F-1 1 d360161df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on September 30, 2013

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Qunar Cayman Islands Limited

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

Cayman Islands   4700   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

17th Floor, Viva Plaza, Building 18, Yard 29,

Suzhou Street, Haidian District

Beijing 100080

The People’s Republic of China

+86 10 5760 3000

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

 

 

Law Debenture Corporate Services Inc.

400 Madison Avenue, Suite 4D

New York, NY10017

+1 212 750 6474

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

 

 

Copies to:

Li He, Esq.

Davis Polk & Wardwell LLP

2201 China World Office 2

1 Jian Guo Men Wai Avenue

Chao Yang District

Beijing 100004, China

+86 10-8567-5000

 

Leiming Chen, Esq.

Simpson Thacher & Bartlett LLP

c/o 35th Floor, ICBC Tower

3 Garden Road, Central

Hong Kong

+852 2514-7600

 

 

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

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

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

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

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed Maximum
Aggregate
Offering Price(1) (2)
  Amount Of
Registration Fee

Class B Ordinary shares, par value US$0.001 per share(3)

  US$125,000,000   US$17,050

 

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Includes Class B ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These ordinary shares are not being registered for the purpose of sales outside the United States. Also includes Class B ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option.
(3) American depositary shares issuable upon deposit of the Class B ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 to be filed with the Commission (Registration No. 333-            ). Each American depositary share represents Class B ordinary shares.

 

 

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

 

 

 


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The information in this preliminary 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 preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                     , 2013

                     American Depositary Shares

LOGO

Qunar Cayman Islands Limited

Representing                      Class B Ordinary Shares

 

 

This is the initial public offering of American depositary shares, or ADSs, of Qunar Cayman Islands Limited. We are offering              ADSs. Each ADS represents              Class B ordinary shares, par value US$0.001 per share, of us.

Prior to this offering, there has been no public market for the ADSs or our Class B ordinary shares. We anticipate that the initial public offering price of the ADSs will be between US$             and US$             per ADS.

Upon the completion of this offering, 303,344,804 Class A ordinary shares and              Class B ordinary shares of our company will be issued and outstanding, assuming that the underwriters do not exercise their over-allotment option to purchase additional ADSs. Each Class A ordinary share will be entitled to three votes and each Class B ordinary share will be entitled to one vote on all matters subject to shareholder vote. Upon completion of this offering, Baidu Holdings Limited, our controlling shareholder, will hold 185,202,519 Class A ordinary shares, which will represent         % of our aggregate voting power, assuming that the underwriters do not exercise their over-allotment option to purchase additional ADSs.

 

 

We have applied to have the ADSs listed on the New York Stock Exchange, or NYSE, under the symbol “QUNR.”

 

 

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, and Section 3(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

 

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 14 of this prospectus.

 

 

 

     Price to the
Public
     Underwriting
Discounts and
Commissions
     Proceeds to the
Company
 

Per ADS

   US$                   US$                   US$               

Total

   US$                   US$                   US$               

 

 

We have granted the underwriters the right to purchase up to              additional ADSs at the initial public offering price, less underwriting discounts and commissions, to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs against payment in U.S. dollars on                     , 2013.

 

 

 

Goldman Sachs (Asia) L.L.C.   Deutsche Bank Securities
Stifel
Pacific Crest Securities   China Renaissance Securities
(Hong Kong) Limited

 

 

Prospectus dated                     , 2013


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Table of Contents

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Table of Contents

TABLE OF CONTENTS

 

     Page  

Conventions that Apply to This Prospectus

     ii   

Prospectus Summary

     1   

The Offering

     7   

Summary Consolidated Financial Data

     10   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     55   

Use of Proceeds

     56   

Dividend Policy

     57   

Capitalization

     58   

Dilution

     59   

Exchange Rate Information

     61   

Enforceability of Civil Liabilities

     62   

History and Corporate Structure

     64   

Selected Consolidated Financial Data

     69   

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

     74   

Industry

     103   

Business

     108   

Regulation

     124   

Management

     146   

Principal Shareholders

     152   

Related Party Transactions

     154   

Description of Share Capital

     155   

Description of American Depositary Shares

     168   

Shares Eligible for Future Sale

     178   

Taxation

     180   

Underwriting

     186   

Expenses Relating to This Offering

     195   

Legal Matters

     196   

Experts

     196   

Where You Can Find Additional Information

     197   

Index to Consolidated Financial Statements

     F-1   

 

 

We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where such 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 the sale of any ADS.

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

 

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CONVENTIONS THAT APPLY TO THIS PROSPECTUS

Except where the context otherwise indicates and for the purpose of this prospectus only:

 

   

“ADSs” refers to our American depositary shares, each of which represents              Class B ordinary shares, and “ADRs” refers to the American depositary receipts that evidence our ADSs;

 

   

“active mobile users” refers to mobile users who accessed our mobile platform on three or more different days in the preceding 12-month period as of any given date;

 

   

“active web users” refers to web users who accessed our website on three or more different days in the preceding 12-month period as of any given date;

 

   

“China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this prospectus, Hong Kong, Macau and Taiwan;

 

   

“mobile users” refers to users who accessed our mobile platform in the preceding 12-month period as of any given date, each being identified by a unique serial number of the user’s mobile device;

 

   

“monthly unique visitors” refers to visitors who accessed a website in any given month, each visitor being identified by an IP address which is verifiable by third-party market research firms from publicly available information;

 

   

“ordinary shares” refers to our ordinary shares, par value US$0.001 per share;

 

   

“qualified click” refers to a user click which occurs when the user is directed to a customer’s website or our SaaS system by clicking on a search result on our website, regardless of whether the user proceeds to make a purchase from the customer, excluding repeating clicks resulting from suspected frauds or mistakes;

 

   

“RMB” or “Renminbi” refers to the legal currency of China;

 

   

“US$,” “U.S. dollars,” or “dollars” refers to the legal currency of the United States;

 

   

“we,” “us,” “our company,” “our,” or “Qunar” refers to Qunar Cayman Islands Limited, a Cayman Islands company, and unless the context requires otherwise, includes its predecessor entities and consolidated subsidiaries and variable interest entities; and

 

   

“web users” refers to users who accessed our website in the preceding 12-month period as of any given date, each being identified by a unique cookie installed on the user’s computer.

Unless otherwise indicated, information in this prospectus relating to the number of ordinary shares that will be outstanding immediately after this offering:

 

   

assumes the issuance and sale of              Class B ordinary shares (in the form of ADSs) by us;

 

   

assumes no exercise of the underwriters’ option to purchase additional ADSs to cover over-allotments;

 

   

excludes              Class B ordinary shares issuable upon the exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of US$              per share; and

 

   

excludes              Class B ordinary shares reserved for future issuances under our 2007 Share Plan.

This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. The Company uses the RMB as its reporting currency. Unless otherwise indicated, conversions of RMB into U.S. dollars in this prospectus are based on the exchange rate set forth in the H.10 statistical release of the Federal Reserve Bank of New York on June 28, 2013, which was RMB6.1374 to US$1.00. Translation differences are recorded in accumulated other comprehensive loss, a component of shareholders’ deficit. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. On September 20, 2013, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.1210 to US$1.00.

 

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PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. You should carefully read this entire prospectus, including the “Risk Factors” section and the financial statements and the related notes, before deciding whether to invest in our ADSs.

Our Business

We are the leading search-based commerce platform for the travel industry in China. We enable people to find best-value deals by aggregating and processing highly fragmented travel product information from tens of thousands of travel service providers, or TSPs, into an organized and user-friendly display through our proprietary technology. According to iResearch, we ranked No. 1 among all non-state-owned online travel companies in China in terms of monthly unique visitors since November 2010. We were the most visited travel website in China among online travel users, according to a report released by Nielsen in June 2012.

We optimize users’ travel experience by enabling them to easily identify and compare their desired travel products anytime and anywhere through our website and mobile applications. We retrieve and display real-time information about air tickets, hotels, vacation packages and other travel products based on user search queries. Our comprehensive and accurate search results are sourced from third-party travel websites as well as our proprietary software-as-a-service, or SaaS, system, on which we host the web outlets for a large and growing number of TSPs. Our platform is designed to facilitate and enhance convenience, data accuracy, and transaction security for our users. As a result of our focus on user experience, we have attracted a large and rapidly expanding user base. The number of our web users grew from 71.7 million in 2010 to 187.3 million in 2012. The number of our web users was 203.2 million in the 12-month period ended June 30, 2013. In addition, the number of our mobile users grew from 0.2 million in 2010 to 21.9 million in 2012. The number of our mobile users was 39.6 million in the 12-month period ended June 30, 2013.

Our customers include TSPs and display advertisers. Leveraging our large user base and our advanced technologies, we provide an attractive value proposition to our customers.

 

   

Our SaaS system enables TSPs with limited or no online presence, usually independent hotels and TSPs who have traditionally conducted business offline, to have advanced online outlets to sell products and services via the Internet. We provide our SaaS system free of charge to TSPs who use our pay-for-performance, or P4P, services.

 

   

Our P4P services provide an efficient channel for TSPs to reach a large and fast-growing number of travelers through qualified clicks, for which we charge on a cost-per-click, or CPC, or cost-per-sale, or CPS, basis.

 

   

Additionally, our display advertising service provides targeted advertising solutions based on the demographics, search parameters and transaction history of our large user base, and our promotional programs expose TSPs to new online marketing methods while providing them with additional channels to distribute travel products to our users.

We are a technology-driven company. Our industry experts, product managers and software engineers collaborate closely to drive our product development efforts to better serve our users. Our superior search capabilities are at the core of our technological competence. We processed approximately 1.8 billion web and mobile search queries in 2012 and approximately 1.4 billion web and mobile search queries in the first six months in 2013 for air tickets and hotels. We are able to instantly extract targeted data from a massive number of online sources with different formats. Unlike general search engines, our search results must be current and accurate for users to proceed with their transactions. We maintain a dynamic data cache which is constantly verified and refreshed to ensure up-to-date, accurate and fast search results. Our platform also powers natural language fuzzy search, which significantly broadens permissible search parameters and optimizes search results

 

 

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by analyzing and organizing unstructured information from the Internet. The key word database for our search service utilizes an intelligent “machine learning” technology, allowing it to automatically improve itself with the injection of new data. As a result, our search results become more relevant and accurate over time.

We have achieved substantial growth since the commencement of our operations in 2005. Our revenues increased from RMB123.9 million in 2010 to RMB262.4 million in 2011 and to RMB501.7 million (US$81.7 million) in 2012, and from RMB204.6 million in the six months ended June 30, 2012 to RMB358.8 million (US$58.5 million) in the six months ended June 30, 2013. We recorded net losses of RMB4.4 million, RMB46.0 million, RMB91.1 million (US$14.8 million), RMB64.1 million and RMB16.9 million (US$2.8 million) in 2010, 2011, 2012 and the six months ended June 30, 2012 and 2013, respectively. Our adjusted EBITDA was RMB4.0 million and RMB2.8 million in 2010 and 2011, respectively, and we recorded negative adjusted EBITDA of RMB24.0 million (US$3.9 million) in 2012. Our adjusted EBITDA was RMB13.7 million (US$2.2 million) in the six months ended June 30, 2013, compared to negative adjusted EBITDA of RMB27.2 million in the six months ended June 30, 2012. For information regarding adjusted EBITDA, see “Summary Consolidated Financial Data—Non-GAAP Financial Measures.”

The PRC government extensively regulates, through licensing and permit requirements, foreign ownership of companies that provide Internet-based services. We derive most of our revenues from Beijing Qunar Software Technology Company Limited, a wholly foreign owned enterprise, or WFOE, and its subsidiaries in the PRC. To comply with certain licensing and permit requirements imposed by applicable PRC laws and regulations, we also conduct part of our business through Qunar.com Beijing Information Technology Company Limited, a variable interest entity, or VIE. We face risks and uncertainties associated with our corporate structure, as our control over our VIE and its subsidiaries is based on contractual arrangements rather than equity ownership. See “Risk Factors—Risks Related to Our Corporate Structure” and “History and Corporate Structure—Our Corporate Structure—Contractual Arrangements with our VIE and its shareholders.”

Our Industry

The travel industry in China has undergone rapid growth driven by several trends such as the rising disposable income, an expanding middle class, growing consumer demand for travel, rising car ownership, new emerging travel transportation means such as high speed rail, and supportive government policies. Total revenue of China’s travel industry grew from RMB1.16 trillion in 2008 to RMB2.57 trillion in 2012, representing a compound annual growth rate, or CAGR, of 22.0%, according to iResearch. The online travel market in China grew from RMB48.6 billion in 2008 to RMB170.9 billion in 2012, representing a CAGR of 36.9%, and shows significant growth potential driven by a growing number of Internet users and increasing use of the Internet for travelers to search and purchase travel products, according to iResearch.

Although advancements with the Internet have greatly improved the travel industry’s ability to distribute information and process transactions, the travel distribution system in China remains fragmented, complex and technologically underdeveloped. As a result, Chinese travelers, especially leisure travelers, are significantly underserved and TSPs’ ability to improve yield management is considerably hindered.

We believe we are uniquely positioned in China’s travel industry and we are transforming the way Chinese people shop for travel online. We have developed a search-based travel commerce platform to solve the challenges faced by different participants in China’s travel industry by aggregating highly fragmented travel information for travelers and connecting TSPs directly to consumers, thereby creating a more transparent, efficient distribution system for travel products.

Our Strengths

We believe the following strengths have contributed to our success and allowed us to achieve our market leading position:

 

   

our industry position as the leading travel website addressing the unique needs of the travel market in China;

 

 

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our advanced and scalable proprietary technology;

 

   

our superior user experience and strong brand recognition;

 

   

our large and diversified customer base; and

 

   

our visionary and entrepreneurial management team and supportive shareholders.

Our Strategies

Our goal is to empower Chinese travelers to define their travel experience. We intend to achieve this goal by pursuing the following strategies:

 

   

continue to improve our user experience;

 

   

further enhance our value proposition to TSPs;

 

   

continue to develop our mobile platform; and

 

   

pursue selective strategic alliances and acquisitions.

Our Challenges

Our ability to achieve our goal and execute our strategies is subject to risks and uncertainties, including the following:

 

   

our historical operations at a loss and our ability to be profitable in the future;

 

   

our ability to manage growth effectively;

 

   

our ability to continue to innovate and provide attractive products and services to our users;

 

   

our ability to effectively monitor the service quality of TSPs;

 

   

our ability to successfully respond to competition;

 

   

our ability to manage risks associated with intellectual property rights and other legal claims; and

 

   

our ability to attract, train and retain qualified personnel.

You should refer to “Risk Factors”, beginning on page 14, for a more detailed discussion of the risks involved in investing in our ADSs.

History and Corporate Structure

Mr. Frederick Demopoulos, Mr. Chenchao (CC) Zhuang and Mr. Douglas Khoo launched www.qunar.com, which was then registered under Mr. Zhuang’s personal name, in May 2005 to provide online travel search services. In March 2006, the VIE was established in the PRC and commenced operations of online travel search business. In July 2006, Qunar Cayman Islands Limited, or Qunar Cayman, was incorporated in the Cayman Islands.

We are a holding company and we conduct our operations primarily through our subsidiaries and affiliated entities in China. PRC laws, regulations and rules currently restrict foreign-invested entities from engaging in the operation of Internet-related businesses in China. To comply with PRC laws, regulations and rules, we operate our www.qunar.com website through the VIE. In October 2006, through the WFOE, we entered into certain

 

 

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contractual arrangements (as amended and restated in October 2012) with the VIE and its shareholders, through which we obtained effective control over the operations of the VIE.

The contractual arrangements in connection with our VIE include (i) a Restated Exclusive Technical Consulting and Services Agreement which will continue to be in effect until terminated by the WFOE, (ii) a Restated Loan Agreement which will continue indefinitely until such time as (a) the Baidu nominee and Mr. Chenchao (CC) Zhuang receive a repayment notice from the WFOE and the Baidu nominee and Mr. Chenchao (CC) Zhuang fully repay the loans, or (b) an event of default (as defined therein) occurs unless the WFOE sends a notice indicating otherwise within 15 calendar days after it becomes aware of such event, (iii) a Restated Equity Option Agreement which will remain effective with respect to each of the VIE’s shareholders until all of his or her equity interest has been transferred or we terminate the agreement unilaterally with a 30-day prior written notice, (iv) an Equity Interest Pledge Agreement which became effective upon registration and will expire when all obligations under the aforementioned loan agreement, equity option agreement and exclusive technical consulting and services agreement have been satisfied, or the pledgor completes a transfer of equity interest pursuant to the aforementioned equity option agreement so that it no longer holds any equity interest in the VIE, and (v) Powers of Attorney which will remain in force until the Baidu nominee or Mr. Chenchao (CC) Zhuang, as the case may be, no longer holds any equity interest in the VIE. Please refer to “History and Corporate Structure—Our Corporate Structure” for more details about such contractual arrangements.

If the VIE or its shareholders fail to perform their obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control, and if we are unable to maintain effective control over the VIE, we may not be able to continue to consolidate the VIE’s financial results with our financial results. The VIE contributed 16.6%, 22.7%, 13.4% and 9.4% of our total consolidated revenues for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013, respectively. For a detailed description of the risks associated with our corporate structure and the contractual arrangements that support our corporate structure, including risks and uncertainties regarding the validity of these contractual arrangements, the control that these contractual arrangements grant us, our relationships with the shareholders of the VIE, the consequences of the VIE’s bankruptcy and adverse tax consequences of these contractual arrangements, see “Risk Factors—Risks Related to Our Corporate Structure.”

As a holding company, our ability to pay dividends depends on dividends paid to us by our WFOE. Pursuant to PRC laws and regulations, (i) our WFOE in China can pay dividends to us only out of its accumulated profits, (ii) our WFOE is required to set aside at least 10% of its after tax profits each year to fund certain statutory reserve funds until the aggregate amount of such reserve funds reaches 50% of its registered capital, and such reserve funds are not distributable as cash dividends, and (iii) any instruments governing our WFOE’s debts may restrict its ability to pay dividends or make other payments to us. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain routine procedural requirements. Therefore, our WFOE is able to pay dividends in foreign currencies to us without prior SAFE approval.

We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our WFOE and VIE in China. All of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action in the United States against us or against these individuals in the event that you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more

 

 

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information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

Since 2006, we have completed various rounds of equity financing. In July 2011, we entered into an agreement with Baidu Holdings Limited, a wholly-owned subsidiary and investment vehicle of Baidu, Inc., a Cayman Islands company listed on the NASDAQ Global Select Market. We refer to Baidu, Inc. and its subsidiaries as Baidu. Pursuant to the agreement, Baidu paid US$306 million to acquire 181,402,116 of our ordinary shares and became our majority shareholder. We continued to operate independently after this transaction with Baidu, or the Baidu Transaction. See “History and Corporate Structure—Baidu Transaction.”

The following diagram illustrates our corporate structure, the places of formation and the ownership interests of our significant subsidiaries, the VIE and its significant subsidiaries immediately following this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

LOGO

For more information about the business operations of each of the subsidiaries and affiliated entities shown in the diagram above, please refer to “History and Corporate Structure—Our significant subsidiaries and affiliated entities.”

Corporate Information

Our principal executive offices are located at 17th Floor, Viva Plaza, Building 18, Yard 29, Suzhou Street, Haidian District, Beijing, People’s Republic of China. Our telephone number at this address is +86 10 5760 3000.

 

 

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Our registered office in the Cayman Islands is located at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KYI-1104 Cayman Islands.

Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, Suite 4D, New York, NY 10017.

Our website can be found at www.qunar.com. The information contained on our website is not a part of this prospectus.

 

 

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THE OFFERING

 

Offering price

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

 

Total ADSs offered by us:

             ADSs

 

Over-allotment option

We have granted the underwriters an option to purchase up to                      additional ADSs to cover over-allotments. The underwriters may exercise this option within 30 days from the date of this prospectus.

 

The ADSs

Each ADS represents          of our Class B ordinary shares, par value US$0.001 per share. The ADSs may be evidenced by an ADR.

 

  We have entered into a deposit agreement with Deutsche Bank Trust Company Americas, who will hold the Class B ordinary shares represented by the ADSs as depositary. The deposit agreement governs the relationship between the depositary and the holders of the ADSs. We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

  If we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class B ordinary shares, after deducting its fees and expenses. You may turn in your ADSs to the depositary in exchange for Class B ordinary shares. The depositary will charge you fees for any exchange.

 

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

 

Private Placement

In conjunction with, and subject to, the completion of this offering, Jaguarundi Partners, LLC, or Jaguarundi, a company incorporated in the State of Delaware and associated with David Bonderman, has agreed to purchase from us                      Class B ordinary shares at a per share price equal to the initial public offering price of our ADSs divided by the number of ordinary shares represented by each ADS, for a total purchase price of US$5.0 million. This investment is being made pursuant to an exemption from registration with the U.S. Securities and Exchange Commission under section 4(a)(2) of the Securities Act. See “Underwriting” for more information.

 

ADSs outstanding immediately after this offering

                     ADSs (or                      ADSs if the underwriters exercise the over-allotment option in full)

 

 

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Ordinary shares

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. On all matters subject to shareholders’ vote, holders of Class A ordinary shares are entitled to three votes per share, while holders of Class B ordinary shares are entitled to one vote per share. We plan to issue Class B ordinary shares represented by our ADSs in this offering. In addition, all options granted prior to or to be granted after the completion of this offering entitle option holders to the equivalent number of Class B ordinary shares once the options are vested and exercised. Upon any sale, pledge, transfer, assignment or disposition of a Class A ordinary share by its holder to any person who is not already a holder of Class A ordinary shares, such Class A ordinary share shall automatically convert into one Class B ordinary share without any actions on the part of the transferor or the transferee. Except as provided in our memorandum and articles of association, Class A ordinary shares are not convertible into Class B ordinary shares. In no event shall Class B ordinary shares be convertible into Class A ordinary shares. For more information on our ordinary shares, you should refer to the “Description of Share Capital” section of this prospectus.

 

Ordinary shares outstanding immediately after this offering and the private placement

                     ordinary shares (or                      ordinary shares if the underwriters exercise the over-allotment option in full), comprised of (i) 303,344,804 Class A ordinary shares, par value US$0.001 per share, and (ii)                      Class B ordinary shares, par value US$0.001 per share (or                      Class B ordinary shares if the underwriters exercise their over-allotment option in full), which includes                      Class B ordinary shares issued and offered by us to Jaguarundi in connection with its investment in our Class B ordinary shares.

