mazda dealership ranked fourth in 2007 and second in 2008 and 2009 among over 100 FAW-Mazda dealerships in China; and our Chang An-Mazda dealership ranked third in 2008 among over 85 Chang An-Mazda dealerships in China as of the end of 2008 and second in 2009 among over 100 Chang An-Mazda dealerships in China as of the end of 2009.

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Strong relationships with key automobile manufacturers in China.  We have achieved significant sales volumes for the automobile brands we represent. As a result of our leading market position and large customer base, we have established strong and mutually beneficial relationships with the leading automobile manufacturers in China whose brands we represent. The specific advantages of our strong relationships with these key manufacturers include the receipt of purchase rebates, reliable access to popular vehicles, an advantageous brand mix and manufacturers' support for continued expansion.

Strong brand recognition driven by customer service-focused organization.  We were rated by the CADA in 2008 as one of the ten most influential automobile dealership groups in the industry for the 30 years since China's adoption of economic reform policies. Our individual dealerships have also received high customer satisfaction ratings and various awards in recent years in recognition of their outstanding customer service. We believe that our commitment to customer service has not only strengthened our relationships with our existing customers and helped promote customer loyalty for our brand, but has also contributed to our success in attracting new customers and generating repeat business.

Valuable institutional customers and industry relationships.  We believe our well-regarded brand name and reputation for high quality customer service have helped us attract reliable institutional customers in China. We are a long-term supplier of vehicles to several of Beijing's largest taxi companies and government entities and have also developed close cooperative relationships with a number of major insurance companies and financial institutions in China that are key participants in the automobile retail industry. We believe our broad-based and mutually beneficial commercial relationships with our institutional customers and other industry participants have enhanced our profile within the automobile retail industry and better positioned us to capture potential growth opportunities.

Experienced management team.  We have a management team with extensive experience and expertise in the automobile retail sector in China. Mr. Hetong Guo, our founder and chairman, has served in the automobile industry for more than 20 years and has led our company in achieving our success to date. Mr. Guo has established essential industry relationships with many of our key suppliers and institutional customers and he serves in leadership positions at several national and local automobile retail business associations. Mr. Jing Yang, our chief executive officer, has approximately 13 years of experience in the automobile retail industry and has guided us in formulating our growth strategies and expansion plans.

We intend to pursue the following key growth strategies:

Increase the size and scope of our dealership network.  We plan to significantly expand the size and scope of our dealership network through organic growth and targeted acquisitions. We intend to capitalize on our local knowledge, industry experience, industry and other relationships and well-known brand name to establish new dealerships. We believe we can leverage our strong and established relationships with leading automakers in China to obtain additional franchises and further expand our network by opening new dealerships. In addition, there are numerous potential acquisition opportunities as a result of China's highly fragmented automobile retail industry. Through our organic growth and acquisition efforts, we intend to increase our market share in Beijing, expand our brand mix and enter geographic regions we do not currently serve.

Increase sales at existing dealerships.  We believe there is significant opportunity for sales growth at each of our dealerships. We plan to increase sales and profitability by striving to continually provide a high level of customer service, closely monitor market trends, sales performance and customer requirements for different services and make corresponding adjustments to optimize our product and service offerings, leverage our strong relationships with automobile manufacturers and use information technology to increase productivity and enhance our customer relationships.

Focus on higher margin products and services.  While new vehicle sales are fundamental to our business, other products and services, such as automobile repair and maintenance service, automobile accessories sales and the arrangement of insurance and financing for our customers, generally provide significantly higher

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    profit margins. To improve our profitability, we will focus on expanding these higher margin products and services.

Develop a new business unit focused on fleet car leasing and used car sales.  We plan to leverage our significant scale of operations and strong relationships with automobile manufacturers to develop a new business model focused on complementary fleet car leasing and used car sales operations. We intend to enter the fleet car leasing business by making volume purchases of large numbers of vehicles from automobile manufacturers, which will further enhance our relationships with the manufacturers and thereby allow us to lower our per vehicle purchase costs. We will lease these vehicles to retail car rental companies that offer short-term rental services to individual customers. After six to twelve months in service, such rental cars will then be offered for sale by us as used vehicles. We intend to benefit from this new business model by capitalizing on the demand for new and more diversified models of rental cars, achieving synergies among fleet car leasing, used car sales and automobile repair and maintenance service, and capturing the substantial growth opportunity in the used car sales market.

Our Challenges

Our ability to achieve our goals and execute our strategies is subject to risks and uncertainties. We believe the following are the major risks and uncertainties that may materially affect us:

our dependence on the franchises awarded by automobile manufacturers;

our ability to successfully implement our growth strategies, including executing our expansion plan, acquiring new dealerships and developing the fleet car leasing and used car sales businesses;

our dependence on new vehicle sales and customers' demand for the particular lines of vehicles we carry and our ability to obtain a desirable mix of popular new vehicles from manufacturers;

our ability to obtain additional franchises from automobile manufacturers;

our ability to meet an automobile manufacturer's sales, operational, customer satisfaction and other requirements;

our ability to substantially grow our automobile repair and maintenance service business; and

changes in PRC governmental economic and other policies affecting the automobile industry.

See "Risk Factors" and "Special Notes Regarding Forward-Looking Statements" for a detailed discussion of these and other risks and uncertainties associated with our business and investing in our ADSs.

Our Corporate Structure

Mr. Hetong Guo, our chairman, founded our business in 1994 and opened our first authorized dealership under the FAW-Volkswagen franchise in 1997. Since then, we have opened five additional franchise dealerships, including an Audi dealership and a FAW-Mazda dealership in 2003, a Shanghai-Volkswagen dealership in 2004, a Toyota dealership in 2005 and a Chang An-Mazda dealership in 2008. Prior to our reorganization, these franchised dealerships were operated under the control of their parent company, Beijing Lentuo Electromechanical Group Co., Ltd., or Lentuo Electromechanical, a PRC-incorporated entity controlled by Mr. Hetong Guo.

In anticipation of our overseas listing and to facilitate foreign investment in our company, we reorganized our corporate structure and incorporated Lentuo International Inc. as an offshore holding company in the Cayman Islands and wholly owned subsidiaries in both the Hong Kong Special Administrative Region and Beijing, China in 2009. Through a series of contractual arrangements entered into in January and June 2010, Lentuo Electromechanical transferred the effective control over our automobile retail business to Lentuo Hong Kong and Lentuo Beijing. Mr. Hetong Guo held the same controlling interest in our company immediately before and after the reorganization. Accordingly, the reorganization has been reflected in our financial statements as if the current corporate structure had always existed and our results of operations, assets and liabilities are stated at their

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historical carrying amounts. The following diagram illustrates our company's corporate structure as of the date of this prospectus:

GRAPHIC


GRAPHIC   Equity interest
Contractual arrangements
(1)
The following table sets forth our affiliated entities as of the date of this prospectus:

 
Affiliated Entity
  Function
  Beijing Tuozhan Industrial & Trading Development Co., Ltd.    FAW-Volkswagen dealership
  Beijing Aotong Automobile Trading Co., Ltd.    Audi dealership
  Beijing Lentuo Chengxin Commercial & Trading Co., Ltd.    FAW-Mazda dealership
  Beijing Yuantongqiao Toyota Automobile Trading Co., Ltd.    Toyota dealership
  Beijing Tuojiacheng Commercial & Trading Co., Ltd.    Chang An-Mazda dealership
  Beijing Lentuo Huitong Automobile Sales Service Co., Ltd.    Shanghai-Volkswagen dealership
  Beijing Tuozhan Automobile Repair Co., Ltd.    Automobile repair shop
  Beijing Lentuo Automobile Leasing Co., Ltd.    Automobile leasing
(2)
Lentuo Electromechanical's shareholders include Mr. Hetong Guo, Mr. Jing Yang, Ms. Xiaoli Geng, Mr. Chuanxin Sun, Mr. Xueyuan Han and Ms. Miusi Yang. At the time the agreements related to the contractual arrangements with our PRC affiliated entities were executed in January and June 2010, each of Lentuo International Inc. and Lentuo Electromechanical was 75% owned by Mr. Hetong Guo, 6% owned by Mr. Jing Yang, 6% owned by Ms. Xiaoli Geng, 6% owned by Mr. Chuanxin Sun, 6% owned by Mr. Xueyuan Han and 1% owned by Ms. Miusi Yang.

(3)
Exclusive Technology Consulting and Service Agreement.

(4)
Exclusive Call Option Agreement.

(5)
Powers of Attorney.

(6)
Equity Interest Pledge Agreement.

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Corporate Information

Our principal executive offices are located at A-18 Huagong Road, Guangqumenwai, Chaoyang District, Beijing, China 100124. Our telephone number at this address is (86-10) 6778 3955 and our fax number is (86-10) 6778 0229. Our registered office is located at Marquee Place, Suite 300, 430 West Bay Road, P.O. Box 32052, Grand Cayman KYI-1208, Cayman Islands, British West Indies.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.lentuo.net. The information contained on our website does not constitute part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017.

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The Offering

Issuer

  Lentuo International Inc.

Securities Offered

 

13,000,000 ordinary shares in the form of ADSs. Our ordinary shares are being offered only in the form of ADSs.

Price per ADS

 

We currently estimate that the initial public offering price will be between $8.00 and $10.00 per ADS.

ADSs Offered by Us in This Offering

 

6,500,000 ADSs

ADSs Outstanding Immediately After This Offering

 

6,500,000 ADSs (or 7,475,000 ADSs if the underwriters exercise the over-allotment option in full).

Ordinary Shares Outstanding Immediately After This Offering

 

58,937,912 ordinary shares (or 60,887,912 ordinary shares if the underwriters exercise the over-allotment option in full), excluding ordinary shares reserved for issuance under our equity incentive plan.

Over-Allotment Option

 

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 975,000 additional ADSs at the initial public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions.

The ADSs

 

Each ADS represents two ordinary shares, par value $0.00001 per ordinary share. The ADSs will be evidenced by American depositary receipts, or ADRs.

 

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

 

Subject to the terms of the deposit agreement, you may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

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

 

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

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Timing and Settlement for ADSs

 

The ADSs are expected to be delivered against payment on or about                    , 2010. The ADRs evidencing the ADSs will be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust Company, or DTC, in New York, New York. DTC, and its direct and indirect participants, will maintain records that will show the beneficial interests in the ADSs and facilitate any transfer of the beneficial interests.

Use of Proceeds

 

We estimate that we will receive net proceeds of approximately $50.5 million (or $58.7 million if the underwriters exercise the over-allotment option in full) from this offering, after deducting the underwriter discounts, commissions and estimated offering expenses payable by us and assuming an initial public offering price of $9.00 per ADS, the mid-point of the estimated offering price range set forth on the cover of this prospectus. We intend to use our net proceeds from this offering for the following purposes:

 

•       approximately 85% of the total net proceeds, to expand the size and scope of our dealership network through the establishment of new dealerships and acquisitions;

 

•       approximately 5% of the total net proceeds, to enhance our higher margin products and services, increase sales at our existing dealerships and implement our other growth strategies, such as hiring additional service staff and technicians, upgrading and modifying the showrooms at our dealerships, further developing our company-wide management tools and databases, expanding training programs for our employees, adding new service bays, upgrading service equipment and developing fleet car leasing and used car sales; and

 

•       the remaining amount to fund our working capital requirements and for other general corporate purposes.

 

In the event the underwriters exercise their over-allotment option, we plan to allocate the additional net proceeds in the same percentage as described above. See "Use of Proceeds" for additional information.

Listing

 

Our ADSs have been approved for listing on the New York Stock Exchange. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

NYSE Symbol

 

"LAS"

Depositary

 

Citibank, N.A.

Lock-up

 

We, our directors, executive officers and certain of our existing shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See "Underwriting."

Risk Factors

 

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

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Summary Consolidated Financial and Operating Data

The following summary consolidated statements of income and comprehensive income data and summary consolidated cash flow 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 consolidated financial statements, which have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. The report of Ernst & Young Hua Ming on those financial statements is included elsewhere in this prospectus. The following summary interim condensed consolidated statements of income and comprehensive income data and summary interim condensed consolidated cash flow data for the six months ended June 30, 2009 and 2010 and the summary interim condensed consolidated balance sheet data as of June 30, 2010 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited interim consolidated financial information on the same basis as our audited consolidated financial statements. The unaudited interim financial information includes all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for the periods presented. 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 accounting principles generally accepted in the United States, or U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.

The table below contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the exchange rate as set forth on June 30, 2010 in the H.10 statistical release of the Federal Reserve Board, which was RMB6.7815 to $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.

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  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands, except for share and per share data)
 

Summary Consolidated Statements of Income Data:(1)

                                           

Revenues

    1,656,809     1,879,279     2,341,491     345,277     1,084,993     1,312,821     193,589  

Cost of goods sold

    (1,517,542 )   (1,684,058 )   (2,062,163 )   (304,087 )   (976,952 )   (1,157,031 )   (170,616 )

Gross profit

    139,267     195,221     279,328     41,190     108,041     155,790     22,973  

Total operating expenses

    (56,315 )   (60,935 )   (70,625 )   (10,415 )   (28,744 )   (37,842 )   (5,580 )

Operating income

    82,952     134,286     208,703     30,775     79,297     117,948     17,393  

Interest income

    2,753     2,278     2,392     353     2,219     227     33  

Interest expenses

    (21,403 )   (33,435 )   (33,288 )   (4,909 )   (13,078 )   (23,697 )   (3,494 )

Exchange loss

                        (513 )   (76 )

Other (expense)/income, net

    (51 )   1,179     1,394     206     873     286     42  

Income before income tax expenses

    64,251     104,308     179,201     26,425     69,311     94,251     13,898  

Income tax expenses

    (29,654 )   (27,806 )   (50,039 )   (7,379 )   (19,401 )   (26,864 )   (3,961 )

Income from continuing operations

    34,597     76,502     129,162     19,046     49,910     67,387     9,937  

(Loss) income from discontinued operations(2)

    (50 )   23     (433 )   (64 )   16          

Net income

    34,547     76,525     128,729     18,982     49,926     67,387     9,937  

Income per share from continuing operations

    0.87     1.92     3.24     0.48     1.25     1.69     0.25  

Earnings per ordinary share, basic and diluted

    0.87     1.92     3.23     0.48     1.25     1.69     0.25  

Weighted average ordinary shares outstanding

    39,908,389     39,908,389     39,908,389     39,908,389     39,908,389     39,908,389     39,908,389  
   

 

 
  As of December 31,   As of June 30, 2010  
 
  2007   2008   2009   Actual   Pro Forma
as Adjusted(3)
 
 
  RMB   RMB   RMB   $   RMB   $   $  
 
  (Amounts in thousands, except for share data)
 

Summary Consolidated Balance Sheet Data:(1)

                                           

Cash and cash equivalents

    123,513     103,143     72,082     10,629     70,016     10,325     64,860  

Inventories, net

    117,807     244,518     290,298     42,807     369,328     54,461     54,461  

Advances to suppliers

    264,441     270,059     251,632     37,106     262,519     38,710     38,710  

Total assets

    953,395     1,365,116     1,406,789     207,445     1,338,072     197,313     251,848  

Bills payable

    456,349     775,933     409,584     60,397     336,149     49,569     49,569  

Short-term loans

    243,550     208,928     325,460     47,992     250,718     36,971     36,971  

Total liabilities

    876,281     1,211,477     1,124,420     165,807     1,111,394     163,887     149,887  

Ordinary shares, par value $0.00001 per share

                                           
 

Authorized—500,000,000 shares as of December 31, 2007, 2008 and 2009 and June 30, 2010;

                                           
 

Issued and outstanding—39,908,389 shares as of December 31, 2007, 2008 and 2009 and June 30, 2010

    1     1     1         1          

Additional paid-in capital

    53,972     53,972     53,973     7,959     53,973     7,959     76,494  

Total shareholders' equity

    77,114     153,639     282,369     41,638     226,678     33,426     101,961  

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  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands)
 

Summary Consolidated Cash Flow Data:

                                           

Net cash provided by (used in) operating activities

    (66,002 )   370,070     (92,932 )   (13,704 )   (172,899 )   (70,927 )   (10,459 )

Net cash provided by (used in) investing activities

    (19,344 )   (203,561 )   (131,270 )   (19,357 )   53,065     17,325     2,555  

Net cash provided by (used in) financing activities

    58,806     (186,879 )   193,141     28,481     156,778     51,536     7,599  
   

 

 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  

Margin Data:(4)

                               

Net income margin

    2.1 %   4.1 %   5.5 %   4.6 %   5.1 %

Overall gross margin

    8.4 %   10.4 %   11.9 %   10.0 %   11.9 %

New vehicle sales gross margin

    7.1 %   7.6 %   7.3 %   5.5 %   6.8 %

Automobile repair and maintenance service gross margin

    29.6 %   43.6 %   57.4 %   58.2 %   55.2 %

Operating Data:

                               

Number of dealership at the end of period

    5     6     6     6     6  

Number of new vehicles sold

    12,819     11,689     15,047     7,389     7,013  
   
(1)
Our historical consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009 and six months ended June 30, 2010 include certain assets, liabilities and results of operations of Lentuo Electromechanical that are related to the automobile retail sales business. Lentuo Electromechanical directly operated our Shanghai-Volkswagen dealership prior to June 2010. In preparation for this offering, Lentuo Electromechanical transferred all of its net assets that would be used by us in the automobile retail sales business to Beijing Lentuo Huitong Automobile Sales Service Co., Ltd., one of our variable interest entities, on June 20, 2010. All of the net assets of Lentuo Electromechanical that would not be used by us in the automobile retail sales business, mainly including amounts due from related parties, a building and construction in progress, were retained by Lentuo Electromechanical, and accounted for as a distribution to our shareholders as of June 20, 2010. These net assets retained by Lentuo Electromechanical and the related results of operations (consisting of depreciation of the building) were included in our historical consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009, but will be excluded from our consolidated financial statements for the period ending after June 20, 2010. See Note 1 to our consolidated financial statements included elsewhere in this prospectus. In addition, certain subsidiaries of Lentuo Electromechanical that are unrelated to the automobile retail sales business, all of which are insignificant, were not included in our historical consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009 and six months ended June 30, 2010.

(2)
In November 2009, Lentuo Electromechanical disposed of Lentuo Tonghe Advertising Co., Ltd., a company engaged in automobile advertising and promotion-related services. The results of operations of Lentuo Tonghe Advertising Co., Ltd. have been presented as discontinued operations in our historical consolidated financial statements.

(3)
The pro forma as adjusted balance sheet data as of June 30, 2010 gives effect to (1) the issuance and sale of 1,510,844 ordinary shares to Newman Investments Limited in August 2010 in exchange for $18.0 million, of which $14.0 million was paid in February 2010 and $4.0 million was paid in August 2010, pursuant to a subscription agreement dated February 20, 2010 and (2) the issuance and sale of 13,000,000 ordinary shares in the form of ADSs by us in this offering and our receipt of the expected net proceeds from this offering, assuming an initial public offering price of $9.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses payable by us.

(4)
Net income margin is equal to net income divided by revenues. Overall gross margin is equal to overall gross profit divided by revenues. New vehicle sales gross margin is equal to gross profit of new vehicle sales divided by revenues from new vehicle sales. Automobile repair and maintenance service gross margin is equal to gross profit of automobile repair and maintenance service divided by revenues from automobile repair and maintenance service.

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Risk Factors

This offering involves a high degree of risk. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before deciding to invest in our ADSs. The trading price of our ADSs could decline due to any of these risks and uncertainties, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

Our business depends on the franchises awarded by automobile manufacturers, and if we fail to renew one or more of our franchise agreements from such vehicle manufacturers on favorable terms, or at all, or if one or more of our franchise agreements are terminated, our inventory supply would be significantly disrupted and our business, financial condition, results of operations and prospects would be materially and adversely affected.

Each of our dealerships operates under a franchise granted by the manufacturer (or manufacturer-authorized distributor). Our franchise agreements are non-exclusive, must be renewed periodically and typically have a term of one or two years. Our dealerships may obtain new vehicles from manufacturers, sell new vehicles and display vehicle manufacturers' trademarks only to the extent permitted under franchise agreements.

As a result of our dependence on these franchise rights, manufacturers exercise a significant level of influence over our day-to-day operations. The terms of our franchise agreements, together with manufacturers' dealership manuals, service manuals and operating standards which are often referenced in these franchise agreements, govern key aspects of our operations and capital spending. Such franchise agreements and dealership manuals typically contain provisions and standards relating to:

the achievement of certain sales and customer satisfaction targets;

inventories of new vehicles and manufacturer replacement parts;

the maintenance of necessary net working capital;

facilities and placement of signage;

procedures for inspection, testing and evaluation of the dealership by the manufacturer;

advertising, marketing, deposit and warranty practices;

products authorized to be offered to customers;

after-sales services;

data sharing regarding market trends and customer statistics;

dealership management;

personnel training;

information systems; and

monthly and annual sales and financial reporting to the manufacturer.

Our compliance with these requirements is closely monitored by the manufacturers. Any failure to comply that is not cured within a specified period of time may give rise to early termination of the franchise agreement by manufacturers.

Most of our franchise agreements provide the manufacturer with the right to terminate the agreement or refuse to renew it after the expiration of the term of the agreement under specified circumstances. Certain franchise agreements allow the automobile manufacturers to terminate the agreements under any circumstances as long as a prior written notice is given. We cannot assure you that we will be able to renew any of our existing franchise agreements on favorable terms, or at all. Specifically, many of our franchise agreements provide that the manufacturer may terminate the agreement if the dealership undergoes a change of control. These provisions may provide manufacturers with superior bargaining positions in the event they seek to terminate our franchise

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agreements or renegotiate the agreements on terms that are disadvantageous to us. Our supply of inventory could be significantly disrupted and our business and results of operations could be materially and adversely affected to the extent that our franchise agreements are terminated or not renewed, our franchise rights become compromised or our operations become restricted due to the terms of our franchise agreements.

We may not succeed in implementing our growth strategies.

One of our primary strategies is to consolidate and retain our position as a leading automobile dealer in Beijing and expand into other regional markets in China. Our expansion plan includes increasing the size and scope of our dealership network, growing our after-sales businesses and entering into car rental and leasing and used car sales businesses. Our growth strategies may not be implemented successfully due to a number of risks, including our inability to:

determine the proper magnitude and prospects of our proposed expansion and effectively execute this expansion plan;

hire, train and maintain sufficient qualified staff;

obtain adequate financial resources;

enter into new dealership agreements with automakers;

obtain appropriate licenses, permits and approvals from relevant PRC government authorities on a timely basis;

identify desirable locations for our dealerships and showrooms;

negotiate the terms of new leases or land use rights for properties in desirable locations; or

obtain, evaluate the condition and potential resale value of and refurbish used cars for resale.

In addition, various factors beyond our control may significantly influence the results of our growth strategies, including general economic conditions in China, particularly in the automobile market and the automobile dealership industry and the specific geographical areas in which we operate. We may not be able to sustain our revenue growth or profit margins at historical levels or we may not be able to manage our growth successfully. Should any or all of the risks in relation to our expansion plan materialize, our results of operations, financial condition and growth prospects could be materially and adversely affected.

Our dealerships depend upon new vehicle sales and, therefore, our success depends in large part upon customer demand for the particular lines of vehicles our dealerships carry.

New vehicle sales generate the majority of our total revenues and lead to sales of higher-margin services, such as automobile repair and maintenance service and the arrangement of insurance and financing for customers. Our dealerships depend in large part on the overall success of the vehicle lines they carry. Although we have sought to limit our dependence on any one vehicle brand, our new vehicle sales consist only of six brands, which are Audi, FAW-Volkswagen, Toyota, FAW-Mazda, Chang An-Mazda and Shanghai-Volkswagen. In particular, Audi and FAW-Volkswagen accounted for 29.8% and 29.1%, respectively, of our revenues from new vehicle sales in 2009. If one or more vehicle lines that separately or collectively account for a significant percentage of our new vehicle sales suffer from decreasing consumer demand, our new vehicle sales and related revenues may be materially reduced.

If we fail to obtain a desirable mix of popular new vehicles from manufacturers, our profitability may be affected.

Our new automobile sales are influenced by the manufacturers' abilities to anticipate changes in consumer tastes, preferences and requirements, including those driven by environmental or popular trends, and to manufacture and deliver to us in sufficient quantities and on a timely basis, a desirable, high quality and price-competitive mix of new vehicles to sell to our customers. The most popular vehicles usually generate the highest profit margins and

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are frequently difficult to obtain from the manufacturers. If we cannot obtain sufficient quantities of the most popular models, our profitability may be adversely affected. Sales of less desirable models may reduce our profit margins. Several manufacturers generally allocate their vehicles among their franchise dealerships based on the sales history of each dealership. If our dealerships experience prolonged sales slumps relative to our competitors, these manufacturers may cut back their allotments of popular vehicles to our dealerships and new vehicle sales and profits may decline. Similarly, the delivery of vehicles, particularly newer, more popular vehicles, from manufacturers at a time later than scheduled could lead to reduced sales during those periods.

We may not obtain additional franchises and our new dealerships may not initially benefit from economies of scale.

We plan to increase the size and scope of our network by establishing new dealerships and acquiring dealerships from other parties in Beijing and other geographical regions in China. To implement this strategy, we are required to apply for franchises from relevant automobile manufacturers for any additional dealerships we intend to establish. In addition, franchise agreements between automobile dealerships and manufacturers generally provide that changes in ownership of automobile dealerships will require the prior approval of the relevant automobile manufacturers. Accordingly, our acquisition of automobile dealerships is subject to the approval of relevant automobile manufacturers. Automobile manufacturers have complete discretion in approving an application to set up new dealerships or an acquisition of existing dealerships and will typically consider such factors as the applicants' or acquirers' operating history, financial resources, sales performance records, customer satisfaction records and/or geographical distribution. Furthermore, some automobile manufacturers may limit the number of franchises or shares of franchises or vehicle sales maintained by an affiliated dealership group on a national, regional or local basis. Manufacturers may also tailor these types of restrictions to particular dealership groups. Generally it takes three to six months to apply for and obtain new franchises from automobile manufacturers. It generally takes a shorter period of time for automobile manufacturers to grant approvals for the acquisition of existing dealerships. However, such approvals may also take significantly longer. Automobile manufacturers may not approve our new franchise applications or acquisitions of dealerships from other parties, which could materially compromise our growth strategies and business prospects.

In addition, even if automobile manufacturers approve our new franchise applications, we expect that our revenues and profit margins from the new dealerships will be lower during their ramp-up period and such new dealerships will not be able to enjoy the benefits of economies of scale at the initial stage of their operations.

Adverse conditions affecting one or more manufacturers may negatively impact our business, financial condition, results of operations and prospects.

The success of each of our dealerships depends to a great extent on our vehicle manufacturers' reputations, financial condition, marketing efforts, vehicle design, production capabilities and management. Adverse conditions affecting these and other important aspects of the manufacturers' operations and public relations may adversely affect our ability to market their automobiles to the public. For example, Toyota, which accounted for 7.8% of our total units of vehicles sold in 2009, recently was involved in a series of large-scale global automobile recalls and is under investigations by the governmental agencies in certain countries with respect to allegedly defective and unsafe products. As a result, Toyota's reputation and sales have been adversely affected. If Toyota cannot successfully manage this crisis or if there are more defective automobile recalls, Toyota's reputation and sales may further deteriorate, and, as a result, our sales of Toyota branded vehicles could also fall significantly. In addition, in 2009, there were worker strikes demanding higher wages at Honda's manufacturing facilities in China, which could encourage similar behavior at other joint venture automobile manufacturers in China from whom we obtained, or plan to obtain, franchises. Adverse conditions such as the Toyota recalls, worker strikes or other adverse conditions or events involving automobile manufacturers that supply vehicles to us may have a material adverse impact upon our business, financial condition, results of operations and prospects.

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We may not continue to receive purchase rebates from automobile manufacturers if we fail to meet an automobile manufacturer's sales, operational, customer satisfaction and other requirements or if an automobile manufacturer changes its rebate policy.

We receive purchase rebates from automobile manufacturers based on evaluation of our operations under certain performance indicators, including sales volume, satisfaction of sales targets, operating track records and customer satisfaction, which account for a significant portion of our profit on new vehicles sales. For the years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2010, rebates granted to us amounted to approximately RMB94.9 million, RMB128.7 million, RMB151.1 million ($22.3 million) and RMB88.5 million ($13.1 million), respectively. If we fail to achieve satisfactory levels of performance as measured by such indicators in the future, the rebates we receive from automobile manufacturers may decrease. In addition, there can be no assurance that the automobile manufacturers will continue to grant us rebates at similar levels or at all. Should some or all of the manufacturers cease to offer such rebates, decrease the magnitude of such rebates or alter the conditions by which such rebates are granted, our financial condition, results of operations and profitability may be materially and negatively affected.

Our ability to meet our customers' demand for new vehicles, spare parts and automobile accessories depend in part on our ability to maintain a reasonable level of inventory of these products.

We must maintain a reasonable level of inventory of new automobiles, spare parts and automobile accessories in terms of their quantity and selection to satisfy our customers' needs in a timely manner. We actively control and monitor our inventory to achieve its turnover efficiency, principally by lowering the level of our slow-moving inventory and increasing the level of our fast-moving inventory. If our inventory is too high, we may be required to increase our working capital and incur additional financing cost. If our inventory is too low, our ability to satisfy our customers' needs may be compromised, which may harm our reputation and result in lost revenues.

We depend on third parties for the supply of certain spare parts and automobile accessories.

Other than automobile manufacturers that grant us franchise rights and supply us with original parts, we also depend on third parties for the supply of certain spare parts for our automobile repair shop and automobile accessories. We rely on such third party suppliers to supply us with high-quality and price-competitive spare parts and automobile accessories. If such suppliers fail to provide us with products that satisfy manufacturers' and our requirements, we may not be able to secure replacement products on favorable terms, in a timely manner, or at all. In addition, defective spare parts and automobile accessories from these suppliers may cause personal and/or property damage to our customers resulting in damage claims against us, for which we may not be able to obtain indemnity from such suppliers. We may also incur significant financial costs in connection with such claims and they may divert our management's attention away from other important matters. As a result, our business, financial condition and results of operations may be negatively affected.

We may not be successful in identifying and acquiring suitable acquisition targets or in establishing additional dealerships, which could adversely affect our growth.

We intend to expand our operations and markets through acquisitions and organic growth. The identification and completion of acquisitions and the establishment of additional dealerships require significant financial, managerial and other resources and we may not be able to identify, or complete the acquisition of, suitable acquisition targets, or to establish desired dealerships, on favorable terms or at all. We compete with several other dealer groups, some of which may have greater financial and other resources, and we may not be able to compete successfully with such groups in acquiring suitable targets or in establishing desired dealerships. If we do not succeed in identifying and acquiring suitable acquisition targets or in establishing additional dealerships, our growth and business prospects will be materially and adversely affected.

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If we are unable to successfully integrate acquired businesses or manage newly established dealerships, we will be unable to realize desired results from our growth strategies and such acquired and newly established operations will divert resources from our other comparatively profitable operations.

Our future growth depends in large part on our ability to acquire and establish additional dealerships, manage expansion, control costs in our operations and consolidate new dealerships into our organization. We have historically grown our business by establishing new dealerships and we do not have a history of acquiring and integrating additional dealerships. We may not be able to effectively execute our growth strategies through acquiring and integrating additional dealerships.

In pursuing our growth strategy of acquiring and establishing additional dealerships, we will face various risks that include, but are not limited to:

incurring significantly higher capital expenditures and operating expenses;

failing to integrate the operations and personnel of the acquired dealerships;

entering new markets with which we are unfamiliar;

incurring undiscovered liabilities at acquired dealerships;

disrupting our ongoing business;

diverting our management resources;

failing to maintain uniform standards, controls and policies;

impairing relationships with employees, manufacturers and customers as a result of changes in personnel with respect to acquired management teams; and

incorrectly valuing acquired entities.

We may not adequately anticipate all the demands that our growth will impose on our personnel, procedures and structures, including our financial and reporting control systems, data processing systems and management structure. Moreover, our failure to retain qualified management personnel at any acquired dealership may increase the risk associated with integrating the acquired dealership. If we cannot adequately anticipate and respond to these demands, we may fail to realize acquisition synergies and our resources will be focused on incorporating new operations into our structure rather than on areas that may be more profitable.

We may encounter difficulties in expanding our business lines beyond new vehicle sales and automobile repair and maintenance service, which may materially and adversely affect our growth and business prospects.

We presently generate most of our revenues from new vehicle sales and automobile repair and maintenance service. We plan to expand into other business lines, such as the fleet car leasing and used car sales businesses. We intend to make volume purchases of large numbers of vehicles from automobile manufacturers at discounted rates and then lend these vehicles to retail car rental companies that offer short-term rental services to individual customers. After six to twelve months in service, such rental cars will then be offered for sale by us as used vehicles. The execution of our expansion plan will be subject to significant risks and uncertainties, including the following:

we may not be able to secure desired vehicles from manufacturers in desired quantities on favorable terms or at all;

the retail market price of new vehicles may drop significantly before we complete the sale of used vehicles of the same or competing brands and, as a result, the sales of our used vehicles may be subject to increased pricing pressure and we may sustain a loss on such sales;

our existing car leasing operations are very small in scale and we do not have a track record in operating such businesses on a large scale;

we may fail to obtain a steady and desirable mix of used vehicles from our automobile leasing programs;

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our experience and expertise gained from our new vehicle sales business may not be relevant or be successfully applied to the car leasing and used car sales businesses;

we will face intense competition from other dealers or dealer groups that are already in or intend to expand into the car leasing or used car sales businesses;

we may not be able to accurately assess and respond to consumer tastes, preferences and demands in the car leasing and used car sales markets; and

we may not be able to generate enough revenues to offset our costs.

These and other risks may make our business expansion plan unsuccessful. In addition, implementing this plan may require us to devote significant financial, managerial and other resources to the car rental and leasing and used car sales businesses, which may divert such resources from our existing business lines. If we are not successful in executing our expansion plan, our growth may be materially and adversely affected.

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

Our business and expansion plan will require significant working capital and capital expenditures. We expect that our current cash and cash equivalents, cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated cash needs, for both working capital and capital expenditures, for at least 12 months following this offering. If, however, there are unforeseen changes in general business conditions or unexpected developments in our business or expansion, we may require additional cash resources. We may seek to sell additional equity or debt securities or obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. Furthermore, if we incur more debt, we will be liable for increased debt service costs and might have to agree to operating and financing covenants that would restrict our operations and liquidity. Our ability to obtain additional capital on commercially acceptable terms is subject to significant risks and uncertainties, including:

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

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

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

PRC governmental regulation of foreign investment in automobile distribution enterprises in China;

PRC governmental policies relating to foreign exchange; and

economic, political and other conditions in China.

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

We face substantial competition in our industry, and if we fail to compete successfully, our profitability may be materially and adversely affected.

The automobile retail and servicing industry is highly fragmented and competitive in Beijing, where we presently operate all of our business, as well as other areas in China where we may expand in the future. According to the CADA, there were over 600 franchise automobile dealerships in the Beijing metropolitan area as of the end of 2009. We face intense competition in all of our principal business lines. We compete with other dealerships operating in Beijing for vehicle sales and the principal competitive factors include the selection of popular vehicles, price, location of dealerships, suitability of the facility, on-site management and the quality of customer service. For automobile repair and maintenance service, we compete with other franchise or independent dealers and independent service shops and the principal competitive factors include factory-approved replacement parts, price, the familiarity with a manufacturer's brands and models, customer service and the ability to attract repeat customers. For our finance and insurance business, the principal competitive factors are favorable interest rates, convenience of "one-stop shopping," product knowledge and flexibility in finance terms.

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We do not have any cost advantage in purchasing new vehicles from manufacturers, in securing spare parts from suppliers or in sourcing finance or insurance products from financial institutions or insurance companies. We typically rely on advertising, merchandising, sales expertise, service reputation and dealership location to sell our products to our customers. Our franchise agreements do not grant us the exclusive right to sell a manufacturer's product within a given geographic area. Further, some of our competitors may have greater financial, marketing and personnel resources, better locations and lower overhead and sales costs than we do. Our main competitors in the local Beijing market include Beijing Automobile Repair Company, Beijing Tengda Automobile Sales & Service Co., Ltd. and Beijing Yuntong Group. We will also face increased competition from other dealer groups as we expand into other regional markets in China. If we fail to compete with existing or future competitors, our market share could decline and our revenues or profitability could be materially and adversely affected.

If vehicle manufacturers discontinue advertising campaigns, incentive programs or other promotional activities, our sales volume and/or profit margin on each sale may be materially and adversely affected.

Our dealerships depend on manufacturers for advertising, sales incentives, warranties and other promotional programs that are intended to promote and support new vehicle sales. Manufacturers may discontinue or from time to time make changes to these promotional and incentive programs. Some key promotional and incentive programs include:

national, regional or local advertising campaigns for new models of vehicles;

customer incentives on new vehicles;

dealer rebates on new vehicles;

special financing or leasing terms;

warranties on new vehicles; and

sponsorship of used vehicle sales by authorized vehicle dealers.

A reduction or discontinuation of manufacturers' promotional and incentive programs may reduce our new vehicle sales volume, resulting in decreased vehicle sales and related revenues, and may reduce our profit margin on each sale.

Changes in PRC governmental economic policies in relation to the automobile industry may adversely affect our business, operations, financial condition and results of operations.

The automobile industry in China is subject to various industrial policies of the PRC government. We may be affected significantly in the future by changes in PRC governmental industrial regulations and economic policies relating to or affecting our industry. Our customers consist of individual customers, corporate entities and governmental agencies and the level of their demand for automobiles may vary significantly as a result of such changes. For example, since late 2008, as part of its efforts to stimulate the Chinese economy amid the global financial crisis, the PRC government has adopted a series of policies favorable to the automobile industry, including implementing an automobile industry stimulus plan and certain related incentive programs in the form of tax deduction and governmental subsidies for purchasing new vehicles. Partly due to such policies and programs, new vehicle sales volumes in China reached 13.6 million units in 2009, representing a 45.5% increase over 2008, according to CAAM. Some of such policies and programs have a fixed term and will be phased out upon the expiration of their term and there is no assurance that they will be replaced by other similarly favorable policies and programs. Any changes, discontinuation or expiration of governmental policies favorable to the automobile industry may discourage consumers from buying new vehicles and, as a result, may have a material adverse effect on our sales and results of operations.

The level of vehicle supply may also vary significantly as a result of changes in PRC governmental policies relating to or affecting the automobile industry. PRC governmental regulations on automobile imports, production capacity, foreign investment, automobile emission standards and certain other aspects of the industry could affect the supply of new vehicles in the market. For example, foreign investors currently are not permitted to hold a

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majority equity interest in any automobile manufacturers in China. In addition, one foreign investor may only invest in up to two automobile manufacturers that manufacture the same category of vehicles (such as passenger vehicles or commercial vehicles) in China. If such restrictions are removed, foreign investors may significantly increase their investment and expand their business in China. As a result, the overall supply of automobiles in China may increase significantly. Any changes in governmental policies that may increase the overall supply of automobiles in China could subject us to a higher degree of pricing pressure and as a result, our business, financial condition, results of operations and profitability may be materially affected.

The automobile industry is also affected by PRC governmental regulations on the availability of credit, interest rates and other factors that could affect the demand and supply of automobiles. Any unfavorable changes in such governmental policies may have a material adverse effect on our business, financial condition and results of operations.

Our business will be harmed if overall consumer demand suffers from a severe or sustained economic downturn or if there is an oversupply in the automobile industry.

Our business is heavily dependent on consumer demand and preferences in China. Our revenues will be materially and adversely affected if there is a severe or sustained downturn in overall levels of consumer spending in China. Retail vehicle sales are cyclical and historically have experienced periodic downturns characterized by oversupply and weak demand. These cycles are often dependent on general economic conditions, consumer confidence and governmental incentive programs, as well as the level of discretionary personal income and credit availability. In 2008 and 2009, a global financial crisis and economic downturn severely affected the economies of most countries in the world, including the U.S. and European countries, particularly with respect to their financial industries. China has also been severely affected by this downturn. The PRC government has adopted a series of stimulus policies and incentive programs, including those relating to the automobile industry, to stimulate its economy amid this economic downturn. Partly due to such policies and programs, China's GDP grew by 8.7% in 2009, according to the International Monetary Fund. According to CAAM, the new vehicle sales volumes in China reached 13.6 million units in 2009, representing a 45.5% increase from the previous year. It is believed that the global economy is recovering from the global financial crisis. However, if the global economy does not recover as expected, or if such policies and programs of the PRC government are discontinued or changed, the overall economy of China may be adversely affected and the consumer demand for automobiles may drop significantly. Financial institutions may tighten credit in such event, which in turn could materially affect our ability to finance our purchase of new vehicles from manufacturers. In addition, consumers' demand for automobiles is also subject to other factors that are outside of our control. For example, severe or sustained increases in gasoline prices may lead to a reduction in automobile purchases or a shift in buying patterns from luxury/sports utility vehicle models, which typically provide high profit margins to retailers, to smaller, more economical vehicles, which typically have lower margins.

Due to the increased demand of consumers, many automobile manufacturers in China are expanding significantly or plan to expand their production capacity. If the overall capacity of automobile industry outgrows the demand of consumers, the oversupply of automobiles may occur and we may face increased competition and experience increased pricing pressure. As a result, our business and profitability could be materially and adversely affected.

Government regulations and related compliance costs may adversely affect our business and profitability.

We are subject to a wide range of national, provincial and local laws and regulations, including licensing requirements. These laws regulate the conduct of our business, including:

automobile retail sales practices;

automobile parts and services;

used car sales and car rentals;

consumer credit;

deceptive trade practices;

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consumer protection;

consumer privacy;

advertising;

land use and zoning; and

health and safety and employment practices.

To be in compliance with such laws and regulations, we need to train our employees, engage third party advisers, implement effective policies or take other necessary compliance actions, which will increase our cost and distract our personnel resources. If we or our employees at the individual dealerships violate or are alleged to violate these laws and regulations, we could be subject to consumer actions, administrative, civil or criminal actions, investigations and adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including suspension, cancellation or revocation of our licenses and franchises to conduct dealership operations. In addition, our noncompliance with such laws and regulations may cause us to fail to renew our licenses when they expire.

Any environmental claims or failure to comply with any present or future environmental regulations may require us to spend additional funds and may materially adversely affect our financial condition and results of operations.

We are subject to a wide range of environmental laws and regulations in China, including those governing discharges into the air and water, the storage of petroleum substances and chemicals, the handling and disposal of wastes and the remediation of contamination. As with automobile dealerships generally, and vehicle maintenance services providers in particular, our business involves the generation, use, handling and disposal of hazardous or toxic substances and wastes. We believe that we are in compliance with all material environmental, health and safety laws and regulations related to our operations and business activities. The failure to comply with any present or future regulations could result in the assessment of damages or imposition of fines against us or suspension of our operations. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspension of our business operations, which could materially adversely affect our financial condition and results of operations.

We operate all of our business in Beijing and our business may be adversely affected by unfavorable circumstances or events in Beijing.

We currently operate all of our business in Beijing. We plan to expand our business into other geographic regions but we expect that we will continue to generate a majority of our revenues from Beijing in the foreseeable future. Changes in local economic, competitive and governmental policies and other circumstances in Beijing may have a material adverse effect upon our business, financial condition and results of operations. For example, effective from April 1, 2010, the parking rates in business and commercial districts of the Beijing metropolitan area increased significantly under a new policy of the Beijing municipal government, which may undermine consumers' desire to purchase new vehicles and may have an adverse effect on automobile sales. As a further example, effective October 11, 2008, the Beijing municipal government introduced an alternate automobile license plate system to ease traffic congestion in the downtown area. Under this system, on every weekday, 20% of the vehicles in Beijing are prohibited from being operated on roads in the downtown area, depending on the last digit on the vehicle's license plate. This system may have undermined consumers' desire to purchase new vehicles. Any similar adverse conditions or occurrences in Beijing, or in other areas into which we may expand, may have an adverse effect on our business, financial condition and results of operations.

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We have not obtained land use rights and building ownership certificates to some of the properties we occupy and we may not be able to use certain of our leased properties that are on collectively owned rural land that is prohibited from being used for commercial purposes.

We have not obtained land use rights and building ownership certificates relating to some of the properties we occupy. One of our affiliated entities, Beijing Aotong Automobile Trading Co., Ltd., or Aotong, leased a parcel of land from a third party for a term of twenty years starting from July 1, 2003 and constructed the facilities for our Audi dealership on such land. This parcel of land is part of a larger parcel of land that is covered by a single land use right certificate and does not have a separate land use right certificate. Due to this lack of a land use right certificate and the fact that we hold such land through a lease, we are not permitted to apply for a building ownership certificate for the facilities constructed on the land and our property rights to such facilities may be limited.

In addition, a number of our affiliated entities, including Beijing Tuozhan Industrial & Trading Development Co., Ltd. (FAW-Volkswagen dealership), Beijing Yuantongqiao Toyota Automobile Trading Co, Ltd. (Toyota dealership), Beijing Tuojiacheng Commercial & Trading Co., Ltd. (Chang An-Mazda dealership) and Beijing Lentuo Huitong Automobile Sales Service Co., Ltd. (Shanghai-Volkswagen dealership), have all subleased the respective parcels of land on which they constructed facilities to operate their current businesses. All such land is classified as collectively owned rural land under the PRC law and was subleased from a third party who in turn leased the land from the respective rural economic collectives that own such land. Under PRC law, collectively owned rural land may not be used for commercial purposes unless it is converted into state-owned land and we may be required to move off such collectively owned rural land. Under relevant lease and sublease agreements, the economic collectives who own the land will provide necessary assistance for the conversion of such land into state-owned land. Such land conversion may not be accomplished on terms favorable to us or at all. Under such agreements, if we are required to move off such land, the economic collectives will provide another comparable piece of land for our business and operation and compensate us for our losses in connection with such relocation. If such land is not converted into state-owned land, or such economic collectives and/or the third party fail to perform their obligations under such lease or sublease agreements, or such lease and sublease agreements are deemed to be void, voidable or otherwise unenforceable, or if ownership disputes or claims regarding such land otherwise arise, our business, financial condition and results of operations could be materially and adversely affected if we cannot obtain alternative and comparable sites and properties in a timely manner or at reasonable costs. Furthermore, any disputes or claims relating to such land or any efforts in securing alternative sites and properties could divert our resources and management's attention from our regular business operations. Moreover, we have not been able to obtain building ownership certificates and certifications from the relevant fire and environmental protection departments for the facilities constructed on these lands, which may adversely affect our ability to use the facilities.

The seasonality of the automobile industry impacts our operating results.

The automobile industry in China is subject to seasonal variations in revenues. Demand for automobiles is generally higher before or during certain major Chinese holidays, such as the Labor Day holidays in May and the National Day holidays in October. Accordingly, we expect our revenues and operating results generally to be higher in these periods than in other months of the year. Therefore, if circumstances arise during these months that impede automobile sales, such as high fuel costs, automobile supply shortage, unfavorable governmental policy changes, depressed economic conditions or similar adverse conditions, our revenues for the year would be disproportionately adversely affected. In addition, comparisons of sales and operating results between different periods within a single fiscal year, or between the same periods in different fiscal years, may not be meaningful and should not be relied upon as indicators of our performance.

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Our capital costs and our results of operations may be materially and adversely affected by a rising interest rate environment.