 

Reserved ADSs

At our request, the underwriters have reserved up to 7% of the ADSs sold in this offering for our directors, officers, employees and business associates, to be sold at the initial public offering price.

 

Use of proceeds

Our net proceeds from this offering and the investment by Jaguarundi in our Class B ordinary shares will be about US$         million, assuming an initial public offering price per ADS of US$        , the midpoint of the estimated public offering price range, and assuming no exercise of the underwriters’ over-allotment option.

 

  We intend to use the net proceeds from this offering and the investment by Jaguarundi in our Class B ordinary shares for investment in our technology, infrastructure and product development efforts, expansion of our sales and marketing efforts, and general corporate purposes, including working capital needs and potential acquisitions (although we are not currently negotiating any such acquisitions).

 

  See “Use of Proceeds” for more information.

 

 

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Dividend policy

We have no current plan to pay dividends on our ordinary shares. We plan to retain any earnings for use in the operation of our business and to fund future growth.

 

Lock-up

We and all of our directors, executive officers, existing shareholders and certain option holders have agreed with the underwriters, subject to certain limited exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our ADSs or ordinary shares or securities convertible into or exercisable or exchangeable for our ADSs or ordinary shares, and Jaguarundi has agreed with the underwriters not to sell, transfer or dispose of any Class B ordinary shares it acquired in the private placement, other than the ADSs offered and sold in this offering, for a period of 180 days following the date of this prospectus. See “Underwriting” for additional information.

 

Risk factors

See “Risk Factors” for a discussion of risks relating to us, our industry, and the ADSs that you should carefully consider before deciding whether to invest in the ADSs.

 

Listing

Prior to this offering, there has been no public market for the ADSs or our ordinary shares.

 

  We have applied to have the ADSs listed on the NYSE under the symbol “QUNR.”

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment on                     , 2013, through the facilities of The Depository Trust Company, or DTC.

 

Depositary

Deutsche Bank Trust Company Americas

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

We present below our summary consolidated financial data for the periods indicated. The following summary consolidated statement of operations data for the years ended December 31, 2010, 2011 and 2012 and the summary consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

The following summary consolidated financial statements of operations data for the six months ended June 30, 2012 and 2013 and the summary consolidated balance sheet data as of June 30, 2013 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all normal recurring adjustments that we consider necessary for a fair presentation of our financial position and operating results for the periods presented.

The summary consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our historical results are not necessarily indicative of our results for any future periods.

 

    For the Year
Ended December 31,
    For the Six  Months
Ended June 30,
 
    2010     2011     2012     2012     2013  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except share and per share data)        

Consolidated Statement of Operations Data:

             

Revenues:

             

Pay-for-performance services

    104,572        216,932        422,234        68,797        170,054        316,157        51,513   

Display advertising services

    15,014        33,334        46,670        7,604        18,689        25,812        4,206   

Other services

    4,296        12,161        32,821        5,348        15,821        16,838        2,743   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    123,882        262,427        501,725        81,749        204,564        358,807        58,462   

Cost of revenues

    (23,086     (43,682     (95,787     (15,607     (40,174     (72,890     (11,876
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    100,796        218,745        405,938        66,142        164,390        285,917        46,586   

Operating expenses

             

Product developments(1)

    (28,975     (83,110     (187,266     (30,512     (81,475     (120,416     (19,620

Sales and marketing(1)

    (62,481     (134,246     (243,800     (39,724     (111,189     (140,984     (22,972

General and administrative(1)

    (13,418     (43,135     (50,574     (8,241     (24,964     (40,908     (6,665
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (4,078     (41,746     (75,702     (12,335     (53,238     (16,391     (2,671

Interest income, net

    764        1,767        832        136        857        215        35   

Foreign exchange gain (loss), net

    430        (33     (656     (107     (20     (438     (71

Other income, net

    2        6        363        59        187        522        85   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (2,882     (40,006     (75,163     (12,247     (52,214     (16,092     (2,622

Income tax expense

    (1,492     (5,945     (15,950     (2,599     (11,883     (833     (136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (4,374     (45,951     (91,113     (14,846     (64,097 )       (16,925     (2,758
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deemed dividend

    —          (31,181     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

    (4,374     (77,132     (91,113     (14,846     (64,097     (16,925  

 

(2,758

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per ordinary share—basic

    (0.12     (0.51     (0.32     (0.05     (0.23     (0.06     (0.01

Net loss per ordinary share—diluted

    (0.12     (0.51     (0.32     (0.05     (0.23     (0.06     (0.01

Weighted average number of shares used in computation of basic net loss per ordinary share

    36,246,976        151,820,420        281,682,508        281,682,508        281,682,508        295,804,889        295,804,889   

Weighted average number of shares used in computation of diluted net loss per ordinary share

    36,246,976        151,820,420        281,682,508        281,682,508        281,682,508        295,804,889        295,804,889   

Foreign currency translation adjustment

    (3,739     (5,491     (542     (88     507        (5,593     (911
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to ordinary shareholders

    (8,113     (51,442     (91,655     (14,934     (63,590 )       (22,518     (3,669
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Non-GAAP Financial Data:

             

Adjusted net income/(loss)(2)

    460        (9,865     (57,257     (9,329     (46,157     382        62   

Adjusted EBITDA(2)

    4,025        2,771        (24,010     (3,912     (27,196     13,667        2,227   

 

 

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(1) Share-based compensation expenses were allocated in the operating expenses as follows:

 

    Years Ended December 31,     Six Months Ended June 30,  
        2010             2011             2012         2012     2013  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Product developments

    2,356        13,546        15,241        2,483        7,835        7,699        1,255   

Sales and marketing

    1,152        5,471        6,573        1,071        4,178        1,910        311   

General and administrative

    1,326        9,437        5,392        879        2,602        4,738        772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total share-based compensation expenses

      4,834        28,454        27,206          4,433        14,615        14,347        2,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) See “—Non-GAAP Financial Measures.”
     As of December 31,     As of June 30,  
     2011     2012     2013  
     RMB     RMB     US$     RMB     US$  
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

     123,445        148,511        24,198        285,579        46,531   

Short-term investments

     98,394        521        85        185,343        30,199   

Accounts receivable

     37,851        45,631        7,435        72,618        11,832   

Funds receivable

     3,347        30,838        5,025        117,045        19,071   

Total current assets

     290,546        359,478        58,572        926,794        151,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

     25,058        32,298        5,262        34,918        5,689   

Total assets

     320,973        392,352        63,928        970,261        158,090   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     193,020        315,016        51,327        540,826        88,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     196,158        332,610        54,194        559,296        91,129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity

     998,666        998,666        162,718        998,666        162,718   

Ordinary shares (US$ 0.001 par value; 800,000,000 shares authorized; 181,402,116, 181,402,116 and 203,064,412 shares issued and outstanding as of December 31, 2011, December 31, 2012 and June 30, 2013, respectively)

     1,172        1,172        191        1,306        213   

Additional paid-in capital

     (742,946     (716,364     (116,721     (342,757     (55,847

Accumulated other comprehensive income

     (11,061     (11,603     (1,891     (17,196     (2,802

Accumulated deficit

     (121,016     (212,129     (34,563     (229,054     (37,321
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ deficit

     (873,851     (938,924     (152,984     (587,701     (95,757
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, mezzanine equity and shareholders’ deficit

     320,973        392,352        63,928        970,261        158,090   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We did not declare or pay any cash dividends during the year ended December 31, 2010. We declared cash dividends in 2011 in connection with the Baidu Transaction and paid such cash dividends in 2011 and 2012. For more information about these cash dividend payments, please see Note 14 of the Notes to the Consolidated Financial Statements for the Years ended December 31, 2010, 2011 and 2012 included in this prospectus.

Non-GAAP Financial Measures

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use Adjusted net income/(loss) and Adjusted EBITDA as additional non-GAAP financial measures. We present these non-GAAP financial measures because they are used by our management to evaluate our operating performance, formulate business plans, and make strategic decisions on capital allocation. These non-GAAP financial measures enable our management to assess our operating results without considering the impact of non-cash charges, including share-based payments, depreciation and amortization, and expenses relating to free user traffic contributed by Baidu. Furthermore, these non-GAAP financial measures eliminates the impact of items that we do not consider indicative of the performance of our business. We also believe that these non-GAAP

 

 

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financial measures provide useful information to investors and others in understanding and evaluating our operating performance and consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

Adjusted net income/(loss)

We define Adjusted net income/(loss) as net loss or income excluding share-based compensation expenses, non-cash expenses relating to free user traffic contributed by Baidu, Inc., which shall continue for an initial term of three years starting from July 2011, and expenses relating to the Baidu Transaction. Adjusted net income/(loss) eliminates the effect of share-based compensation expenses and non-cash expenses relating to free user traffic contributed by Baidu which have been and will continue to be significant recurring factors in our business, as well as the expenses relating to the one-time event of the Baidu Transaction. The use of Adjusted net income/(loss) has material limitations as an analytical tool, as Adjusted net income/(loss) does not include all items that impact our net loss or income for the period. For more information about the free user traffic contributed by Baidu, Inc., please see “Selected Consolidated Financial Data—Non-GAAP Financial Measures.”

Adjusted EBITDA

Adjusted EBITDA, as we present it, represents net income or loss before income taxes, interest expenses, depreciation and amortization, further adjusted to exclude share-based compensation expense, non-cash expenses relating to free user traffic contributed by Baidu, Inc. and expenses relating to the Baidu Transaction.

The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expense that affect our operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation expense, amortization, income taxes and interest expenses, as well as share-based compensation expenses and non-cash expenses relating to free user traffic contributed by Baidu, Inc. have been and may continue to be incurred in our business and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider changes in working capital, capital expenditures and other investing activities and should not be considered as a measure of our liquidity. The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP.

 

 

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We compensate for these limitations by reconciling the non-GAAP financial measures to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating our performance. The following table reconciles our Adjusted net income/(loss) and Adjusted EBITDA in the years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net loss:

 

     For the Year
Ended December 31,
    For the Six Months Ended
June 30,
 
     2010     2011     2012     2012     2013  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net loss

     (4,374 )      (45,951 )      (91,113 )      (14,846 )      (64,097     (16,925     (2,758
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add:

              

Share-based compensation expenses

     4,834        28,454        27,206        4,433        14,615        14,347        2,338   

Non-cash expenses relating to free user traffic contributed by Baidu, Inc.

     —          1,200        6,650        1,084        3,325        2,960        482   

Expenses relating to Baidu Transaction

     —          6,432        —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income/(loss) (non-GAAP)

     460        (9,865 )      (57,257 )      (9,329 )      (46,157     382        62   

Add:

              

Income tax expense

     1,492        5,945        15,950        2,599        11,883        833        136   

Depreciation

     2,073        6,691        16,876        2,750        7,078        10,719        1,747   

Interest expense

     —          —          421        69        —          1,733        282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (non-GAAP)

     4,025        2,771        (24,010 )      (3,912 )      (27,196     13,667        2,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In light of the foregoing limitations for each of the non-GAAP financial measures, when assessing our operating and financial performance, you should not consider Adjusted net income/(loss) or Adjusted EBITDA in isolation or as a substitute for our net loss, operating loss or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, because these non-GAAP measures may not be calculated in the same manner by all companies, they may not be comparable to other similar titled measures used by other companies.

 

 

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RISK FACTORS

Investing in our ADSs involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our ADSs. The risks and uncertainties described below are not the only ones that we may face.

If any of the following risks actually occur, they may harm our business, financial condition and operating results. In this event, the market price of our ADSs could decline and you could lose some or all of your investment.

Risks Related to Our Business

We have operated at a loss and we may not be profitable in the near future.

We have not achieved profitability. We may not be able to achieve profitability or avoid net losses in the future. Although our revenues have grown significantly in recent periods, such growth rates may not be sustainable and may decrease in the future. In addition, our ability to become profitable depends on various factors, including our ability to control our costs and expenses, which we expect will increase as we expand our business and invest more in product developments and sales and marketing. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus, and we may further encounter unforeseen expenses, difficulties, complications, delays and other unknown events. If our revenues fail to increase at the rate we anticipate, or if our costs and expenses increase at a more rapid rate than our revenues, we may not be able to achieve profitability and may incur greater losses.

Our growth may slow down and we may not be able to manage our future growth effectively.

We have experienced rapid revenue growth since the commencement of our operations. Our total annual revenues grew by 111.8% from RMB123.9 million in 2010 to RMB262.4 million in 2011 and by 91.2% to RMB501.7 million (US$81.7 million) in 2012. Our web users increased from 71.7 million to 110.2 million and 187.3 million over the same periods. Our revenue grew by 75.4% from RMB204.6 million in the six months ended June 30, 2012 to RMB358.8 million (US$58.5 million) in the six months ended June 30, 2013. The number of our web users was 203.2 million in the 12-month period ended June 30, 2013. While we expect our business to grow, we may not be able to maintain our historical growth rates in future periods. Revenue growth may slow or revenues may decline for any number of reasons, including our inability to attract and retain users, decreased customer spending, increased competition, slowing growth of the overall online travel market, the emergence of alternative business models, changes in government policies or general economic conditions. As the size of our user base continues to increase, we anticipate that the growth rate of our user base will decline over time. We may also lose users for other reasons, such as failure to deliver satisfactory search results or transaction experience or high quality services. In addition, even if our user base continues to grow, there can be no assurance that our revenues will grow at the same rate, or at all. If our growth rates decline, investors’ perception of our business and business prospects may be adversely affected.

We intend to increase our service offerings to achieve future growth. In doing so, we will need to work with a large number of new travel service providers, or TSPs, and efficiently establish and maintain mutually beneficial relationships with our existing and new TSPs. To support our growth, we will also need to implement a variety of new and upgraded managerial, operating, financial and human resource systems, procedures and controls. These efforts will place significant strain on our management and resources, and failures to effectively manage our growth will materially and adversely affect our financial condition and business prospect.

If we do not continue to innovate and provide attractive products and services to our users, we may not be able to retain a large and active user base and our financial condition and operating results could suffer.

Our success depends on our ability to retain and attract users, which require our continuous innovation to provide features and functions that make our website and mobile applications attractive to users. Participants in

 

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the online travel industry are constantly developing new technologies and products and services. If we fail to innovate and improve our technology at a competitive pace, we may lose users to our competitors. Constantly changing user preferences have affected and will continue to affect the online travel industry. We must stay abreast of emerging user preferences and be able to anticipate trends that will appeal to existing and potential users. We have developed products and services, such as itinerary management tools and location-based services, that are relatively new to users and they may not be able to achieve popularity. If we fail to constantly tailor our products and services to accommodate our users’ changing needs and preferences, we may lose users. Decreases in our user traffic would significantly affect our business, resulting in fewer qualified clicks and less demand for our advertising services, which would materially and adversely affect our financial condition and operating results.

We may not be able to adequately monitor or ensure the TSPs’ service quality, and increases in user dissatisfaction with the TSPs could materially and adversely affect our results of operations.

We do not provide the travel products users find through our website or mobile platform. We redirect our users to the TSPs to purchase travel products shown in our search results and other promotional programs on our website and mobile platform. Certain TSPs may lack adequate quality control for their travel products and customer service. Although we do not have a legal obligation to ensure the quality of TSPs’ travel products and services, our reputation, brand and user experience are negatively affected if the TSPs fail to provide high quality travel products to our users.

Substantial demand has been, and will continue to be, placed on our operational, technological and other resources to ensure that our TSPs provide high quality travel products and services to our users on a consistent basis. For example, we have established a user service center with a dedicated team to handle user complaints against TSPs and monitor TSPs’ performance on a regular basis. We also screen our TSPs by reviewing copies of their requisite licenses and permits prior to including them in our search results. However, we cannot ensure that our TSPs will not fail to provide quality products and services to our users. Similarly, we cannot ensure that every TSP has obtained, and duly maintained, all of the licenses and permits required for them to provide travel products to consumers.

Our ability to control TSPs’ service quality is limited, and the actions we take to monitor and ensure quality products and services from the TSPs may be inadequate in timely discovering and remedying quality issues, many of which are beyond our control. There have been user complaints against us due to the TSPs’ failure to provide satisfactory travel products or services. If our users are dissatisfied with the travel products and services provided by our TSPs, they may reduce their use of, or completely forgo, our website or mobile platform, and in certain rare cases, demand refunds from us for their payments to the TSPs. Increases in user dissatisfaction with TSPs could reduce our user traffic and materially and adversely affect our results of operations.

Competition could adversely affect us.

We operate in the highly competitive and rapidly evolving travel industry in China. Our unique business model as a search-based travel commerce platform caused us to maintain a cooperative-competitive relationship with some of our competitors as they are also our TSPs or even customers. In the online travel sector, we compete primarily with other service providers who also provide online flight and hotel booking services, such as Ctrip.com, or Ctrip, and e-commerce websites, such as the travel channel of Taobao.com. We also compete with other travel search providers and traditional travel agencies. Certain current and potential competitors, including online travel agency(ies), or OTA(s), non-OTA TSPs, travel channels of general portals, general search engines and e-commerce websites, have a longer history, larger user base, greater brand recognition and significantly greater financial, marketing, personnel, technical and other resources than us. Intense competition may lead to various unfair competition practices or legal or administrative proceedings brought against us by our competitors. For example, we and Ctrip have been in dispute over various matters, including Ctrip’s alleged prevention of its TSPs from establishing customer relationships with us.

 

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In connection with the Baidu Transaction in July 2011, Baidu agreed not to engage in certain businesses that may cause it to compete with us until Baidu ceases to hold 50% or more of the voting power attaching to our shares or July 2014, whichever is later. Once this non-compete agreement expires and if Baidu decides to enter into the same business as ours, our competitive landscape may change, and we may face increased competition.

Meanwhile, due to the cooperative-competitive relationship between the TSPs and us, our website displays and provides links to information from some of our competitors. Certain TSPs may block our access to their information or make claims against us alleging that we inappropriately used their information. The comprehensiveness of our search results could be impaired if we are denied access to travel product information from these certain TSPs. In addition, certain TSPs may leverage their established reputation or relationships to prevent other TSPs from becoming our customers, which would limit our ability to generate more revenues.

Our industry is characterized by relatively low fixed costs. New competitors face low entry barriers. In addition, new and enhanced technologies may help new entrants to compete with us. Smaller companies or new competitors may be acquired by, receive investment from or enter into strategic alliances with well-established and well-financed companies or investors which would help enhance their competitive positions. Some of our competitors may devote greater resources to marketing and promotional campaigns and technological development than us.

We face competition for display advertising services from both online advertising service providers, such as travel-related websites and the travel channels of general portals, and traditional advertising media, such as television, radio, newspapers, magazines, billboards and other forms of outdoor media. Many large companies in China allocate, and will likely continue to allocate, larger budgets to traditional advertising media and a small portion to online marketing. If we cannot attract more online marketing spending from large companies in China, or if our existing display advertisers reduce their online marketing spending with us, our ability to generate revenues from display advertising could be restrained and our operating results could be adversely affected.

We may also face competition from foreign travel service or travel information providers if they enter the China market by partnering with or acquiring our existing competitors. These foreign competitors may leverage their global brand recognition, broad geographical presence and sophisticated technologies to quickly attract Chinese users who seek travel-related information online. These competitors may also be able to devote greater resources than we can to establish and customize their online travel information platform to satisfy changing user demands and market needs.

Increased competition could result in reduced user traffic and loss of market share for us. If we do not compete successfully against existing and future competitors, we may lose our leadership position, and our business, results of operations and financial condition may be materially and adversely affected.

We have limited experience and operating history in developing and providing new service offerings, which may negatively affect our business, financial condition and results of operations.

As part of our growth strategy, we intend to develop and offer new services to satisfy the evolving needs of our users and customers. In 2011 and 2012, we launched travel group buying services and new hotel promotion services, such as “last-minute sale” promotion and “opaque booking” reservations. We have limited experience and operating history in developing and operating these new services. These and other new services we may offer in the future present operating and marketing challenges that are different from those we currently encounter. In addition, the market for some of these new services, such as the group buying services, is highly competitive due to a number of factors, such as the relatively low barriers to entry, the continued growth of e-commerce in China and the growing acceptance of online shopping by Chinese Internet users. If we fail to successfully develop and operate these new services in an increasingly competitive market, we may not be able to capture the growth opportunities associated with these new services or recover the developing and marketing costs, and our future results of operations and growth strategies could be materially and adversely affected.

 

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If our customers or other advertisers choose to reduce or eliminate the fees they pay us, or choose not to advertise with us, our results of operations could be materially and adversely affected.

We derive revenues primarily from fees paid by our customers, most of whom are our TSPs, for qualified clicks generated by users of our search service, as well as from display advertisements. Since we do not have long-term contracts with most of our customers or advertisers, these customers or advertisers may choose to modify or discontinue their relationship with us, block our access to their travel product information or reduce the fees paid to us for clicks generated from our platform.

In addition, our customers and advertisers may not continue to do business with us if their investment does not generate expected clicks and ultimately consumers, or if we do not deliver their travel product information in our search results in an appropriate and effective manner. Third parties may develop and use certain technologies to block the display of advertisements on our website or mobile applications, which may in turn cause us to lose advertisers. Failure to retain our existing customers and advertisers or attract new customers and advertisers could seriously harm our business, operating results and growth prospects.

The proper functioning of our website and operating platform is essential to our business. Any failure to maintain the satisfactory performance and security of our website and operating platform will materially and adversely affect our business operations, reputation, financial condition and results of operations.

The satisfactory performance, reliability and availability of our website, SaaS system and mobile applications are critical to our ability to attract and retain users and provide quality service to our users. Our revenues depend primarily on the number of clicks generated by our users and the quantity of advertising we sell. Any system interruptions caused by our servers, telecommunications failures, computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or SaaS system would reduce the number of users visiting our website. Some of the telecommunications carriers have system constraints which can affect our user experience. For example, if a large number of users use the same telecommunications carrier at the same time for services requiring a large amount of data transmission, the users could experience reduced speed or other technical issues due to the carrier’s capacity restraints. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins, or other potential disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and process user queries. We may also experience interruptions caused by reasons beyond our control such as power outages. Unexpected interruptions could damage our reputation and result in a material decrease in our revenues.

In addition, our Internet systems, including our website, SaaS system and our mobile applications, could contain undetected errors or “bugs” that could adversely affect their performance. We regularly update and enhance our website and our other Internet systems and introduce new versions of software products and applications. The occurrence of errors in any of these may cause us to lose market share, damage our reputation and brand name, and materially and adversely affect our business.