We finance our purchases of new vehicle inventory through loans from banks and other lenders under which we are charged interest at floating rates. We plan to obtain capital for acquisitions and the establishment of dealerships and for other working capital purposes under similar arrangements. As a result, our debt service expenses may rise with increases in interest rates. Rising interest rates may also have the effect of depressing demand in the interest-rate sensitive aspects of our business, particularly new and used vehicle sales, because some of our customers finance their vehicle purchases with floating rate loans. As a result, rising interest rates may have the effect of simultaneously increasing our costs and reducing our revenues.

Manufacturers may direct us to apply our resources to capital projects and restructurings that we may not otherwise have chosen to do.

Manufacturers may direct us to implement costly capital improvements on certain dealerships as a condition for renewing our franchise agreements with them. Manufacturers also typically require that their franchises meet specific standards of appearance. These factors, either alone or in combination, could cause us to divert our financial resources to capital projects from uses that management believes may be of higher long-term value to us, such as acquisitions.

We rely on the services of key personnel, including Mr. Hetong Guo, our founder and chairman, and Mr. Jing Yang, our chief executive officer, and our business and growth prospects may be severely disrupted if we lose their services. In addition, we are dependent on our ability to attract, train, motivate and retain our store management, sales personnel and automobile engineers and technicians.

Our success depends to a significant degree upon the continued contributions of our management team, including Mr. Hetong Guo and Mr. Jing Yang. Our business and operations depend to a significant degree on their business vision, industry expertise, experience with our business operations and management skills, as well their relationships with automobile manufacturers, key customers and our employees. We do not maintain key-man life insurance for Mr. Guo, Mr. Yang or other management team members. The loss of the services of one or more of our key personnel may materially impair the efficiency, productivity and profitability of our operations.

In addition, we are dependent on the continued service of, and our ability to attract, train, motivate and retain, our store management, sales personnel and automobile engineers and technicians for the performance and continued success of our business. Due to the strong growth of the PRC economy and the PRC automobile industry, the competition for such personnel is intense. We may not be able to attract, train, motivate and retain the necessary personnel to grow and develop our business, continue to deliver high quality sales or customer service, or open new dealerships. Our financial condition, management and results of operations may be materially and adversely affected if we fail to attract and retain the experienced personnel we need.

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

Following this offering, Mr. Hetong Guo, our founder and chairman, will beneficially own 50.8% of our outstanding ordinary shares, or 49.2% if the underwriters exercise their over-allotment option in full. Accordingly, he will have significant influence in determining the outcome of any corporate transaction or other matters submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. Mr. Guo will also have the power to prevent or cause a change in control. In addition, without the consent of Mr. Guo, we could be prevented from entering into transactions that could be beneficial to us. Mr. Guo may cause us to take actions that are opposed by other shareholders as his interests may differ from those of other shareholders, including those who purchase ADSs in this offering.

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Our insurance coverage is limited and we may incur substantial costs in the event of a disruption in our business or other unexpected losses or other events, which could have a material adverse effect on our financial condition and results of operations.

Insurance companies in China offer limited business insurance products and generally do not, to our knowledge, offer business liability insurance covering third party liabilities that arise in an enterprise's ordinary course of business. Business disruption insurance is available to a limited extent in China, but we have determined that the cost of such insurance and the difficulties associated with acquiring such insurance, together with what we perceive to be a limited risk of disruption, make it impractical for us to subscribe for such insurance. We do not maintain insurance coverage for any kinds of business liabilities or disruptions and would have to bear the costs and expenses associated with any such events out of our own resources.

We rely on computer equipment and software systems to manage our operations and we do not maintain data backup systems.

We are dependent on information management systems to manage, supervise and improve ordering, inventory and logistics management and financial and cash management, minimize the costs of maintaining inventory and improve our overall sales performance. We intend to continue upgrading our existing information technology systems across our distribution network to operate a uniform platform that is complementary to the expansion of our business. If our computer equipment or software systems fail, our businesses and operations may be disrupted. In addition, we do not have any disaster recovery plan and data back-up systems to handle system failures. Any failure in our computer equipment or software systems could have a material adverse effect on our business, financial condition and results of operations. Our growth may also be restricted by the capacity of our computer equipment or software systems to meet the increased needs of larger scale operations.

In the course of auditing our consolidated financial statements for the years ended December 31, 2007, 2008 and 2009, we and our independent auditors noted two material weaknesses and certain significant deficiencies in our internal control over financial reporting. We may incur additional costs in implementing measures to address such weaknesses and deficiencies. If we fail to implement and maintain an effective system of internal control, we may be unable to accurately report our results of operations or prevent fraud, and investor confidence in our reported financial information and the market price of our ADSs may be materially and adversely affected.

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to implement our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audit of our consolidated financial statements for the years ended December 31, 2007, 2008 and 2009, we and our independent registered public accounting firm identified two "material weaknesses" and certain "significant deficiencies" in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States. The two material weaknesses identified were: (i) insufficient personnel with U.S. GAAP expertise in the preparation of the financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements and (ii) lack of an effective independent oversight function to prevent and detect misstatements in financial statements. The significant deficiencies identified include our ineffective controls over preparation of tax returns, which resulted in an understatement of revenues and overstatement of cost of goods sold in our tax returns for 2007 and 2008. Although on July 1, 2010 we added to our management team a chief financial officer with U.S. publicly listed company reporting experience and knowledge of U.S. GAAP, such officer will require additional time to become fully integrated into our management team, evaluate our current disclosure controls and procedures, hire additional finance and accounting personnel with requisite experience and implement additional measures to address our existing weaknesses and deficiencies in internal control that have been identified. In addition, we may not be able to complete the implementation of such measures in a timely manner. We are also not able to

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estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal controls.

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 of 2002, or Section 404, will require that we include a report of management on 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. In addition, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is adverse if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

During the course of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, we may identify other deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could harm our operating results and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting, regulatory investigations and civil or criminal sanctions.

If we grant employee share options or other share-based compensation in the future, our net income could be adversely affected.

We plan to adopt an equity incentive plan prior to the consummation of this offering that permits the grant of incentive share options, non-statutory share options, restricted share, share appreciation rights, restricted share units, performance units, performance shares, and other share-based awards to employees, directors and consultants of our company. Under the 2010 equity incentive plan, we will be permitted to issue options to purchase up to 4,500,000 ordinary shares, plus an annual increase of 1% of the outstanding ordinary shares on the first day of the fiscal year, or such lesser amount of shares as determined by the board of directors. As a result of potential future grants under the plan, we expect to incur share-based compensation expenses in future periods. The amount of these expenses will be based on the fair value of the share-based awards. We will apply the Accounting Standards Codification Topic 718, Compensation-Stock Compensation, for the accounting treatment of our equity incentive plan. As a result, we will have to account for compensation costs for all share options, including share options granted to our directors and employees, using a fair-value based method and recognize expenses in our consolidated statement of income in accordance with the relevant rules under U.S. GAAP, which may have a material adverse effect on our net income. Moreover, the additional expenses associated with share-based compensation may reduce the attractiveness of such incentive plan to us. Employee share options or other share-based compensation we may grant in the future may have a material adverse effect on our profitability.

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Risks Related to Our Corporate Structure

If the PRC government finds that the contractual arrangements that establish the structure for operating our business in China do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.

The automobile industry is subject to extensive governmental regulations in China, including with respect to foreign ownership of, and the licensing and permit requirements pertaining to, companies engaged in automobile distribution. We are a Cayman Islands company and a foreign legal person under PRC law. As a result of foreign ownership restrictions in the automobile distribution industry, we conduct our automobile sales, repair and maintenance and other services and businesses in China by way of a series of contractual arrangements with Lentuo Electromechanical, a company incorporated in China and controlled by Mr. Hetong Guo, our founder and chairman, and its various subsidiaries in China. Lentuo Electromechanical's eight subsidiaries hold the relevant licenses, permits and franchises for operating our business in China. Our wholly owned subsidiaries, Lentuo Hong Kong and Lentuo Beijing, have entered into agreements with Lentuo Electromechanical, all of its shareholders and our eight affiliated entities. Under such agreements, we are able to exercise effective control over our PRC operating affiliated entities and receive a substantial portion of the economic benefits from our affiliated entities in consideration for the services provided by Lentuo Beijing. We also have an exclusive option to purchase from Lentuo Electromechanical all or part of its equity interest in each of the affiliated entities.

In the opinion of Jingtian & Gongcheng, our PRC legal counsel, the ownership structure of Lentuo Electromechanical, its subsidiaries and Lentuo Beijing, both currently and after giving effect to this offering, are in compliance with existing PRC laws and regulations; and the contractual arrangements among Lentuo Hong Kong, Lentuo Beijing, the eight affiliated entities, Lentuo Electromechanical and its shareholders are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities will not in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our business in the PRC do not comply with PRC government restrictions on foreign investment in the automobile retail business, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

revoking the business licenses of our PRC subsidiaries and affiliated entities;

discontinuing or restricting the operations of any related-party transactions among our PRC subsidiaries and affiliated entities;

imposing fines or other requirements with which we may not be able to comply; or

requiring us to restructure the relevant ownership structure or operations.

The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business and our financial condition and results of operations.

We rely on contractual arrangements with Lentuo Electromechanical, its shareholders and subsidiaries for our operations, which may not be as effective in providing operational control as direct ownership.

We rely on the contractual arrangements with Lentuo Electromechanical, its shareholders and its subsidiaries to operate our automobile distribution business in China. For a description of these contractual arrangements, see "Our Corporate Structure." These contractual arrangements may not be as effective in providing us with control over our affiliated PRC operating entities as direct ownership. If we had direct ownership of our affiliated entities, we would be able to exercise our rights as the equity interest holder to operate and effect changes in such entities. However, under the current contractual arrangements, as a legal matter, if Lentuo Electromechanical or any of its shareholders or any of the affiliated entities fail to perform his or her or its respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and

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would be required to rely on legal remedies available under PRC law, including seeking specific performance and claims for damages, which may not be effective. For example, if Lentuo Electromechanical were to refuse to transfer its equity interests in its subsidiaries to us when we exercise the call option pursuant to the contractual arrangements, or if Lentuo Electromechanical were otherwise to act in bad faith toward us, or any of the affiliated entities fail to fulfill the contractual payment obligations to us, then we may be required to take legal action to compel them to fulfill their respective contractual obligations.

All of such contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in 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 affiliated PRC operating entities, our ability to conduct our business may be materially adversely affected and we may be unable to continue to consolidate the financial results of our affiliated entities into our results of operations.

Contractual arrangements entered into among Lentuo Beijing, Lentuo Electromechanical and its subsidiaries may be subject to scrutiny by the PRC tax authorities and a finding that Lentuo Beijing, Lentuo Electromechanical and its subsidiaries owe additional taxes could substantially reduce our consolidated net income in the future and the value of your investment.

Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among Lentuo Beijing, Lentuo Electromechanical and its subsidiaries are not based on arm's-length prices and adjust any of the Lentuo Electromechanical's or its subsidiaries' income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by our affiliated entities, which could in turn increase their tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties to our affiliated entities for under-paid taxes. Our consolidated net income in the future may be materially and adversely affected if our affiliated entities' tax liabilities increase or if they are found to be subject to late payment fees or other penalties.

The dividends we receive from our PRC subsidiary and our global income may be subject to PRC tax under the enterprise income tax law in China, which would have a material adverse effect on our results of operations.

Under China's enterprise income tax, or EIT law, and its implementation rules, dividends, interest, rent, royalties and gains on transfers of property of a foreign-invested enterprise in the PRC payable to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise's jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. The Hong Kong Special Administrative Region, or Hong Kong, where Lentuo Hong Kong, our PRC subsidiary's direct holding company, is incorporated, does have a tax treaty with the PRC. That tax treaty provides that, among other things, dividends payable on equity interests of a PRC company to individuals or entities in Hong Kong are entitled to enjoy a reduced withholding tax rate of 5%, provided that such individuals or entities are deemed as the "beneficial owners" to those dividends as defined under that tax treaty. On October 27, 2009, the State Administration of Taxation, or SAT, promulgated the Circular on How to Understand and Recognize the "Beneficial Owner" in Tax Treaties, or Circular 601. Circular 601 clarifies that a beneficial owner shall be a person engaged in actual operation and this person could be an individual, a company or any other entity. Circular 601 expressly excludes a "conduit company," which is established for the purposes of tax avoidance and dividend transfers and is not engaged in actual operations such as manufacturing, sales and management, from being a beneficial owner. It is still unclear how Circular 601 is being implemented by SAT or its local counterparts in practice and whether Lentuo Hong Kong could be recognized as a "beneficial owner." If Lentuo

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Hong Kong is considered as a non-resident enterprise but not qualified as a beneficial owner, Lentuo Hong Kong will not be entitled to a reduced 5% withholding tax and the 10% withholding tax would be imposed on our dividend income received from our PRC subsidiary. As a result, our net income would be reduced and our operating results would be adversely affected.

Under the EIT law, an enterprise established outside the PRC with its "de facto management body" within the PRC is considered a resident enterprise and will be subject to enterprise income tax at the rate of 25% on its worldwide income. The "de facto management body" is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. It remains unclear how the PRC tax authorities will interpret such a broad definition. Substantially all of our management members are based in the PRC. If the PRC tax authorities subsequently determine that Lentuo International Inc. should be classified as a resident enterprise, then its worldwide income will be subject to income tax at a uniform rate of 25%, which may have a material adverse effect on our financial condition and results of operations. Notwithstanding the foregoing provision, the EIT law also provides that, if a resident enterprise directly invests in another resident enterprise, the dividends received by the investing resident enterprise from the invested enterprise are exempted from income tax, subject to certain conditions. Therefore, if Lentuo International Inc. and Lentuo Hong Kong are classified as PRC resident enterprises, the dividends received from our PRC subsidiary may be exempted from income tax. However, it remains unclear how the PRC tax authorities would interpret the PRC tax resident treatment of an offshore company, like Lentuo International Inc., having indirect ownership interests in PRC enterprises through intermediary holding vehicles.

We rely principally on dividends and other distributions on equity paid by our wholly owned operating subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our operating subsidiary to pay dividends to us could have a material adverse effect on our ability to borrow money or pay dividends.

As a holding company, we rely principally on dividends and other distributions on equity paid by Lentuo Hong Kong and Lentuo Beijing for our cash requirements, including funds necessary to service any debt we may incur. If Lentuo Hong Kong or Lentuo Beijing incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by Lentuo Beijing only out of its retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, Lentuo Beijing is required to set aside a portion of its net income each year to fund a statutory surplus reserve. This reserve is not distributable as dividends until the accumulated amount of such reserve has exceeded 50% of its registered capital. As a result, Lentuo Beijing is restricted in its ability to transfer its net assets to us in the form of dividends, loans or advances. Limitations on the ability of Lentuo Beijing to pay dividends to us could materially and adversely limit our ability to borrow money outside of the PRC or pay dividends to holders of our ADSs. Also see "—Risks Related to Our Business and Industry—The dividends we receive from our PRC subsidiary and our global income may be subject to PRC tax under the EIT law, which would have a material adverse effect on our results of operations."

Risks Related to Doing Business in China

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

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

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China's economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over 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.

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

The PRC government also extensively regulates the automobile industry in general and automobile distribution in particular. Changes in these regulations could have a material adverse impact on our business and operations. See "—Risks Related to Our Business and Industry—Changes in PRC governmental economic policies in relation to the automobile industry may adversely affect our business, operations, financial condition and results of operations."

Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.

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

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Any requirement to obtain prior approval under the M&A Rules and/or any other regulations subsequently promulgated by relevant PRC regulatory agencies could delay this offering and failure to obtain this approval, if required, could have a material adverse effect on our business, operating results and reputation as well as the trading price of our ADSs, and could also create uncertainties for this offering.

On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, or SASAC, the State Administration of Taxation, or SAT, SAIC, CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. The M&A Rules prescribe, among other things, the procedures and formalities of merger and acquisition of a domestic enterprise in China by foreign investors by either purchasing the equities or assets of, or stock swap with, the target PRC enterprise. Following the adoption of the M&A Rules, on September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles as defined under the M&A Rules.

The application of the M&A Rules remains unclear with respect to our corporate structure that was established under contractual arrangements for this offering. Our PRC counsel, Jingtian & Gongcheng, has advised us that, we are not required by the M&A Rules to apply to the relevant regulatory agencies, including CSRC, for approval of the listing and trading of our ADSs on a U.S. stock exchange because (1) Lentuo Beijing was established as a foreign-invested enterprise by means of direct investment at the time of incorporation and not through a merger or acquisition of the equity or assets of PRC domestic enterprises as such term is defined under the M&A Rules; (2) we do not hold any equity interests in any affiliated entities; and (3) neither the M&A Rules themselves, nor the administrative practices under the M&A Rules made public as of the date of this prospectus require the application of the M&A Rules in connection with the corporate structure for this offering, or listing and trading of our ADSs on a U.S. stock exchange.

However, we cannot exclude the possibility that relevant PRC regulatory agencies may further interpret the M&A Rules or promulgate new regulations or rules to require approval by one or more PRC regulatory agencies of our corporate structure for this offering. If such approvals are required, we may be unable to obtain a waiver from those PRC regulatory agencies. In addition, any uncertainties and/or negative publicity regarding the approval requirement of those PRC regulatory agencies could have a material adverse effect on the trading price of our ADSs.

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

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

SAFE regulations require PRC residents who make, or have previously made, direct or indirect investments in offshore companies to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update his or her registration with the relevant SAFE branches, with respect to that offshore company, any material change involving increase or decrease of capital, transfer or swap of shares, merger, division, equity or debt investment or creation of any security interest. Moreover, the PRC subsidiaries of that offshore company are required to coordinate and supervise the filing of SAFE registrations by the offshore company's shareholders who are PRC residents in a timely manner. If a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or

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liquidation in respect of the PRC subsidiaries, and the offshore parent company may also be prohibited from injecting additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above may result in liability for the PRC shareholders and the PRC subsidiary under PRC law for foreign exchange registration evasion.

On March 28, 2007, SAFE issued the Operating Procedures on Administration of Foreign Exchange regarding PRC Individuals' Participation in Employee Share Ownership Plans and Employee Stock Option Plans of Overseas Listed Companies, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures. We and our PRC employees who have been granted stock options will be subject to the Stock Option Rule when our company becomes an overseas publicly listed company. If we or our PRC employees fail to comply with such regulation, we or our employees may be subject to fines and legal sanctions.

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

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

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

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

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

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

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

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

We face risks related to epidemics, which may severely disrupt our business and operations.

Our business could be materially and adversely affected by epidemics. For example, from December 2002 to June 2003, China and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. During May and June of 2003, the PRC government closed many businesses in China to prevent transmission of SARS. Since 2003, there have been reports of occurrences of avian influenza in various parts of China, including a number of confirmed human cases and deaths. In 2009, there was an outbreak of H1N1 influenza virus (also known as "swine flu") in Mexico and that virus quickly spread to China and other countries, resulting in a world wide epidemic. Any actual or threatened outbreak of epidemics in China may, among other things, significantly disrupt our business operations and severely restrict the level of economic activity in affected areas, which would in turn reduce the demand for our automobiles and related products and services.

The state of the PRC's political relationships with other nations may affect the performance of our operations.

We sell automobiles, spare parts, automobile accessories and other automobile-related products supplied by a number of automakers and suppliers. A significant number of the automakers and suppliers are foreign entities with headquarters in Japan or members of the European Union, or are joint ventures incorporated in the PRC by such foreign entities. China's political relationships with, or the general public's perception towards, other nations, particularly those connected or associated with the automakers or other suppliers, may affect both supply and demand for the relevant automaker or supplier's products in China. There can be no assurance that PRC consumers will not alter their brand preferences based on the state of political relations between China and the automaker or supplier's actual or perceived home country. Any relevant political dispute and adverse response to it by PRC automobile consumers may cause a decline in our revenue and profits and materially and adversely affect our financial condition, results of operations and prospects for growth.

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Risks Related to our ADSs and this Offering

An active trading market for our ordinary shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

Prior to the completion of this offering, there has been no public market for our ADSs or our ordinary shares underlying the ADSs, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.

The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. A number of PRC companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The market price of these PRC companies' securities after their offerings may affect the attitudes of investors toward PRC companies listed in the United States in general and consequently may impact the market price of our ADSs, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

variations in our revenues, earnings and cash flow, including as a result of seasonality;

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

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

changes in financial estimates by securities analysts;

additions or departures of key personnel;

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

potential litigation or regulatory investigations; and

fluctuations in market prices for our services.

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

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless held by our "affiliates" as that term is defined in Rule 144 under the Securities Act. There will be 6,500,000 ADSs (equivalent to 13,000,000 ordinary shares) outstanding immediately after this offering, or 7,475,000 ADSs (equivalent to 14,950,000 ordinary shares) if the underwriters exercise the over-allotment option in full. In connection with this offering, we and our shareholders have agreed not to sell any ordinary shares or ADSs for 180 days after the date

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of this prospectus without the prior written consent of the underwriters. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the U.S. Financial Industry Regulatory Authority. 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. See "Underwriting" and "Shares Eligible for Future Sale" for a more detailed description of the restrictions on selling our securities after this offering.

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

If you purchase ADSs in this offering, you will pay more for each ADS than the corresponding amount paid by existing shareholders for their ordinary shares. As a result, you will experience immediate and substantial dilution of approximately $5.54 per ADS (or $5.38 per ADS assuming full exercise of the underwriters' over-allotment option). This amount represents the difference between our pro forma net tangible book value per ADS of $3.46 (or $3.62 assuming full exercise of the underwriters' over-allotment option) as of June 30, 2010, after giving effect to this offering, and the assumed initial public offering price of $9.00 per ADS (the mid-point of the estimated price range set forth on the cover of this prospectus).

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

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

Our foreign ADS holders may be subject to a PRC withholding tax upon the dividends payable by us and upon gains realized on the sale of our ADSs, if we are classified as a PRC "resident enterprise."

Under the EIT law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs, subject to reduction by an applicable tax treaty, if such income is sourced from the PRC. Although our company is incorporated in the Cayman Islands, it remains unclear whether the dividends payable by us or the gains our foreign ADS holders may realize will be regarded as income from sources within the PRC if Lentuo International Inc. is classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.

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

Depending upon the value of our ordinary shares and ADSs and the nature of our assets and income over time, we could be classified as a PFIC for U.S. federal income tax purposes. Specifically, we will be classified as a PFIC in any taxable year if either: (1) the average percentage value of our gross assets during the taxable year that

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produce passive income or are held for the production of passive income is at least 50% of the value of our total gross assets or (2) 75% or more of our gross income for the taxable year is passive income. "Passive income" includes dividends, interest, royalties, certain net gain from the sale of commodities, rents and royalties (other than rents and royalties derived in the active conduct of a trade or business), annuities and gain from the sale of assets that produce passive income. Although we do not expect to be a PFIC for the taxable year ending December 31, 2010, there can be no assurance that we will not be a PFIC for the taxable year 2010 or future taxable years, as PFIC status is tested after the close of each year and depends on our assets and income in such year. In particular, we would likely become a PFIC if the value of our outstanding shares were to decrease significantly while we hold substantial amounts of cash and cash equivalents. We will make a determination for each taxable year as to whether we are a PFIC (after the close of such taxable year) and intend to disclose such determination in our annual reports on Form 20-F to be filed with the SEC.

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

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

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

The Cayman Islands courts are also unlikely:

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

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

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands (2010 Revision) and the laws applicable to companies incorporated in the United States and their shareholders, see "Description of Share Capital—Corporate Law."

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

We are a Cayman Islands company and all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. 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 the 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 the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase our ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

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

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our amended and restated memorandum and articles of association, the minimum notice period required for convening a general meeting is 21 days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will as soon as practicable after receipt of notice from us notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested. See "Description of American Depositary Shares—Voting Rights".

The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders' meetings, except in limited circumstances, which could adversely affect your interests.

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

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

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

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

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

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

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

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

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

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to holders of ADSs, or are registered under the provisions of the Securities Act.

The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

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

Your ADSs represented by American depositary receipts, or ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and New York Stock Exchange, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers due to increased risks of liability to our directors under these rules and regulations. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

Shareholders of a public company may bring securities class action suits against the company following periods of instability in the market price of that company's securities. If we were involved in a class action suit, it could divert a significant amount of our management's attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

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Special Note Regarding Forward-Looking Statements

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

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

our growth strategies;

the anticipated growth and development of our business, results of operations and financial condition;

factors that affect our future revenues and expenses;

our relationships with vehicle manufacturers;

the future growth of our industry in China as a whole;

trends and competition in our industry in China, including the level of manufacturer incentives, new and used vehicle retail sales volume, customer demand, interest rates and changes in industry-wide inventory levels;

economic and demographic trends in China;

the completion of future acquisitions and the revenues to be generated by those acquisitions;

our expectation that we will benefit from entering the car rental and leasing and used vehicle retail markets;

our ability to obtain and maintain permits and licenses to carry on our business;

availability of financing for inventory, working capital and capital expenditures; and

our plan to use the proceeds from this offering.

This prospectus also contains data related to the retail automobile market worldwide and in China. This market data includes projections that are based on a number of assumptions. The market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the retail automobile market subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

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

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Use of Proceeds

We estimate that we will receive net proceeds from this offering of approximately $50.5 million (or $58.7 million if the underwriters exercise the over-allotment option in full), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and assuming an initial public offering price of $9.00 per ADS, the mid-point of the estimated range of the initial public offering price as set forth on the cover page of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $9.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by $6.0 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters' over-allotment option and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus.

We intend to use the net proceeds we receive from this offering primarily for the following purposes:

approximately 85% of the total net proceeds, to expand the size and scope of our dealership network through the establishment of new dealerships and acquisitions;

approximately 5% of the total net proceeds, to enhance our higher margin products and services, increase sales at our existing dealerships and implement our other growth strategies, such as hiring additional service staff and technicians, upgrading and modifying the showrooms at our dealerships, further developing our company-wide management tools and databases, expanding training programs for our employees, adding new service bays, upgrading service equipment and developing fleet car leasing and used car sales; and

the remaining amount to fund our working capital requirements and for other general corporate purposes.

In the event the underwriters exercise their over-allotment option, we plan to allocate the additional net proceeds in the same percentage as described above. The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. 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. To the extent that a certain portion or all of the net proceeds we receive from this offering are not immediately applied for the above purposes, we plan to invest the net proceeds in short-term interest-bearing debt instruments or bank deposits.

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Capitalization

The following table sets forth our capitalization, as of June 30, 2010:

on an actual basis; and

on an as adjusted basis to give effect to (1) the issuance and sale of 1,510,841 ordinary shares to Newman Investments Limited in August 2010 in exchange for $18.0 million, of which $14.0 million was paid in February 2010 and $4.0 million was paid in August 2010, pursuant to a subscription agreement dated February 20, 2010; (2) the issuance of 4,518,682 ordinary shares to Newman Investments Limited as part of the stock dividends to our existing shareholders on a pro rata basis in October 2010; and (3) the issuance and sale of 13,000,000 ordinary shares in the form of ADSs by us in this offering based on an assumed initial public offering price of $9.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters' over-allotment option and no other change to the number of ADSs sold by us as set forth on the cover page of this prospectus.

The information on an as adjusted basis below is illustrative only and our capitalization 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.

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 June 30, 2010  
 
  Actual   As adjusted  
 
  RMB   $   RMB   $  
 
  (Amounts in thousands, except for share data)
 

Short-term loans

    250,718     36,971     250,718     36,971  

Shareholders' equity

                         

Ordinary shares, $0.00001 par value

                         
 

Authorized—500,000,000 shares

                         
 

Issued and outstanding—39,908,389 shares on an actual basis and 58,937,912 shares on an as adjusted basis(1)(2)

    1         2      

Additional paid-in capital(2)

    53,973     7,959     518,741     76,494  

Retained earnings(2)

    172,704     25,467     172,704     25,467  
                   

Total shareholders' equity

    226,678     33,426     691,447     101,961  
                   
 

Total capitalization(2)

    477,396     70,397     942,165     138,932  
                   
   
(1)
Excludes $4,500,000 ordinary shares reserved for future issuance under our equity incentive plan.

(2)
Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $9.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus, would increase (decrease) additional paid-in capital, total shareholders' equity and total capitalization by RMB41.0 million ($6.0 million).

As of the date of this prospectus, there has been no material change to our capitalization as set forth above.

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Dilution

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share of our ADSs is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares. Our net tangible book value as of June 30, 2010 was approximately $33.4 million, or $0.84 per ordinary share and $1.68 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities.

After giving effect to (1) the issuance and sale of 1,510,841 ordinary shares to Newman Investments Limited in August 2010 in exchange for $18.0 million, of which $14.0 million was paid in February 2010 and $4.0 million was paid in August 2010, pursuant to a subscription agreement dated February 20, 2010; (2) the issuance of 4,518,682 ordinary shares to Newman Investments Limited as part of the stock dividends to our existing shareholders on a pro rata basis in October 2010; and (3) our sale of the ADSs offered in this offering at the initial public offering price of $9.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus, and after deduction of the underwriting discounts and commissions and estimated offering expenses of this offering payable by us, our adjusted net tangible book value as of June 30, 2010 would have increased to $102.0 million or $1.73 per ordinary share and $3.46 per ADS. This represents an immediate increase in net tangible book value of $0.89 per ordinary share and $1.78 per ADS to the existing shareholders and an immediate dilution in net tangible book value of $2.77 per ordinary share and $5.54 per ADS to investors purchasing ADSs in this offering.

The following table illustrates such dilution on a per ordinary share and per ADS basis:

   
 
  Per Ordinary
Share
  Per ADS  

Estimated initial public offering price

  $ 4.50   $ 9.00  

Net tangible book value as of June 30, 2010

  $ 0.84   $ 1.68  

Adjusted net tangible book value after giving effect to this offering
(no exercise of the underwriters' over-allotment option)

  $ 1.73   $ 3.46  

Adjusted net tangible book value after giving effect to this offering
(full exercise of the underwriters' over-allotment option)

  $ 1.81   $ 3.62  

Dilution in net tangible book value to new investors in this offering
(no exercise of the underwriters' over-allotment option)

  $ 2.77   $ 5.54  

Dilution in net tangible book value to new investors in this offering
(full exercise of the underwriters' over-allotment option)

  $ 2.69   $ 5.38  
   

A $1.00 increase (decrease) in the assumed initial public offering price of $9.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus, would increase (decrease) our adjusted net tangible book value after giving effect to the offering by $6.0 million (or $7.0 million in the case of full exercise of the underwriters' over-allotment option), the adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by $0.10 per ordinary share and $0.21 per ADS (or $0.11 per ordinary share and $0.23 per ADS in the case of full exercise of the underwriters' over-allotment option) and the dilution in adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by $0.40 per ordinary share and $0.79 per ADS (or $0.39 per ordinary share and $0.77 per ADS in the case of full exercise of the underwriters' over-allotment option), assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other expenses of the offering. The adjusted 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 an as adjusted basis, as of June 30, 2010, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters. The information in the following table is illustrative only and the total consideration paid and the average price per ordinary share is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

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

Existing shareholders

    45,937,912     78 % $ 18,000,444     24 % $ 0.39   $ 0.78  

New investors

    13,000,000     22 % $ 58,500,000     76 % $ 4.50   $ 9.00  
                               
 

Total

    58,937,912     100 % $ 76,500,444     100 %            
                                   
   

A $1.00 increase (decrease) in the assumed initial public offering price of $9.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus, 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 $6.5 million, $6.5 million and $0.22, respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions and other expenses of the offering.

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Dividend Policy

In June 2010, as part of our reorganization, all of the net assets of Lentuo Electromechanical that would not be used by us in the automobile retail sales business, mainly including amounts due from related parties, a building and construction in progress, were retained by Lentuo Electromechanical and accounted for as a deemed dividend to our shareholders. These net assets had a carrying value of RMB120.0 million ($17.7 million) as of December 31, 2009. We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable 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 regarding whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See "Description of American Depositary Shares." Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we will rely on dividends distributed by our PRC subsidiary. Certain payments from our PRC subsidiary to us may be subject to PRC taxes, such as withholding income tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Our PRC subsidiary is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory surplus reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserves are not distributable as loans, advances or cash dividends. Our PRC subsidiary is also required to set aside a certain amount of its after-tax profits each year, if any, to fund a public welfare fund. The specific size of the public welfare fund is at the discretion of the board of directors of the relevant entity. These reserve funds can only be used for specific purposes and are not transferable to the company's parent in the form of loans, advances or dividends. See "Risk Factors—Risks Related to Doing Business in China—We rely principally on dividends and other distributions on equity paid by our wholly owned operating subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our operating subsidiary to pay dividends to us could have a material adverse effect on our ability to borrow money or pay dividends."

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Exchange Rate Information

Our business is conducted in China and a substantial portion of our revenues are denominated in RMB. However, periodic reports made to shareholders will be expressed in U.S. dollars using the then current exchange rates. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the exchange rate as set forth on June 30, 2010 in the H.10 statistical release of the Federal Reserve Board, which was RMB6.7815 to $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 PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On December 3, 2010 the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.6628 to $1.00. See "Risk Factors—Risks Related to Doing Business in China—Fluctuations in exchange rates could result in foreign currency exchange losses" and "Risk Factors—Risks Related to Doing Business in China—Restrictions on currency exchange under the PRC laws may limit our ability to convert cash derived from our operating activities into foreign currencies and may materially and adversely affect the value of your investment" for discussions of the effects of fluctuating exchange rates and currency control on the value of our ADSs.

The following table sets forth information regarding the noon buying rates in Renminbi and U.S. dollars for the periods indicated.

   
 
  Renminbi per U.S. Dollar Rate(1)  
 
  Period End   Average(2)   Low   High  

2005

    8.0702     8.1826     8.0702     8.2765  

2006

    7.8041     7.9579     7.8041     8.0702  

2007

    7.2946     7.5806     7.2946     7.8127  

2008

    6.8225     6.9193     6.7800     7.2946  

2009

    6.8259     6.8307     6.8176     6.8470  

2010

                         

June

    6.7815     6.8184     6.7815     6.8323  

July

    6.7735     6.7762     6.7709     6.7807  

August

    6.8069     6.7873     6.7670     6.8069  

September

    6.6905     6.7396     6.6869     6.8102  

October

    6.6705     6.6675     6.6397     6.6912  

November

    6.6670     6.6538     6.6330     6.6892  

December (through December 3)

    6.6628     6.6622     6.6609     6.6630  
   
(1)
For periods prior to January 1, 2009, the exchange rates reflect the noon buying rates as reported by the Federal Reserve Bank of New York. For periods after January 1, 2009, the exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board.

(2)
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

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Enforceability of Civil Liabilities

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

political and economic stability;

an effective judicial system;

a favorable tax system;

the absence of exchange controls 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 provides significantly less protection to investors; and

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

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

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

We have appointed Law Debenture Corporate Services Inc. as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Maples and Calder, our counsel as to Cayman Islands law, and Jingtian & Gongcheng, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and the PRC, 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 without any reexamination of the merits of the underlying dispute. However, the Cayman Islands courts are unlikely to enforce a punitive judgment of a United States court predicated upon the liabilities provision of the federal securities laws in the United States without retrial on the merits if such judgment gives rise to obligations to make payments that may be regarded as fines, penalties or similar charges.

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Jingtian & Gongcheng has advised us further that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or the Cayman Islands.

U.S. shareholders may be able to originate actions against us in the Cayman Islands based upon Cayman Islands laws. However, we do not have any substantial assets in the Cayman Islands and it may be difficult for a shareholder to enforce a judgment obtained in a Cayman Islands court in China, where all of our operations are conducted. In addition, it will be difficult for U.S. shareholders to originate actions against us in China based upon Cayman Islands laws, U.S. law or PRC laws, because we are incorporated under the laws of the Cayman Islands and it is difficult for U.S. shareholders, by virtue only of holding our ADSs or ordinary shares, to establish a connection to the PRC as required by the PRC Civil Procedures Law in order for a PRC court to have jurisdiction.

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Our Corporate Structure

Mr. Hetong Guo, our chairman, founded Beijing Lentuo Electromechanical Company in 1994 for the retail distribution of Chinese domestic automobiles. In 1997, Beijing Lentuo Electromechanical Company opened its first authorized dealership under the FAW-Volkswagen franchise and in 2002, Beijing Lentuo Electromechanical Company changed its name to Lentuo Electromechanical Group Co., Ltd., or Lentuo Electromechanical. Since then Lentuo Electromechanical opened five additional franchise dealerships, including an Audi dealership and a FAW-Mazda dealership in 2003, a Shanghai-Volkswagen dealership in 2004, a Toyota dealership in 2005 and a Chang An-Mazda dealership in 2008.

Prior to June 2010, Lentuo Electromechanical, owned by certain PRC citizens and controlled by Mr. Hetong Guo, directly operated our Shanghai-Volkswagen dealership. The remaining five dealerships have been operated by Lentuo Electromechanical's five wholly owned subsidiaries, namely, Beijing Tuozhan Industrial & Trading Development Co., Ltd., Beijing Aotong Automobile Trading Co., Ltd., Beijing Lentuo Chengxin Commercial & Trading Co., Ltd., Beijing Yuantongqiao Toyota Automobile Trading Co., Ltd. and Beijing Tuojiacheng Commercial & Trading Co., Ltd. In June 2010, Lentuo Electromechanical transferred the automobile retail business it directly operated to another wholly owned subsidiary, Beijing Lentuo Huitong Automobile Sales Service Co., Ltd. In addition, Lentuo Electromechanical operated independent automobile repair and leasing businesses through two wholly owned subsidiaries, Beijing Tuozhan Automobile Repair Co., Ltd. and Beijing Lentuo Automobile Leasing Co., Ltd. Lentuo Electromechanical also operated automobile advertising and promotion-related services through a wholly owned subsidiary, Lentuo Tonghe Advertising Co., Ltd., which Lentuo Electromechanical disposed of in November 2009.

In anticipation of our overseas listing and to facilitate foreign investment in our company, we reorganized our corporate structure and incorporated Lentuo International Inc. as an offshore holding company in the Cayman Islands and its wholly owned subsidiary, Lentuo Hong Kong, in the Hong Kong Special Administrative Region of the PRC in September 2009. In November 2009, we established Lentuo Beijing in the PRC, which is wholly owned by Lentuo Hong Kong. In April 2010, we established Beijing Jiashi Shengtong Investment Consulting Co., Ltd., wholly owned by Lentuo Hong Kong, in the PRC as part of our corporate strategic planning. Jiashi Shengtong has yet to conduct any business operations. We may use Jiashi Shengtong as a vehicle to hold equity interest in acquired dealerships in the future.

Under current PRC regulations, foreign investment in the automobile distribution business is restricted. If an enterprise engaging in automobile distribution operates more than 30 dealerships in China, foreign investment is only allowed in the form of a joint venture in which the foreign equity ownership interest in such enterprise is less than 50%. As a result, we reorganized our corporate structure to conduct all of our business through contractual arrangements among Lentuo Hong Kong, Lentuo Beijing, eight affiliated entities wholly owned by Lentuo Electromechanical, Lentuo Electromechanical and its shareholders. The eight affiliated entities hold the relevant licenses, permits and franchises required to conduct our business in the PRC. The contractual arrangements allow us to control these affiliated entities and therefore consolidate their operating results and other financial information into our own. See "—Contractual Arrangements with Our PRC Affiliated Entities" below.

As a result of our reorganization, our current corporate structure consists of our holding company in the Cayman Islands, our wholly owned subsidiaries in Hong Kong and the PRC, and our eight affiliated entities in the PRC. Lentuo Electromechanical, upon the transfer of its automobile retail business to one of our affiliated entities in

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June 2010, is no longer part of our company. The following diagram illustrates our company's corporate structure as of the date of this prospectus:

GRAPHIC


GRAPHIC   Equity interest
Contractual arrangements
(1)
The following table sets forth our affiliated entities as of the date of this prospectus:

 
Affiliated Entity
  Function
  Beijing Tuozhan Industrial & Trading Development Co., Ltd.    FAW-Volkswagen dealership
  Beijing Aotong Automobile Trading Co., Ltd.    Audi dealership
  Beijing Lentuo Chengxin Commercial & Trading Co., Ltd.    FAW-Mazda dealership
  Beijing Yuantongqiao Toyota Automobile Trading Co., Ltd.    Toyota dealership
  Beijing Tuojiacheng Commercial & Trading Co., Ltd.    Chang An-Mazda dealership
  Beijing Lentuo Huitong Automobile Sales Service Co., Ltd.    Shanghai-Volkswagen dealership
  Beijing Tuozhan Automobile Repair Co., Ltd.    Automobile repair shop
  Beijing Lentuo Automobile Leasing Co., Ltd.    Automobile leasing
(2)
Lentuo Electromechanical's shareholders include Mr. Hetong Guo, Mr. Jing Yang, Ms. Xiaoli Geng, Mr. Chuanxin Sun, Mr. Xueyuan Han and Ms. Miusi Yang. At the time the agreements related to the contractual arrangements with our PRC affiliated entities were executed in January and June 2010, each of Lentuo International Inc. and Lentuo Electromechanical was 75% owned by Mr. Hetong Guo, 6% owned by Mr. Jing Yang, 6% owned by Ms. Xiaoli Geng, 6% owned by Mr. Chuanxin Sun, 6% owned by Mr. Xueyuan Han and 1% owned by Ms. Miusi Yang.

(3)
Exclusive Technology Consulting and Service Agreement.

(4)
Exclusive Call Option Agreement.

(5)
Powers of Attorney.

(6)
Equity Interest Pledge Agreement.

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Contractual Arrangements with Our PRC Affiliated Entities

We do not have any direct equity interest in any of the eight PRC affiliated entities. Between January and June 2010, we entered into a series of contractual arrangements, including exclusive technology consulting and service agreements, exclusive call option agreements, equity interest pledge agreements and powers of attorney, which enable us to:

exercise effective control over these eight affiliated entities owned by Lentuo Electromechanical;

receive a substantial portion of the economic benefits from these affiliated entities in consideration for the services provided by Lentuo Beijing, our wholly owned subsidiary in China, and also assume the economic losses of these affiliated entities; and

have an exclusive option to purchase all or part of the equity interests in each of the affiliated entities when and to the extent permitted by PRC laws.

Accordingly, we have consolidated the historical operating results of each of the eight affiliated entities as our variable interest entity in our financial statements according to U.S. GAAP. Furthermore, as our reorganization was conducted between entities under the common control of Mr. Hetong Guo, the historical financial results, assets and liabilities of the affiliated entities and Lentuo Electromechanical have been reflected in our consolidated financial statements as if the current organizational structure had always existed.

Exclusive Technology Consulting and Service Agreements

Lentuo Beijing entered into an exclusive technology consulting and service agreement with each of the affiliated entities. Under this agreement, Lentuo Beijing will provide technology consulting and services and other significant resources necessary for the business operation of each affiliated entity on an exclusive basis. The term of the agreement is ten years starting from the execution date of the agreement. The agreement may be terminated upon written confirmation of both parties before its expiration. Otherwise, the agreement will be automatically renewed for an additional ten years. Each affiliated entity agrees to pay service fees to Lentuo Beijing on a quarterly basis in an amount equal to 100% of such entity's quarterly profit.

Exclusive Call Option Agreements

Lentuo Hong Kong and Lentuo Electromechanical entered into an exclusive call option agreement with each of our affiliated entities. Under such agreement, Lentuo Electromechanical irrevocably granted Lentuo Hong Kong or its designee person an exclusive call option to purchase, when and to the extent permitted under PRC law, all or part of the equity interests of Lentuo Electromechanical in each of the affiliated entities. The exercise price for the option will be determined by the parties based on the valuation by the competent authority and should be the lowest price as permitted under PRC law. The exclusive call option agreement will remain valid and effective for ten years starting from the execution date of the agreement and is renewable at the discretion of Lentuo Hong Kong for an additional ten years. The exclusive call option agreement provides that, without the prior written consent of Lentuo Hong Kong or its designated person:

each affiliated entity may not amend its articles of association or increase or reduce its registered capital;

each affiliated entity may not (i) sell, transfer, mortgage, or otherwise dispose of or grant a security interest in its assets, business, revenue or interest; (ii) incur, succeed, guarantee or admit any liability, except for those incurred in the ordinary course of business and not incurred through the loan; (iii) enter into any material contract in the amount of RMB100,000 or more, except for those incurred in the ordinary course of business; or (iv) provide a loan or credit to any person;

each affiliated entity may not merge with or acquire interest from or invest in any third parties;

each affiliated entity may not declare or pay any dividends to its shareholder and may only declare and pay all attributable profit to its shareholder upon the request by Lentuo Hong Kong or its designated person; and

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Lentuo Electromechanical may not sell, transfer, mortgage or otherwise dispose of or grant security interest on its equity interest in each affiliated entity.

In addition, Lentuo Hong Kong is obligated to provide unlimited financial funding to each affiliated entity when and if required.

Powers of Attorney

Lentuo Electromechanical executed a power of attorney appointing Lentuo Hong Kong as its sole and exclusive agent and irrevocably authorized Lentuo Hong Kong to, as long as Lentuo Electromechanical remains a shareholder of the affiliated entities, exercise the following shareholder's rights in each of the affiliated entities owned by Lentuo Electromechanical: (i) attending shareholders' meetings and signing resolutions of shareholders' meetings of each affiliated entity; (ii) exercising all shareholders' rights granted by laws and the articles of association of each affiliated entity, including but not limited to shareholders' voting rights and the rights relating to the sale, transfer, mortgage or disposal of all or part of Lentuo Electromechanical's equity interest in each affiliated entity; and (iii) designating and appointing the legal representative, chairman, directors, supervisors, general manager and other management members of each affiliated entity.

All of the shareholders of Lentuo Electromechanical also executed a power of attorney appointing Lentuo Beijing as their sole and exclusive agent and irrevocably authorized Lentuo Beijing to, as long as such shareholders remain shareholders of Lentuo Electromechanical, exercise the following shareholders' rights in Lentuo Electromechanical: (i) attending shareholders' meetings and signing resolutions of shareholders' meetings of Lentuo Electromechanical; (ii) exercising all shareholders' rights granted by laws and the articles of association of Lentuo Group, including but not limited to shareholders' voting rights and the rights relating to the sale, transfer, mortgage or disposal of all or part of the equity interests in Lentuo Electromechanical; and (iii) designating and appointing the legal representative, chairman, directors, supervisors, general manager and other management members of Lentuo Electromechanical.

Equity Interest Pledge Agreement

Under the equity interest pledge agreement between Lentuo Beijing and Lentuo Electromechanical, Lentuo Electromechanical pledged its entire equity interests held in each of the affiliated entities to Lentuo Beijing to secure the payment obligations of each affiliated entity under the exclusive technology consulting and service agreement with Lentuo Beijing. Upon the occurrence of certain events of default specified in the equity interest pledge agreement, Lentuo Beijing may enforce the equity interest pledge by complying with certain required procedures under PRC laws and regulations.

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Selected Consolidated Financial and Operating Data

The following selected consolidated statements of income and comprehensive income data for the three years ended December 31, 2007, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements, which have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. The report of Ernst & Young Hua Ming on those financial statements is included elsewhere in this prospectus. The following selected interim condensed consolidated statements of income and comprehensive income data for the six months ended June 30, 2009 and 2010 and the selected interim condensed consolidated balance sheet data as of June 30, 2010 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited interim consolidated financial information on the same basis as our audited consolidated financial statements. The unaudited interim financial information includes all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for the periods presented. 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.

We have not included financial information for the years ended December 31, 2005 and 2006. This information is not available under either U.S. GAAP or our home country GAAP because we have been a private company and only prepared limited and incomplete financial statements, at the individual entity level and not on a consolidated basis, for periods prior to the year ended December 31, 2007. Due to such limited and incomplete information, we are unable to present the financial information for the earliest two years of the five-year period without unreasonable effort or expense.