If we fail to adopt new technologies or adapt our website and systems to changing user requirements, increasing traffic or emerging industry standards, our business may be materially and adversely affected.

The online travel industry is subject to rapid technological changes. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our website and mobile platform. The online travel industry is also characterized by rapid technological evolution, changes in user requirements and preferences, and the introductions of new travel products and services embodying new technologies that could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. The development of websites and other proprietary technology entails significant technical and business risks. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require substantial expenditures to modify or adapt our travel products, services or

 

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infrastructure. We may not be able to use new technologies effectively or adapt our website, proprietary technologies, transaction-processing systems and management systems to user requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner to changing market conditions or user requirements, whether for technical, legal, financial or other reasons, our business, financial condition and results of operations may be materially and adversely affected.

We have a proprietary software system that supports nearly all aspects of our service. Our business may be harmed if we are unable to upgrade our system and infrastructure fast enough to accommodate increasing traffic levels, or to avoid obsolescence, or successfully integrate any newly developed or purchased technology with our existing system. Capacity constraints could cause unanticipated system disruptions, slower response times, poor user experience, impaired quality and speed of reservations and confirmations, and delays in reporting accurate financial and operating information. These factors could cause us to lose users and TSPs. Additionally, we will continue to upgrade and improve our technology infrastructure to support our business growth. However, we cannot assure you that we will be successful in executing these system upgrades and improvement strategies. In particular, our system may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a timely basis, or at all. If our existing or future technology infrastructure does not function properly, it could cause system disruptions and slow response times that affect data transmission, which in turn could materially and adversely affect our business, financial condition and results of operations.

If we are unable to develop services compatible with new mobile devices and technologies, we may fail to successfully capture and retain a significant portion of the growing number of users that access online travel products and services through mobile devices.

Capturing a greater share of the growing number of users that access the Internet through smartphones and other mobile devices by developing new mobile applications is one of our business strategies. The lower functionality, speed and memory generally associated with mobile devices make the use of our services through such devices more difficult, and the versions of the mobile applications we develop for these devices may fail to prove compelling to users, manufacturers or distributors of mobile devices. Manufacturers or distributors of mobile devices may establish unique technical standards for their devices, and our mobile applications and services may not work or be viewable on these devices as a result. As new mobile devices and technologies are continually being released, it is difficult to predict the problems we may encounter in developing or adapting new versions of our mobile applications to these devices and technologies and we may need to devote significant resources to the creation, support, and maintenance of such mobile applications. If we are slower than our competitors in developing attractive mobile applications that are adapted for such devices, we may fail to capture and retain a significant portion of the growing number of users who access services through mobile devices, and we may also lose our existing users, either of which could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to establish, maintain and deepen relationships with TSPs.

Our ability to attract users to our website and use our mobile applications depends in large part on providing a comprehensive set of query results. To do so, we maintain relationships with TSPs to include their travel product data in our query results. The loss of existing relationships with TSPs, or an inability to continue to add new ones, may result in search results with incomplete pricing, availability and other information important to our users. This deficiency could reduce users’ confidence in the query results we provide, making us less popular among our users.

With respect to our flight and fare information, we currently have supplier relationships with most major domestic airlines in China and certain international airlines operating flights from and to China. However, these airlines may enter into similar arrangements or other relationship with our competitors, which may offer better terms than we do. If we lose any of our airline suppliers, we would be unable to continue to display travel data

 

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from such airlines, which would reduce the breadth of our query results. The number of users using our services could decline, making us unattractive to our users and resulting in a loss of revenues and a decline in our operating results.

In order to provide high quality search service and comprehensive information about air tickets, we retrieve ticket availability information from China’s sole global distribution systems, or GDS, pursuant to certain contractual arrangements. The GDS may decide to limit the information that they provide to us or even stop working with us due to commercial or other reasons. In addition, our cost to obtain data from the GDS may significantly increase. The loss or deterioration of the relationship with such GDS may affect the comprehensiveness and accuracy of flight information available on our platform or increase our operating costs, which would negatively impact users’ experience or adversely affect our financial condition and results of operations.

Brand name hotels from major hotel chains compose a significant portion of the hotel choices offered on our website. A loss of any one of these hotel chains as a TSP, or a loss of any one of these chains as a provider of travel information to OTAs, could have a negative impact on our business, financial condition or results of operations. Although we have been actively trying to establish customer relationships with independent hotels to expand the reach of our hotel search, we may not be able to locate and attract those independent hotels due to technical, business or commercial reasons. If we fail to attract those independent hotels to become our customers, our growth prospects may be adversely affected.

In addition, in order to maintain and grow our business, we will need to maintain and strengthen relationships with our OTAs that are our existing customers and establish new customer relationships with other OTAs and TSPs to ensure that we have access to a steady supply of travel product information on favorable commercial terms. However, we may not be able to successfully maintain or strengthen the relationships with our existing OTA customers. For example, in September 2013, we early terminated an agreement, or the Inventory Distribution Agreement, with a PRC operating subsidiary of a PRC-based Nasdaq-listed OTA, because we believed that the counterparty had failed to perform its obligations under the agreement and hence had caused the purpose of the agreement not able to be achieved. The original term of the Inventory Distribution Agreement is from May 13, 2013 to June 30, 2016. The Inventory Distribution Agreement allowed us to experiment a new hotel distribution model under which the counterparty agreed to make its domestic and international hotel inventories available on our platform before certain specified time and pay us a commission on a CPS basis and we agreed to provide it with a minimum of 450,000 room night bookings from such inventories each quarter from July to December 2013, subject to an annual increase starting 2014. Under the Inventory Distribution Agreement, we agreed to compensate the counterparty on a RMB27 per room night basis for the room night bookings that we have failed to provide. Because we believed that the counterparty had failed to make its international hotel inventories available on our platform within the agreed time period despite our request to rectify such failure, we terminated the Inventory Distribution Agreement in early September 2013. We do not expect that the termination of the agreement will have a material impact on our future business operations because the counterparty is one of 1,240 OTA customers we had as of June 30, 2013 and the Inventory Distribution Agreement is one of several ways we have adopted to improve the hotel information comprehensiveness since early 2013. We are expanding our business relationships with hotels directly and have made significant progress in this respect to have approximately 53,360 hotel customers as of June 30, 2013. While the counterparty and we have a disagreement over which party has breached the Inventory Distribution Agreement, we have not been notified of any legal proceedings initiated by the counterparty against us as a result of our early termination of the Inventory Distribution Agreement and the counterparty has not made any Form 6-K filing in connection with such dispute despite the SEC requirement that a reporting foreign private issuer shall file a Form 6-K when a material event arises. Like other TSPs, such counterparty has been continuously using our standard P4P services charged on a CPC basis under a separate contract, which is immaterial to our overall business and financial performance, and has no dispute with us under that contract. Nevertheless, such counterparty may terminate its CPC business with us and bring a lawsuit against us during or after this offering, in which case we plan to defend our rights vigorously and may bring counterclaims against it.

 

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If the counterparty sues us, however, we cannot predict the exact claims or the outcome of such lawsuit, which may result in a significant amount of compensation to the counterparty for losses recognized by the court and may materially and adversely affect our results of operations. In addition, such disputes and lawsuits, if any, may cause negative publicity on us and divert our management’s attention. We also cannot assure you that we will be able to identify appropriate OTAs and other TSPs or enter into arrangements with them on favorable terms, if at all. Moreover, as part of our growth strategy, we plan to further expand our service offerings. If we fail to establish new customer relationships on favorable terms or our new service offerings fail to attract new customers due to any reason, the growth of our business may also be materially and adversely affected.

We may also lose TSPs for many other reasons, which may adversely affect our customer base, results of operations as well as users’ perception of the completeness of travel product offerings available on our platform. For example, if one of our TSPs merges or consolidates with, or is acquired by, another company with which we do not have a relationship, we may lose that TSP in our query results or as an advertiser. Similarly, we may lose a TSP if it goes out of business. Our pricing and other terms may affect our on-going business relationships with OTAs and other TSPs. For example, we temporarily suspended our business relationships with several hotel OTAs in China in April 2013 following disagreements on our new pricing terms. We may also be unable to obtain access, pricing or other terms from existing or new TSPs that are consistent with or more favorable than our current terms. A failure to retain current terms or obtain more favorable terms with TSPs could harm our business and operating results. As our agreements with TSPs typically are short-term and non-exclusive, if any of our TSPs establishes similar or more favorable relationships with our competitors, such TSPs may prevent or restrict us from accessing or using their data and hence our search results may be incomplete and unattractive to users. Moreover, if any of our TSPs does not have or loses the authority to sell certain travel products or services, it may cease selling such travel products or services at any time, which may adversely affect the accuracy of our search results, reputation and results of operations.

If the fragmented travel market in China becomes consolidated, our business model may lose value.

China’s size and population, imbalanced economic development and differences in consumer behavior across the country have created a highly complex, fragmented and diverse travel market. According to the China National Tourism Administration, there were 22,784, 23,690 and 24,944 travel agencies in China in 2010, 2011 and 2012, respectively. A majority of travel agencies tend to be unaffiliated and small local office operations. Users must work with a large number of small, independent TSPs either directly or through a network of OTAs, both of which can be difficult to manage. Such a fragmented travel market has caused difficulties for travelers to obtain comprehensive travel information while creating opportunities and value for our business model as a consolidator of travel information from those TSPs. If, however, TSPs start to form alliances, or merge or consolidate among themselves, there will be fewer but larger TSPs, which would make comprehensive travel information more readily available to users. If that happens, our business model may lose its value, and our business prospects, financial condition and results of operations may be adversely affected.

We are dependent on the leisure travel industry for a significant portion of our net revenues.

Historically, revenues from the leisure travel industry accounted for a significant portion of our total revenues. We expect that it will continue to represent a significant portion of our total revenues in the near future. Leisure travel, including leisure airline tickets and hotel room reservations, is dependent on personal discretionary spending levels. Demand for leisure travel services tends to decline, along with the advertising money spent by TSPs, during general economic downturns and recessions. Although the Chinese leisure travel industry has experienced rapid growth in the past decade, the recent slowdown of the PRC economy has led to a general decrease in leisure travel and travel spending in China. Reduction in our revenue from the leisure travel industry could materially and adversely affect our financial condition, operating results and business prospects.

We may be unable to maintain or increase our brand awareness and preference.

We have developed our user base primarily through word-of-mouth recommendations and have in the past incurred limited brand promotion expenses. We believe that the recognition and reputation of our “Qunar

 

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( LOGO )” brand among our target users and TSPs have contributed significantly to the growth and success of our business. User awareness, perceived quality and attributes of the “Qunar” brand are important aspects of our efforts to attract users to our website and mobile applications. Maintaining and enhancing our brand are critical to our business and competitiveness. Many factors, some of which are beyond our control, are important to maintaining and enhancing our brand. These factors include our ability to:

 

   

provide a compelling user experience of online travel searches;

 

   

maintain the popularity, attractiveness, diversity and quality of the services we offer;

 

   

increase brand awareness through various means of marketing and brand promotion activities; and

 

   

preserve our reputation and goodwill in the event of any negative media publicity toward our services, Internet security, or other issues affecting us or other online travel businesses in China.

Since some of our competitors may have more resources than we do, and can spend more advertising their brands and services, we may be forced to spend considerable money and other resources to preserve and increase our brand awareness. Should the competition for top-of-mind awareness and brand preference increase among online travel search companies, we may not be able to successfully maintain or enhance the strength of our brand. Even if we are successful in our branding efforts, such efforts may not be cost effective. If we are unable to maintain or enhance user and TSP awareness of our brand in a cost effective manner, our business, results of operations and financial condition would be adversely affected.

We are subject to payment-related risks.

We enable our users to make and our customers to accept payments through our SaaS system by working with various third-party online payment service providers such as Tenpay, 99Bill and Alipay. Because we rely on third parties to provide payment processing services, including processing payments made with credit cards and debit cards, it could disrupt our business if these companies become unwilling or unable to provide these services to us. We may be subject to human error, fraud and other illegal activities in connection with third-party online payment services.

In addition, we allow users to keep small amounts of account balance with us and transfer money to third parties on our SaaS system. We will be subject to risks related to user account abuse, human error, fraud and other illegal activities in connection with the user accounts. If our data security systems are breached or compromised, we may lose our ability to keep user account balances, accept credit and debit card payments from our users, process funds transfers, and we may be subject to claims for damages from our users and third parties, all of which could adversely and materially affect our reputation as well as our operating results.

Failure to protect confidential information of our users and network against security breaches could damage our reputation and substantially harm our business and results of operations.

We acquire personal or confidential information from users. The secure transmission of confidential information (such as users’ itineraries, hotel and other reservation information, credit card numbers and expiration dates, personal information and billing addresses) is essential to maintaining user confidence. Security breaches to our system, particularly the SaaS system, whether coming from internal or external sources, could significantly harm our reputation and business, and expose us to monetary loss or litigation.

Although we continuously strengthen our security measures, we cannot assure you that external attacks will not occur in the future, or that our existing security measures will prevent security breaches or attacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Any incident of security breach may affect the accessibility of our website, which could cause us to lose substantial user traffic and transaction volume. The risk of such security breaches is likely to increase as we grow and as the tools and techniques used in these types of attacks become more advanced. Meanwhile, we have limited control or influence over the security policies or measures adopted by third-party providers of online

 

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payment services through which our users make payment for transactions completed on our SaaS system. Although we do not believe that we will be held responsible for any illegal activities of third parties, any negative publicity on our website’s safety or privacy protection mechanism and policy could have a material and adverse effect on our public image and reputation. If we grant third parties greater access to our technology infrastructure in the future to provide more technology assistance to or other technical cooperation with TSPs and others, it may be more challenging for us to ensure the security of our SaaS system. Any security breach on our system or compromise of the information security measures of our TSPs and other third-party service providers could result in negative publicity, damage our reputation, expose us to risk of monetary loss or litigation, and may even subject us to regulatory penalties and sanctions, any of which could have a material and adverse effect on our reputation, business, financial condition and results of operations.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

We principally rely on trade secrets to protect our technology and know-how. We have devoted substantial resources to the development of our technology and know-how. In order to protect our technology and know-how, we rely significantly on confidentiality agreements or provisions with our employees, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we would not be able to assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive position.

We may not be able to adequately protect our intellectual property, which could harm the value of our brands and adversely affect our business.

We regard our intellectual property as critical to our success, and we rely on trademark, trade name, copyright, patent, trade secret and anti-unfair competition law, as well as confidentiality and/or license agreements to protect our proprietary rights. The protection of intellectual property rights in China may not be as effective as those in the United States or other countries. The steps we have taken may be inadequate to prevent the misappropriation of our technology. Reverse engineering, unauthorized copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without paying us. Moreover, unauthorized use of our technology could enable our competitors to offer services that are comparable to or better than ours, which could harm our business and competitive position. From time to time, we may have to enforce our intellectual property rights through litigation. Such litigation may result in substantial costs, diversion of resources and management attention. If we are not successful in protecting our intellectual property, it could have a material adverse effect on our business, results of operations and financial condition.

We have registered domain names for websites that we use in our business, such as qunar.com. If we lose the ability to use the domain name of qunar.com, we would be forced to incur significant expenses to market our services under a new domain name, which could substantially harm our business. In addition, our competitors could attempt to capitalize on our brand recognition by using domain names similar to ours. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of, our brand or our trademarks. Protecting and enforcing our rights in our domain names and determining the rights of others may require litigation, which could result in substantial costs and diversion of management attention.

In 2009, Guangzhou Qu Na Information Technology Co., Ltd., or Guangzhou Qu Na, an unaffiliated third party, launched and operated “quna.com”, a “copycat” of our website “qunar.com”. From September to October 2009, Guangzhou Qu Na filed oppositions against all our trademark applications for our online travel-related service brands that had been preliminarily approved by the PRC Trademark Office. In April 2011, we filed a

 

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lawsuit against Guangzhou Qu Na over its unfair competition with the Guangzhou Intermediate People’s Court. The PRC Trademark Office ruled in our favor in each of the eight trademark oppositions that Guangzhou Qu Na filed against us in the period from October 2011 to February 2012. In June 2013, Guangzhou Intermediate People’s Court issued a judgment largely in our favor, ordering Guangzhou Qu Na to cease using “ LOGO ,” “ LOGO ,” “ LOGO ,” and “quna.com” as its service marks, and cease using and transfer to us the domain names of “quna.com,” “123quna.com,” and “mquna.com.” Guangzhou Qu Na and we have each filed an appeal against each other with the Guangdong Higher People’s Court on June 20, 2013 on its judgment. Currently, the case is pending appellate decision. While we intend to vigorously pursue our legal rights in PRC courts, we may not be able to obtain or enforce favorable rulings in China in a satisfactory manner. “Copycat” websites may misappropriate, dilute, or damage our brand and the functionality of our website and misdirect user traffic from our website, which could adversely affect the growth of our user base. In addition, any measures that we may take to protect our right may require us to expend significant financial or other resources and may detract management attention. Any of these factors may have material adverse effect on our business and growth prospects.

Claims by third parties that we infringe on their intellectual property rights or that our website or TSPs’ web outlets hosted by us contain errors or false or misleading information could lead to government administrative actions and result in significant costs and have a material adverse effect on our business, results of operations and financial condition.

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon patents, copyrights, know-how or other intellectual property rights held by third parties. We have been in the past, and may be from time to time in the future, subject to legal proceedings, claims or government administrative actions relating to the intellectual property rights of others. For example, our group buying channel may contain pictures that infringe upon the copyrights of third parties, and our website may contain other parties’ proprietary information such as hotel reviews. If we are found to have infringed on the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the intellectual property in question. Moreover, regardless of whether we successfully defend against such claims, we could suffer negative publicity and our reputation could be severely damaged. Any of these events could have a material and adverse effect on our business, results of operations or financial condition.

Meanwhile, our website and TSPs’ web outlets hosted by us contain information about hotels, flights, popular vacation destinations and other travel-related topics. It is possible that if any contents accessible on our website infringe upon the intellectual property rights of any third parties or contain errors or false or misleading information, third parties or our users could take actions against us for such contents or their use of such contents. Any claims, with or without merit, could be time-consuming to defend, result in litigation and divert management’s attention and resources.

In addition, user generated content on our website may contain or provide links to information that infringes on the copyrights or other intellectual property rights of third parties or violates applicable rules or regulations in relation to censorship, or we may use the user generated content in a way that infringes upon the rights of the users or third parties. Our copyright policies and user agreements prohibit users from illegally uploading copyright-protected content to our website. However, the above measures may not be sufficient to eliminate the risk of infringing or illegal material being posted or linked to on our website. Claims by third parties or actions taken by the government over infringing or illegal materials hosted or linked to on our website could result in significant costs and have a material adverse effect on our business, results of operations or financial condition.

 

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We may be the subject of unfair competition, harassing, or other detrimental conduct by third parties including complaints to regulatory agencies, negative blog postings, and the public dissemination of malicious assessments of our business that could harm our reputation and cause us to lose market share, users and revenues.

We have been, and in the future may be, the target of unfair competition, harassing, or other detrimental conduct by third parties. Such conduct includes complaints, anonymous or otherwise, to regulatory agencies regarding our alleged unfair competition activities in the online travel service sector. For example, in early 2013, we were subject to negative publicity claiming that certain brand-name hotel chains discountinued business relationships with us due to unauthorized discounts offered by our TSPs, and such negative publicity could for a certain period of time adversely affect our users’ perception of the availability of certain brand-name hotel chains in our search results. Additionally, allegations, directly or indirectly against us, may be posted in Internet chat-rooms or on blogs or any websites by anyone, whether or not related to us, on an anonymous basis. We have been, and in the future may continue to be, subject to government or regulatory investigation as a result of such third-party conduct and may be required to expend significant time and incur substantial costs to address such third-party conduct, and we may not be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Our reputation may be negatively affected as a result of the public dissemination of anonymous allegations or malicious statements about our business, which in turn may cause us to lose market share, users, advertisers and revenues.

We may become the target of antitrust legal claims.

As the leading search-based commerce platform for the travel industry in China, we may receive close scrutiny from government agencies under PRC antitrust laws, which also provide private rights of action for competitors or users to bring antitrust claims against us. If we do not prevail in any antitrust lawsuits or administrative proceedings initiated against us by private parties or government agencies, we may face confiscation of unlawful gains, heavy fines and various constraints on our business. These constraints may include forced termination of any agreements or arrangements that are determined as in violation of antitrust laws, compulsory disposal of relevant business and limitation on certain operation practices, which may limit our ability to continue to innovate, diminish the appeal of our services, and increase our business operation costs. Such constraints may enable our competitors to develop websites, products and services that mimic the functionality of ours, which could result in decreased popularity of our website among users. Consequently, our business, financial condition and results of operations may be materially and adversely affected.

Baidu will be able to control the outcome of a large number of shareholder actions in our company.

Baidu currently holds 61.05% of our ordinary shares. Upon completion of this offering and the investment by Jaguarundi in our Class B ordinary shares, assuming the underwriters do not exercise their over-allotment option, Baidu will hold     % of our total outstanding ordinary shares, representing approximately     % of our voting power due to our dual-class ordinary share structure. As long as Baidu holds a majority of our voting power, it has the ability to control shareholder actions through ordinary resolutions under Cayman Islands law, our memorandum and articles of association and NYSE requirements. Baidu will have sufficient voting power to determine the outcome of all matters requiring shareholder approval even if it should, at some point in the future, hold considerably less than a majority of the combined total of our outstanding ordinary shares.

Baidu’s voting control may cause transactions to occur that might not be beneficial to you as a holder of ADSs, and may prevent transactions that would be beneficial to you. For example, Baidu’s voting control may prevent a transaction involving a change of control of us, including transactions in which you as a holder of our ADSs might otherwise receive a premium for your securities over the then-current market price. In addition, Baidu is not prohibited from selling a controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your ADSs. If Baidu is acquired or otherwise undergoes a change of control, its acquiror or successor will be entitled to exercise the voting control and contractual rights of Baidu, and may do so in a manner that could vary significantly from that of Baidu.

 

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We may have conflicts of interest with Baidu and, because of Baidu’s controlling ownership interest in our company, may not be able to resolve such conflicts on favorable terms for us.

Conflicts of interest may arise between Baidu and us in a number of areas relating to our past and ongoing relationships. Potential conflicts of interest that we have identified include the following:

Business cooperation arrangements. In 2012 and the first six months of 2013, approximately 51% and 51%, respectively, of our user traffic came from various channels through Baidu, including Baidu’s web page search service, directory navigation site and map service. During the same periods, 36% and 14%, respectively, of our user traffic from Baidu was purchased by us, and 64% and 86%, respectively, was redirected to us free of charge, including both user traffic from organic search results and user traffic redirected to us pursuant to our business cooperation agreement and other related agreements with Baidu prior to this offering. So long as Baidu continues to control us, we may not be able to bring a legal claim against Baidu in the event of contractual breach, notwithstanding our contractual rights under the agreements described above and other inter-company agreements entered into from time to time.

Sale of shares in our company. Baidu may decide to sell all or a portion of our shares that it holds to a third party, including to one of our competitors, thereby giving that third party substantial influence over our business and our affairs. Such a sale could be contrary to the interests of certain of our shareholders, including our employees or our public shareholders.

Allocation of business opportunities. Business opportunities may arise that both we and Baidu find attractive, and which would complement or expand our respective businesses. Baidu may decide to take the opportunities itself, which would prevent us from taking advantage of the opportunity ourselves.

Developing business relationships with Baidu’s competitors. So long as Baidu remains as our controlling shareholder, we may be limited in our ability to do business with its competitors, such as other Internet search service providers or portals in China. This may limit the effectiveness of our online advertisement and not be in the best interests of our company and our other shareholders.

Strategic decisions made by Baidu. Although our company is a separate, stand-alone entity, we expect to operate, for as long as Baidu is our controlling shareholder, as a part of the Baidu group. Baidu may from time to time make strategic decisions that it believes are in the best interests of its business as a whole, including our company. These decisions may be different from the decisions that we would have made on our own. Baidu’s decisions with respect to us or our business may be resolved in ways that favor Baidu and therefore Baidu’s own shareholders, which may not coincide with the interests of our other shareholders.

Further, Baidu nominated one of its employees to hold 60% of the equity interest in Qunar.com Beijing Information Technology Company Limited, i.e., our VIE. When any conflict of interests between Baidu and us arises, we cannot assure you Baidu’s nominee will act completely in our interests or that conflicts of interest will be resolved in our favor. We may not be able to resolve any potential conflicts, and even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated shareholder. Even if both parties seek to transact business on terms intended to approximate those that could have been achieved among unaffiliated parties, this may not succeed in practice.

Our business could be negatively affected by changes in general search engine algorithms and dynamics or termination of traffic-generating arrangements.

Since the third quarter of 2009, we started to make significant use of Internet search engines, principally through participation in search engine optimization and the purchase of travel-related keywords, to generate traffic to our website. Approximately 47% of our user traffic in 2012 resulted from searches initially entered on general search engine websites, primarily the search service of Baidu. Search engines, such as Baidu and Google, frequently update and change the logic which determines the placement and ordering of results of a user’s search, which may reduce the effectiveness of the keywords we have purchased. If a major search engine, such as Baidu

 

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and Google, changes its algorithms in a manner that negatively affects the search engine ranking of our website, or changes its pricing, operating or competitive dynamics to our disadvantage, our business, results of operations and financial condition could be adversely affected.

We also enter into commercial traffic-generating arrangements with various service providers such as Baidu, Google and Tencent. Approximately 44% of our user traffic in 2012 were from paid traffic-generating services. Any loss or impairment of one or more of our traffic-generating services or arrangements, especially the ones we have with Baidu, could significantly reduce our user traffic and have a material and adverse impact on our operating results.

Our business may be severely disrupted if we lose our senior management team’s services.

Our success heavily depends upon the continued services of our senior management team. In particular, we rely on the expertise and experience of Mr. Chenchao (CC) Zhuang, our co-founder and chief executive officer. If one or more of our senior executive officers were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all and our business, financial condition and results of operations may be materially and adversely affected. If any of our senior executive officer joins a competitor or forms a competing business, we may lose users, TSPs, know-how and key professionals and staff members. Each of our senior executive officers has entered into an employment agreement with us. However, if any dispute arises between our senior executive officers and us, we may incur substantial costs and expenses enforcing such agreements in China or we may be unable to enforce them at all.

If we are unable to attract, train and retain qualified personnel, our business may be materially and adversely affected.

Our future success depends, to a significant extent, on our ability to attract, train and retain qualified personnel, particularly management, technical engineers and product development personnel, with expertise in the online travel or search industry. Since our industry is characterized by high demand and intense competition for talent, we may not be able to attract or retain qualified staff or other skilled employees that we will need to achieve our strategic objectives. As we are still a relatively young company, our ability to train and integrate new employees into our operations may not meet the growing demands of our business. If we are unable to attract, train and retain qualified personnel, our business, financial condition and results of operations may be materially and adversely affected.

Our business is sensitive to general economic conditions. A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business and our financial condition.

The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including the escalation of the European sovereign debt crisis since 2011. It is unclear whether the European sovereign debt crisis will be contained and what effects it may have. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including China’s. There have also been concerns over unrest in the Middle East and Africa, which have resulted in higher oil prices and significant market volatility, and over the possibility of a war involving Iran. In addition, there have been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan. Economic conditions in China are sensitive to global economic conditions. Since we derive, and expect to continue to derive, our revenues almost entirely from China, and both the leisure travel market and the advertising industry tend to be cyclical and are particularly sensitive to overall economic conditions, our business and prospects may be affected by economic conditions in China. We cannot assure you that reductions in leisure travel spending will not occur, or that advertising spending in general or with respect to our offerings in particular will not decrease from current levels. A decline in the economic prospects of travelers or advertisers or the economy in general could reduce leisure travels and the needs for our services, and may also alter current or prospective advertisers’ spending

 

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priorities. Therefore, any prolonged slowdown in the global or China’s economy may lead to a reduction in both leisure travel and advertising activities, which could materially and adversely affect our financial condition and results of operations. In addition, the weak economy could erode investors’ confidence, which constitutes the basis of the credit markets. Renewed financial turmoil affecting the financial markets, banking systems or currency exchange rates may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at all, which could also materially and adversely affect our business, results of operations and prospects.

Acquisitions, investments and strategic alliances could result in operating difficulties, dilution and other harmful consequences.

We may in the future evaluate and enter into discussions regarding a wide array of potential merger or acquisition transactions. Any transactions that we enter into could be material to our financial condition and results of operations. The process of integrating an acquired company, business, asset or technology may create unforeseen operating difficulties and expenditures. The areas where we face risks include:

 

   

significant costs of identifying and consummating acquisitions;

 

   

diversion of management time and focus from operating our business to acquisition integration challenges;

 

   

difficulties in integrating the management, technologies and employees of the acquired businesses;

 

   

implementation or remediation of controls, procedures and policies at the acquired company;

 

   

coordination of travel products and services, engineering and sales and marketing functions;

 

   

retention of employees from the businesses we acquire;

 

   

liability for activities of the acquired company before the acquisition;

 

   

potential significant impairment losses related to goodwill and other intangible assets acquired;

 

   

litigation or other claims in connection with the acquired company;

 

   

significant expenses in obtaining approvals for the transaction from shareholders and relevant government authorities in China;

 

   

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries; and

 

   

failure to achieve the intended objectives, benefits or revenue-enhancing opportunities.

Our failure to address these risks or other problems encountered in connection with our future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business generally. If we use our equity securities to pay for acquisitions, we may dilute the value of your ADSs and the underlying Class B ordinary shares. If we borrow funds to finance acquisitions, such debt instruments may contain restrictive covenants that could, among other things, restrict us from distributing dividends. Such acquisitions may also generate significant amortization expenses related to intangible assets.

We may in the future enter into strategic alliances with various third parties to further our business purposes from time to time. Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the counter-party, reputation risk and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business. To the extent the third parties suffer negative publicity or harm to their reputations from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with such third parties.

 

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If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.

Prior to this offering, we have been a private company and have had limited accounting personnel and other resources with which to address our internal control over financial reporting. Our failure to discover and address any material weaknesses or control deficiencies in our internal control over financial reporting may result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

We are not currently required to comply with Securities and Exchange Commission, or SEC, rules that implement Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose as a standalone company. However, we have been required to maintain an effective internal control over financial reporting under Section 404 as a subsidiary of Baidu, Inc. since 2012. For the year ended December 31, 2012, as part of Baidu, Inc.’s Section 404 assessment, we performed a limited review of our internal control over financial reporting according to the scope assigned to us from Baidu Inc., and no material weakness was reported to Baidu, Inc. Baidu, Inc did not note any material weaknesses as of December 31, 2012, in its internal control over financial reporting.

Upon the completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley Act, subject to exemptions we qualify for under the JOBS Act. Pursuant to SEC rules adopted under Section 404, public companies shall include in their annual report a report of management on the effectiveness of their internal control over financial reporting. In addition, an independent registered public accounting firm must report on the effectiveness of the public company’s internal control over financial reporting in our annual report on Form 20-F for the fiscal year beginning after the date on which we cease to qualify as an emerging growth company. Our management may conclude that our internal control over financial reporting is not effective on a standalone basis. Moreover, even if our management concludes that our internal control over financial reporting is effective on a standalone basis, our independent registered public accounting firm may not reach the same conclusion or may issue a report that is qualified if it is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated or reviewed. In addition, during the course of the evaluation, documentation and testing of our internal control over financial reporting, we may identify material weaknesses and deficiencies that we may not be able to remedy in time to meet the deadline imposed by the SEC for compliance with the requirements of Section 404. If our management or our independent registered public accounting firm concludes that our internal control over financial reporting is not effective, the market price of our ADSs may be adversely affected due to a loss of investor confidence in the reliability of our reporting process. We will need to incur significant costs and use significant management and other resources to comply with Section 404 of the Sarbanes-Oxley Act.

We are an “emerging growth company” and may not be subject to requirements that other public companies are subject to, which could harm investor confidence in us and our ADSs.

On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. The JOBS Act contains provisions that, among other things, relax certain requirements for qualifying public companies. We are an “emerging growth company” as defined under the JOBS Act and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies, including an exemption from the requirement to comply with the auditor attestation requirements of Section 404 and an exemption from the requirement to adopt and comply with new or revised accounting standards at the same time as other public companies. We will remain an emerging growth company up to the last day of the fifth fiscal year following the date of the offering, except that (i) if the market value of our common stock that is held by non-affiliates exceeds US$700 million as

 

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of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31; (ii) if our annual gross revenues exceed US$1 billion during any fiscal year before that time, we would cease to be an emerging growth company as of the end of such fiscal year; and (iii) if during any three-year period before that time we issue an aggregate of over US$1 billion in non-convertible debt, we would cease to be an emerging growth company upon the date of such issuance.

The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with any new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We also expect that these new rules and regulations could make it more expensive for us to renew director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee.

We cannot predict if investors will find our ADSs less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our ADS price may be more volatile.

The requirements of being a public company may strain our resources and distract our management.

Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us, either or both of which could have a negative effect on our business, results of operations and financial condition.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the requirements of the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are currently evaluating and monitoring developments with respect to these rules. We expect these rules and regulations will increase our legal and financial compliance costs, but we cannot predict or estimate the additional costs or the timing of initially additional costs we may incur.

We have no insurance coverage which could expose us to significant costs and business disruption.

As the insurance industry in China is still in an early stage of development, insurance providers in China currently offer limited business-related insurance products. We do not maintain business interruption insurance, key-man life insurance, or any insurance policies for our properties. Any business disruption, litigation or natural disaster may result in our incurring substantial costs and the diversion of our resources. Due to our lack of insurance coverage, if we encounter any accident or interruption to our business, or our key personnel or major

 

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properties for any reason, our business, financial condition and results of operations could be materially and adversely affected.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

Our business could be materially and adversely affected by natural disasters, including hurricanes, tsunamis, earthquakes or volcanic eruptions, or the outbreak of avian influenza (including H1N1 and H7N9 subtypes), severe acute respiratory syndrome, or SARS, or another epidemics. Any of such occurrences could cause severe disruption to normal leisure travel patterns and levels and hence reduce users’ travel interest and their needs for our services. Our operations could also be severely disrupted if our TSPs or advertisers were affected by such natural disasters or health epidemics. The leisure travel industry is also sensitive to other events beyond our control, such as worker shortages, work stoppages or labor unrest at any of the major airlines, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities, travel-related accidents and terrorist attacks, any of which could have an impact on our business, financial condition and results of operations.

Our use of “open source” software could adversely affect our ability to offer our services and subject us to possible litigation.

We use open source software in connection with our development of technology infrastructure. From time to time, companies that use open source software have faced claims challenging the use of open source software and/or compliance with open source license terms. We could be subject to suits by parties claiming ownership of what we believe to be open source software, or claiming noncompliance with open source licensing terms. Some open source licenses require users who distribute software containing open source to make available all or part of such software, which in some circumstances could include valuable proprietary code. While we monitor the use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our proprietary source code or pay damages for breach of contract could be harmful to our business, results of operations or financial condition, and could help our competitors develop travel products and services that are similar to or better than ours.

We may need additional capital, and financing may not be available on terms acceptable to us, or at all.

We believe that our current cash and cash equivalents, and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any marketing initiatives or investments we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.

The successful operation of our business depends upon the performance and reliability of the Internet infrastructure and telecommunications networks in China.

Our business depends on the performance and reliability of the Internet infrastructure and telecommunications networks in China. Almost all access to the Internet is maintained through state-owned telecommunications operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology of the PRC, or the MIIT. In addition, the national networks in China are connected to the Internet through international gateways controlled by the PRC government. These international gateways are the only channels through which a domestic user can connect to the Internet. We rely on this infrastructure, primarily China Telecom and China Unicom, to provide data communications capacity. Although the PRC government has pledged to improve the Internet infrastructure in China as part of its stimulus packaged introduced in the first quarter of 2009, a more sophisticated Internet infrastructure may not develop in China. We,

 

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or our users, may not have access to alternative networks in the event of disruptions, failures or other problems with China’s Internet infrastructure. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our website. However, we have no control over the costs of the services provided by telecommunications service providers. If the prices we pay for telecommunications and Internet services rise significantly, our results of operations may be materially and adversely affected. If Internet access fees or other charges to Internet users increase, our user traffic may decline and our business may be harmed. Moreover, if we are not able to renew services agreements with the telecommunications carriers when they expire and are not able to enter into agreements with alternative carriers on commercially reasonable terms or at all, the quality and stability of our services may be adversely affected.

Risks Related to Our Corporate Structure

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

Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in Internet businesses and other related businesses, including the provision of Internet content and online advertising services. Specifically, foreign ownership in an Internet content provider or other value-added telecommunications service provider may not exceed 50%. We are a Cayman Islands corporation and a foreign person under Chinese laws. Due to the foreign ownership restrictions on these businesses, we conduct part of our business through contractual arrangements with our VIE in which we do not own any equity interests. The VIE and its subsidiaries hold the licenses, approvals and key assets such as our website that are essential for our business operations.

In the opinion of our PRC counsel, our current ownership structures, the ownership structure of our wholly-owned subsidiary and our VIE, the contractual arrangements among us, Beijing Qunar Software Technology Company Limited, i.e., our WFOE, our VIE and its shareholders are in compliance with all existing Chinese laws, rules and regulations. There are, however, substantial uncertainties regarding the interpretation and application of current or future Chinese laws and regulations. Accordingly, we cannot assure you that Chinese government authorities will not ultimately take a view contrary to the opinion of our Chinese legal counsel.

In or around September 2011, various media sources reported that the China Securities Regulatory Commission, or the CSRC, had prepared a report proposing regulating the use of variable interest entity structures, such as ours, in industry sectors subject to foreign investment restrictions in China and overseas listings by China-based companies. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide.

If we and our VIE and its subsidiaries are found to be in violation of any existing or future Chinese laws or regulations, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation, levying fines, restricting our right to collect revenues, confiscating our income, or the income of our VIE and its subsidiaries, revoking our business licenses, or the business licenses of our VIE and its subsidiaries, requiring us and our affiliated Chinese entities to restructure our ownership structure or operations, and requiring us or our VIE and its subsidiaries to discontinue any portion or all of our Internet content provision, or advertising businesses. Any of these actions could cause significant disruption to our business operations and may materially and adversely affect our business, financial condition and results of operations.

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

Since PRC law limits foreign equity ownership in Internet and other related business in China, we operate our Internet and other related businesses through the VIE and its subsidiaries. We have no equity ownership

 

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interest in the VIE or its subsidiaries and rely on contractual arrangements with the VIE to control and operate such businesses. Such contractual arrangements include (i) a Restated Exclusive Technical Consulting and Services Agreement which will continue to be in effect until terminated by the WFOE, (ii) a Restated Loan Agreement which shall continue indefinitely until such time as (a) the Baidu nominee and Mr. Chenchao (CC) Zhuang receive a repayment notice from the WFOE and the Baidu nominee and Mr. Chenchao (CC) Zhuang fully repay the loans, or (b) an event of default (as defined therein) occurs unless the WFOE sends a notice indicating otherwise within 15 calendar days after it is aware of such event, (iii) a Restated Equity Option Agreement which will remain effective with respect to each of the VIE’s shareholders until all of his or her equity interest has been transferred or we terminate the agreement unilaterally with a 30 days prior written notice, (iv) an Equity Interest Pledge Agreement which became effective upon registration and will expire when all obligations under the aforementioned loan agreement, equity option agreement and exclusive technical consulting and services agreement have been satisfied, or the pledgee completes a transfer of equity interest pursuant to the aforementioned equity option agreement so that it no longer holds any equity interest in the VIE, and (v) Powers of Attorney which will remain in full force and effect until the Baidu nominee or Mr. Chenchao (CC) Zhuang, as the case may be, no longer holds any equity interest in the VIE. Most of the contractual arrangements are effective until we or the WFOE, in our sole discretion, terminate such contractual arrangement or exercises the rights granted thereunder. Please refer to “History and Corporate Structure—Our Corporate Structure” for more details about such contractual arrangements.

These contractual arrangements may not be as effective in providing control over the VIE and its subsidiaries as direct ownership. For example, the VIE may fail to take actions required for our operations or fail to maintain our website despite its contractual obligation to do so. In addition, we cannot assure you that either of the VIE’s shareholders would always act in our best interests.

Any failure by the VIE or its respective shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business and financial condition.

If the VIE or its shareholders fail to perform their respective obligations under the contractual arrangements of which they are a party, we may incur substantial costs and expend substantial resources to enforce our rights under the contracts. We may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders of the VIE were to refuse to transfer their equity interest in the VIE to us or our designee when we exercise the equity option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we might have to take legal action to compel them to perform their respective contractual obligations.

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. However, the legal system in the PRC, particular as it relates to arbitration proceedings, is not as developed as in other jurisdictions, such as the United States. See “Risks Related to Doing Business in the PRC—Uncertainties with respect to the PRC legal system could adversely affect us.” Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. These uncertainties under the PRC legal system could limit our ability to enforce these contractual arrangements. Additionally, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which could cause additional expenses and delays. In the event we are unable to enforce these contractual arrangements or we experience significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our affiliated entities, our ability to conduct our business may be negatively affected and our business and operations could be severely disrupted, which could materially and adversely affect our results of operations and damage our reputation.

 

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Shareholders of our VIE may have potential conflicts of interest with us, which may affect the performance and renewal of our contractual arrangements with our VIE and materially and adversely affect our business and financial condition.

Mr. Chenchao (CC) Zhuang and an individual appointed by Baidu, or the Baidu nominee, are the shareholders of our VIE. Mr. Zhuang is our chief executive officer and holds 40% of the VIE’s voting power. Conflicts of interests between his duties to our company and the VIE may arise. As Mr. Zhuang is a director and executive officer of our company, he has a duty of loyalty and care to us under Cayman Islands law. We cannot assure you, however, that when conflicts of interest arise between us and the VIE, Mr. Zhuang will act completely in our interests or that the conflicts of interest will be resolved in our favor. Mr. Zhuang could violate his employment agreement with us or his legal duties by diverting business opportunities from us to others. If we cannot resolve the conflicts of interest between us and Mr. Zhuang, we would have to resort to legal proceedings, which could result in disruption of our business. The Baidu nominee is a Baidu employee and holds 60% of the VIE’s equity interest. The Baidu nominee does not have any employment contract with us, nor does he owe any legal duty to us other than the contractual obligations in connection with the VIE. Either Mr. Zhuang or the Baidu nominee may breach or cause the VIE to breach or refuse to renew the existing contractual arrangements that allow us to effectively control our affiliated PRC entities and receive economic benefits from them. There is currently no specific and clear guidance under PRC laws that address any conflict between PRC laws and Cayman Islands laws in respect of any conflict relating to corporate governance.

We may lose the ability to use and enjoy assets held by our VIE or its subsidiaries that are important to the operation of our business if our VIE or its subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.

Our VIE and its subsidiaries hold certain assets that are important to our business operations. Our contractual arrangements with our VIE contain terms that specifically obligate the shareholders of the VIE to ensure the valid existence of the VIE and that the VIE may not be voluntarily liquidated. However, in the event the shareholders breach this obligation and voluntarily liquidate the VIE or cause the VIE to liquidate any of its subsidiaries, or the VIE or any of its subsidiaries declares bankruptcy, and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business operations, which could materially and adversely affect our business, financial condition and results of operations. Furthermore, if the VIE or any of its subsidiaries undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

Contractual arrangements we have entered into with our affiliated PRC entity may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could substantially reduce our consolidated net income and the value of your investment.

Pursuant to applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We would be subject to adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements between the WFOE and the VIE were not on an arm’s length basis and therefore constitute a favorable transfer pricing. As a result, the PRC tax authorities could require that the VIE adjust its taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by: (i) increasing the VIE’s tax expenses without reducing the WFOE’s tax expenses, which could subject the VIE to late payment fees and other penalties for under-payment of taxes; and/or (ii) resulting in the WFOE’s loss of its preferential tax treatment. In addition, the PRC tax authorities may impose late payment fees and other penalties on our affiliated PRC entities for underpaid taxes. Our results of operations may be adversely affected if our affiliated PRC entities’ tax liabilities increase or if they are found to be subject to late payment fees or other penalties.