The table below contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the exchange rate as set forth on June 30, 2010 in the H.10 statistical release of the Federal Reserve Board, which was RMB6.7815 to $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.

   
 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands, except for share and per share data)
 

Selected Consolidated Statements of Income Data:(1)

                                           

Revenues

    1,656,809     1,879,279     2,341,491     345,277     1,084,993     1,312,821     193,589  

Cost of goods sold

    (1,517,542 )   (1,684,058 )   (2,062,163 )   (304,087 )   (976,952 )   (1,157,031 )   (170,616 )

Gross profit

    139,267     195,221     279,328     41,190     108,041     155,790     22,973  

Total operating expenses

    (56,315 )   (60,935 )   (70,625 )   (10,415 )   (28,744 )   (37,842 )   (5,580 )

Operating income

    82,952     134,286     208,703     30,775     79,297     117,948     17,393  

Interest income

    2,753     2,278     2,392     353     2,219     227     33  

Interest expenses

    (21,403 )   (33,435 )   (33,288 )   (4,909 )   (13,078 )   (23,697 )   (3,494 )

Exchange loss

                        (513 )   (76 )

Other (expense)/income, net

    (51 )   1,179     1,394     206     873     286     42  

Income before income tax expenses

    64,251     104,308     179,201     26,425     69,311     94,251     13,898  

Income tax expenses

    (29,654 )   (27,806 )   (50,039 )   (7,379 )   (19,401 )   (26,864 )   (3,961 )

Income from continuing operations

    34,597     76,502     129,162     19,046     49,910     67,387     9,937  

(Loss) income from discontinued operations(2)

    (50 )   23     (433 )   (64 )   16          

Net income

    34,547     76,525     128,729     18,982     49,926     67,387     9,937  

Income per share from continuing operations

    0.87     1.92     3.24     0.48     1.25     1.69     0.25  

Earnings per ordinary share, basic and diluted

    0.87     1.92     3.23     0.48     1.25     1.69     0.25  

Weighted average ordinary shares outstanding

    39,908,389     39,908,389     39,908,389     39,908,389     39,908,389     39,908,389     39,908,389  
   

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  As of December 31,   As of June 30, 2010  
 
  2007   2008   2009   Actual   Pro Forma
as Adjusted(3)
 
 
  RMB   RMB   RMB   $   RMB   $   $  
 
  (Amounts in thousands, except for share data)
 

Selected Consolidated Balance Sheet Data:(1)

                                           

Cash and cash equivalents

    123,513     103,143     72,082     10,629     70,016     10,325     64,860  

Inventories, net

    117,807     244,518     290,298     42,807     369,328     54,461     54,461  

Advances to suppliers

    264,441     270,059     251,632     37,106     262,519     38,710     38,710  

Total assets

    953,395     1,365,116     1,406,789     207,445     1,338,072     197,313     251,848  

Bills payable

    456,349     775,933     409,584     60,397     336,149     49,569     49,569  

Short-term loans

    243,550     208,928     325,460     47,992     250,718     36,971     36,971  

Total liabilities

    876,281     1,211,477     1,124,420     165,807     1,111,394     163,887     149,887  

Ordinary shares, par value $0.00001 per share

                                           
 

Authorized—500,000,000 shares as of December 31, 2007, 2008 and 2009 and June 30, 2010;

                                           
 

Issued and outstanding—39,908,389 shares as of December 31, 2007, 2008 and 2009 and June 30, 2010

    1     1     1         1          

Additional paid-in capital

    53,972     53,972     53,973     7,959     53,973     7,959     76,494  

Total shareholders' equity

    77,114     153,639     282,369     41,638     226,678     33,426     101,961  
   

 

 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  

Margin Data:(4)

                               

Net income margin

    2.1 %   4.1 %   5.5 %   4.6 %   5.1 %

Overall gross margin

    8.4 %   10.4 %   11.9 %   10.0 %   11.9 %

New vehicle sales gross margin

    7.1 %   7.6 %   7.3 %   5.5 %   6.8 %

Automobile repair and maintenance service gross margin

    29.6 %   43.6 %   57.4 %   58.2 %   55.2 %

Operating Data:

                               

Number of dealership at the end of period

    5     6     6     6     6  

Number of new vehicles sold

    12,819     11,689     15,047     7,389     7,013  
   
(1)
Our historical consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009 include certain assets, liabilities and results of operations of Lentuo Electromechanical that are related to the automobile retail sales business. Lentuo Electromechanical directly operated our Shanghai-Volkswagen dealership prior to June 2010. In preparation for this offering, Lentuo Electromechanical transferred all of its net assets that would be used by us in the automobile retail sales business to Beijing Lentuo Huitong Automobile Sales Service Co., Ltd., one of our variable interest entities, on June 20, 2010. All of the net assets of Lentuo Electromechanical that would not be used by us in the automobile retail sales business, mainly including amounts due from related parties, a building and construction in progress, were retained by Lentuo Electromechanical, and accounted for as a distribution to our shareholders as of June 20, 2010. These net assets retained by Lentuo Electromechanical and the related results of operations (consisting of depreciation of the building) were included in our historical consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009, but will be excluded from our consolidated financial statements for the period ending after June 20, 2010. See Note 1 to our consolidated financial statements included elsewhere in this prospectus. In addition, certain subsidiaries of Lentuo Electromechanical that are unrelated to the automobile retail sales business, all of which are insignificant, were not included in our historical consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009.

(2)
In November 2009, Lentuo Electromechanical disposed of Lentuo Tonghe Advertising Co., Ltd., a company engaged in automobile advertising and promotion-related services. The results of operations of Lentuo Tonghe

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    Advertising Co., Ltd. have been presented as discontinued operations in our historical consolidated financial statements.

(3)
The pro forma as adjusted balance sheet data as of June 30, 2010 gives effect to (1) the issuance and sale of 1,510,844 ordinary shares to Newman Investments Limited in August 2010 in exchange for $18.0 million, of which $14.0 million was paid in February 2010 and $4.0 million was paid in August 2010, pursuant to a subscription agreement dated February 20, 2010 and (2) the issuance and sale of 13,000,000 ordinary shares in the form of ADSs by us in this offering and our receipt of the expected net proceeds from this offering, assuming an initial public offering price of $9.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses payable by us.

(4)
Net income margin is equal to net income divided by revenues. Overall gross margin is equal to overall gross profit divided by revenues. New vehicle sales gross margin is equal to gross profit of new vehicle sales divided by revenues from new vehicle sales. Automobile repair and maintenance service gross margin is equal to gross profit of automobile repair and maintenance service divided by revenues from automobile repair and maintenance service.

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Recent Developments

The following is a summary of our selected operating data and preliminary financial data for the three months and the nine months ended September 30, 2010. Our financial results for these three-month and nine-month periods are based on our management accounts and have not been audited by the independent registered public accounting firm. As a result, our preliminary financial results set forth below may be subject to change. See "Special Note Regarding Forward-Looking Statements."

In the three months ended September 30, 2010, we sold 4,871 new vehicles, representing a 29.5% increase over the third quarter of 2009 and a 26.0% increase over the second quarter of 2010. We serviced approximately 32,210 vehicles at our dealerships in the three months ended September 30, 2010, representing a 15.4% increase over the third quarter of 2009 and a 5.5% increase over the second quarter of 2010. The growth was primarily driven by the increased market demand and our enhanced sales efforts, consistent with the trend in recent quarters. For the three months ended September 30, 2010, we recorded, subject to the adjustments described above:

revenues of RMB945.9 million ($139.5 million), a 56.0% increase from RMB606.3 million ($89.4 million) in the same period of 2009;

gross profit of RMB94.1 million ($13.9 million), a 5.8% increase from RMB88.9 million ($13.1 million) in the same period of 2009;

operating income of RMB75.4 million ($11.1 million), a 7.4% increase from RMB70.2 million ($10.4 million) in the same period of 2009; and

net income of RMB45.0 million ($6.6 million), a 2.5% increase from RMB43.9 million ($6.5 million) in the same period of 2009.

In the nine months ended September 30, 2010, we sold 11,884 new vehicles, representing a 6.6% increase over the same period of 2009. We serviced approximately 93,890 vehicles at our dealerships in the nine months ended September 30, 2010, representing a 26.1% increase over the same period of 2009. The growth was primarily driven by the increased market demand and our enhanced sales efforts. For the nine months ended September 30, 2010, we recorded, subject to the adjustments described above:

revenues of RMB2,258.7 million ($333.1 million), a 33.5% increase from RMB1,691.3 million ($249.4 million) in the same period of 2009;

gross profit of RMB249.8 million ($36.8 million), a 26.8% increase from RMB197.0 million ($29.0 million) in the same period of 2009;

operating income of RMB193.3 million ($28.5 million), a 29.3% increase from RMB149.5 million ($22.1 million) in the same period of 2009; and

net income of RMB112.4 million ($16.6 million), a 19.8% increase from RMB93.8 million ($13.8 million) in the same period of 2009.

We cannot assure you that our results for this interim period will be indicative of our results for the full year or future quarterly periods. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus for information regarding trends and other factors that may influence our results of operations.

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

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our audited consolidated financial statements and related notes for the years ended December 31, 2007, 2008 and 2009 included elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption "Risk Factors" beginning on page 12 of this prospectus.

Overview

We are the largest non-state-owned automobile retailer in Beijing, China as measured by new vehicle sales revenues in 2009, according to the CADA. We operate six franchise dealerships, ten automobile showrooms, one automobile repair shop and one car leasing company in the Beijing metropolitan area, which is the largest automobile market among all cities in China in terms of annual new passenger vehicle registrations, according to the CADA. Three of our six dealerships are also among the leading dealerships in China for their respective brands as measured by individual dealership new vehicle sales volume.

We provide a "one-stop shop" experience for our customers by offering them a wide range of automobile products in each of our franchise dealerships. We offer new passenger vehicles, auto parts and accessories for sale, as well as automobile repair and maintenance service, and provide a channel for vehicle manufacturers to gather customer feedback. We also offer our customers assistance with procuring automobile insurance and financing and other automobile-related services. In 2009, our new vehicle sales accounted for 91.0% of our total revenues, our automobile repair and maintenance service operations accounted for 8.7%, and our insurance, finance and other operations accounted for 0.3%.

Our dealerships sell six different brands and over 30 different models of new passenger vehicles. We have one dealership for each of the following brands:

FAW-Volkswagen, a joint venture between Volkswagen and the Chinese automaker FAW;

Audi, selling imported Audi-branded vehicles as well as those domestically manufactured by FAW-Volkswagen;

FAW-Mazda, a joint venture between Mazda and FAW;

Shanghai-Volkswagen, a joint venture between Volkswagen and the Chinese automaker SAIC Motors;

Toyota, selling imported Toyota-branded vehicles as well as those domestically manufactured by FAW-Toyota, a joint venture between Toyota and FAW; and

Chang An-Mazda, a joint venture between Mazda and the Chinese automaker Chana Auto.

We market our various services under the "Lentuo" brand, which has created strong brand awareness in the market we serve. We are well recognized by our customers and automobile manufacturers for our high quality customer service and industry-leading sales performance. We have consistently ranked among the top dealerships in Beijing and China for individual dealership new vehicle sales volume for several of the brands we represented in the past few years.

Our business has grown significantly in recent years. Our revenues increased from RMB1,656.8 million in 2007 to RMB1,879.3 million in 2008 and RMB2,341.5 million ($345.3 million) in 2009, representing a compound annual growth rate, or CAGR, of 18.9%. We grew our net income from RMB34.5 million in 2007 to RMB76.5 million in 2008 and RMB128.7 million ($19.0 million) in 2009, representing a CAGR of 93.0%. Our revenues and net income in the six months ended June 30, 2010 were RMB1,312.8 million ($193.6 million) and

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RMB67.4 million ($9.9 million), respectively, representing an increase of 21.0% and 35.0%, respectively, over the same period in 2009.

Factors Affecting Our Financial Performance and Results of Operations

We believe the key general factors affecting our financial performance and results of operations include:

Market demand and supply.  Our revenues are significantly affected by the demand for new automobiles in China. Market demand for automobiles is driven by various factors including, among others, the growth of individual and family disposable income, continued urbanization and improvement in China's road networks and other infrastructure. The rapid growth of China's economy has led to an increase in living standards and per capita disposable income as well as accelerated urbanization. These factors helped drive the significant growth in automobile retail sales in China in recent years. However, the automobile industry in China has historically been cyclical and is affected by general economic conditions, consumer confidence and other factors such as manufacturers' respective production capacities. Retail sales could slow down or decrease if growth in the Chinese economy slows or if the expanded production capacity of automobile manufacturers leads to an over-supply of new vehicles, and our revenues may be negatively affected as a result.

Competition.  We face increasing competition in China and our results of operations may be affected not only by competition among automobile manufacturers in terms of vehicle quality, model variety, price and delivery time, but also by competition from other dealerships in the same region who sell the same brands and models of automobiles as we do. Our financial condition and results of operations may be adversely affected if we fail to successfully compete against such dealerships in terms of price, location, quality of customer service and the ability to attract repeat business.

Government policies.  Our results of operations may be affected by government policies and regulations relating to the automobile industry in China, such as PRC governmental policies on foreign investment in the automobile retail business as well as any policies or regulations affecting market demand. For example, since early 2009, as part of its efforts to stimulate the economy amid the global financial crisis, the PRC government adopted a series of policies favorable to the automobile industry, including implementing an automobile industry stimulus plan and certain related incentive programs in the form of tax deductions and governmental subsidies for purchasing new vehicles. Although the current government incentives did not significantly contribute to our financial performance in the past, any additional government policies favorable or unfavorable to the automobile retail industry could impact our revenues and results of operations in the future.

Our results of operations in any given period are also directly affected by company-specific factors, including:

Size and scope of our dealership network.  Our revenues are directly affected by the number, location and performance of our franchise dealerships. Revenues will grow as we seek to increase the size and scope of our dealership network. We currently operate six franchise dealerships and our sales volumes for the year ended December 31, 2009 amounted to 15,047 vehicles. In response to the increasing demand for mid-line and luxury brand automobiles, we plan to significantly expand our network through organic growth and targeted acquisitions both in Beijing and in other geographic regions in China we do not currently serve.

Product and service mix.  Changes in product and service mix in connection with our sale of goods and provision of services may affect our profitability and gross margin. We offer a diversified portfolio of automobile brands, and the Audi brand, our luxury brand, typically generates a higher gross profit margin than our mid-line brands. The aggregate gross margins from our new vehicle sales vary based on the relative proportion of our sales attributable to mid-line brands and our luxury brand. In addition, our automobile repair and maintenance service and the arrangement of financing and insurance for our customers generally result in higher gross profit margins than new vehicle sales. Although a substantial majority of our revenues are currently generated from our new vehicle sales business, the proportion of revenues and profit

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    contributed by our automobile repair and maintenance service business has increased over the three-year period ended December 31, 2009, primarily due to the rapid expansion of our after-sales customer base and increase in demand for automobile repair and maintenance services. We expect to continue expanding our higher margin products and services to meet the increasing market demand.

Pricing.  Our revenues are directly affected by the price of our products and services. The average selling price of the new vehicles sold by us was RMB122,916 in 2007, RMB149,252 in 2008, RMB141,650 ($20,888) in 2009 and RMB168,009 ($24,775) in the six months ended June 30, 2010. The average selling price is calculated by dividing the total revenues generated through new vehicle sales by the total number of new vehicles sold by us during the relevant year. We expect the price of new vehicles to decrease in the long run in China primarily due to the lowering of tariffs on imported cars and increased competition. However, our average selling price of new vehicles may fluctuate period over period depending on the mix of vehicles we sell during a particular period that consists of different models in different price ranges. We seek to increase the sales of vehicle models that generate higher gross margins.

Impact of dealership acquisitions.  We are implementing an acquisition strategy and plan to pursue selective acquisitions of additional dealerships as a means of growing our business. Our ability to identify, acquire, effectively manage and integrate new dealerships into our existing franchise network, the consideration we pay for those acquisitions and the performance of the acquired dealerships will have a significant effect on our financial condition and results of operations.

Cost of goods sold and purchase rebates.   Our gross profit is directly affected by our cost of goods sold. Our cost of goods sold consists primarily of the purchase cost of new vehicles from automobile manufacturers, which is determined by the manufacturers. Our purchase cost of new vehicles may be reduced by any purchase rebates we can obtain from the manufacturers. Automakers typically determine the rebates with reference to a number of factors including, among others, our sales volume, our ability to achieve sales targets, our operating history and customer satisfaction survey results. Any significant change to our cost of goods sold, in particular the purchase cost of new vehicles as offset by the rebates, will affect our financial condition and results of operations.

Seasonality.  Our revenues are subject to seasonal variations. Demand for automobiles is generally higher before or during certain major Chinese holidays, such as the Labor Day holidays in May and the National Day holidays in October. Our revenues and operating results are generally higher around these periods than in other months of the year. If circumstances arise during these months that impede automobile sales, such as high fuel costs, automobile supply shortages, unfavorable governmental policy changes, depressed economic conditions or similar adverse conditions, our revenues for the year would be disproportionately adversely affected. As a result of these fluctuations, comparisons of our sales and operating results between different periods within a single fiscal year, or between the same periods in different fiscal years, may not be meaningful and should not be relied upon as indicators of our performance.

Taxation.  A number of uncertainties under PRC tax regulations could adversely affect our results of operations. For example, if Lentuo Hong Kong is considered a non-PRC-resident enterprise but is not qualified as a "beneficial owner" of the dividends paid by our PRC subsidiaries, a 10% withholding tax (as opposed to a reduced 5% withholding tax) would be imposed on our dividend income received from PRC subsidiaries. However, if Lentuo Hong Kong is considered a PRC-resident enterprise, then the dividend income received from PRC subsidiaries would be exempt from withholding tax. The interpretation of "beneficial owner" and "resident enterprise" remains uncertain under existing PRC tax regulations and the resolution of such uncertainty could reduce our net income. We do not know when additional clarity on these tax treatments will become available. We currently believe Lentuo Hong Kong should be considered as a non-PRC resident enterprise for PRC tax purposes as discussed under "Taxation—PRC Taxation."

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Key Components of Results of Operations

Revenues

A substantial majority of our revenues is derived from new vehicle sales. The remaining portion of our revenues is generated by our automobile repair and maintenance service operations and other sources, such as insurance and finance agency services and car rentals. All of our revenues are currently derived from our operations in Beijing, China. The table below sets forth a breakdown of our revenues by revenue source for the periods indicated:

   
 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of Revenues  
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands, except for percentages)
 

Revenues:

                                                                         
 

New vehicle sales

    1,575,666     95.1%     1,744,610     92.8%     2,131,403     314,297     91.0%     997,130     91.9%     1,178,247     173,744     89.7%  
 

Automobile repair and maintenance service

    74,892     4.5%     125,809     6.7%     203,083     29,947     8.7%     83,810     7.7%     130,169     19,195     9.9%  
 

Other services

    6,251     0.4%     8,860     0.5%     7,005     1,033     0.3%     4,053     0.4%     4,405     650     0.4%  
                                                   

    1,656,809     100.0%     1,879,279     100.0%     2,341,491     345,277     100.0%     1,084,993     100.0%     1,312,821     193,589     100.0%  
                                                   
   

Our revenues from new vehicle sales and automobile repair and maintenance service have grown significantly in the three-year period ended December 31, 2009 and the six-month period ended June 30, 2010, driven primarily by increasing market demand for new vehicles and automobile repair and maintenance service in China and our enhanced sales efforts to meet this demand. During this period, we strived to increase our sales by improving our customer service, incentivizing our sales and service managers and fully utilizing our existing capacity. We believe our revenues will continue to grow as we seek to expand our dealership network and increase same-store sales at each dealership. We further believe our revenues from automobile repair and maintenance service will grow as a percentage of our total revenues as we maximize the use of our existing service capacity, add new capacity and continue to develop long-term customer relationships and generate repeat business.

Cost of Goods Sold

The principal components of our cost of goods sold are the cost of new vehicles purchased from automobile manufacturers, the cost of spare parts and automobile accessories and the salaries and compensation expenses of automobile repair and maintenance personnel for our automobile repair and maintenance service operations. Our cost of goods sold has grown significantly in the three-year period ended December 31, 2009 and the six-month period ended June 30, 2010, in line with the substantial growth of our revenues. The following table sets forth a breakdown of our cost of goods sold by revenue source for the periods indicated:

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  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of Revenues  
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands, except for percentages)
 

Cost of goods sold:

                                                                         
 

New vehicle sales

    1,464,466     88.4%     1,612,552     85.8%     1,975,497     291,307     84.4%     941,808     86.8%     1,098,268     161,950     83.7%  
 

Automobile repair and maintenance service

    52,706     3.2%     70,974     3.8%     86,432     12,745     3.7%     35,034     3.2%     58,264     8,592     4.4%  
 

Other services

    370     *     532     *     234     35     *     110     *     499     74     *  
                                                   

    1,517,542     91.6%     1,684,058     89.6%     2,062,163     304,087     88.1%     976,952     90.0%     1,157,031     170,616     88.1%  
                                                   
   
*
Less than 0.1%.

The purchase cost of new vehicles is affected by the purchase rebates we receive from the automobile manufacturers. Manufacturers settle the rebates with us by deducting the rebate amounts from the prices payable by us for our subsequent vehicle purchases. Rebates relating to automobiles purchased and sold are deducted from cost of goods sold, while rebates relating to automobiles purchased but still held on the reporting date are deducted from the carrying value of these items so that the cost of inventories is recorded net of applicable rebates. For the years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2010, rebates granted to us amounted to approximately RMB94.9 million, RMB128.7 million, RMB151.1 million ($22.3 million) and RMB88.5 million ($13.1 million), respectively.

We expect our cost of goods sold to continue to grow as we expand our dealership network and seek to represent more brands and increase the scope of our new vehicle sales.

Gross Profit and Gross Margin

Gross profit is equal to revenues less cost of goods sold. Gross margin is equal to gross profit divided by revenues. The table below sets forth a breakdown of our gross profit and gross margin by revenue source for the periods indicated:

   
 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  Amount   Gross
Margin
  Amount   Gross
Margin
  Amount   Gross
Margin
  Amount   Gross
Margin
  Amount   Gross
Margin
 
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands, except for percentages)
 

Gross profit:

                                                                         
 

New vehicle sales

    111,200     7.1%     132,058     7.6%     155,906     22,990     7.3%     55,322     5.5%     79,979     11,794     6.8%  
 

Automobile repair and maintenance service

    22,186     29.6%     54,835     43.6%     116,651     17,202     57.4%     48,776     58.2%     71,905     10,603     55.2%  
 

Other services

    5,881     94.1%     8,328     94.0%     6,771     998     96.7%     3,943     97.3%     3,906     576     88.7%  
                                                             

    139,267     8.4%     195,221     10.4%     279,328     41,190     11.9%     108,041     10.0%     155,790     22,973     11.9%  
                                                             
   

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The increases in our gross margin from 2007 to 2009 were primarily driven by the increase in revenues from our automobile repair and maintenance service operations as a percentage of total revenues from 4.5% to 8.7%. Our automobile repair and maintenance service operations generally result in higher gross margins relative to our new vehicle sales. We achieved significant growth in gross margin for our automobile repair and maintenance service business in those periods because we enhanced our sales efforts in response to increased market demand and substantially increased our revenues from automobile repair and maintenance service by more fully utilizing our existing capacity. In particular, we included automobile repair and maintenance service sales as a key factor in evaluating the performance of dealership general managers, further incentivizing them to improve the automobile repair and maintenance service sales. After this period of rapid growth, we expect the gross margin for our automobile repair and maintenance service business at our existing dealerships to remain relatively stable going forward. We expect our overall average gross margin to continue to grow as we further expand our higher margin products and services, including the automobile repair and maintenance service business.