 

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Risks Related to Doing Business in the PRC

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

Substantially all of our operations are conducted in China and substantially all of our revenues are sourced from China. Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and legal developments in China. Economic reforms begun in the late 1970s have resulted in significant economic growth. However, any economic reform policies or measures in China may from time to time be modified or revised. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors. The PRC government exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since late 2003, the PRC government has implemented a number of measures, such as increasing the People’s Bank of China’s statutory deposit reserve ratio and imposing commercial bank lending guidelines, which have had the effect of slowing the growth of credit availability. In 2008 and 2009, however, in response to the global financial crisis, the PRC government has loosened such requirements. Although the Chinese economy has grown significantly in the past decade, that growth may not continue and any slow-down may have a negative effect on our business. Since 2012, the growth of the Chinese economy has slowed. The overall Chinese economy affects our profitability, since expenditures for travel may decrease in a slowing economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China, could have a material adverse effect on the overall economic growth of China and investment in the travel industry. Such developments could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.

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

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy.

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

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of Internet and other related businesses.

We conduct our business primarily through our PRC subsidiary and consolidated affiliated entities in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiary is a foreign-invested

 

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enterprise and is subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to foreign-invested enterprises.

The PRC government extensively regulates the Internet and related industries, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the Internet and other related industries. Internet-related laws and regulations in China are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC government regulation of the Internet industry include, but are not limited to, the following:

 

   

We do not own the websites, due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including Internet content provision services. As a result, we only have contractual control over our websites. This may significantly disrupt our business, subject us to sanctions, compromise the enforceability of related contractual arrangements, or have other harmful effects on us.

 

   

There are uncertainties relating to the regulation of the Internet and other related industries in China, including evolving licensing practices. This means that permits, licenses or operations at some of our operating entities may be subject to challenge, or we may have failed to obtain permits or licenses that applicable regulators may deem necessary for our operations or we may not be able to obtain or renew certain permits or licenses to maintain their validity. For example, we are providing mobile applications to mobile device users free of charge and therefore we do not believe we need to obtain a separate operating license in addition to the valued-added telecommunications business operating licenses for Internet content provision service, or the ICP license, which we have already obtained. Although we believe this is in line with the current market practice, there can be no assurance that we will not be required to apply for an operating license for our mobile applications in the future.

 

   

New laws and regulations may be promulgated that will regulate Internet activities, including the online information and advertising of travel products. If these new laws and regulations are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new regulations at the time they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.

On July 13, 2006, the MIIT, the predecessor of which is the Ministry of Information Industry, issued the Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services. This notice prohibits domestic telecommunication services providers from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunications business in China. According to this notice, either the holder of a value-added telecommunications services operation permit or its shareholders must directly own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services. The notice also requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. Currently, our VIE and its significant operating subsidiary own the related domain names and trademarks and hold the ICP licenses necessary to conduct our operations and websites in China.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the Internet and other related industries have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, Internet and other related businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain any new licenses if required by any new laws or regulations. There are also risks that we may be found

 

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to violate the existing or future laws and regulations given the uncertainty and complexity of China’s regulation of the Internet and other related industries.

Under PRC law, insurance agency activities are categorized into “principal business” or “sideline business”, and the operation of both is subject to obtaining approval from the relevant authorities. Insurance agencies engaged in Internet insurance activities are required to fulfill certain criteria mainly relating to registered capital thresholds, the possession of a value-added telecommunications business related permit and a filing with the China Insurance Regulatory Commission, or the CIRC. See “Regulation—Regulations on Sideline Insurance Agency”. Although our VIE has obtained a Sideline Insurance Agency license, the applicability of the regulations relating to Internet insurance with regard to sideline insurance agencies is unclear and so far, no official interpretations have been issued with respect to this matter. We have yet to complete the filing with the CIRC in accordance with the CIRC rules. If any official interpretations as to their applicability to sideline insurance agencies are issued, we intend to complete such a filing with the CIRC as failure to do so could result in us being subject to penalties imposed by the CIRC, including the imposition of fines and the revocation of our VIE’s Sideline Insurance Agency license.

Furthermore, under PRC law, a company that sets up a branch to conduct business in a location outside its registered address must register with the local administration for industry and commerce, or local AIC, while a liaison office, which is typically for liaison purpose without direct business operation, is generally not required to register, although local AICs may have different practices. Our WFOE currently has nine offices outside its registered address, which are solely responsible for sales promotion and not sales or operations and none of which has been registered. If the relevant local AIC deems that any of our liaison offices is actually a branch and thus subject to such registration requirements, we may be subject to penalties for failing to register such entity. These penalties may include fines and disgorgement of gains or revocation of business license of our WFOE, although we believe that, as a matter of practice, the authorities typically impose an extreme penalty only after repeated warnings are ignored or where a violation is blatant and continuous. Because of the discretionary nature of regulatory enforcements in the PRC, we cannot assure you that we will not be subject to these penalties as a result of violations of the requirements, or that these penalties would not substantially inhibit our ability to operate our business.

Our P4P and other related services conducted by WFOE might be regarded as a form of online advertising or as part of services requiring an ICP license or other licenses.

PRC laws and regulations and administrative authorities currently do not classify P4P services and other related services as a form of online advertising or as part of services requiring an ICP license or other licenses. We conduct our P4P and other related business through our WFOE in the PRC which does not have the qualification to operate online advertising business or holds an ICP license. However, we cannot assure you that the PRC government will not classify P4P and other related services as a form of online advertising or as part of services requiring an ICP license or other licenses in the future. If new regulations characterize P4P and other related services as a form of online advertising or as part of ICP services requiring an ICP license or other licenses, we may have to conduct our P4P business through our VIE or its subsidiaries, which are qualified to operate online advertising business and hold ICP or other licenses. If the change in classification of P4P and other related services were to be retroactively applied, we might be subject to sanctions, including payment of delinquent taxes and fines. In addition, under PRC advertising laws and regulations, an online advertising service provider is obligated to monitor the advertising content posted on its websites to ensure that such content is fair and accurate and in compliance with applicable law. Therefore, the classification of P4P and other related services as a form of online advertising could subject us to an obligation to examine the content of listings of our P4P customers on our websites and the associated risks. Any change in the classification of P4P and other related service by the PRC government may significantly disrupt our operations and materially and adversely affect our business, results of operations and financial condition.

 

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We principally rely on dividends and other distributions on equity paid by our WFOE to fund any cash and financing requirements we may have. Any limitation on the ability of our WFOE to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to conduct our business or our financial condition.

We are a holding company, and we rely principally on dividends and other distributions on equity from our WFOE in China for our cash requirements, including the funds necessary to service any debt we may incur. Current PRC regulations permit our WFOE in China to pay dividends to us only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our WFOE is required to set aside at least 10% of its respective after tax profits each year, if any, to fund certain statutory reserve funds until the aggregate amount of such reserve funds reaches 50% of its registered capital. These reserves are not distributable as cash dividends. At its discretion but in accordance with its articles of association, our WFOE may allocate a discretionary portion of its after-tax profits to staff welfare and bonus funds. Furthermore, if our WFOE incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. As a result, our ability to distribute dividends largely depends on earnings from our WFOE and its ability to pay dividends out of its earnings. We cannot assure you that our WFOE will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.

In addition, under the PRC Enterprise Income Tax Law and its implementation rules, distributions of earnings generated by our WFOE after January 1, 2008 and paid to the WFOE’s immediate holding company incorporated in Hong Kong generally will be subject to a withholding tax (unless the PRC tax authorities determine that our Hong Kong subsidiary is a PRC resident enterprise). If certain conditions and requirements under the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income entered into between Hong Kong and the PRC and other related PRC laws and regulations are met, the withholding rate could be reduced from 10% to 5%. The immediate holding company of our PRC subsidiary is Queen’s Road Investment Management Limited, a company incorporated in Hong Kong. Pursuant to the abovementioned laws and regulations, dividends paid to by our WFOE to Queen’s Road Investment Management Limited may be subject to 5% withholding tax if certain conditions and requirements are satisfied, subject to approvals by competent PRC tax authorities.

In October 2009, the State Administration of Taxation, or the SAT, issued a Circular on How to Interpret and Recognize the “Beneficial Owner” in Tax Treaties, or Circular 601, and certain other related rules. According to Circular 601, non-resident enterprises or individuals that cannot provide valid supporting documents as “beneficial owners” may not be approved to enjoy tax treaty benefits. “Beneficial owners” refer to individuals, enterprises or other organizations that are normally engaged in substantive operations. These rules also set forth certain restrictions on a person’s qualification as a “beneficial owner.” Specifically, the Circular expressly excludes a “conduit company,” or any company established for the purposes of avoiding or reducing tax obligations or transferring or accumulating profits and not engaged in actual operations such as manufacturing, sales or management, from the definition of a “beneficial owner.” As a result, although our WFOE is currently wholly-owned by our Hong Kong subsidiary, we may not be able to enjoy the 5% withholding tax rate under the tax treaty with respect to dividends to be paid by our PRC subsidiary to our Hong Kong subsidiary, because our Hong Kong subsidiary may not qualify as a beneficial owner of the dividends paid by our PRC subsidiary.

We and/or our Hong Kong subsidiary may be classified as a ‘‘PRC resident enterprise’’ for PRC enterprise income tax purposes, which could result in our global income being subject to 25% PRC enterprise income tax.

The PRC Enterprise Income Tax Law, or EIT Law, provides that an enterprise established outside China whose “de facto management body” is located in China is considered a “PRC resident enterprise” and will

 

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generally be subject to the uniform 25% enterprise income tax rate, or EIT rate, on its global income. Under the implementation rules of the EIT Law, “de facto management body” is defined as the organization body that effectively exercises management and control over such aspects as the business operations, personnel, accounting and properties of the enterprise.

On April 22, 2009, the State Administration of Taxation, or SAT, released the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, that sets out the standards and procedures for determining whether the “de facto management body” of an enterprise registered outside of the PRC and controlled by PRC enterprises or PRC enterprise groups is located within the PRC. Under Circular 82, a foreign enterprise controlled by PRC enterprises or PRC enterprise groups is considered a PRC resident enterprise if all of the following apply: (i) the senior management and core management departments in charge of daily operations are located mainly within the PRC; (ii) financial and human resources decision are subject to determination or approval by persons or bodies in the PRC; (iii) major assets, accounting books, company seals and minutes and files of board and shareholders’ meeting are located or kept within the PRC; and (iv) at least half of the enterprise’s directors with voting rights or senior management reside within the PRC. Although Circular 82 explicitly provides that the above standards apply to enterprises which are registered outside the PRC and controlled by PRC enterprises or PRC enterprise groups, Circular 82 may reflect the SAT’s criteria for determining the tax residence of foreign enterprises in general. We currently do not believe that we are or our Hong Kong subsidiary is a PRC resident enterprise, because we do not believe that we or our Hong Kong subsidiary meet all of the conditions above. If the PRC tax authorities were to disagree with our position, we or our Hong Kong subsidiary may be subject to PRC enterprise income tax reporting obligations and to 25% PRC enterprise income tax on our global taxable income, except for our income from dividends received from our WFOE, which may be exempt from PRC tax. If we are treated as a PRC resident enterprise, the 25% PRC income tax on our global taxable income could affect our ability to satisfy any cash requirements we may have.

You may be subject to PRC income tax on dividends from us or on any gain realized on the transfer of our ADSs or Class B ordinary shares.

Under the EIT Law and its implementation rules, subject to any applicable tax treaty or similar arrangement between the PRC and your jurisdiction of residence that provides for a different income tax arrangement, PRC withholding tax at the rate of 10% is normally applicable to dividends from PRC sources payable to investors that are non-PRC resident enterprises, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business if the relevant income is not effectively connected with the establishment or place of business. Any gain realized on the transfer of American depositary shares or shares by such non-PRC resident enterprise investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC unless a treaty or similar arrangement otherwise provides. Under the PRC Individual Income Tax Law and its implementation rules, dividends from sources within the PRC paid to foreign individual investors who are not PRC residents are generally subject to a PRC withholding tax at a rate of 20% and gains from PRC sources realized by such investors on the transfer of American depositary shares or shares are generally subject to 20% PRC income tax, in each case, subject to any reduction or exemption set forth in applicable tax treaties and PRC laws. Although substantially all of our business operations are in China, it is unclear whether dividends we pay with respect to our Class B ordinary shares or ADSs, or the gain realized from the transfer of our Class B ordinary shares or ADSs, would be treated as income derived from sources within the PRC and as a result be subject to PRC income tax if we were considered a PRC resident enterprise, as described above. If PRC income tax were imposed on gains realized through the transfer of our ADSs or Class B ordinary shares or on dividends paid to our non-resident investors, the value of your investment in our ADSs or Class B ordinary shares may be materially and adversely affected. Furthermore, our ADS holders whose jurisdictions of residence have tax treaties or arrangements with China may not qualify for benefits under such tax treaties or arrangements.

 

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Regulation and censorship of information disseminated over the Internet in China may adversely affect our business and subject us to liability for information displayed on or linked to our website.

The PRC government has adopted regulations governing Internet access and the distribution of information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide Internet content and other licenses and the closure of the concerned websites. In the past, failure to comply with such requirements has resulted in the closure of certain websites. The website operator may also be held liable for such censored information displayed on or linked to the website.

In addition, the MIIT has published regulations that subject website operators to potential liability for content displayed on their websites and the actions of users and others using their systems, including liability for violations of PRC laws prohibiting the dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local Internet service provider to block any Internet website at its sole discretion. From time to time, the Ministry of Public Security has stopped the dissemination over the Internet of information which it believes to be socially destabilizing. The State Administration for the Protection of State Secrets is also authorized to block any website it deems to be leaking State secrets or failing to meet the relevant regulations relating to the protection of State secrets in the dissemination of online information.

Although we attempt to monitor the content in our query results and the user generated reviews and comments on our website, we are not able to control or restrict the content of other Internet content providers linked to or accessible through our website, or content (including reviews, as well as pictures and travel experience sharing) generated or placed on our website by our users, experts and others. To the extent that PRC regulatory authorities find any content displayed on or linked to our website objectionable, they may require us to limit or eliminate the dissemination of such information on our website, which may reduce our user traffic and have an adverse effect on our business. In addition, we may be subject to penalties for violations of those regulations arising from information displayed on or linked to our website, including a suspension or shutdown of our online operations.

The heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our business operations, our acquisition or restructuring strategy or the value of your investment in us.

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the SAT in December 2009, with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas non-public holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate of less than 12.5% or (ii) does not impose income tax on foreign income of its residents, the non-resident enterprise, being the transferor, must report to the competent tax authority of the PRC resident enterprise this Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.

On March 28, 2011, the SAT released SAT Public Notice (2011) No. 24, or SAT Public Notice 24, to clarify several issues related to Circular 698. SAT Public Notice 24 became effective on April 1, 2011. According to SAT Public Notice 24, the term “effective tax” refers to the effective tax on the gain derived from disposition of

 

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the equity interests of an overseas holding company; and the term “does not impose income tax” refers to the cases where the gain derived from disposition of the equity interests of an overseas holding company is not subject to income tax in the country/region where the overseas holding company is a resident.

There is uncertainty as to the application of SAT Circular 698. For example, while the term “Indirect Transfer” is not clearly defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or made any formal declaration as to the process and format for reporting an Indirect Transfer to the competent tax authority of the relevant PRC resident enterprise. In addition, there are no formal declarations with regard to how to determine whether a foreign investor has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax. SAT Circular 698 may be determined by the tax authorities to be applicable to previous investments by non-resident investors in our company, if any of such transactions were determined by the tax authorities to lack reasonable commercial purpose. As a result, we and our existing non-resident investors may be at risk of being taxed under SAT Circular 698 and may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we should not be taxed under SAT Circular 698, which may have a material adverse effect on our financial condition and results of operations or such non-resident investors’ investments in us. We have conducted and may conduct acquisitions involving corporate structures, and historically our shares were transferred by certain then shareholders to our current shareholders. We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance for the investigation of PRC tax authorities with respect thereto. Any PRC tax imposed on a transfer of our shares or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in us.

Discontinuation of any of the preferential tax treatments or imposition of any additional taxes could adversely affect our financial condition and results of operations.

China passed the EIT Law and its implementation rules, both of which became effective on January 1, 2008. The EIT Law significantly curtails tax incentives granted to foreign-invested enterprises under the previous laws and regulations. The EIT Law, however, (i) reduces the statutory rate of the enterprise income tax from 33% to 25%, (ii) permits companies established before March 16, 2007 to continue to enjoy their existing tax incentives, adjusted by certain transitional phase-out rules promulgated by the State Council on December 26, 2007, and (iii) introduces new tax incentives, subject to various qualification criteria. The EIT Law and its implementation rules permit certain “high and new technology enterprises strongly supported by the state” which hold independent ownership of core intellectual property to enjoy a preferential enterprise income tax rate of 15% subject to certain new qualification criteria. Our WFOE and VIE were recognized by the relevant authorities as “high and new technology enterprises”, or HNTEs, on December 14, 2009 and were reaffirmed as such pursuant to a three-year review on October 30, 2012, and therefore remain eligible for the reduced 15% corporate income tax rate upon their filing with the relevant tax authorities. The qualification as a “high and new technology enterprise” is subject to annual evaluation and a three-year review by the relevant authorities in China. In order to maintain this qualification and the preferential tax rate, our WFOE and VIE must submit a review application to the Beijing Municipal Science and Technology Commission before October 29, 2015. If our WFOE or VIE fails to maintain their “high and new technology enterprise” qualifications or renew these qualifications when the relevant term expires, their applicable corporate income tax rate would increase to 25%, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be able to maintain our current effective tax rate in the future.

The PRC government’s pilot plan to replace the business tax with a VAT may require us to pay more taxes.

Pursuant to the PRC Provisional Regulations on Business Tax, taxpayers providing taxable services falling under the category of service industry in China are required to pay a business tax at a normal tax rate of 5% of their revenues. In November 2011, the Ministry of Finance and the SAT promulgated the Pilot Plan for

 

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Imposition of Value-Added Tax to Replace Business Tax. Pursuant to this plan and relevant notices issued by the Beijing Municipal Office of SAT, from September 1, 2012, a value-added tax, or VAT, is imposed to replace the business tax in the transport and shipping industry and some of the modern service industries in Beijing. Under the pilot plan, a VAT rate of 6% applies to certain modern service industries. Our WFOE and most of our affiliated PRC entities are located in Beijing, and since this pilot plan applies to our businesses, we are subject to a VAT rate of 6%, subject to certain offset by the VAT we pay in connection with the purchases from our suppliers. The 6% VAT rate is higher than the business tax rate that previously applied to us and may have a negative effect on our financial condition and results of operations.

With respect to display advertising services, we regularly provide such services at a discount to our standard rates, a standard industry practice in the PRC. These discounts are in the form of free advertising elements, of which the duration and other terms of services are specified as part of the advertisement contract. The VAT pilot plan created uncertainties as to whether these free elements should constitute deemed taxable services, and therefore should not be treated as discounts to the overall contract arrangements and should be subject to VAT based on the standard rates of services. We currently do not treat such free elements as giving rise to deemed taxable services for VAT purposes. The rules related to the VAT pilot plan are still evolving and the timing of the promulgation of the final tax rules or related interpretation is uncertain. The estimated amount for this contingency up to June 30, 2013 was RMB6.2 million (US$1.0 million).

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

We may transfer funds to our WFOE or finance our WFOE by means of shareholder loans or capital contributions upon completion of this offering. Any loans to our WFOE, which is a foreign-invested enterprise, cannot exceed statutory limits based on the difference between the registered capital and the investment amount of such subsidiary, and shall be registered with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Furthermore, any capital contributions we make to our WFOE shall be approved by the Ministry of Commerce, or MOFCOM, or its local counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or approvals, our ability to provide loans or capital contributions to our WFOE in a timely manner may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

In addition, SAFE promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 142, on August 29, 2008. SAFE promulgated Circular 45 on November 16, 2011 in order to clarify the application of Circular 142. Under Circular 142 and Circular 45, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and may not be used for equity investments in the PRC. In addition, foreign-invested companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if proceeds of such loans have not been utilized. Violations of Circular 142 or Circular 45 may result in severe penalties, including heavy fines as set forth in the section entitled “Regulations—Regulations on Foreign Exchange.” As a result, Circular 142 and Circular 45 may significantly limit our ability to transfer the net proceeds from our initial public offering and subsequent offerings or financings to our WFOE, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

Furthermore, SAFE promulgated the Circular on Issues concerning Straightening the Administration of Foreign Exchange Businesses, or SAFE Circular 59 on November 9, 2010 which requires the local SAFE branch and banks to closely examine the authenticity of the settlement of net proceeds from offshore offerings and the net proceeds to be settled in the manner described in the offering documents. Circular 142, Circular 45 and Circular 59 may significantly limit our ability to transfer the net proceeds from this offering to our WFOE and

 

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convert the net proceeds into RMB, which may materially and adversely affect our liquidity and our ability to fund and expand our business in the PRC.

Restrictions on the remittance of RMB into and out of the PRC and governmental control of currency conversion may limit our ability to pay dividends and other obligations, and affect the value of your investment.

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and the remittance of currency out of China. We receive substantially all of our revenues in RMB and substantially all of our cash inflows and outflows are denominated in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our subsidiaries in China after they receive payments from the VIE under various service and other contractual arrangements. We may convert a portion of our revenues into other currencies to meet our foreign currency obligations, such as payments of dividends declared in respect of our ordinary shares, if any. Shortages in the availability of foreign currency may restrict the ability of our WFOE to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency denominated obligations.

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain routine procedural requirements. Therefore, our WFOE is able to pay dividends in foreign currencies to us without prior SAFE approval, provided that we comply with certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs. Further, there is no assurance that new regulations will not be promulgated in the future that would have the effect of further restricting the remittance of RMB into or out of PRC. Further, there is no assurance that new regulations will not be promulgated in the future that would have the effect of further restricting the remittance of RMB into or out of PRC.

We may be subject to penalties, including restriction on our ability to inject capital into our WFOE and our WFOE’s ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules.

SAFE issued a public notice in October 2005, or Circular 75, requiring PRC residents to register with the local SAFE branch for establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies owned by such PRC residents, referred to in the notice as an “offshore special purpose vehicle.” The term “control” under Circular 75 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. SAFE has further issued a series of implementation guidelines. These regulations require PRC residents and PRC corporate entities to register their direct or indirect offshore investment in offshore special purpose vehicles with competent local branches of SAFE. These regulations may apply to our shareholders and beneficial owners who are PRC residents or which have PRC residents as their ultimate owners and may apply to any offshore acquisitions that we make in the future.

Under these foreign exchange regulations, PRC residents who establish or control, or have previously established or controlled prior to October 2005, offshore special purpose vehicles are required to register those investments. In addition, any PRC resident that is a shareholder or beneficial owner of an offshore special purpose vehicle is required to amend the SAFE registration with respect to that offshore special purpose

 

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company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China or other material changes in share capital. Moreover, any subsidiary of such offshore special purpose company in China is required to urge the PRC resident shareholders and beneficial owners to update their registration with the local branch of SAFE. If any shareholder or beneficial owner who is considered as a PRC resident by SAFE fails to make the required registration or to update the previously filed registration, the subsidiary of such offshore special purpose company in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the offshore special purpose company, and the offshore special purpose company may also be prohibited from making additional capital contribution into its subsidiary in China.

We have requested all of our current shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the ambit of Circular 75 and its guidance and will urge relevant shareholders and beneficial owners, upon learning they are PRC residents, to register with the local SAFE branch as required under Circular 75 and its guidance. However, we may not be fully informed of the identities of all our shareholders or beneficial owners who are PRC residents, and as Circular 75 and its related foreign exchange regulations are relatively new and evolving and their interpretation and enforcement involve significant uncertainties, we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents have fully complied or will comply with our request to make, obtain or update any applicable registrations or have fully complied or will fully comply with other requirements required by Circular 75 or other related rules in a timely manner. For example, Mr. Zhuang, one of our founders and a PRC resident, is currently in the process of applying for amendments to his SAFE registration under Circular 75 with respect to recent changes in our share capital. We cannot assure you that Mr. Zhuang will successfully obtain such SAFE registration in accordance with applicable PRC law.

In case of any non-compliance by any of our shareholders or beneficial owners who are PRC residents, our WFOE and such shareholders and beneficial owners may be subject to fines and other legal sanctions, including restrictions on our ability to contribute additional capital into our WFOE and our WFOE’s ability to distribute dividends to our offshore holding companies, any of which would adversely affect our business.

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

Under SAFE regulations, PRC residents who participate in an employee stock ownership plan or stock option plan in an overseas publicly-listed company are required to register with the SAFE or its local branch and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of these participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise or sale of stock options. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes.

We and our PRC resident employees who participate in our share incentive plan, which we adopted in 2007, will be subject to these regulations when our company becomes publicly listed in the United States. If we or our PRC resident option grantees fail to comply with these regulations, we or our PRC resident option grantees may be subject to fines and other legal or administrative sanctions. See “Regulation—Regulations on Employee Stock Options Plans.”

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

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Although the exchange rate between the RMB and the

 

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U.S. dollar has been effectively pegged by the People’s Bank of China since 1994, there can be no assurance that the RMB will remain pegged to the U.S. dollar, especially in light of the significant international pressure on the Chinese government to permit the free floatation of the RMB, which could result in a continuous appreciation of the RMB against the U.S. dollar. Our revenues and costs are mostly denominated in RMB. We rely entirely on dividends and other fees paid to us by our subsidiaries and affiliated entity in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of the RMB against the U.S. dollar would make any new RMB-denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. 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 resulted in an over 20% appreciation of the RMB against the U.S. dollar over the following three years. For almost two years after reaching a high against the U.S. dollar in July 2008, however, the RMB traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high. As a consequence, the RMB fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. In April 2012, the PRC government announced that it would allow more RMB exchange rate fluctuation. However, it remains unclear how this announcement might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar. Substantially all of our revenues and costs are denominated in RMB, and a significant portion of our financial assets are also denominated in RMB. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of the RMB may materially and adversely affect any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we received from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law, and, if required, we cannot assure you that we will be able to obtain such approval.

On August 8, 2006, six PRC regulatory agencies, including MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, SAT, the State Administration for Industry & Commerce, or SAIC, the China Securities Regulatory Commission, or CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, which became effective on September 8, 2006, and were amended on June 22, 2009 by MOFCOM. These regulations, among other things, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this offering may ultimately require approval from CSRC. If CSRC approval is required, it is uncertain how long it will take us to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, results of operations and financial condition.

 

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Our PRC counsel, TransAsia Lawyers, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our ADSs on the NYSE because (i) CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation, and (ii) our wholly-owned PRC subsidiary was established by foreign direct investment, rather than through a merger or acquisition of a domestic company as defined under the New M&A Rules. However, we cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel. If prior approval is required, we plan to make best endeavors to apply for it, but we may not be able to obtain it and hence, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

PRC laws and regulations establish more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

PRC laws and regulations, such as the New M&A Rules, Anti-monopoly Law of the PRC and the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the MOFCOM in August 2011, or the MOFCOM Security Review Rules, established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review or security review.

The MOFCOM Security Review Rules are formulated to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or Circular No. 6. The MOFCOM Security Review Rules came into effect on September 1, 2011 and replaced the Interim Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM in March 2011. According to these circulars and rules, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises have “national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review, the MOFCOM will look into the substance and actual impact of the transaction. The MOFCOM Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.

 

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There is no requirement for foreign investors in those mergers and acquisitions transactions already completed prior to the promulgation of Circular No. 6 to submit such transactions to MOFCOM for security review. As we have already obtained the “de facto control” over our affiliated PRC entities prior to the effectiveness of these circulars and rules, we do not believe we are required to submit our existing contractual arrangement to the MOFCOM for security review.

However, as these circulars and rules are relatively new and there is a lack of clear statutory interpretation on the implementation of the same, there is no assurance that the MOFCOM will not apply these national security review-related circulars and rules to the acquisition of equity interest in our WFOE. If we are found to be in violation of the MOFCOM Security Review Rules and other PRC laws and regulations with respect to the merger and acquisition activities in China, or fail to obtain any of the required approvals, the relevant regulatory authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income, revoking our WFOE’ business or operating licenses, requiring us to restructure or unwind the relevant ownership structure or operations. Any of these actions could cause significant disruption to our business operations and may materially and adversely affect our business, financial condition and results of operations. Further, if the business of any target company that we plan to acquire falls into the ambit of security review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any contractual arrangement. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

We face certain risks relating to the real properties that we lease.

We lease real properties from third parties primarily for our office use in the PRC, and we have certain title defects relating to these properties. The premises currently used by our headquarters in Beijing, China, are leased from a third party. The registered uses for such building and its underlying land do not include use by an industrial or commercial company like us. Therefore, the lease of such a property to us shall be subject to approval by the competent government authorities and may be subject to payment of premium fees to the government by the lessor. We cannot ensure that the lessor has completed all or any of the necessary formalities with the relevant governmental authorities.

We also lease from third parties certain other real properties, and the title certificates or building ownership certificates for some of those properties have not been provided to us. We cannot assure you that title to these properties we currently lease will not be challenged. In addition, we have not registered any of our lease agreements with relevant PRC governmental authorities as required by PRC law, and although failure to do so does not in itself invalidate the leases, we may not be able to defend these leases against bona fide third parties.

As of the date of this prospectus, we are not aware of any actions, claims or investigations being contemplated by government authorities with respect to the defects in our leased real properties or any challenges by third parties to our use of these properties. However, if third parties who purport to be property owners or beneficiaries of the mortgaged properties challenge our right to lease these properties, we may not be able to protect our leasehold interest and may be ordered to vacate the affected premises, which could in turn materially and adversely affect our business and operating results.

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

On June 29, 2007, the Standing Committee of the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. The PRC Labor Contract Law introduces specific provisions related to fixed-term employment contracts, part-time employment, probation, consultation with labor

 

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union and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining, which together represent enhanced enforcement of labor laws and regulations. According to the PRC Labor Contract Law, an employer is obliged to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract must have an unlimited term, with certain exceptions. The employer must pay severance to an employee where a labor contract is terminated or expires, with certain exceptions. In addition, the government has continued to introduce various new labor-related regulations after the effectiveness of the PRC Labor Contract Law. For example, regulations require that annual leave ranging from five to 15 days be made available to employees and that employees be compensated for any untaken annual leave days at a rate of three times their daily salary, subject to certain exceptions. On October 28, 2010, the Standing Committee of the National People’s Congress promulgated the PRC Social Insurance Law, which became effective on July 1, 2011. According to the PRC Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay the social insurance premiums for such employees.

As a result of these new regulations designed to enhance labor protection, we expect our labor costs to increase. In addition, as the interpretation and implementation of these new regulations are still evolving, our employment practice may not be at all times be deemed in compliance with the new regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issued the audit reports included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and applicable professional standards. Because our auditor is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by the PCAOB.

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, and such deficiencies may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures, and to the extent that such inspections might have facilitated improvements in our auditor’s audit procedures and quality control procedures, investors may be deprived of such benefits.

We may be adversely affected by the outcome of the administrative proceedings brought by the SEC against five accounting firms in China.

The SEC has brought administrative proceedings against five accounting firms in China, alleging that the accounting firms refused to produce audit papers and other documents related to certain China-based companies that were under investigation by the SEC for potential accounting fraud. The independent registered public accounting firm that will issue the audit reports included in this prospectus and our future annual reports to be filed with the SEC is one of the five accounting firms named in the SEC’s proceedings, and we may be adversely affected by the outcome of the proceedings.

 

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The PCAOB announced on May 24, 2013 that it had entered into a Memorandum of Understanding on Enforcement Cooperation, or the MOU, with CSRC and the Ministry of Finance of China. The MOU establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the US and the PRC. The PCAOB continues to engage in discussions with the CSRC and Ministry of Finance of China to permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

However, the SEC administrative proceedings are ongoing and it is unclear what impact, if any, the MOU will have on the SEC proceedings. If the SEC prevails in the proceedings, our independent registered public accounting firm and the other four accounting firms in China that were named in the proceedings may be barred from practicing before the SEC and hence unable to continue serving as auditors for China-based companies listed in the U.S. If none of the China-based auditors are able to continue serving as auditors for China-based companies listed in the U.S., we will not be able to meet the reporting requirements under the Exchange Act following the listing of our ADSs in the U.S., which may ultimately result in our deregistration by the SEC and delisting from the NYSE.

Risks Relating to Our ADSs and this Offering

There has been no public market for our ordinary shares or ADSs prior to this offering, and an active trading for our ADSs may not develop after this offering so you may not be able to resell your ADSs at or above the price you paid, or at all.

Prior to this offering, there has been no public market for our ordinary shares or ADSs. The initial public offering price for our ADSs will be determined through negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our ADSs after this offering. If you purchase our ADSs, you may not be able to resell those ADSs at or above the initial public offering price. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market for our ADS or otherwise or how liquid that market might become. An active public market for our ADSs may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell our ADSs at a price that is attractive to you, or at all.

The market price for our ADSs may be volatile, which could result in substantial losses to you.

The market price for our ADSs may be volatile and subject to wide fluctuations in response to factors such as actual or anticipated fluctuations in our quarterly results of operations, changes in financial estimates by securities research analysts, negative publicity, studies or reports, changes in the economic performance or market valuations of other companies operate in our industry, announcements by us or our competitors of material acquisitions, strategic partnerships, joint ventures or capital commitments, fluctuations of exchange rates between RMB and the U.S. dollar, intellectual property litigation, actual or threatened litigation arising from other reasons including contract disputes with our business partners, release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs, regulatory developments affecting us, our customers and our industry, sales or perceived potential sales of additional ADSs or ordinary shares, and economic or political conditions in China. In addition, the performance, and fluctuation in market prices, of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes of our ADSs. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of other Chinese companies’ securities after their offerings, including Internet companies, may affect the attitudes of investors towards Chinese companies listed in the United States, which consequently may impact the trading price of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices, business practice, fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including

 

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us, regardless of whether we have conducted any inappropriate activities. Volatility in global capital markets, as was experienced during the recent global financial crisis and the ongoing European debt crisis, could also have an adverse effect on the market price of our ADSs. Furthermore, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

Our quarterly results may fluctuate, making quarterly comparisons and financial forecasting difficult, and could fall below investor expectations or estimates by securities research analysts, which may cause the trading price of our ADSs to decline.

Our revenues and operating results have varied significantly from quarter to quarter because our business experiences seasonal fluctuations, which reflect seasonal trends for demand for the travel products searched and advertised on our platform. Traditional leisure travel bookings in China are generally more frequent in the first and third quarter of the year primarily because during the first quarter, many people travel to reunite with their families for the Chinese New Year holiday, and during the third quarter, summer break for students, favorable weather throughout China and advance travel booking for the National Day holiday all contribute to an increased amount of travel activities in China. We have seen and expect to continue to see, that the most significant quarter-over-quarter growth of our revenues will be earned in the first and third quarters. However, the historical seasonality of our business has been relatively mild due to the rapid growth we have experienced. In addition, advertising spending has historically been cyclical in nature, reflecting overall economic conditions as well as individual travel patterns. As our business is rapidly changing and evolving, which has tended to mask the cyclicality and seasonality of our business, our historical operating results may not be useful to you in predicting our future operating results. As our growth rate slows, the seasonality and cyclicality in our business will become more pronounced and cause our operating results to fluctuate.

A number of factors, many of which are beyond our control, may cause our results of operations for future periods fall below the expectations of public market analysts and investors, causing the market price of our securities to decline. Factors that may affect our quarterly results include, but are not limited to:

 

   

seasonal variations in operating results;

 

   

the discretionary nature of our users’ demands and spending patterns;

 

   

the cyclical nature of advertising spending;

 

   

competition from our competitors;

 

   

vulnerability of our business to a general economic downturn in the global economy; and

 

   

changes in the laws that affect our operations.

As a result, investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance.

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

Sales of substantial amounts of our ordinary shares or ADS, including those issued upon the exercise of outstanding options, in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our ADSs and could impair our ability to raise capital through the sale of additional shares. Such sales may also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Immediately after the completion of this offering and the investment by Jaguarundi in our Class B ordinary shares, we will have an aggregate of              ordinary shares issued and outstanding, including              Class B ordinary shares represented by              ADSs offered in this offering and

 

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             Class B ordinary shares issued and offered by us to Jaguarundi in connection with its investment in our Class B ordinary shares. Our ADSs sold in this offering will be eligible for immediate resale in the public market without restrictions, except for any shares of our ADSs that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. Restricted securities held by our existing shareholders may also be sold in the public market in the future subject to the restrictions contained in Rule 144 under the Securities Act and applicable lock-up agreements. If any existing shareholder or shareholders sell a substantial amount of ordinary shares after the expiration of the lock-up period, the prevailing market price for our ADSs could be adversely affected. See “Underwriting” and “Shares Eligible for Future Sale” for additional information regarding resale restrictions. Sales by our existing shareholders of a substantial number of shares in the public market, or the threat of a substantial sale, could cause the market price of our ADSs to decrease significantly.

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

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of our ordinary shares issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our ordinary shares. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

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

The public offering price per ADS will be substantially higher than the net tangible book value per ordinary shares issued prior to this offering. Purchasers of our ADSs offered in the offering will therefore incur an immediate and substantial dilution in the net tangible book value per ADSs from the initial public offering price. See “Dilution.”

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

We do not anticipate that we will pay any cash dividends on our ordinary shares, or indirectly on our ADSs, for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions relating to indebtedness we may incur, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase ADSs in this offering, realization of a gain on your investment will depend on the appreciation of the price of our ADSs, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our ADSs.

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 organized under Cayman Islands law, conduct substantially all of our operations in China and all of our directors and officers reside outside the United States.

Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2012 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the

 

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Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands have a less developed body of securities laws as compared to the U.S., and provide significantly less protection to investors. Therefore, our public shareholders may have more difficulties in protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. As a result, our ability to protect our interests if we are harmed in a manner that would otherwise enable us to sue in a United States federal court may be limited.

We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our WFOE and VIE in China. All of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

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

You may not have the same voting rights as the holders of our Class B ordinary shares and must act through the depositary to exercise your rights.

Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis, unless he/she converts such ADSs into Class B ordinary shares registered directly in his/her own name. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affects the rights of shareholders. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the shares underlying your ADSs are not voted as you requested.

You may be subject to limitations on the sale, deposit, cancellation and transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties.

 

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In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it advisory to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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

If we offer holders of our Class B ordinary shares any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to you. However, the depositary may allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them. In addition, U.S. securities laws may restrict the sale, deposit, cancellation and transfer of the ADSs issued after exercise of rights. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act, with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. We can give no assurance that we can 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, you may be unable to participate in our rights offerings and may experience dilution of your holdings as a result.

You may lose some or all of the value of the distribution by the depositary if the depositary cannot convert RMB into U.S. dollars on a reasonable basis.

The depositary will convert any cash dividend or other cash distribution we pay on the Class B ordinary shares into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any approval from any government is needed and cannot be obtained, the depositary is allowed to distribute RMB only to those ADS holders to whom it is possible to do so. It will hold RMB it cannot convert for the account of the ADS holders who have not been paid. However, it will not invest RMB and it will not be liable for interest. In addition, if the exchange rates fluctuate during a time when the depositary cannot convert RMB, the ADS holders who have not been paid may lose some or all of the value of the distribution.

You may not receive distributions on our Class B ordinary shares or any value for them if such distribution is illegal or impractical or if any required government approval cannot be obtained in order to make such distribution 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 our Class B ordinary shares or other deposited securities after deducting its fees and expenses, although we do not expect to pay dividends in the near future. You will receive these distributions in proportion to the number of Class B 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. We have no obligation under the U.S. securities laws to register the ADSs, Class B ordinary shares, rights or other securities distributed through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Class B ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive the distribution we make on our Class B ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

Our management will have considerable discretion as to the use of the net proceeds to be received by us from this offering and you may not agree with our management on these uses.

We have not allocated the majority of the net proceeds to be received by us of this offering to any particular purpose. Rather, our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

 

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

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. On all matters subject to shareholders’ vote, holders of Class A ordinary shares are entitled to three votes per share, while holders of Class B ordinary shares are entitled to one vote per share. We plan to issue ADSs representing our Class B ordinary shares in this offering. In addition, all options granted prior to or to be granted after the completion of this offering entitle option holders to the equivalent number of Class B ordinary shares once the options are vested and exercised. Upon any sale, pledge, transfer, assignment or disposition of a Class A ordinary share by its holder to a person who is not already a holder of Class A ordinary shares, such Class A ordinary share shall automatically convert into one Class B ordinary share without any actions on the part of the transferor or the transferee. Except as provided in our memorandum and articles of association, Class A ordinary shares are not convertible into Class B ordinary shares. In no event shall Class B ordinary shares be convertible into Class A ordinary shares. For more information on our ordinary shares, you should refer to the “Description of Share Capital” section of this prospectus.

Due to the disparate voting powers attached to these two classes of ordinary shares, we anticipate that immediately after this offering and the investment by Jaguarundi in our Class B ordinary shares, our existing Class A ordinary shareholders will collectively own approximately             %, and our controlling shareholder Baidu alone will possess approximately             %, of the total voting power represented by our outstanding ordinary shares and will have considerable influence over matters requiring shareholder approval, including election of directors and significant corporate transactions such as a merger or sale of our company or our assets. Please also see “—Baidu will be able to control the outcome of a large number of shareholder actions in our company” in this section. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class B ordinary shares and ADSs may view as beneficial.

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

We adopted a share incentive plan in 2007, as most recently amended and restated in 2013. We are required to account for share-based compensation in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation, which requires a company to recognize, as an expense, the fair value of share options and other equity incentives to employees based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. As of the date of this prospectus, options to purchase a total of 29,686,442 Class B ordinary shares were outstanding under our share incentive plan. See “Management—Equity Incentive Plan” for a detailed discussion. For the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013, we recorded RMB4.8 million, RMB28.5 million, RMB27.2 million (US$4.4 million) and RMB14.3 million (US$2.3 million), respectively, in share-based compensation expenses. We believe the granting of share-based compensation is of significant importance to our ability to attract, retain and motivate our management team and talented employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase significantly, which may have an adverse effect on our results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and Note 2 of the Notes to the Consolidated Financial Statements for the Years ended December 31, 2010, 2011 and 2012 included in this prospectus for a more detailed presentation of accounting for our share-based compensation plan.

 

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We will be a “controlled company” within the meaning of the Listed Company Manual of the NYSE, or the NYSE Listing Rules, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies, and we will also rely on the foreign private issuer exemption from certain corporate governance requirements under the NYSE Listing Rules.

As a foreign private issuer whose ADSs are listed on the NYSE, we are permitted to follow certain home country corporate governance practices pursuant to exemptions under the NYSE Listing Rules. A foreign private issuer must disclose in its annual reports filed with the SEC each requirement under the NYSE Listing Rules with which it does not comply, followed by a description of its applicable home country practice. Our Cayman Islands home country practices may afford less protection to holders of our ADSs. We may rely on certain exemptions provided by the NYSE to a foreign private issuer, and we may follow our home country practices in the future, as a result, you may not be provided with the benefits of certain corporate governance requirements of the NYSE.

After the completion of this offering and the investment by Jaguarundi in our Class B ordinary shares, Baidu will have more than 50% of the total voting rights in our company and we will be a “controlled company” under the NYSE Listing Rules. As a controlled company, we are not obligated to comply with certain NYSE corporate governance requirements, including the requirement that we have a nominating and corporate governance committee and a compensation committee, each of which is composed entirely of independent directors.

We are not required to and will not voluntarily meet these requirements. As a result of our use of the “controlled company” exemptions, you will not have the same protection afforded to shareholders of companies that are subject to all of NYSE’s corporate governance requirements.

Furthermore, because we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time, and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. As a result, you may not be provided with the same benefits as a holder of shares of a U.S. issuer.

There can be no assurance that we will not be a passive foreign investment company (a “PFIC”) for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or Class B ordinary shares.

A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income is “passive income” or (ii) at least 50% of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. Based upon the expected composition of our income and assets and estimates of the value of our assets, including goodwill, which are based on the expected price of our ADSs in this offering, we do not expect to be a PFIC for our current taxable year. However, it is not entirely clear how the contractual arrangements between us and our VIE will be treated for purposes of the PFIC rules. Moreover, the determination of whether we are a PFIC is an annual test that is based on the composition of our income and assets and the value of our assets from time to time. Because the treatment of our contractual arrangements with the VIE is not entirely clear, and because the determination of whether we are a PFIC will depend on the composition of our income and assets and the value of our assets from time to time, which may be based on the market price of our ADSs, which is likely to fluctuate after this offering (and may fluctuate considerably given that market prices of Internet companies historically have been especially volatile), we cannot assure you that we will not be a PFIC for our current taxable year or any other taxable year. If we were a PFIC for any taxable year during which a U.S. person held an ADS or a Class B ordinary share, certain adverse U.S. federal income tax consequences could apply to such U.S. person. See “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Industry” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

our goals and strategies;

 

   

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

 

   

the expected growth of the online travel markets in China;

 

   

our expectations regarding demand for and market acceptance of our products and services;

 

   

our expectations regarding our relationships with users and travel service providers;

 

   

our plans to invest in our technology platform;

 

   

competition in our industry;

 

   

fluctuations in general economic and business conditions in China; and

 

   

relevant government policies and regulations relating to our industry.