Operating Expenses

Our operating expenses consist of selling, marketing and distribution expenses and general and administrative expenses. The following table sets forth our operating expenses for the periods indicated:

   
 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of
Revenues
  Amount   % of
Revenues
 
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands, except for percentages)
 

Operating expenses:

                                                                         
 

Selling, marketing and distribution expenses

    29,521     1.8%     37,615     2.0%     38,774     5,718     1.7%     16,261     1.5%     21,173     3,122     1.6%  
 

General and administrative expenses

    26,794     1.6%     23,320     1.2%     31,851     4,697     1.4%     12,483     1.1%     16,669     2,458     1.3%  
                                                   

Total operating expenses

    56,315     3.4%     60,935     3.2%     70,625     10,415     3.0%     28,744     2.6%     37,842     5,580     2.9%  
                                                   
   

Selling, Marketing and Distribution Expenses.    Our selling, marketing and distribution expenses primarily include salaries and other compensation expenses of employees in vehicle sales and customer service departments, provisions for depreciation of properties used for sales purposes, advertising and promotion expenses, and utilities and rental expenses for dealership premises or underlying lands used in sales activities. Our selling, marketing and distribution expenses remained relatively stable as a percentage of our revenues in the three-year period ended December 31, 2009 and the six-month period ended June 30, 2010. We anticipate such expenses will continue to increase as we expand our dealership network and build our operations in additional regional markets in China, but will remain stable as a percentage of revenues in the near future. In addition, we plan to adopt a share incentive plan prior to the consummation of this offering and our selling, marketing and distribution expenses will increase as a result of our providing share-based compensation to our sales and marketing team.

General and Administrative Expenses.    Our general and administrative expenses consist primarily of salaries and other compensation expenses of management, accounting and administrative personnel, utilities, rental expenses and provision for depreciation of properties or underlying lands used in connection with administrative activities, and professional service fees and other administrative costs not related to the delivery of services. Our general and administrative expenses have increased primarily as a result of our expanding operations and hiring of additional staff to support our growth. Our general and administrative expenses as a percentage of revenues remained relatively stable in the three-year period ended December 31, 2009 and the six-month period ended June 30, 2010. We expect such expenses to continue to increase as our business expands. We will also incur additional

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costs to meet the requirements of being a public company in the U.S., such as hiring additional staff with experience in U.S. GAAP and SEC reporting requirements and developing internal audit, disclosure control and compliance functions. In addition, we plan to adopt a share incentive plan and our general and administrative expenses will increase as a result of our providing share-based compensation to our management and administrative employees. All of these measures will increase our general and administrative expenses in the periods following this offering.

Interest Expenses

Our interest expenses primarily include interest paid on short-term loans and bills payable, interest on late tax payments and miscellaneous bank charges. For the three years ended December 31, 2007, 2008 and 2009, interest expenses represented 1.3%, 1.8% and 1.4% of our revenues, respectively. We use short-term loans for working capital purposes, including financing our new vehicle purchases. Bills payable are guaranteed by restricted cash and are used to pay for new vehicle purchases as well. During a period of strong vehicle sales, we typically leverage our better liquidity position and use cash proceeds from short-term loans to pay for new vehicle purchases to avoid interest and miscellaneous charges in connection with issuing bills payable. During a period of weak vehicle sales, the average balances of our short-term loans often increase and we also maximize the use of bills payable to finance vehicle purchases, resulting in increased interest expenses. In addition, our interest expense on late tax payments grew significantly in the three-year period ended December 31, 2009 as a result of our underpayment of tax in 2007 and 2008. The PRC tax authorities require us to pay in full all of our outstanding taxes payable, including interest charges on the late payments, by September 2011 according to an agreed upon payment schedule. We intend to pay off this liability by December 2010. See "—Taxation—PRC." We expect our interest expenses to increase as our purchases of and prepayments for new vehicles increase due to the continuing expansion of our business.

Taxation

The Cayman Islands and Hong Kong Special Administrative Region

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. Dividend payments are not subject to withholding tax in the Cayman Islands. There are no other taxes likely to be material to our company levied by the government of the Cayman Islands, except for stamp duties that may be applicable on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. The Cayman Islands is not a party to any double taxation treaties that are applicable to any payments made to or by our company.

Lentuo Hong Kong, our wholly owned subsidiary incorporated in Hong Kong, is subject to Hong Kong corporate income tax of 16.5% on the estimated assessable profits arising in Hong Kong. As a holding company, Lentuo Hong Kong does not have any operations in Hong Kong. Dividend payments are not subject to withholding tax in Hong Kong.

PRC

Pursuant to the PRC EIT law and relevant regulations that were applicable before January 1, 2008, our PRC subsidiary and affiliated entities were generally subject to enterprise income taxes at a statutory rate of 33%. Such income tax rate was reduced to 25% under the current EIT law that became effective on January 1, 2008. The effective tax rate applicable to our operations, which are located entirely in the PRC, was 46% in 2007, 27% in 2008 and 28% in 2009.

Under the EIT law and its implementation rules, dividends, interest, rent, royalties and gains on transfers of property of a foreign-invested enterprise in the PRC payable to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise's jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. The Hong Kong

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Special Administrative Region, or Hong Kong, where Lentuo Hong Kong, our PRC subsidiary's direct holding company, is incorporated, does have a tax treaty with the PRC. That tax treaty provides that, among other things, dividends payable on equity interests of a PRC company to individuals or entities in Hong Kong are entitled to enjoy a reduced withholding tax rate of 5%, provided that such individuals or entities are deemed as the "beneficial owners" of those dividends as defined under that tax treaty. On October 27, 2009, the State Administration of Taxation, or SAT, promulgated the Circular on How to Understand and Recognize the "Beneficial Owner" in Tax Treaties, or Circular 601. Circular 601 clarifies that a beneficial owner shall be a person engaged in actual operation and this person could be an individual, a company or any other entity. Circular 601 expressly excludes a "conduit company," which is established for the purposes of tax avoidance and dividends transfer and is not engaged in actual operations such as manufacturing, sales and management, from being a beneficial owner. It is still unclear how Circular 601 is implemented by SAT or its local counterparts in practice and whether Lentuo Hong Kong could be recognized as a "beneficial owner." If Lentuo Hong Kong is considered as a non-resident enterprise but not qualified as a beneficial owner, Lentuo Hong Kong will not be entitled to a reduced 5% withholding tax and the 10% withholding tax would be imposed on our dividend income received from our PRC subsidiary. As a result, our net income would be reduced and our operating results would be adversely affected.

Under the EIT law, an enterprise established outside the PRC with its "de facto management body" within the PRC is considered a resident enterprise and will be subject to enterprise income tax at the rate of 25% on its worldwide income. The "de facto management body" is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. It remains unclear how the PRC tax authorities will interpret such a broad definition. Substantially all of our management members are based in the PRC. If the PRC tax authorities subsequently determine that Lentuo International Inc. and Lentuo Hong Kong should be classified as a resident enterprise, then its worldwide income will be subject to income tax at a uniform rate of 25%, which may have a material adverse effect on our financial condition and results of operations. Notwithstanding the foregoing provision, the EIT law also provides that, if a resident enterprise directly invests in another resident enterprise, the dividends received by the investing resident enterprise from the invested enterprise are exempted from income tax, subject to certain conditions. Therefore, if Lentuo International Inc. and Lentuo Hong Kong are classified as PRC resident enterprises, the dividends received from our PRC subsidiary may be exempted from income tax. However, it remains unclear how the PRC tax authorities would interpret the PRC tax resident treatment of an offshore company, like Lentuo International Inc., having indirect ownership interests in PRC enterprises through intermediary holding vehicles.

For the years ended December 31, 2007 and 2008, we underpaid our PRC income tax, which resulted in an unrecognized tax benefit. See "—Internal Control Over Financial Reporting" and Note 16 to our consolidated financial statements included elsewhere in this prospectus. The relevant PRC tax authorities require us to pay in full all of our outstanding taxes for 2007 and 2008, including interest charges on the late payments, by September 2011 according to an agreed upon payment schedule. We intend to pay off this liability by December 2010. We will use cash generated from our operating activities to pay for the outstanding tax liability and we believe this payment will not have material impact on our financial condition and results of operations.

Critical Accounting Policies

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

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The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. For further information on our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this prospectus. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

For each of our revenue sources described below, our revenues are recognized only when the following four criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the goods have been delivered or the services have been rendered, (iii) the price or fees are fixed or determinable, and (iv) collectability is reasonably assured.

New vehicle sales.    We and our customer sign an agreement containing the significant terms of sales to evidence that an arrangement exists. Delivery of the automobile is evidenced by the customer's sign-off on an acceptance form upon receipt. The purchase price is fixed or determinable because it is stipulated in the signed sales agreement and no concessions such as discounts, rebates, refunds or other price changes are provided subsequently. For the substantial majority of sales, the customers pay the full purchase price in cash upon delivery of the automobile. We conduct thorough credit checks on customers prior to extending credit to such customers. Some customers obtain loans at market terms through third party financial institutions. We arrange for the customer to pick up the automobile only after the customer's loan application is approved and we typically receive the full payment from the financial institution within two weeks of the delivery date. Financial institutions bear full collection risk and there is no recourse to us in the event a customer defaults on the loan payments. We have not experienced any defaults on payments from financial institutions once a loan application has been approved. Therefore, collectability is considered reasonably assured when a customer's loan application is approved. Accordingly, revenues on new vehicle sales are recognized by us upon delivery of the automobile to the customer, which coincides with when all the conditions required for revenue recognition have been met.

Automobile repair and maintenance service.    Revenues generated from automobile repair and maintenance service are recognized after services have been rendered and accepted by the customer. A work order detailing the services to be provided and the preliminary price estimate is signed by the customer and service representative from us prior to the requested service being performed. When the service has been completed, the customer signs a settlement worksheet as evidence of acceptance of the services provided and the final fees charged for such services which signifies persuasive evidence of an arrangement and performance of services. Fees are considered fixed or determinable because no subsequent concessions such as discounts, rebates, refunds or other price changes are provided subsequent to the customer's acceptance. The majority of automobile repair and maintenance services provided by us are paid in full by the customer upon delivery of the serviced automobile to the customer. We also accept repair work that is paid directly by the customer's insurance company. Collectability is considered reasonably assured as we verify that the service and charges are acceptable under the customer's insurance policy coverage directly with the insurance company prior to performing the work. Lastly, fees charged to suppliers for automobile repair and maintenance services covered by supplier's warranties are based on standard rates billed to customers and insurance companies for such services. Suppliers settle fees charged for warranty-covered services on a monthly basis. Collectability is considered reasonably assured as we deal with only reputable insurance companies and suppliers and, historically, we have not experienced any significant defaults for payment. Based on the above, revenues on automobile repair and maintenance service are recognized upon completion of the requested services and delivery of serviced automobile to the customer, which coincides with when all the conditions required for revenue recognition have been met.

Other services.    Revenues from other services are primarily commission fees that third party insurance firms pay to us for arranging for customers to obtain automobile insurance or that third party financial institutions pay to us for arranging for customers to obtain financing loans, as well as revenues from the provision of automobile leasing services. We are not a party to the insurance or financing contracts, which are solely between the third party insurance company or financial institution and the customer. Persuasive evidence of the arrangement is

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documented in a contract signed by the third party insurance company or financial institution and us. The commission fees are fixed and non-refundable once received. Payment of the commission fee coincides with the completion of the required service that results in the recognition of revenue. We had limited operations relating to automobile leasing services, which accounted for an insignificant portion of total revenues for all years presented herein. Revenues from the provision of automobile leasing services are recognized ratably over the lease terms in accordance with Accounting Standards Codification, or ASC, 840. All leases have been accounted for as operating leases.

In accordance with ASC sub-topic 605-45, Revenue Recognition: Principal Agent Considerations, we act as the principal in our automobile sales and repair and maintenance transactions with the customers. Accordingly, we record revenues from automobile sales and automobile repair and maintenance services on a gross basis. In all such arrangements, we contract directly with our customers, serve as the primary obligor and assume inventory risk.

In accordance with the relevant tax laws in the PRC, value-added taxes, or VAT, are levied on the invoiced value of sales and are payable by the purchaser. We are required to remit the VAT we collect to the tax authority, but may deduct the VAT we have paid on eligible purchases. The difference between the amounts collected and paid is presented as a VAT recoverable or payable balance on the consolidated balance sheets. We recognize revenues net of VAT.

We are subject to business tax on certain revenues earned in the PRC at an applicable rate of 5%. However, revenues derived from sales of automobiles and automobile repair and maintenance service are not subject to business tax.

Inventories

Inventories, consisting of new automobiles, spare parts and accessories, are stated at the lower of purchased cost net of rebates or market value. Purchase cost is determined by the weighted-average method.

We provide inventory allowances on new automobiles when conditions indicate that the selling price is less than cost due to physical deterioration, usage, obsolescence and reductions in estimated future demand. Spare parts and accessories are reviewed to determine if the inventory quantities are in excess of forecasted usage, or if they have become obsolete. We balance the need to maintain strategic inventory levels with the risk of obsolescence due to varying customer demand levels, although this rarely happens. Unfavorable changes in general market and economic conditions may result in a need for additional inventory reserves that could adversely impact our gross margins.

Our purchase arrangements with certain automobile manufacturers entitle us to receive a specified amount of cash rebates if certain conditions are met during the stated rebate periods. We account for these rebates in accordance with ASC sub-topic 605-50, Revenue Recognition: Customer Payments and Incentives. Rebates that are solely based on conditions that are fixed or can be reasonably estimated, such as volume purchase rebates, are recognized on an accrual basis based on our purchase estimates. For rebates based on achieving a specified cumulative level of purchases, we calculate the amount of rebate based on our actual purchase volume to date from the automobile manufacturer multiplied by the applicable rebate rate for the cumulative purchase level we expect to achieve. As a result, the amount of rebates can vary should our estimate differ from the actual amount of purchases made. We develop our purchase estimates from each automobile manufacturer based on various factors, including historical sales data, market data on expected demand for our products and our historical experience in achieving purchase rebates. Accordingly, a significant decline in market demand for vehicles on which we are eligible to receive purchase rebates could also result in variability in our rebate accrual. Historically we have not experienced any significant variability in our rebate estimates. While the demand for our products have steadily grown during the three years ended December 31, 2009, there is uncertainty as to whether such growth will continue or if the variability in demand for vehicles can be reasonably estimated in the future. Rebate amounts are settled with the respective automobile manufacturers on a quarterly or semi-annual basis and in aggregate amounted to

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RMB94.9 million, RMB128.7 million, RMB151.1 million ($22.3 million) and RMB88.5 million ($13.1 million) for the years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2010, respectively. Since the terms of our rebate programs with automobile manufacturers have remained relatively unchanged, the methods and assumptions used in our estimates of volume purchase rebate accruals have not changed significantly over the past three fiscal years, and we do not expect them to change in the future. Rebates that are based on subjective factors such as customer satisfaction results or based on the discretion of the automobile manufacturer are recognized only when realized. Rebates relating to vehicles purchased but still held by us as of the balance sheet date are recorded as a reduction to cost of inventories while rebates relating to motor vehicles purchased and sold during the reporting period are recorded as a reduction to cost of goods sold.

Income Taxes

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We make assumptions, judgments and estimates in the recognition and measurement of a tax position taken or expected to be taken in a tax return. These judgments, assumptions and estimates take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts of unrecognized, uncertain tax positions, if any, provided or to be provided for in our consolidated financial statements.

We follow the liability method of accounting for income taxes in accordance with ASC topic 740, or ASC 740, Income Taxes. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities, net operating loss carry forwards, and credits, using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant tax authorities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

Effective January 1, 2007, we adopted ASC 740 to account for uncertainty in income taxes. ASC 740 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position must meet before being recognized in the financial statements. The cumulative effects of applying ASC 740, if any, is recorded as an adjustment to retained earnings as of the beginning of the period of adoption.

We classify interest and/or penalties related to unrecognized tax benefits as interest expenses and other expenses, respectively. Our estimated liability for unrecognized tax benefits and the related interest and penalties are periodically assessed for adequacy and may be affected by changing interpretation of laws, rulings by tax authorities, certain changes and/or developments with respect to our tax audits, and expiration of the statute of limitations.

Internal Control Over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal controls over financial reporting. However, in connection with the audit of our consolidated financial statements for the years ended December 31, 2007, 2008 and 2009, we and our independent registered public accounting firm identified two material weaknesses and certain significant deficiencies in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States. The two material weaknesses identified were: (i) insufficient personnel with U.S. GAAP expertise in the preparation of the financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements and (ii) lack of an effective independent oversight function to prevent and detect misstatements in financial statements. The significant deficiencies identified include our ineffective controls over preparation of tax returns, which resulted in an

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understatement of revenues and overstatement of cost of goods sold in our tax returns for 2007 and 2008. See "Risk Factors—Risks Related to our Business and Industry—In the course of auditing our consolidated financial statements for the years ended December 31, 2007, 2008 and 2009, we and our independent auditors noted two material weaknesses and two significant deficiencies in our internal control over financial reporting. We may incur additional costs in implementing measures to address such weakness and deficiencies. If we fail to implement and maintain an effective system of internal control, we may be unable to accurately report our results of operations or prevent fraud, and investor confidence in our reported financial information and the market price of our ADSs may be materially and adversely affected."

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company. It is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies and weaknesses may have been identified.

We are in the process of implementing a number of measures to address the weaknesses and deficiencies that have been identified. We added to our management team a chief financial officer with U.S. publicly listed company reporting experience and knowledge in U.S. GAAP in July 2010. We plan to hire additional accounting personnel with requisite experience in U.S. GAAP and SEC reporting requirements and strong analytical skills and provide regular training to our accounting personnel that covers a broad range of financial reporting and tax accounting topics. We are developing a comprehensive manual with detailed step-by-step guidance on accounting policies and procedures and will continue to update the manual as needed. We will also implement formal controls for the tax preparation process to ensure there is no discrepancy between financial reporting and tax reporting. In addition, we are in the process of developing a set of corporate governance rules and functions, including establishing an audit committee that will consist solely of independent directors and will oversee our financial reporting process and the implementation of internal control policies and procedures.

Upon the completion of this offering, we will become a public company in the United States that will be subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on 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. In addition, assuming certain requirements under Section 404 are met, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is adverse if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

During the course of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, we may identify other deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could harm our operating results and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting, regulatory investigations and civil or criminal sanctions.

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Results of Operations

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

   
 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands, except for percentages)
 

Revenues:

                                           
 

New vehicle sales

    1,575,666     1,744,610     2,131,403     314,297     997,130     1,178,247     173,744  
 

Automobile repair and maintenance service

    74,892     125,809     203,083     29,947     83,810     130,169     19,195  
 

Other services

    6,251     8,860     7,005     1,033     4,053     4,405     650  
                               

    1,656,809     1,879,279     2,341,491     345,277     1,084,993     1,312,821     193,589  
                               

Cost of goods sold:

                                           
 

New vehicle sales

    (1,464,466 )   (1,612,552 )   (1,975,497 )   (291,307 )   (941,808 )   (1,098,268 )   (161,950 )
 

Automobile repair and maintenance service

    (52,706 )   (70,974 )   (86,432 )   (12,745 )   (35,034 )   (58,264 )   (8,592 )
 

Other services

    (370 )   (532 )   (234 )   (35 )   (110 )   (499 )   (74 )
                               

    (1,517,542 )   (1,684,058 )   (2,062,163 )   (304,087 )   (976,952 )   (1,157,031 )   (170,616 )
                               

Gross profit

    139,267     195,221     279,328     41,190     108,041     155,790     22,973  
                               

Operating expenses:

                                           
 

Selling, marketing and distribution expenses

    (29,521 )   (37,615 )   (38,774 )   (5,718 )   (16,261 )   (21,173 )   (3,122 )
 

General and administrative expenses

    (26,794 )   (23,320 )   (31,851 )   (4,697 )   (12,483 )   (16,669 )   (2,458 )
                               

Total operating expenses

    (56,315 )   (60,935 )   (70,625 )   (10,415 )   (28,744 )   (37,842 )   (5,580 )
                               

Operating income

    82,952     134,286     208,703     30,775     79,297     117,948     17,393  

Interest income

    2,753     2,278     2,392     353     2,219     227     33  

Interest expenses

    (21,403 )   (33,435 )   (33,288 )   (4,909 )   (13,078 )   (23,697 )   (3,494 )

Exchange loss

                        (513 )   (76 )

Other income/(expense), net

    (51 )   1,179     1,394     206     873     286     42  
                               

Income before income tax expenses

    64,251     104,308     179,201     26,425     69,311     94,251     13,898  

Income tax expenses

    (29,654 )   (27,806 )   (50,039 )   (7,379 )   (19,401 )   (26,864 )   (3,961 )
                               

Income from continuing operations

    34,597     76,502     129,162     19,046     49,910     67,387     9,937  

(Loss) income from discontinued operations(1)

    (50 )   23     (433 )   (64 )   16          
                               

Net income

    34,547     76,525     128,729     18,982     49,926     67,387     9,937  
                               
   
(1)
In November 2009, we disposed Lentuo Tonghe Advertising Co., Ltd., a company engaged in automobile advertising and promotion-related services. The results of operations of Lentuo Tonghe Advertising Co., Ltd. have been classified as discontinued operations in our historical consolidated financial statements.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues.    Our revenues increased by 21.0%, or RMB227.8 million ($33.6 million), to RMB1,312.8 million ($193.6 million) in the six months ended June 30, 2010 from RMB1,085.0 million in the six months ended

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June 30, 2009. This increase was primarily attributable to an increase in revenues from new vehicle sales and, to a lesser extent, an increase in revenues from automobile repair and maintenance service operations. Our revenues from new vehicle sales increased by 18.2%, or RMB181.1 million ($26.7 million), to RMB1,178.2 million ($173.7 million) in the six months ended June 30, 2010 from RMB997.1 million in the six months ended June 30, 2009. This increase was primarily attributable to a 24.5% increase in the average selling price of our new vehicles to RMB168,009 ($24,775) in the first six months of 2010 from RMB134,948 in the same period of 2009, primarily due to an increase in sales prices for several popular models that were in short supply and an increase of higher-priced models in our vehicle mix sold in the first six months of 2010. Such increase was partially offset by a decrease in our sales volume to 7,013 units in the first six months of 2010 from 7,348 units in the same period of 2009, representing a decrease of 4.6%, primarily due to the allocation by the manufacturers of the limited supply of vehicles over a greater number of dealerships as market demand for these models substantially increased in the first half of 2010. Our revenues from automobile repair and maintenance service increased by 55.3%, or RMB46.4 million ($6.8 million), to RMB130.2 million ($19.2 million) in the six months ended June 30, 2010 from RMB83.8 million in the six months ended June 30, 2009. This significant increase was attributable to our continuing enhanced sales efforts in response to increased market demand for automobile repair and maintenance services, which resulted in the number of vehicles serviced at our dealerships increasing by 32.5% to 61,680 units in the first half of 2010 from 46,560 units in the same period of 2009.

Cost of Goods Sold.    Our cost of goods sold increased by 18.4%, or RMB180.1 million ($26.6 million), to RMB1,157.0 million ($170.6 million) in the six months ended June 30, 2010 from RMB977.0 million in the six months ended June 30, 2009. The increase, primarily due to our increased purchases of new vehicles and spare parts, was in line with the increase of our revenues during the same period and consistent with the continued expansion of our business. Cost of goods sold attributable to our new vehicle sales increased by 16.6%, or RMB156.5 million ($23.1 million), to RMB1,098.3 million ($162.0 million) in the first six months of 2010 from RMB941.8 million in the same period of 2009. Cost of goods sold attributable to our automobile repair and maintenance service operations increased by 66.3%, or RMB23.2 million ($3.5 million), to RMB58.3 million ($8.6 million) in the first six months of 2010 from RMB35.0 million in the same period of 2009.