In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.

This prospectus also contains certain data and information, which we obtained from various government and private publications, including iResearch and Nielsen. Although we believe that the publications and reports are reliable, we have not independently verified the data. Statistical data in these publications includes projections that are based on a number of assumptions. If any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.

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. Although we will become a public company after this offering and have ongoing disclosure obligations under United States federal securities laws, we do not intend to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

Based upon an assumed initial offering price of US$             per ADS (the mid-point of the estimated public offering price range shown on the front cover of this prospectus), we estimate that we will receive net proceeds from this offering and the investment by Jaguarundi in our Class B ordinary shares of approximately US$             million if the over-allotment option is not exercised, and US$             million if the over-allotment option is exercised, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) the net proceeds to us from this offering and the investment by Jaguarundi in our Class B ordinary shares by US$             million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

As of the date of this prospectus, we have not allocated any specific portion of the net proceeds of this offering for any particular purpose. We anticipate using the net proceeds of this offering for the following purposes.

 

   

approximately             %, or US$             to invest in technology, infrastructure and product development efforts;

 

   

approximately             %, or US$             to expand our sales and marketing efforts; and

 

   

the remaining amount to general corporate purposes, including working capital needs and potential acquisitions (although we are not currently negotiating any such acquisitions).

For a discussion of our strategies and business plan, see “Business.” We do not currently have any agreements or understandings to make any material acquisitions of, or investments in, other businesses.

In utilizing the proceeds we expect to receive from this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our WFOE through capital contributions or loans, subject to approvals from or registrations with relevant PRC government authorities. If we were to increase the registered capital of our WFOE , we need to receive approval from MOFCOM or its local counterparts, which will decide whether or not to grant such approval within 90 days after receiving the application documents. If we were to provide funding to our WFOE through loans, the total amount of such loans may not exceed the difference between the WFOE’s total investment amount as approved by the foreign investment authorities and the WFOE’s registered capital. Such loans must also be registered with the SAFE, which registration usually takes no more than 20 working days to complete. The cost for obtaining such approvals and completing such registration is minimal. We currently expect that a substantial portion of the proceeds of this offering will be used by our WFOE in connection with its business expansion, such as data acquisition costs, bandwidth and server hosting costs, product development expenses, sales and marketing expenses, and other general and administrative expenses. We cannot assure you that we will be able to complete these government registrations or obtain the relevant approvals on a timely basis, if at all. See ‘‘Risk Factors—Risks Related to Doing Business in the PRC—PRC regulations of loans to PRC entities and direct investment in PRC entities by offshore holding companies may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our WFOE.”

The foregoing represents our current intentions with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of this offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

 

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DIVIDEND POLICY

We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. We do not have any plan to declare or pay any dividends in the near future.

Our board of directors has complete discretion in deciding whether to distribute dividends. Even if our board of directors decides to pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.

If we pay any dividends, our ADS holders will be entitled to such dividends to the same extent as holders of our Class B 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 Class B ordinary shares, if any, will be paid in U.S. dollars.

We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. If our PRC subsidiary or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. Our PRC subsidiaries may, at their own discretion, allocate a portion of their respective after-tax profits based on PRC accounting standards to staff welfare and bonus funds in accordance with their respective articles of association. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. For more details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Holding Company Structure.”

 

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CAPITALIZATION

The following table sets forth our total capitalization as of June 30, 2013:

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis to reflect (i) the automatic conversion of our outstanding redeemable Class A ordinary shares into Class A ordinary shares without redemption rights upon the completion of our initial public offering, and (ii) the sale of              Class B ordinary shares in the form of ADSs by us in this offering and the issuance and sale of              Class B ordinary shares in connection with the investment by Jaguarundi in our Class B ordinary shares at an assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with our consolidated financial statements, 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, 2013  
     Actual     Pro forma as
adjusted(1)
 
     (RMB)     (US$)     (RMB)     (US$)  
     (in thousands)  

Mezzanine equity

     998,666        162,718        —          —     

Equity:

        

Ordinary shares (US$ 0.001 of par value per share; 800,000,000 shares authorized; 203,064,412 shares issued and outstanding as of June 30, 2013)

     1,306        213        1,406        229   

Additional paid-in capital

     (342,757     (55,847     655,809        106,855   

Accumulated other comprehensive loss

     (17,196     (2,802     (17,196     (2,802

Accumulated deficit

     (229,054     (37,321     (229,054     (37,321
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholder’s (deficit) equity

     (587,701     (95,757     410,965        66,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization(2)

     410,965        66,961        410,965        66,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, accumulative deficit, accumulative other comprehensive loss and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.
(2) Assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, a US$1.00 increase (decrease) in the assumed initial public offering price of US$             would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$             million.

 

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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 assumed initial public offering price per ordinary share is substantially in excess of the net tangible book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value was approximately US$             million, or US$             per ordinary share and US$             per ADS as of June 30, 2013. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities, intangible assets and good will. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the proceeds we will receive from this offering and the sale of Class B ordinary shares to Jaguarundi, from the assumed initial public offering price per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after June 30, 2013, other than to give effect to our sale of the ADSs offered in this offering and our sale of Class B ordinary shares in connection with the investment by Jaguarundi at an assumed initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of              would have been US$             million, or US$             per outstanding ordinary share, and US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share and US$             per ADS, to the existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share and US$             per ADS, to investors purchasing ADSs in this offering.

The following table illustrates such dilution:

 

     Per Ordinary Share      Per ADS  

Assumed initial public offering price

   US$                    US$                

Net tangible book value as of June 30, 2013

     

Pro forma net tangible book value

     

Increase in pro forma net tangible book value

     
  

 

 

    

 

 

 

Dilution in pro forma net tangible book value to new investors in this offering

     
  

 

 

    

 

 

 

A US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$             million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$             per ordinary share and US$              per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus and the number of ordinary shares issued and sold to Jaguarundi, and after deducting underwriting discounts and commissions and other offering expenses. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering and the investment by Jaguarundi in our Class B ordinary shares 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 the pro forma as adjusted basis described above as of June 30, 2013, 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/ADS paid before deducting estimated underwriting discounts and commissions and the estimated offering

 

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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.

 

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

Existing shareholder

            US$                          US$                    US$                

New investors

            US$                          US$                    US$                
  

 

  

 

 

   

 

 

    

 

 

      

Total

        100.0   US$           100.0     
  

 

  

 

 

   

 

 

    

 

 

      

 

(1) Assumes an initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price.

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

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The preceding discussion and tables:

 

   

assume no exercise of options to purchase ordinary shares. As of June 30, 2013, there were              ordinary shares issuable upon exercise of options to purchase ordinary shares at a weighted average exercise price of US$             per share. To the extent outstanding options are exercised, new investors will experience further dilution;

 

   

are based on ordinary shares outstanding as of June 30, 2013.

 

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EXCHANGE RATE INFORMATION

Our reporting currency is Renminbi as our business is primarily conducted in China and substantially all of our revenues are denominated in Renminbi. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. For all dates and periods through December 31, 2008, conversions of Renminbi into U.S. dollars are based on the noon buying rate in The City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. For January 1, 2009 and all later dates and periods, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise indicated, conversions of RMB into U.S. dollars in this prospectus are based on the exchange rate of RMB6.1374 to US$1.00, the noon buying rate on June 28, 2013. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, 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 September 20, 2013, the daily exchange rate reported by the Federal Reserve Board was RMB6.1210 to US$1.00.

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

 

      Exchange Rate  

Period

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

2008

     6.8225         6.9193         6.7800         7.2946   

2009

     6.8259         6.8295         6.8176         6.8470   

2010

     6.6000         6.7603         6.6000         6.8330   

2011

     6.2939         6.4475         6.2939         6.6364   

2012

     6.2303         6.3085         6.2221         6.3789   

2013

           

March

     6.2108         6.2154         6.2105         6.2246   

April

     6.1647         6.1861         6.1947         6.2078   

May

     6.1340         6.1416         6.1264         6.1647   

June

     6.1374         6.1342         6.1248         6.1488   

July

     6.1284         6.1343         6.1284         6.1408   

August

     6.1193         6.1213         6.1123         6.1302   

September (through September 20)

     6.1210         6.1199         6.1178         6.1213   

 

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

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We were incorporated in the Cayman Islands in order to enjoy certain benefits, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions, and the availability of professional and support services. Certain disadvantages, however, accompany incorporation in the Cayman Islands. These disadvantages include a less developed body of Cayman Islands securities laws that provide significantly less protection to investors as compared to the laws of the United States, and the potential lack of standing by Cayman Islands companies to sue in the federal courts of the United States.

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

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

Maples and Calder, our special Cayman Islands counsel, and TransAsia Lawyers, our special PRC counsel, have advised us that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

   

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

 

   

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

Maples and Calder has further advised us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty; and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. 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.

Claims against us by our shareholders must, as a general rule, be based on the general law of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our amended and restated memorandum and articles of association. Furthermore, if any wrong is done to our company (for example, as a result of any wrongful act or breach of duty by one of our directors), the general rule is that the proper plaintiff in an action in respect of that wrong is, prima facie, our company itself, and an individual

 

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shareholder would not be able to bring an action in respect of that wrong. However, based on English authorities, which would be persuasive authority in the Cayman Islands, the Cayman Islands courts would be expected to apply and follow the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) which permit a shareholder to commence a representative action against, or derivative action in the name of, our company to challenge (i) an act which is ultra vires or illegal, (ii) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us, and (iii) an irregularity in the passing of a resolution which requires a qualified (or special) majority.

TransAsia Lawyers has further advised us 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 China and the country where the judgment is made or on principles of 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. TransAsia Lawyers has advised us that in the event a shareholder brings an action against a company in China for disputes related to contracts or other property interests, the PRC court may accept the case if (a) the subject matter of the case is located in the PRC, (b) the company (as the defendant) has seizable property in the PRC, (c) the company has a representative organization in the PRC, or (d) the parties choose to submit to the jurisdiction of PRC courts in the contract. The action may be initiated by such shareholder by filing a claim with the competent PRC court which will then determine whether to accept the claim in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action himself/herself/itself or appoint any another person or PRC legal counsel to participate on his/her/its behalf. Foreign citizens and companies have the same right as PRC citizens and companies in initiating an action in China unless the relevant foreign country to which such citizen or company belongs restricts the rights of PRC citizens and companies to take similar actions.

In addition, it will be difficult for U.S. shareholders to originate actions against us in China based upon Cayman Islands, U.S. 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 Class B 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. 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 other than certain corporate documents and records 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.

 

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HISTORY AND CORPORATE STRUCTURE

Our History

Mr. Frederick Demopoulos, Mr. Chenchao (CC) Zhuang and Mr. Douglas Khoo launched Qunar.com, which was then registered under Mr. Zhuang’s personal name, in May 2005 to provide online travel search services. In March 2006, our VIE, Qunar.com Beijing Information Technology Company Limited, was established in the PRC commence operations of online travel search business. In July 2006, Qunar Cayman Islands Limited, or Qunar Cayman, was incorporated in the Cayman Islands.

In October 2006, Qunar Cayman established the WFOE, Beijing Qunar Software Technology Co., Ltd., as Qunar Cayman’s wholly foreign owned enterprise in the PRC. In August 2010, Qunar Cayman set up Queen’s Road Investment Management Limited, or Qunar HK, as its wholly-owned subsidiary in Hong Kong. Through a share transfer agreement between Qunar Cayman and Qunar HK in March 2011, the WFOE became a wholly-owned subsidiary of Qunar HK and an indirect wholly-owned subsidiary of Qunar Cayman.

PRC laws, regulations and rules currently restrict foreign-invested entities engaging in the operation of Internet-related businesses in China. To comply with PRC laws, regulations and rules we operate our Qunar.com website through the VIE. In October 2006, through the WFOE, we entered into certain contractual arrangements with the VIE and its shareholders through which we obtained effective control over the operations of the VIE.

Since 2006, we have completed various rounds of equity financing. In October 2009, we effected a 10-for-1 share split for all of the shares in our authorized share capital at the time. As a result, the par value of the shares was changed to US$0.001 per share. Unless otherwise noted, all share information and per share data included in this prospectus and accompanying financial statements have been adjusted to reflect this share split and change in par value.

From 2006 to 2007, we issued and sold a total of 26,513,257 Series A preferred shares to several investors for an aggregate consideration of US$2.5 million. From 2007 to 2009, we issued and sold a total of 24,828,360 Series B preferred shares to a number of investors for an aggregate consideration of US$8.4 million. From 2009 to 2010, we issued and sold a total of 11,750,990 Series C preferred shares for an aggregate consideration of US$14.0 million.

Baidu Transaction

In July 2011, we entered into an agreement with Baidu Holdings Limited, a wholly-owned subsidiary and the investment vehicle of Baidu, Inc., a Cayman Islands company listed on the Nasdaq Global Select Market. Pursuant to the agreement, Baidu paid US$306 million to acquire 181,402,116 of our ordinary shares and became our majority shareholder. We continued to operate independently after the transaction.

In connection with the Baidu Transaction, we and Baidu also entered into a series of agreements regarding the share conversion and restructuring of our VIE arrangement, our business cooperation with Baidu, as well as Baidu’s rights as our shareholder.

Share Conversion and Restructuring

Immediately prior to the Baidu Transaction, we converted all issued and outstanding Series A, Series B and Series C preferred shares, and reclassified and converted certain issued and outstanding ordinary shares, into ordinary shares at various conversion ratios.

Upon the completion of the Baidu Transaction, we restructured our contractual arrangement with the VIE. Each of the shareholders of the VIE at the time transferred a portion or all of his or her equity interest in the VIE to the Baidu nominee, such that after the transfer the Baidu nominee and Mr. Chenchao (CC) Zhuang held 60%

 

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and 40% of the equity interest in the VIE, respectively. In connection with such equity interest transfer, we, the WFOE and the VIE amended certain of the contractual arrangements in July 2011. See “Our Corporate Structure” below.

Business Cooperation with Baidu

Pursuant to a business cooperation agreement, we and Baidu agreed to cooperate in the following aspects:

Products and Services Integration. We and Baidu agreed to integrate certain products and services and maintain such integration for a period of three years starting from July 2011. Subject to certain exceptions, Baidu agreed to, among other things, display our contents and a hyperlink to our website as the most prominently displayed search result on Baidu’s box search in response to user searches for airline tickets or hotels, use our content on a non-exclusive preferred supplier basis for specific hotel data for display of any hotel information page made available on Baidu Map geo-data platform on Baidu’s websites, and provide us with Baidu’s “Brand Zone” service, which will enable our banner advertisement to be displayed in response to user searches for Qunar or any derivative or variant thereof on Baidu’s websites. All of the abovementioned services are provided to us free of charge.

New Travel Products. Baidu agreed to give us a reasonable time period of advance notice if Baidu launches any new products or any new functions of existing products which utilize any travel-related online products or services, so that we can develop appropriate content for such new products or new features and become a non-exclusive preferred supplier of Baidu.

Non-Competition from Baidu

Subject to certain exceptions, Baidu agreed that, until the later of (i) three years from the date of the business cooperation agreement and (ii) the date on which Baidu holds less than 50% of the voting power attaching to our outstanding shares on a fully-diluted basis, it would not engage in certain businesses that may compete with our businesses, including (a) collection, editing, marketing, provision or sale of product or service databases for airline tickets (or related information), cruises, car rental, train tickets, hotels and tourist attraction tickets, including detailed specifications for such product or service (e.g., flight number, departure time and price information for airline tickets, room type, vacancy status and room rate information for hotels) and provision of search, price comparison and vendor transaction functionality or services based on such databases, and we and Baidu agree and acknowledge that such business is the same as our existing travel vertical search business; (b) collection, editing, marketing, provision or sale of commercial package tour products or services (which refer to the priced package tour products or services designed by professional travel companies or travel agencies, but exclude the then existing “Baidu Travel” products such as regular users’ UGC attractions information, travel routes or strategies) databases and any search, price comparison and transactions based on such databases, and (c) provision of group purchase/sales, agent sales, non-transparent pricing sales and other e-commerce travel products or services (including airline tickets (or related information), hotels, train tickets, and scenic attraction tickets).

Baidu’s Shareholder Rights

Registration Rights. Same as certain other shareholders of us, Baidu is entitled to registration rights, subject to customary restrictions. See “Description of Share Capital—Registration Rights.”

Baidu’s Pre-emption Rights. If upon the closing of this offering and after giving effect to any proposed sale by any shareholders of ordinary shares in or in connection with this offering, Baidu’s pro forma ownership percentage of the total number of ordinary shares then issued and outstanding would reasonably be expected to be less than 50.1%, then Baidu will have the right, but not the obligation, to purchase from us such number of ordinary shares which would cause its pro forma ownership percentage to be equal to 50.1%.

 

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2013 Investment

In March 2013, we issued and sold a total of 21,662,296 ordinary shares to several investors, including Baidu Holdings Limited, for US$57.0 million pursuant to a share purchase agreement. The shares are subject to the investors’ rights agreement (as amended), the voting agreement (as amended) and the transfer of shares agreement (as amended) that we entered into in connection with the Baidu Transaction.

Our Corporate Structure

The following diagram illustrates our corporate structure, the places of formation and the ownership interests of our significant subsidiaries, the VIE and its significant subsidiaries immediately following this offering, assuming no exercise of the over-allotment option granted to the underwriters:

 

LOGO

Contractual Arrangements with our VIE and its shareholders

Since we are a Cayman Islands company and therefore are a foreign or foreign-invested enterprise under PRC law, neither we nor the WFOE is eligible to hold a license to operate a commercial website in China. Thus, in order to comply with PRC laws and regulations we operate our website in China through the VIE by exercising effective control over its operations and receiving economic benefits generated from the VIE through a series of contractual arrangements. For detailed discussion about the relevant PRC laws and regulations, please see “Regulation.”

We originally obtained control over the VIE in October 2006 through a series of contractual arrangements, including an exclusive services agreement and other related agreements. The current contractual arrangements

 

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were amended and restated in October 2012, and further supplemented in April 2013 except for the power of attorney.

Restated Exclusive Technical Consulting and Services Agreement. Pursuant to the restated exclusive technical consulting and services agreement between the VIE and the WFOE, the WFOE will provide technical, marketing and management consulting services to the VIE on an exclusive basis. In consideration for these services the VIE will pay the WFOE based on a set formula defined in this agreement and during the term of this agreement the WFOE has the right to adjust the service fee at its sole discretion without the consent of the VIE. Based on the formula provided in this agreement, the service fee payable by the VIE to the WFOE has been nil to date. The WFOE will exclusively own any intellectual property arising from the performance of this agreement. This Restated Exclusive Technical Consulting and Services Agreement will continue to be in effect until terminated by the WFOE.

Restated Loan Agreement. Pursuant to the restated loan agreement, the WFOE granted interest-free loans of RMB6.6 million to the Baidu nominee and RMB4.4 million to Mr. Chenchao (CC) Zhuang. The WFOE may request repayment of these loans at its sole discretion with a prior notice. The loans are only repayable by such shareholders through a transfer of his or her equity interest in the VIE to the WFOE or its designated party, in proportion to the amount of the loan to be repaid. Further, the shareholders agreed that the total consideration from the transfer or sale of any equity interest or assets of the VIE shall first be applied to the outstanding balance under the restated loan agreement and the restated exclusive technical consulting and services agreement. The term of the restated loan agreement will continue indefinitely until such time as (i) the Baidu nominee and Mr. Chenchao (CC) Zhuang receive a repayment notice from the WFOE and the Baidu nominee and Mr. Chenchao (CC) Zhuang fully repay the loans, or (ii) an event of default (as defined therein) occurs unless the WFOE sends a notice indicating otherwise within 15 calendar days after it is aware of such event.

Restated Equity Option Agreement. Pursuant to the restated equity option agreement, among us, the WFOE, the VIE and each shareholder of the VIE, the shareholders of the VIE granted the WFOE and us or our designated persons the exclusive and irrevocable rights to purchase part or all of their equity interests in the VIE. We may decide in our sole discretion, whether the rights granted under the agreement will be exercised by us or by the WFOE. The WFOE may decide the form of payment in consideration for the equity option. In the event of liquidation or dissolution of the VIE, all assets of the VIE shall be sold to the WFOE at the lowest selling price permitted by applicable PRC laws and any proceeds from the sale, together with any residual interest in the VIE, shall be remitted to the WFOE immediately. The VIE’s shareholders may not transfer any part of his or her equity interest to any party other than us or our designated party, and may not pledge or create or permit any security interest or similar encumbrance to be created on all or any part of his equity interest. We and the WFOE are obligated, to the extent permitted by law, to provide financing support to the VIE to ensure the cash flow requirements of its ordinary operations and to offset any loss from such operations. We and the WFOE will not request repayment if the shareholders of the VIE are unable to repay. The equity option agreement will remain effective with respect to each of the VIE’s shareholders until all of his or her equity interest has been transferred or we terminate the agreement unilaterally with a 30 days prior written notice.

Equity Interest Pledge Agreement. Pursuant to an equity interest pledge agreement among the WFOE and the VIE’s shareholders, each VIE’s shareholders agreed to pledge all of his equity interests in the VIE, along with all rights, titles and interests in connection with and arising from such equity interest, to the WFOE as collateral to ensure the performance of its obligations under the aforementioned loan agreement, equity option agreement, and exclusive technical consulting and services agreement. The WFOE may enforce this pledge upon the occurrence of a settlement event or as required by PRC laws as specified in this equity interest pledge agreement, such as the termination or expiration of the aforementioned exclusive technical consulting and services agreement or equity option agreement, the insolvency or potential insolvency of the VIE or its shareholders, or an event of default specified in the agreement. The pledge, along with this agreement, must be and has been registered with the SAIC and has become effective upon such registration. It will expire when all obligations under the aforementioned loan agreement, equity option agreement and exclusive technical consulting and services agreement have been satisfied, or

 

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the pledgor completes a transfer of equity interest pursuant to the aforementioned equity option agreement so that it no longer holds any equity interest in the VIE. In enforcing the pledge, the WFOE is entitled to dispose of the pledge and have priority in receiving payment by the evaluation or proceeds from the auction or sale of whole or part of the pledge until the obligations are settled.