Gross Profit.    Our gross profit increased by 44.2%, or RMB47.7 million ($7.0 million), to RMB155.8 million ($23.0 million) in the six months ended June 30, 2010 from RMB108.0 million in the six months ended June 30, 2009. Our gross margin increased to 11.9% in the first six months of 2010 from 10.0% in the same period of 2009. The increases in gross profit and gross margin were primarily attributable to the increase of revenues from the higher margin automobile repair and maintenance service as a percentage of our total revenues, which grew to 9.9% in the first six months of 2010 from 7.7% in the same period of 2009. The gross margin of our automobile repair and maintenance service operations, however, decreased slightly to 55.2% in the first six months of 2010 from 58.2% in the same period of 2009, primarily due to the service discounts we offered in 2010 as part of our efforts to attract customers. We expect the gross margin of our automobile repair and maintenance service to remain stable at the current level for the foreseeable future, which we believe is still higher than the industry average. The gross margin of our new vehicle sales increased to 6.8% in the first six months of 2010 from 5.5% in the same period of 2009 primarily attributable to an increase in sales prices for several popular models that were in short supply and an increase of higher-margin models in our vehicle mix sold in the first six months of 2010.

Operating Expenses.    Our operating expenses increased by 31.7%, or RMB9.0 million ($1.3 million), to RMB37.8 million ($5.6 million) in the six months ended June 30, 2010 from RMB28.7 million in the six months ended June 30, 2009.

Selling, Marketing and Distribution Expenses.    Our selling, marketing and distribution expenses increased by 30.2%, or RMB4.9 million ($0.7 million), to RMB21.2 million ($3.1 million) in the six months ended June 30, 2010 from RMB16.3 million in the six months ended June 30, 2009. This increase was primarily due to an increase of RMB2.3 million ($0.3 million) in performance-based compensation paid to sales personnel as a result of our improved sales performance.

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General and Administrative Expenses.    Our general and administrative expenses increased by 33.5%, or RMB4.2 million ($0.6 million), to RMB16.7 million ($2.5 million) in the six months ended June 30, 2010 from RMB12.5 million in the six months ended June 30, 2009. This increase was primarily due to an increase of RMB3.3 million ($0.5 million) in performance-based compensation paid to our employees as a result of our overall improved performance.

Operating Income.    As a result of the foregoing, our operating income increased significantly by 48.7%, or RMB38.7 million ($5.7 million), to RMB117.9 million ($17.4 million) in the six months ended June 30, 2010 from RMB79.3 million in the six months ended June 30, 2009.

Interest Expenses.    Our interest expenses increased by 81.2%, or RMB10.6 million ($1.6 million), to RMB23.7 million ($3.5 million) in the six months ended June 30, 2010 from RMB13.1 million in the six months ended June 30, 2009. This increase was primarily due to a RMB7.9 million ($1.2 million) increase in interest expenses on short-term loans as a result of increased short-term loan balances and an increase of RMB1.6 million ($0.2 million) in interest charges on our outstanding tax liability for 2007 and 2008.

Income Tax Expenses.    Our income tax expenses increased by 38.5%, or RMB7.5 million ($1.1 million), to RMB26.9 million ($4.0 million) in the six months ended June 30, 2010 from RMB19.4 million in the six months ended June 30, 2009. This increase was in line with the increase of our taxable income in the period.

Net Income.    Primarily as a result of the foregoing, our net income increased by 35.0%, or RMB17.5 million ($2.6 million), to RMB67.4 million ($10.0 million) in the six months ended June 30, 2010 from RMB50.0 million in the six months ended June 30, 2009. Our net margin increased to 5.1% in the first six months of 2009 from 4.6% in the same period of 2009.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenues.    Our revenues increased by 24.6%, or RMB462.2 million ($68.2 million), to RMB2,341.5 million ($345.3 million) in the year ended December 31, 2009 from RMB1,879.3 million in the year ended December 31, 2008. This increase was primarily attributable to an increase in revenues from new vehicle sales and, to a lesser extent, an increase in revenues from automobile repair and maintenance service operations.

Our revenues from new vehicle sales increased by 22.2%, or RMB386.8 million ($57.0 million), to RMB2,131.4 million ($314.3 million) in the year ended December 31, 2009 from RMB1,744.6 million in the year ended December 31, 2008. This increase was primarily attributable to an increase in our sales volume to 15,047 units in 2009 from 11,689 units in 2008, representing an increase of 28.7%, as a result of increased market demand. Such increase was partially offset by a 5.1% decrease in the average selling price of our new vehicles to RMB141,650 ($20,888) in 2009 from RMB149,252 in 2008, primarily due to an increase of lower-priced models in our vehicle mix sold in 2009. Our revenues from automobile repair and maintenance service increased by 61.4%, or RMB77.3 million ($11.4 million), to RMB203.1 million ($29.9 million) in the year ended December 31, 2009 from RMB125.8 million in the year ended December 31, 2008. This significant increase was attributable to our continuing enhanced sales efforts in response to increased market demand for automobile repair and maintenance services. As a result of such efforts, the number of vehicles serviced at our dealerships increased by 17.9% to approximately 101,600 units in 2009 from approximately 86,200 units in 2008. Our revenues from other services decreased by 20.9%, or RMB1.9 million ($0.3 million), to RMB7.0 million ($1.0 million) in the year ended December 31, 2009 from RMB8.9 million in the year ended December 31, 2008.

Cost of Goods Sold.    Our cost of goods sold increased by 22.5%, or RMB378.1 million ($55.8 million), to RMB2,062.2 million ($304.1 million) in the year ended December 31, 2009 from RMB1,684.1 million in the year ended December 31, 2008. The increase, primarily due to our increased purchases of new vehicles and spare parts, was in line with the increase of our revenues during the same period and consistent with the continued expansion of our business. Cost of goods sold attributable to our new vehicle sales increased by 22.5%, or RMB362.9 million ($53.5 million), to RMB1,975.5 million ($291.3 million) in the year ended December 31,

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2009 from RMB1,612.6 million in the year ended December 31, 2008. Cost of goods sold attributable to our automobile repair and maintenance service operations increased by 21.8%, or RMB15.5 million ($2.3 million), to RMB86.4 million ($12.7 million) in the year ended December 31, 2009 from RMB71.0 million in the year ended December 31, 2008.

Gross Profit.    Our gross profit increased by 43.1%, or RMB84.1 million ($12.4 million), to RMB279.3 million ($41.2 million) in the year ended December 31, 2009 from RMB195.2 million in the year ended December 31, 2008. Our gross margin increased to 11.9% in 2009 from 10.4% in 2008. The increases in gross profit and gross margin were primarily attributable to the increase of revenues from the higher margin automobile repair and maintenance service operations as a percentage of our total revenues. The gross margin of our automobile repair and maintenance service operations increased significantly to 57.4% in 2009 from 43.6% in 2008 primarily because we enhanced our sales efforts in response to increased market demand and substantially increased our revenues from automobile repair and maintenance service by better utilizing our existing capacity. The gross margin of our new vehicle sales remained stable with a slight decrease to 7.3% in 2009 from 7.6% in 2008.

Operating Expenses.    Our operating expenses increased by 15.9%, or RMB9.7 million ($1.4 million), to RMB70.6 million ($10.4 million) in the year ended December 31, 2009 from RMB60.9 million in the year ended December 31, 2008.

Selling, Marketing and Distribution Expenses.    Our selling, marketing and distribution expenses increased by 3.1%, or RMB1.2 million ($0.2 million), to RMB38.8 million ($5.7 million) in the year ended December 31, 2009 from RMB37.6 million in the year ended December 31, 2008. This increase was primarily due to an increase of RMB1.4 million ($0.2 million) in depreciation of new vehicles we purchased for customer test drive purposes and an increase of RMB1.2 million ($0.2 million) in performance-based compensation paid to sales personnel as a result of our improved sales performance. Such increase was partially offset by a decrease of RMB1.1 million ($0.2 million) in advertising and promotion expense from 2008. Our advertising and promotion expense was higher in 2008 primarily due to advertising expenses relating to the 2008 Beijing Olympic Games.

General and Administrative Expenses.    Our general and administrative expenses increased by 36.6%, or RMB8.5 million ($1.3 million), to RMB31.9 million ($4.7 million) in the year ended December 31, 2009 from RMB23.3 million in the year ended December 31, 2008. This increase was primarily due to an increase of RMB3.0 million ($0.4 million) in performance-based compensation paid to our employees as a result of our overall improved performance and an increase of RMB5.0 million ($0.7 million) in expenses related to our reorganization in 2009.

Operating Income.    As a result of the foregoing, our operating income increased significantly by 55.4%, or RMB74.4 million ($11.0 million), to RMB208.7 million ($30.8 million) in the year ended December 31, 2009 from RMB134.3 million in the year ended December 31, 2008.

Interest Expenses.    Our interest expenses decreased by 0.4%, or RMB0.1 million ($15,000), to RMB33.3 million ($4.9 million) in the year ended December 31, 2009 from RMB33.4 million in the year ended December 31, 2008. This decrease was primarily due to a RMB10.0 million ($1.5 million) decrease in interest payments in connection with bills payable as we decreased our use of bills payable to pay for new vehicle purchases in 2009. Such decrease in our interest expenses was partially offset by an increase of RMB8.1 million ($1.2 million) in interest charges on our outstanding tax liability for 2007 and 2008 and an increase of RMB1.4 million ($0.2 million) in miscellaneous bank charges.

Income Tax Expenses.    Our income tax expenses increased by 80.0%, or RMB22.2 million ($3.3 million), to RMB50.0 million ($7.4 million) in the year ended December 31, 2009 from RMB27.8 million in the year ended December 31, 2008. This significant increase was in line with the substantial increase of our taxable income in the period.

Net Income.    Primarily as a result of the foregoing, our net income increased by 68.2%, or RMB52.2 million ($7.7 million), to RMB128.7 million ($19.0 million) in the year ended December 31, 2009 from

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RMB76.5 million in the year ended December 31, 2008. Our net margin increased to 5.5% in 2009 from 4.1% in 2008.

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

Revenues.    Our revenues increased by 13.4%, or RMB222.5 million, to RMB1,879.3 million in the year ended December 31, 2008 from RMB1,656.8 million in the year ended December 31, 2007. This increase was primarily attributable to an increase in revenues from new vehicle sales and, to a lesser extent, an increase in revenues from our automobile repair and maintenance service operations.

Our revenues from new vehicle sales increased by 10.7%, or RMB168.9 million, to RMB1,744.6 million in the year ended December 31, 2008 from RMB1,575.7 million in the year ended December 31, 2007. This increase was primarily attributable to a 21.4% increase in the average selling price of our new vehicles to RMB149,252 in 2008 from RMB122,916 in 2007, and was partially offset by an 8.8% decrease in our new vehicle sales volume. The increase of the average selling price in 2008 was primarily attributable to an increase of higher-priced models in our vehicle mix sold in 2008. Our total new vehicle sales volume decreased to 11,689 units in 2008 from 12,819 units in 2007, primarily because we registered sales of over 3,000 units to taxi companies in 2007 as part of Beijing municipal government's campaign for replacing aged taxi cars prior to the 2008 Beijing Olympic Games and did not record similar sales in 2008.

Our revenues from automobile repair and maintenance service increased by 68.0%, or RMB50.9 million, to RMB125.8 million in the year ended December 31, 2008 from RMB74.9 million in the year ended December 31, 2007. This significant increase was attributable to our enhanced sales efforts in response to increased market demand for automobile repair and maintenance services. As a result of such efforts, the number of vehicles serviced at our dealerships increased by 29.4% to approximately 86,200 units in 2008 from approximately 66,600 units in 2007. Our revenues from other services increased by 41.7%, or RMB2.6 million, to RMB8.9 million in the year ended December 31, 2008 from RMB6.3 million in the year ended December 31, 2007.

Cost of Goods Sold.    Our cost of goods sold increased by 11.0%, or RMB166.6 million, to RMB1,684.1 million in the year ended December 31, 2008 from RMB1,517.5 million in the year ended December 31, 2007. The increase, primarily due to our increased purchases of new vehicles and spare parts, was in line with the increase of our revenues during the same period and consistent with the continued expansion of our business. Cost of goods sold attributable to our new vehicle sales increased by 10.1%, or RMB148.1 million, to RMB1,612.6 million in the year ended December 31, 2008 from RMB1,464.5 million in the year ended December 31, 2007. Cost of goods sold attributable to our automobile repair and maintenance service operations increased by 34.7%, or RMB18.3 million, to RMB71.0 million in the year ended December 31, 2008 from RMB52.7 million in the year ended December 31, 2007.

Gross Profit.    Our gross profit increased by 40.2%, or RMB55.9 million, to RMB195.2 million in the year ended December 31, 2008 from RMB139.3 million in the year ended December 31, 2007. Our gross margin increased to 10.4% in 2008 from 8.4% in 2007. The increase in gross profit and gross margin was primarily attributable to the increase of revenues from the higher margin automobile repair and maintenance service as a percentage of our total revenues. The gross margin of our automobile repair and maintenance service increased significantly to 43.6% in 2008 from 29.6% in 2007, primarily because we enhanced our sales efforts in response to increased market demand and substantially increased our revenues from automobile repair and maintenance service by better utilizing our existing capacity. The gross margin of our new vehicle sales increased to 7.6% in 2008 from 7.1% in 2007.

Operating Expenses.    Our operating expenses increased by 8.2%, or RMB4.6 million, to RMB60.9 million in the year ended December 31, 2008 from RMB56.3 million in the year ended December 31, 2007.

Selling, Marketing and Distribution Expenses.    Our selling, marketing and distribution expenses increased by 27.4%, or RMB8.1 million, to RMB37.6 million in the year ended December 31, 2008 from RMB29.5 million

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in the year ended December 31, 2007. This increase was primarily due to an increase of RMB3.6 million in advertising and promotion expense we incurred in connection with the 2008 Beijing Olympic Games and an increase of RMB1.4 million in depreciation of new vehicles we purchased for customer test drive purposes.

General and Administrative Expenses.    Our general and administrative expenses decreased by 13.0%, or RMB3.5 million, to RMB23.3 million in the year ended December 31, 2008 from RMB26.8 million in the year ended December 31, 2007. This decrease was primarily due to a decrease of RMB2.0 million in salary expense for administrative staff as a result of reduced working hours during the 2008 Beijing Olympic Games.

Operating Income.    As a result of the foregoing, our operating income increased significantly by 61.9%, or RMB51.3 million, to RMB134.3 million in the year ended December 31, 2008 from RMB83.0 million in the year ended December 31, 2007.

Interest Expenses.    Our interest expenses increased by 56.2%, or RMB12.0 million, to RMB33.4 million in the year ended December 31, 2008 from RMB21.4 million in the year ended December 31, 2007. This significant increase was primarily due to an increase of RMB7.7 million in interest payments in connection with our increased average short-term loan balances and our increased use of bills payable in 2008 to pay for new vehicle purchases. To a lesser extent, the increase in interest expenses was due to an increase of RMB3.9 million in interest charges on our outstanding tax liability for 2007 and 2008.

Income Tax Expenses.    Our income tax expenses decreased by 6.2%, or RMB1.9 million, to RMB27.8 million in the year ended December 31, 2008 from RMB29.7 million in the year ended December 31, 2007. This decrease was attributable to a decrease in our effective tax rate from 46% in 2007 to 27% in 2008 as a result of the EIT law that became effective in 2008.

Net Income.    Primarily as a result of the foregoing, our net income increased by 121.5%, or RMB42.0 million, to RMB76.5 million in the year ended December 31, 2008 from RMB34.5 million in the year ended December 31, 2007. Our net margin increased to 4.1% in 2008 from 2.1% in 2007.

Discussion of Segment Operations

In our management's view, we currently operate through six operating segments corresponding to different dealerships that offer and service six different brands of vehicles, including Audi, FAW-Volkswagen, FAW-Mazda, Toyota, Shanghai-Volkswagen and Chang An-Mazda. Revenues from the Audi, FAW-Volkswagen and FAW-Mazda dealerships accounted for 77.0%, 75.5% and 75.8% of our total revenues in 2008, 2009 and the first half of 2010, respectively. Income from continuing operations from these three dealerships accounted for 83.6%, 85.0% and 98.6% of our total net income in 2008, 2009 and the first half of 2010, respectively.

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The table below sets forth our revenues, gross profit and income from continuing operations at our three largest dealerships for the periods indicated, followed by a discussion of the key components of results of operations for each of these dealerships. We omit the discussion of cost of goods sold and operating expenses below because the cost of goods sold generally follows the trends of revenues at these dealerships and the operating expenses remain relatively stable as a percentage of the revenues from these dealerships. Both cost of goods sold and operating expenses are not major factors that affect the operating results of our dealerships.

   
 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands)
 

Revenues:

                                           
 

Audi:

                                           
   

New vehicle sales

    437,132     584,665     635,360     93,690     289,231     391,404     57,716  
   

Automobile repair and maintenance service

    33,617     55,707     93,820     13,835     39,917     54,698     8,066  
   

Other services

    21     601     774     114     7     780     115  
                               
     

Total

    470,770     640,973     729,954     107,639     329,155     446,882     65,897  
                               
 

FAW-Volkswagen:

                                           
   

New vehicle sales

    581,602     466,917     620,956     91,566     318,136     293,882     43,336  
   

Automobile repair and maintenance service

    9,450     15,388     21,649     3,192     8,704     14,519     2,141  
   

Other services

    969     916     336     50     258     743     110  
                               
     

Total

    592,021     483,221     642,941     94,808     327,098     309,144     45,587  
                               
 

FAW-Mazda:

                                           
   

New vehicle sales

    252,544     302,221     358,933     52,928     167,071     214,762     31,669  
   

Automobile repair and maintenance service

    10,140     19,857     34,472     5,083     14,826     23,686     3,493  
   

Other services

    33     336     331     49     51     662     98  
                               
     

Total

    262,717     322,414     393,736     58,060     181,948     239,110     35,260  
                               

Gross profit:

                                           
 

Audi:

                                           
   

New vehicle sales

    45,096     41,608     57,495     8,478     14,754     43,601     6,428  
   

Automobile repair and maintenance service

    10,023     25,180     60,266     8,887     25,465     30,361     4,477  
   

Other services

    15     601     774     114     7     779     115  
                               
     

Total

    55,134     67,389     118,535     17,479     40,226     74,741     11,020  
                               
 

FAW-Volkswagen:

                                           
   

New vehicle sales

    33,928     33,206     50,423     7,435     23,804     25,931     3,824  
   

Automobile repair and maintenance service

    3,521     7,024     10,468     1,543     4,147     8,739     1,289  
   

Other services

    913     916     336     50     258     703     104  
                               
     

Total

    38,362     41,146     61,227     9,028     28,209     35,373     5,217  
                               
 

FAW-Mazda:

                                           
   

New vehicle sales

    21,959     26,371     12,070     1,779     (521 )   5,563     821  
   

Automobile repair and maintenance service

    4,487     9,748     20,452     3,016     9,121     15,745     2,322  
   

Other services

    31     336     331     49     51     641     95  
                               
     

Total

    26,477     36,455     32,853     4,844     8,651     21,949     3,238  
                               

Income from continuing operations:

                                           
 

Audi

    17,863     23,670     61,115     9,012     20,471     38,667     5,702  
 

FAW-Volkswagen

    17,586     23,451     35,181     5,188     17,916     18,448     2,720  
 

FAW-Mazda

    9,986     16,813     13,548     1,998     1,037     9,349     1,379  
   

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Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2010

Revenues.    Revenues at the Audi dealership increased by 35.8% from the six months ended June 30, 2009 to the six months ended June 30, 2010, driven primarily by a 35.3% increase in revenues from new vehicle sales and a 37.0% increase in revenues from automobile repair and maintenance service operations. The increase in revenues from new vehicle sales was primarily attributable to an increase in our sales volume to 905 units in the first half of 2010 from 737 units in the same period of 2009 as a result of increased market demand for the Audi models, and an increase in the average selling price of our new vehicles to RMB432,491 ($63,775) in 2010 from RMB392,444 in 2009 as a result of an increase of higher-priced models in our vehicle mix sold in 2010. The increase in revenues from automobile repair and maintenance service was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the six months ended June 30, 2010. As a result of such efforts, the number of vehicles serviced at the Audi dealership increased by 41.4% to approximately 12,160 units in the first half of 2010 from approximately 8,600 units in the same period of 2009.

Revenues at the FAW-Volkswagen dealership decreased by 5.5% from the six months ended June 30, 2009 to the six months ended June 30, 2010, driven primarily by a 7.6% decrease in revenues from new vehicle sales, which was partially offset by a 66.8% increase in revenues from automobile repair and maintenance service operations. The decrease in revenues from new vehicle sales resulted from a decrease in our sales volume to 2,712 units in the first half of 2010 from 3,595 units in the same period of 2009, primarily because the manufacturer's limited production capacity failed to meet the substantially increased customer orders for certain popular models in the first half of 2010 and required the manufacturers to allocate the supply among a greater number of dealers. The decrease in new vehicle sales volumes was offset by an increase in the average selling price of our new vehicles to RMB108,364 ($15,979) in 2010 from RMB88,494 in 2009, as a result of an increase in sales prices for several popular models that were in short supply and an increase of higher-priced models in our vehicle mix sold in the first half of 2010. The increase in revenues from automobile repair and maintenance service was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the six months ended June 30, 2010. As a result of such efforts, the number of vehicles serviced at the FAW-Volkswagen dealership increased by 30.6% to approximately 11,860 units in the first half of 2010 from approximately 9,080 units in the same period of 2009.

Revenues at the FAW-Mazda dealership increased by 31.4% from the six months ended June 30, 2009 to the six months ended June 30, 2010, driven primarily by a 28.5% increase in revenues from new vehicle sales and a 59.8% increase in revenues from automobile repair and maintenance service operations. The increase in revenues from new vehicle sales was primarily attributable to an increase in our sales volume to 1,422 units in the first half of 2010 from 1,201 units in the same period of 2009 as a result of increased market demand for newly introduced Mazda models, and an increase in the average selling price of our new vehicles to RMB151,028 ($22,271) in 2010 from RMB139,110 in 2009 as a result of the inclusion of certain higher-priced new models in our vehicle mix sold in 2010. The increase in revenues from automobile repair and maintenance service was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the six months ended June 30, 2010. As a result of such efforts, the number of vehicles serviced at the FAW-Mazda dealership increased by 28.9% to approximately 9,800 units in the first half of 2010 from approximately 7,600 units in the same period of 2009.

Gross Profit and Gross Margin.    Gross profit at the Audi, FAW-Volkswagen and FAW-Mazda dealerships increased by 85.8%, 25.4% and 153.7% from the six months ended June 30, 2009 to the six months ended June 30, 2010, respectively, all primarily driven by the increase of revenues from the higher margin automobile repair and maintenance service as a percentage of the total revenues at each of these dealerships. As a result, during the same period, the gross margin increased from 12.2% to 16.7% at the Audi dealership, from 8.6% to 11.4% at the FAW-Volkswagen dealership and from 4.8% to 9.2% at the FAW-Mazda dealership. Compared with our mid-line brand dealerships, the gross margin of our Audi dealership is typically higher because its product and service offerings consist mainly of higher-priced and higher margin luxury vehicles and related repair and maintenance services. One exception to the overall trend described above is that the gross margin of automobile repair and

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maintenance service operations at the Audi dealership decreased to 55.5% in the first half of 2010 from 63.8% in the same period of 2009, primarily because we initiated service discounts at this dealership as part of our marketing efforts to attract customers in 2010.

Gross profit at the FAW-Volkswagen dealership experienced modest growth in the first half of 2010 primarily because the revenue increase from the higher margin automobile repair and maintenance service was substantially offset by the revenue decrease from new vehicle sales at the FAW-Volkswagen dealership, resulting from the supply shortage on certain popular models as discussed above.

Gross profit at the FAW-Mazda dealership experienced more significant growth from the first six months of 2009 to the first six months of 2010 primarily because of the combined effects of (i) its new vehicle sales operations being loss-making in the first half of 2009 as a result of the manufacturer's price reductions on certain major models in response to increased competition for such models, thereby providing a lower basis for comparison and (ii) the introduction by the manufacturer of certain popular, higher-priced new models in late 2009 that drove significant growth in both revenues and gross profit from new vehicle sales in the first half of 2010.

Income from Continuing Operations.    Primarily as a result of the factors affecting revenues and gross profit discussed above, income from continuing operations at the Audi, FAW-Volkswagen and FAW-Mazda dealerships increased by 88.9%, 3.0% and 801.5%, respectively, from the six months ended June 30, 2009 to the six months ended June 30, 2010.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenues.    Revenues at the Audi dealership increased by 13.9% from 2008 to 2009, driven primarily by a 8.7% increase in revenues from new vehicle sales and a 68.4% increase in revenues from automobile repair and maintenance service operations. The increase in revenues from new vehicle sales was primarily attributable to an increase in our sales volume to 1,580 units in 2009 from 1,469 units in 2008 as a result of increased market demand for Audi models. The increase in revenues from automobile repair and maintenance service was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the year ended December 31, 2009. As a result of such efforts, the number of vehicles serviced at the Audi dealership increased by 15.8% to approximately 19,100 units in 2009 from approximately 16,500 units in 2008.

Revenues at the FAW-Volkswagen dealership increased by 33.1% from 2008 to 2009, driven primarily by a 33.0% increase in revenues from new vehicle sales and a 40.7% increase in revenues from automobile repair and maintenance service operations. The increase in revenues from new vehicle sales was primarily attributable to an increase in our sales volume to 6,791 units in 2009 from 5,336 units in 2008 as a result of increased market demand for FAW-Volkswagen models. The increase in revenues from automobile repair and maintenance service was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the year ended December 31, 2009. As a result of such efforts, the number of vehicles serviced at the FAW-Volkswagen dealership increased by 23.8% to approximately 19,800 units in 2009 from approximately 16,000 units in 2008.

Revenues at the FAW-Mazda dealership increased by 22.1% from 2008 to 2009, driven primarily by a 18.8% increase in revenues from new vehicle sales and a 73.6% increase in revenues from automobile repair and maintenance service operations. The increase in revenues from new vehicle sales was primarily attributable to an increase in our sales volume to 2,476 units in 2009 from 2,025 units in 2008 as a result of the enhanced promotional discounts initiated by the manufacturer on certain major Mazda models, which drove up the market demand. The increase in revenues from automobile repair and maintenance service was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the year ended December 31, 2009. As a result of such efforts, the number of vehicles serviced at the FAW-Mazda dealership increased by 15.4% to approximately 16,500 units in 2009 from approximately 14,300 units in 2008.

Gross Profit and Gross Margin.    Gross profit at the Audi dealership increased by 75.9% from 2008 to 2009, and gross profit at the FAW-Volkswagen dealership increased by 48.9% from 2008 to 2009, both primarily driven by

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the increase of revenues from the higher margin automobile repair and maintenance service as a percentage of the total revenues at each of these dealerships. As a result, gross margin at the Audi dealership increased to 16.2% in 2009 from 10.5% in 2008, and gross margin at the FAW-Volkswagen dealership increased to 9.5% in 2009 from 8.5% in 2008. Gross profit at the Audi dealership grew at a faster rate compared to the FAW-Volkswagen dealership primarily because (i) the 68.4% revenue increase of the higher margin automobile repair and maintenance service at the Audi dealership was more substantial than the 40.7% revenue increase of the same revenue source at the FAW-Volkswagen dealership in 2009 and (ii) the higher margin automobile repair and maintenance service accounted for 12.9% of the total revenues at the Audi dealership in 2009, compared to 3.4% at the FAW-Volkswagen dealership. We believe such differences are attributable to the fact that customers of luxury vehicles at the Audi dealerships are willing to pay premiums and service their vehicles in the franchise dealership, whereas customers of mid-line or economical vehicles at the FAW-Volkswagen dealership tend to be price-sensitive and, compared to customers of luxury vehicles, are more likely to service their vehicles elsewhere.

Gross profit at the FAW-Mazda dealership decreased by 9.9% from 2008 to 2009 and its gross margin decreased to 8.3% in 2009 from 11.3% in 2008, primarily as a result of the 54.2% decrease in gross profit for new vehicle sales from 2008 to 2009 and the significant decrease in gross margin for new vehicle sales from 8.7% in 2008 to 3.4% in 2009. Such decrease at the FAW-Mazda dealership was primarily due to the substantial price reductions initiated by the manufacturer in 2009 for promoting the sales of certain major models in response to the increased competition for those models. The decrease in gross profit for new vehicle sales was offset by the 49.0% increase in gross profit for automobile repair and maintenance service from 2008 to 2009 and the increase in gross margin of this revenue source from 49.1% in 2008 to 59.3% in 2009 at the FAW-Mazda dealership.

Income from Continuing Operations.    Primarily as a result of the factors affecting revenues and gross profit discussed above, income from continuing operations at the Audi and FAW-Volkswagen dealerships increased by 158.2% and 50.0%, respectively, from 2008 to 2009. Income from continuing operations at the FAW-Mazda dealership decreased by 19.4% from 2008 to 2009, primarily due to the substantial price reductions initiated by the manufacturer on certain major models in 2009, as discussed above.

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

Revenues.    Revenues at the Audi dealership increased by 36.2% from 2007 to 2008, driven primarily by a 33.8% increase in revenues from new vehicle sales and a 65.7% increase in revenues from automobile repair and maintenance service operations. The increase in revenues from new vehicle sales was primarily attributable to an increase in our sales volume to 1,469 units in 2008 from 1,008 units in 2007 as a result of increased market demand for Audi vehicles, which was partially offset by a decrease in the average selling price of our new vehicles to RMB398,002 in 2008 from RMB433,663 in 2007 as a result of an increase in mid-range models with lower prices in our vehicle mix sold in 2008. The increase in revenues from automobile repair and maintenance service was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the year ended December 31, 2008. As a result of such efforts, the number of vehicles serviced at the Audi dealership increased by 22.2% to approximately 16,500 units in 2008 from approximately 13,500 units in 2007.

Revenues at the FAW-Volkswagen dealership decreased by 18.4% from 2007 to 2008, driven primarily by a 19.7% decrease in revenues from new vehicle sales, which was partially offset by a 62.8% increase in revenues from automobile repair and maintenance service operations. The decrease in revenues from new vehicle sales was primarily due to a decrease in our sales volume to 5,336 units in 2008 from 7,862 units in 2007 because we registered sales to taxi companies in 2007 as part of the Beijing municipal government's campaign for replacing aged taxi cars prior to the 2008 Beijing Olympic Games and did not record similar sales in 2008. Such decrease substantially affected our FAW-Volkswagen dealership since the taxi cars we sold were mainly Volkswagen models from this dealership. The increase in revenues from automobile repair and maintenance service was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the year ended December 31, 2008. As a result of such efforts, the number of vehicles serviced at the

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FAW-Volkswagen dealership increased by 18.5% to approximately 16,000 units in 2008 from approximately 13,500 units in 2007.

Revenues at the FAW-Mazda dealership increased by 22.7% from 2007 to 2008, driven primarily by a 19.7% increase in revenues from new vehicle sales and a 95.8% increase in revenues from automobile repair and maintenance operations. The increase in revenues from new vehicle sales was primarily attributable to an increase in our sales volume to 2,025 units in 2008 from 1,710 units in 2007 as a result of increased market demand. The increase in revenues from automobile repair and maintenance operations was primarily attributable to our enhanced sales efforts, as described in the discussion of our consolidated results of operations for the year ended December 31, 2008. As a result of such efforts, the number of vehicles serviced at the FAW-Mazda dealership increased by 24.3% to approximately 14,300 units in 2008 from approximately 11,500 units in 2007.

Gross Profit and Gross Margin.    Gross profit at the Audi, FAW-Volkswagen and FAW-Mazda dealerships increased by 22.2%, 7.3% and 37.7%, respectively, from 2007 to 2008, all driven primarily by the substantial increase of revenues from the higher margin automobile repair and maintenance service operations as a percentage of the total revenues at each of these dealerships. As a result, gross margin at the FAW-Volkswagen dealership increased to 8.5% in 2008 from 6.5% in 2007 and gross margin at the FAW-Mazda dealership increased to 11.3% in 2008 from 10.1% in 2007. However, gross margin at the Audi dealership decreased to 10.5% in 2008 from 11.7% in 2007, primarily as a result of the decrease in gross margin for new vehicle sales to 7.1% in 2008 from 10.3% in 2007. Such decrease at the Audi dealership was primarily due to an increase of sales in 2008 of certain mid-range Audi models that the manufacturer promoted in that year. In addition, gross profit at the FAW-Volkswagen dealership grew at a slower rate in 2008 primarily due to the 19.7% decrease in new vehicle sales, as discussed above.

Income from Continuing Operations.    Primarily as a result of the factors affecting revenues and gross profit discussed above, income from continuing operations at the Audi, FAW-Volkswagen and FAW-Mazda dealerships increased by 32.5%, 33.4% and 68.4%, respectively, from 2007 to 2008.

Selected Quarterly Results of Operations

The following table sets forth our selected unaudited quarterly results of operations for the six quarters in the period from January 1, 2009 to June 30, 2010. You should read the following table in conjunction with our audited consolidated financial statements and related notes contained elsewhere in this prospectus. We have prepared the selected unaudited quarterly financial information on the same basis as our audited consolidated financial statements, and it includes 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.

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The historical quarterly results presented below are not necessarily indicative of future results for any quarters or for a full year.

 
  Three Months Ended  
 
  March 31,
2009
  June 30,
2009
  September 30,
2009
  December 31,
2009
  March 31,
2010
  June 30,
2010
 
 
  (Unaudited, in thousands of RMB)
 

Revenues:

                                     
 

New vehicle sales

    459,010     538,120     540,672     593,601     528,571     649,676  
 

Automobile repair and maintenance service

    42,386     41,424     64,685     54,588     51,057     79,112  
 

Other service

    1,739     2,314     980     1,972     1,611     2,794  
                           

    503,135     581,858     606,337     650,161     581,239     731,582  
                           

Cost of goods sold:

                                     
 

New vehicle sales

    (443,836 )   (497,972 )   (497,300 )   (538,954 )   (488,589 )   (609,679 )
 

Automobile repair and maintenance service

    (15,605 )   (19,429 )   (20,041 )   (28,792 )   (26,576 )   (31,688 )
 

Other service

    (42 )   (68 )   (60 )   (64 )   (247 )   (252 )
                           

    (459,483 )   (517,469 )   (517,401 )   (567,810 )   (515,412 )   (641,619 )
                           

Gross profit

    43,652     64,389     88,936     82,351     65,827     89,963  
                           

Operating expenses:

                                     
 

Selling, marketing and distribution expenses

    (7,958 )   (8,303 )   (9,767 )   (12,746 )   (7,695 )   (13,478 )
 

General and administrative expenses

    (6,542 )   (5,941 )   (8,921 )   (10,447 )   (8,456 )   (8,213 )
                           

Total operating expenses

    (14,500 )   (14,244 )   (18,688 )   (23,193 )   (16,151 )   (21,691 )
                           

Operating income

    29,152     50,145     70,248     59,158     49,676     68,272  

Interest income

    1,820     399     86     87     68     159  

Interest expenses

    (5,780 )   (7,298 )   (9,224 )   (10,986 )   (10,056 )   (13,641 )

Exchange loss

                        (513 )

Other income/(expense), net

    612     261     (279 )   800     451     (165 )
                           

Income before income tax expenses

    25,804     43,507     60,831     49,059     40,139     54,112  

Income tax expenses

    (7,229 )   (12,172 )   (17,026 )   (13,612 )   (11,442 )   (15,422 )
                           

Income from continuing operations

    18,575     31,335     43,805     35,447     28,697     38,690  

(Loss) income from discontinued operations

    (112 )   128     72     (521 )        
                           

Net income

    18,463     31,463     43,877     34,926     28,697     38,690  
                           

From January 1, 2009 to June 30, 2010, the seasonality of our business was not apparent because in most cases each quarter had greater revenues than the prior quarter due to the rapid growth we experienced during this period. Our revenues and operating results tend to be at the lowest level in the first quarter and reach the highest level in the fourth quarter, which is consistent with the purchasing habit of consumers in China who tend to refrain from purchasing vehicles during and after the Chinese New Year holidays in February and March, but later increase spending on vehicles from September to the year end. Manufacturers typically step up sales efforts and offer attractive discounts on new vehicles in the fourth quarter to meet their annual targets, which also contributes to the fact that the fourth quarter is typically our strongest quarter in terms of revenues. Our cost of goods sold and gross profit have generally followed the trends of our revenues from quarter to quarter.

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Liquidity and Capital Resources

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

   
 
  Years Ended December 31,   Six Months Ended June 30,  
 
  2007   2008   2009   2009   2010  
 
  RMB   RMB   RMB   $   RMB   RMB   $  
 
  (Amounts in thousands)
 

Net cash provided by (used in) operating activities

    (66,002 )   370,070     (92,932 )   (13,704 )   (172,899 )   (70,927 )   (10,459 )

Net cash provided by (used in) investing activities

    (19,344 )   (203,561 )   (131,270 )   (19,357 )   53,065     17,325     2,555  

Net cash provided by (used in) financing activities

    58,806     (186,879 )   193,141     28,481     156,778     51,536     7,599  

Net increase (decrease) in cash and cash equivalents

    (26,540 )   (20,370 )   (31,061 )   (4,580 )   36,944     (2,066 )   (305 )

Cash and cash equivalents, beginning of year

    150,053     123,513     103,143     15,209     103,143     72,082     10,629  

Cash and cash equivalents, end of year

    123,513     103,143     72,082     10,629     140,087     70,016     10,324  
   

Liquidity

Operating Activities.    Net cash provided by or used in operating activities primarily consists of net income, as adjusted by depreciation and amortization, gain or loss on disposal of property, unrealized loss or realized gain on trading securities, and changes in operating assets and liabilities such as accounts receivable, inventories, advance to suppliers, bills payable, advances from customers, deposits from third-parties, accrued expenses and other current liabilities, prepaid expenses and other current assets, amount due to related parties and taxes payable.

Net cash used in operating activities was RMB70.9 million ($10.5 million) in the six months ended June 30, 2010. This was derived from net income of RMB67.4 million ($10.0 million) in that year, as primarily adjusted by (i) deducting RMB79.0 million ($11.7 million) for increased inventory, (ii) deducting RMB73.4 million ($10.8 million) as a result of our decreased use of bills payable to pay for new vehicle purchases in the first six months of 2010 as compared to the previous year, (iii) deducting RMB44.6 million ($6.6 million) for decreased unrecognized tax benefit as a result of our reclassifying such amount as taxes payable in the first six months of 2010, and (iv) adding RMB65.6 million ($9.7 million) for increased taxes payable, which was in line with the increase of our taxable income and the reclassification of certain unrecognized tax benefits as taxes payable in the first six months of 2010.

Net cash used in operating activities was RMB92.9 million ($13.7 million) in 2009. This was derived from net income of RMB128.7 million ($19.0 million) in that year, as primarily adjusted by (i) deducting RMB366.3 million ($54.0 million) as a result of our decreased use of bills payable to pay for new vehicle purchases in 2009 as compared to the previous year, (ii) deducting RMB45.8 million ($6.8 million) for increased inventory, (iii) adding RMB60.8 million ($9.0 million) for increased deposits from third parties, such as automobile accessories vendors, in exchange for such parties' temporarily displaying our new vehicles to help promote their own products and services, (iv) adding RMB58.9 million ($8.7 million) for accrued expenses and other current liabilities, primarily as a result of increased value added tax payable and interest on late tax payment and (v) adding RMB50.1 million ($7.4 million) for increased taxes payable.

Net cash provided by operating activities was RMB370.1 million in 2008. This was derived from net income of RMB76.5 million in that year, as primarily adjusted by (i) adding RMB319.6 million as a result of our increased use of bills payable to pay for new vehicle purchases in 2008 as compared to the previous year, (ii) adding RMB38.9 million for decreased accounts receivable, (iii) adding RMB32.6 million for increased deposits from third parties, (iv) adding RMB27.8 million for increased unrecognized tax benefit as a result of our continued underpayment of taxes in 2008 and (v) deducting RMB126.7 million for increased inventories, primarily because we increased our new vehicle purchases to take advantage of the attractive incentives offered by the manufacturers towards the end of 2008.

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Net cash used in operating activities was RMB66.0 million in 2007. This was derived from net income of RMB34.5 million in that year, as primarily adjusted by (i) deducting RMB77.2 million for decreased amounts due to related parties, (ii) deducting RMB51.0 million for increased accounts receivable, (iii) deducting RMB44.4 million for increased advances to suppliers, (iv) deducting RMB37.7 million for increased inventories, (v) adding RMB43.7 million for accrued expenses and other current liabilities, (vi) adding RMB36.5 million for increased deposits from third parties and (vii) adding RMB21.7 million for increased unrecognized tax benefit as a result of our underpayment of taxes in 2007.

Investing Activities.    Net cash provided by investing activities was RMB17.3 million ($2.5 million) in the six months ended June 30, 2010, primarily consisting of a decrease of RMB32.5 million ($4.8 million) in amounts due from related parties and an increase of RMB15.7 million ($2.3 million) in loans to certain third parties for their short-term use.

Net cash used in investing activities was RMB131.3 million ($19.4 million) in 2009, primarily consisting of an increase of RMB121.2 million ($17.9 million) in amounts due from related parties and our use of RMB15.7 million ($2.3 million) in the purchase of new vehicles for customer test drive purposes.

Net cash used in investing activities was RMB203.6 million in 2008, primarily consisting of an increase of RMB182.3 million in amounts due from related parties and our use of RMB20.3 million in the purchase of new vehicles for customer test drive purposes.

Net cash used in investing activities was RMB19.3 million in 2007, primarily consisting of our use of RMB15.9 million in the purchase of new vehicles for customer test drive purposes and an increase of RMB3.5 million in amounts due from related parties.

Financing Activities.    Net cash provided by financing activities was RMB51.5 million ($7.6 million) in the six months ended June 30, 2010, primarily resulting from (i) the netting of proceeds from short-term loans and repayments of short-term loans, (ii) an increase of RMB95.6 million ($14.1 million) as a result of the deposit payment from our investor prior to the closing of the private placement of our ordinary shares, and (iii) a decrease of RMB33.4 million ($4.9 million) in restricted cash due to our decreased use of bills payable in the first six months of 2010, thereby reducing the amount of restricted cash required to guarantee the outstanding bills payable.

Net cash provided by financing activities was RMB193.1 million ($28.5 million) in 2009, primarily resulting from the netting of proceeds from short-term loans and repayments of short-term loans and a decrease of RMB81.4 million ($12.0 million) in restricted cash due to our decreased use of bills payable in 2009, thereby reducing the amount of restricted cash required to guarantee the outstanding bills payable.

Net cash used in financing activities was RMB186.9 million in 2008, primarily resulting from the netting of proceeds from short-term loans and repayments of short-term loans and an increase of RMB151.4 million in restricted cash as a result of our increased use of bills payable in 2008.

Net cash provided by financing activities was RMB58.8 million in 2007, primarily resulting from the netting of proceeds from short-term loans and repayments of short-term loans and a decrease of RMB71.2 million in restricted cash due to our decreased use of bills payable in 2007.

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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:

   
 
  Payment Due by Period  
 
  Total   Less than
1 year
  1–3 years   3–5 years   More than
5 years
 
 
  (Amounts in thousands of RMB)
 

Short-term borrowings

    325,460     325,460              

Operating lease commitments

    82,879     5,642     11,284     11,284     54,669  
                       

Total

    408,339     331,102     11,284     11,284     54,669  
                       
   

Capital Resources and Capital Expenditures

To date, we have financed our operations primarily through cash flows from operations, short-term bank borrowings, as well as the sale of ordinary shares in a private placement. We may explore other ways to finance our operations in the future, including long-term credit facilities and offerings of debt or equity securities.

We finance our inventory purchases and other working capital requirements through short-term credit facilities from the financing arms of automobile manufacturers and a number of Chinese domestic banks. Under these credit facilities, we are able to borrow short-term loans with terms typically ranging from three to six months. Our short-term loans amounted to RMB243.6 million as of December 31, 2007, RMB208.9 million as of December 31, 2008, RMB325.5 million ($48.0 million) as of December 31, 2009 and RMB250.7 million ($37.0 million) as of June 30, 2010. The interest rates for these short-term loans ranged from 5.244% to 9.708% for the three years ended December 31, 2009 and 4.46% to 5.75% for the six months ended June 30, 2010. Our short-term loans are (i) guaranteed by Mr. Hetong Guo and other related parties, (ii) guaranteed by Mr. Hetong Guo and other related parties and secured by our property, equipment and land use rights or (iii) unsecured. None of the short-term credit facilities or short-term loans subject us to any restrictive covenants.

We also utilize bills payable to pay for inventory purchases. Bills payable represent short-term bank acceptance notes issued by financial institutions that entitle the holder to receive the stated amount from the financial institutions at the maturity date of the bill, which generally ranges from three to six months from the date of issuance. The holder of the bills can obtain payment from the financial institutions prior to the stated maturity date. In such a case, we may be required to pay the financial institutions an interest charge, which has historically been insignificant. During a period of strong vehicle sales, we typically leverage our better liquidity position and use cash proceeds from short-term loans to pay for new vehicle purchases to avoid interest and miscellaneous charges in connection with issuing bills payable and to take advantage of manufacturers' preferential policies on cash purchases. During a period of weak vehicle sales, we tend to maximize the use of bills payable in inventory purchases, thereby improving our liquidity positions. There is no recourse to us in the event the financial institutions default upon demand for payment by the holders of the bills. Bills payable are secured by our restricted cash.

Our capital expenditures, mainly consisting of purchases of new vehicles for customer test drive purposes, were RMB15.9 million, RMB20.3 million and RMB15.7 million ($2.3 million) for the years ended December 31, 2007, 2008 and 2009, respectively. We expect to incur capital expenditures of approximately RMB40.0 million ($5.9 million) in 2010, which have been and will be used primarily to upgrade service equipment, acquire new equipment and new vehicles for customer test drives and establish new dealerships. We believe the increased level of our planned capital expenditures in 2010 will not have any material impact on our future financial condition or results of operations since they will be funded entirely from the proceeds of this offering.

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We believe that our current cash and cash equivalents, anticipated cash flow from operations and the proceeds from this offering will be sufficient to meet our expected cash requirements, including for working capital and capital expenditure purposes, for at least 12 months following this offering. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. In addition, after this offering, we will become a public company and will incur a significantly higher level of legal, accounting and other expenses than we did as a private company and we may need to obtain additional capital resources to cover these costs. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity or debt securities or borrow from lending institutions. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our shareholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

Off-Balance Sheet Commitments and Arrangements

As of December 31, 2009 and June 30, 2010, we did not have any off-balance sheet commitments or arrangements. We do not anticipate entering into any such commitments or arrangements in the foreseeable future.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are subject to market risks due to fluctuations in interest rates on our debt. Increases in interest rates will increase the cost of new borrowings and our interest expense. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of our debt instruments. Assuming the principal amount of our bank borrowings remains approximately the same as of December 31, 2009, a 0.5% increase in each applicable interest rate would have added approximately RMB1.3 million ($0.2 million) to our interest expenses for 2009. We do not use any derivative instruments to manage our interest rate risk exposure. We have not been subject to nor do we anticipate being exposed to material risks due to changes in interest rates.

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. Historically, 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 decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the Renminbi against the U.S. dollar. The Renminbi further appreciated against the U.S. dollar in June 2010 after a period of several years of relative exchange rate stability. On June 20, 2010, the People's Bank of China announced that the PRC government will further reform the Renminbi exchange rate regime and enhance the Renminbi exchange rate flexibility. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.

We do not believe that we currently have any significant direct foreign exchange risk and have not hedged our exposure to foreign currency exchange risk. All of our revenues and expenses are denominated in Renminbi. Our exposure to foreign exchange risk primarily relates to cash proceeds denominated in U.S. dollars as a result of our past issuance of ordinary shares through private placement. Although we obtain all of our new vehicles from domestic suppliers, a depreciation of the Renminbi would result in an increase in the price of goods with imported components as our supplier