Power of Attorney. Each of the shareholders of the VIE has executed a power of attorney, irrevocably authorizing an appointee of the WFOE, who shall be approved by us, to exercise, in a manner approved by us, on the shareholder’s behalf his full rights as a shareholder of the VIE as granted by applicable laws and the VIE’s articles of association, including but not limited to full voting rights and the right to sell or transfer any or all of the shareholder’s equity interest in the VIE. Each Power of Attorney is effective until such time as the relevant shareholder of the VIE no longer holds any equity interest in the VIE.

As a result of these contractual arrangements, we are considered the primary beneficiary of the VIE as we have the power to direct activities of these entities and, can receive substantially all economic interests in these entities even though we do not necessarily receive all of the VIE’s revenues. Accordingly, we treat it as our variable interest entity under U.S. GAAP and have consolidated the results of operation of the VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. The VIE contributed 16.6%, 22.7%, 13.4% and 9.4% of our total consolidated revenues for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013, respectively.

In the opinion of our PRC legal counsel, TransAsia Lawyers, the ownership structure and the contractual arrangements among the WFOE, and the VIE and/or its shareholders comply with and immediately after this offering, will comply with current PRC laws and regulations. There are, however, substantial uncertainties regarding the interpretation and application of PRC laws and regulations. Accordingly, PRC governmental authorities may ultimately take a view inconsistent with the opinion of TransAsia Lawyers. See “Risk Factors—Risks Related to Our Corporate Structure.”

Our significant subsidiaries and affiliated entities

We operate all of our businesses through our WFOE, our VIE and their subsidiaries in the PRC. Queen’s Road Investment Management Limited, our wholly owned subsidiary in Hong Kong, provides limited display advertising service.

Our WFOE, Beijing Qunar Software Technology Company Limited, primarily provides pay-for-performance service which is the main source of our total revenues. Shanghai Qianlima Network Technology Co. Ltd., a wholly owned subsidiary of the WFOE, primarily engages in the provision of display advertising services.

Our VIE, Qunar.com Beijing Information Technology Company Limited, holds the ICP license, operates our www.qunar.com website, and provides display advertising services to our customers. Beijing JinDuYuanYou Information Technology Company Ltd., a wholly owned subsidiary of our VIE, provides limited pay-for-performance services. Qingdao Yi Lu Tong Xing International Travel Co., Ltd. and Beijing JiaXin HaoYuan Information Technology Company Ltd., both wholly owned subsidiaries of our VIE, primarily engage in the provision of travel related group-buying services.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We present below our selected consolidated financial data for the periods indicated. The following selected consolidated statement of operations data for the years ended December 31, 2010, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated financial statements of operations data for the six months ended June 30, 2012 and 2013 and the selected consolidated balance sheet data as of June 30, 2013 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all normal recurring adjustments that we consider necessary for a fair presentation of our financial position and operating results for the periods presented.

 

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The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of our results for any future periods.

 

    For the Year
Ended December 31,
    For the Six  Months
Ended June 30,
 
    2010     2011     2012     2012     2013  
    RMB     RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

             

Revenues:

             

Pay-for-performance services

    104,572        216,932        422,234        68,797        170,054        316,157        51,513   

Display advertising services

    15,014        33,334        46,670        7,604        18,689        25,812        4,206   

Other services

    4,296        12,161        32,821        5,348        15,821        16,838        2,743   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    123,882        262,427        501,725        81,749        204,564        358,807        58,462   

Cost of revenues

    (23,086     (43,682     (95,787     (15,607     (40,174     (72,890     (11,876
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    100,796        218,745        405,938        66,142        164,390        285,917        46,586   

Operating expenses

             

Product developments(1)

    (28,975     (83,110     (187,266     (30,512     (81,475     (120,416     (19,620

Sales and marketing(1)

    (62,481     (134,246     (243,800     (39,724     (111,189     (140,984     (22,972

General and administrative(1)

    (13,418     (43,135     (50,574     (8,241     (24,964     (40,908     (6,665
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (4,078     (41,746     (75,702     (12,335     (53,238     (16,391     (2,671

Interest income, net

    764        1,767        832        136        857        215        35   

Foreign exchange gain (loss), net

    430        (33     (656     (107     (20     (438     (71

Other income, net

    2        6        363        59        187        522        85   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

    (2,882     (40,006     (75,163     (12,247     (52,214     (16,092     (2,622

Income tax expense

    (1,492     (5,945     (15,950     (2,599     (11,883     (833     (136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (4,374     (45,951     (91,113     (14,846     (64,097     (16,925     (2,758
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deemed dividend

    —          (31,181     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

    (4,374     (77,132     (91,113     (14,846     (64,097     (16,925  

 

(2,758

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per ordinary share—basic

    (0.12     (0.51     (0.32     (0.05     (0.23     (0.06     (0.01

Net loss per ordinary share—diluted

    (0.12     (0.51     (0.32     (0.05     (0.23     (0.06     (0.01

Weighted average number of shares used in computation of basic net loss per ordinary share

    36,246,976        151,820,420        281,682,508        281,682,508        281,682,508        295,804,889        295,804,889   

Weighted average number of shares used in computation of diluted net loss per ordinary share

    36,246,976        151,820,420        281,682,508        281,682,508        281,682,508        295,804,889        295,804,889   

Foreign currency translation adjustment

    (3,739     (5,491     (542     (88     507        (5,593     (911
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to ordinary shareholders

    (8,113     (51,442     (91,655     (14,934     (63,590     (22,518     (3,669
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Non-GAAP Financial Data:

             

Adjusted net income/(loss)(2)

    460        (9,865     (57,257     (9,329)        (46,157     382        62   

Adjusted EBITDA(2)

    4,025        2,771        (24,010     (3,912)        (27,196     13,667        2,227   

 

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(1) Share-based compensation expenses were allocated in the operating expenses as follows:

 

     Years Ended December 31,      Six Months Ended
June 30,
 
         2010              2011              2012              2012              2013      
     RMB      RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Product developments

     2,356         13,546         15,241         2,483         7,835         7,699         1,255   

Sales and marketing

     1,152         5,471         6,573         1,071         4,178         1,910         311   

General and administrative

     1,326         9,437         5,392         879         2,602         4,738         772   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expenses

       4,834         28,454         27,206           4,433         14,615         14,347         2,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See “—Non-GAAP Financial Measures.”

 

     As of December 31,     As of June 30,  
     2011     2012     2013  
     RMB     RMB     US$     RMB     US$  
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

     123,445        148,511        24,198        285,579        46,531   

Short-term investments

     98,394        521        85        185,343        30,199   

Accounts receivable

     37,851        45,631        7,435        72,618        11,832   

Funds receivable

     3,347        30,838        5,025        117,045        19,071   

Total current assets

     290,546        359,478        58,572        926,794        151,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

     25,058        32,298        5,262        34,918        5,689   

Total assets

     320,973        392,352        63,928        970,261        158,090   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     193,020        315,016        51,327        540,826        88,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     196,158        332,610        54,194        559,296        91,129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mezzanine equity

     998,666        998,666        162,718        998,666        162,718   

Ordinary shares (US$ 0.001 par value; 800,000,000 shares authorized; 181,402,116, 181,402,116 and 203,064,412 shares issued and outstanding as of December 31, 2011, December 31, 2012 and June 30, 2013, respectively)

     1,172        1,172        191        1,306        213   

Additional paid-in capital

     (742,946     (716,364     (116,721     (342,757     (55,847

Accumulated other comprehensive income

     (11,061     (11,603     (1,891     (17,196     (2,802

Accumulated deficit

     (121,016     (212,129     (34,563     (229,054     (37,321
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ deficit

     (873,851     (938,924     (152,984     (587,701     (95,757
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, mezzanine equity and shareholders’ deficit

     320,973        392,352        63,928        970,261        158,090   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We did not declare or pay any cash dividends during the year ended December 31, 2010. We declared cash dividends in 2011 in connection with the Baidu Transaction and paid such cash dividends in 2011 and 2012. For more information about these cash dividend payments, please see Note 14 of the Notes to the Consolidated Financial Statements for the Years ended December 31, 2010, 2011 and 2012 included in this prospectus.

Non-GAAP Financial Measures

To supplement our consolidated financial statements which are presented in accordance with U.S. GAAP, we also use Adjusted net income/(loss) and Adjusted EBITDA as additional non-GAAP financial measures. We

 

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present these non-GAAP financial measures because they are used by our management to evaluate our operating performance, formulate business plans, and make strategic decisions on capital allocation. These non-GAAP financial measures enable our management to assess our operating results without considering the impact of non-cash charges, including share-based payments, depreciation and amortization, and expenses relating to free user traffic contributed by Baidu. Furthermore, these non-GAAP financial measures eliminate the impact of items that we do not consider indicative of the performance of our business. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating performance consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

Adjusted net income/(loss)

We define Adjusted net income/(loss) as net loss or income excluding share-based compensation expenses, non-cash expenses relating to free user traffic contributed by Baidu, Inc., which will continue for an initial term of three years starting from July 2011, and expenses relating to the Baidu Transaction. Adjusted net income/(loss) eliminates the effect of non-cash share-based compensation expenses and non-cash expenses relating to free user traffic contributed by Baidu. which have been and will continue to be significant recurring factors in our business, as well as the expenses relating to the one-time event of the Baidu Transaction. The use of Adjusted net income/(loss) has material limitations as an analytical tool, as Adjusted net income/(loss) does not include all items that impact our net loss or income for the period.

The free user traffic contributed by Baidu relates to free online marketing services and directing of user traffic to our website provided by Baidu pursuant to the business cooperation agreement entered into in connection with the Baidu Transaction in July 2011. We estimated the fair value of these non-cash expenses for recordation based on our estimate of the expenses for the same services that would have been incurred if we had operated as an entity unaffiliated with Baidu. We believe that such adjustment is meaningful to investors in our non-GAAP presentation because these non-cash expenses are not indicative of the performance of our business and it provides investors with the ability to assess our operating results without considering the impact of non-cash charges.

Adjusted EBITDA

Adjusted EBITDA, as we present it, represents net income or loss before income taxes, interest expense, depreciation and amortization, further adjusted to exclude share-based compensation expense and expenses relating to the Baidu Transaction.

The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expense that affect our operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation expense, amortization, income taxes and interest expenses/income as well as share-based compensation expenses and non-cash expenses relating to free user traffic contributed by Baidu, Inc. have been and may continue to be incurred in our business and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider changes in working capital, capital expenditures and other investing activities and should not be considered as a measure of our liquidity. The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP.

 

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We compensate for these limitations by reconciling the non-GAAP financial measures to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating our performance. The following table reconciles our Adjusted net income/(loss) and Adjusted EBITDA in the periods/years presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net loss:

 

     For the Year
Ended December 31,
    For the Six Months
Ended June 30,
 
     2010     2011     2012     2012     2013  
     RMB     RMB     RMB     US$     RMB     RMB     US$  
     (in thousands)  

Net loss

     (4,374     (45,951     (91,113     (14,846     (64,097     (16,925     (2,758
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add:

              

Share-based compensation expenses

     4,834        28,454        27,206        4,433        14,615        14,347        2,338   

Non-cash expenses relating to free user traffic contributed by Baidu, Inc.

     —          1,200        6,650        1,084        3,325        2,960        482   

Expenses relating to Baidu Transaction

     —          6,432        —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income/(loss) (non-GAAP)

     460        (9,865     (57,257     (9,329     (46,157     382        62   

Add:

              

Income tax expense

     1,492        5,945        15,950        2,599        11,883        833        136   

Depreciation

     2,073        6,691        16,876        2,750        7,078        10,719        1,747   

Interest expense

     —          —          421        69        —          1,733        282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (non-GAAP)

     4,025        2,771        (24,010     (3,912     (27,196     13,667        2,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In light of the foregoing limitations for each of the non-GAAP financial measures, when assessing our operating and financial performance, you should not consider Adjusted net income/(loss) or Adjusted EBITDA in isolation or as a substitute for our net loss, operating loss or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, because these non-GAAP measures may not be calculated in the same manner by all companies, they may not be comparable to other similar titled measures used by other companies.

 

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

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

Overview

We are the leading search-based commerce platform for the travel industry in China. We enable people to find best-value deals by aggregating and processing highly fragmented travel product information from tens of thousands of travel service providers, or TSPs, into an organized and user-friendly display through our proprietary technology. According to iResearch, we ranked No. 1 among all non-state-owned online travel companies in China in terms of the number of monthly unique visitors since November 2010.

As a technology-driven company, we have developed and are constantly improving our technology to retrieve and display large amount of real-time information about air tickets, hotels, vacation packages and other travel products based on user search queries. Our comprehensive and accurate search results are sourced from third-party travel websites as well as our SaaS system. Our platform is designed to facilitate and enhance convenience, data accuracy, and transaction security for our users. As a result of our focus on user experience, we have attracted a large and rapidly expanding user base. The number of our web users grew from 71.7 million in 2010 to 187.3 million in 2012. The number of our web users was 203.2 million in the 12-month period ended June 30, 2013. In addition, the number of our mobile users grew from 0.2 million in 2010 to 21.9 million in 2012. The number of our mobile users was 39.6 million in the 12-month period ended June 30, 2013.

Our customers include TSPs and display advertisers. Leveraging our large user base and our advanced technologies, we provide an attractive value proposition to our customers.

 

   

Our SaaS system enables TSPs with limited or no online presence, usually independent hotels and TSPs who have traditionally conducted business offline, to have advanced online outlets to sell products and services via the Internet. We provide our SaaS system free of charge to TSPs who use our pay-for-performance, or P4P, services.

 

   

Our P4P services provide an efficient channel for TSPs to reach a large and fast-growing number of travelers through qualified clicks, for which we charge on a CPC or CPS basis.

 

   

Additionally, our display advertising service provides targeted advertising solutions based on the demographics, search parameters and transaction history of our large user base, and our promotional programs expose TSPs to new online marketing methods while providing them with additional channels to distribute travel products to our users.

We have achieved substantial growth since the commencement of our operations in 2005. Our revenues increased from RMB123.9 million in 2010 to RMB262.4 million in 2011 and to RMB501.7 million (US$81.7 million) in 2012, and from RMB204.6 million in the six months ended June 30, 2012 to RMB358.8 million (US$58.5 million) in the six months ended June 30, 2013. We recorded net losses of RMB4.4 million, RMB46.0 million, RMB91.1 million (US$14.8 million), RMB64.1 million and RMB16.9 million (US$2.8 million) in 2010, 2011, 2012 and the six months ended June 30, 2012 and 2013, respectively. Our adjusted EBITDA was RMB4.0 million and RMB2.8 million in 2010 and 2011, respectively, and we recorded negative adjusted EBITDA of RMB24.0 million (US$3.9 million) in 2012. Our adjusted EBITDA was RMB13.7 million (US$2.2 million) in the six months ended June 30, 2013, compared to negative adjusted EBITDA of RMB27.2 million in the six months

 

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ended June 30, 2012. For information regarding adjusted EBITDA, see “Summary Consolidated Financial Data—Non-GAAP Financial Measures.”

Our business operations are subject to primarily PRC laws and regulations on a wide range of business activities, including but not limited to telecommunications services, Internet content services, travel services, insurance provision, and advertising services. In addition, we are subject to PRC laws and regulations on tax, foreign exchange, corporations, labor, information security, privacy and consumer rights protection. Changes in or failure to comply with these laws and regulations may significantly affect our business and financial performance. For a detailed description of the regulations that may directly or indirectly affect our business operations, please see the section entitled “Regulations.”

Description of Certain Statement of Operations Items

Revenues

We generated revenues from three sources: P4P services, display advertising services and other services. The following table sets forth the revenues generated from each source, both in absolute amount and as a percentage of total revenues for the periods indicated.

 

    For the Year
Ended December 31,
    For the Six Months
Ended June 30,
 
    2010     2011     2012     2012     2013  
    RMB     %     RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except percentages)  

Revenues:

                       

Pay-for-performance services

    104,572        84.4        216,932        82.7        422,234        68,797        84.2        170,054        83.1        316,157        51,513        88.1   

Display advertising services

    15,014        12.1        33,334        12.7        46,670        7,604        9.3        18,689        9.2        25,812        4,206        7.2   

Other services

    4,296        3.5        12,161        4.6        32,821        5,348        6.5        15,821        7.7        16,838        2,743        4.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    123,882        100.0        262,427        100.0        501,725        81,749        100.0        204,564        100.0        358,807        58,462        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

P4P services. Revenues from our P4P services constituted the significant majority of our total revenues in 2010, 2011, 2012 and the six months ended June 30, 2013, accounting for 84.4%, 82.7%, 84.2% and 88.1% for each period. Revenues from our P4P services are derived from qualified clicks generated from our search results, text links and other products on our website and starting from 2012, from search results on our mobile platform. We charge for our P4P services primarily on a CPC or CPS basis. Cash or credits provided to end users of our hotel coupon program launched in January 2013 are recognized as a deduction of revenue at each period end. We require the majority of our P4P customers to make advance payments and deposits to us from which we deduct charges for our services on an as-incurred basis. We bill certain airline customers on a monthly basis for our P4P services.

Our revenues from P4P services are primarily derived from web searches and are affected by the following key metrics:

 

   

Number of web search queries. Web search queries refer to user queries for travel information we process through our website. The number of our web search queries for air tickets and hotels increased from 899.7 million in 2010 to 1,139.4 million in 2011 and to 1,573.2 million in 2012, and from 742.3 million in the six months ended June 30, 2012 to 1,054.8 million in the six months ended June 30, 2013. The number of web search queries is directly affected by (i) the number of users who visit our website as well as (ii) the frequency on which they use our search services, as represented by the average number of search queries per user. We have focused on expanding our user base. The number of our web users increased from 71.7 million in 2010 to 110.2 million in 2011 and to 187.3 million in 2012, and further to 203.2 million in the 12-month period ended June 30, 2013. The increase in our user number during this period has resulted in a decrease in the number of web search queries per user as many new users tend to use our services less frequently than active users.

 

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Revenue per thousand web search queries. We use revenue per thousand web search queries, which is calculated as total revenues divided by total thousand web search queries, to measure how effectively we convert user queries to revenues. Our revenue per thousand web search queries for air tickets and hotels increased from RMB116.0 in 2010 to RMB189.6 in 2011 and further to RMB252.1 in 2012, and from RMB223.5 in the six months ended June 30, 2012 to RMB251.5 (US$41.0) in the six months ended June 30, 2013.

The table below shows the breakdown of our web search queries and revenues generated from P4P services for air tickets and hotels from web users for the periods indicated:

 

    For the Year
Ended December 31,
    For the Six Months
Ended June 30,
 
    2010     2011     2012     2012     2013  

Web search queries for air tickets (in thousands)

    830,188        1,031,889        1,394,377        664,767        964,566   

Revenue from web search-air tickets (RMB in thousands)

    77,826        170,577        300,013        128,057        214,981   

Revenue per thousand web search queries for air tickets (RMB)

    93.7        165.3        215.2        192.6        222.9   

Web search queries for hotels (in thousands)

    69,532        107,533        178,852        77,574       
90,205
  

Revenue from web search-hotels (RMB in thousands)

    26,524        45,530        96,536        37,887        50,307   

Revenue per thousand web search queries for hotels (RMB)

    381.5        423.4        539.8        488.4        557.7   

We launched our mobile platform in July 2010 and started to monetize qualified clicks generated from our mobile platform in June 2012. The table below shows the breakdown of our mobile search queries and revenues generated from P4P services for air tickets and hotels through our mobile platform for the periods indicated:

 

    For the Three Months Ended  
    September 30, 2012     December 31, 2012     March 31, 2013     June 30, 2013  

Mobile search queries for air tickets (in thousands)

    34,699        55,805        98,547        134,450   

Revenue from mobile search-air tickets (RMB in thousands)

    2,511        4,895        10,833        12,760   

Revenue per thousand mobile search queries for air tickets (RMB)

    72.4        87.7        109.9        94.9   

Mobile search queries for hotels (in thousands)

    19,713        22,040        32,024        48,638   

Revenue from mobile search-hotels (RMB in thousands)

    4,754        5,215        9,277        9,280   

Revenue per thousand mobile search queries for hotels (RMB)

    241.1        236.6        289.7        190.8   

Our revenues from P4P services are also indirectly affected by certain other factors, including the number and variety of the TSPs’ travel products provided on our platform. We launched a hotel coupon program in January 2013 to offer credit rebates to end users who make reservations through us with some of our hotel customers. The credit rebate amount we offer to the end users is, in accordance with our accounting policies, simultaneously recognized as a reduction of our revenues from the hotel customers. Since we started the hotel coupon program in January 2013, the amount of credit rebate we offered to the end users significantly increased from RMB1.2 million in the three months ended March 31, 2013 to RMB9.3 million (US$1.5 million) in the three months ended June 30, 2013. We expect that revenues from our P4P services will continue to constitute a majority of our total revenues in the near future.

 

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Display advertising services. Revenues from our display advertising services are primarily derived from graphical advertisements placed on our website. We charged for our display advertising services on a cost-per-impression basis prior to 2012. Since 2012, we have been charging for our display advertising services on a cost-per-time basis to be in line with the market practice for online advertising in China. We price our display advertising service based on various factors, including website channel, size and web page position of advertisement, and frequency and duration of display. We implement advanced data mining technology to analyze user demographics, search parameters and search history to improve the effectiveness of our display advertisements. The majority of our advertising customers purchase our display advertising services through third-party advertising agencies. As is customary in the advertising industry in China, we pay rebates to such third-party advertising agencies and recognize revenues net of these rebates.

The most significant factors that directly affect our revenues from display advertising services are the number of advertising customers that use our display advertising services and the average spending per advertising customer. The following chart sets forth the number of advertising customers and their advertising spending for the periods indicated:

 

     For the Year
Ended  December 31,
     For the Six Months
Ended June 30,
 
         2010              2011              2012              2012              2013      

Number of advertising customers

     105         155         164         101         105   

Average spending per advertising customer (RMB in thousands)

     143.0         215.1         284.6         185.0         245.8   

Historically we have been able to increase both metrics to drive the significant increase in our revenues from display advertising services. We plan to focus on improving the effectiveness of our display advertisements and attracting more higher-spending display advertising customers in the future.

Our display advertising revenues are also significantly influenced by the overall advertising spending in China, the portion devoted to Internet advertising, and our share of the overall Internet travel advertising market, which depends primarily on the number of users attracted to our website and the amount of time these users spend on our website. In addition, advertising revenues are affected by seasonality and are generally higher in the second half of each year due to the fact that higher advertising budgets are typically spent in the last quarter of the year.

Other services. We also generated a small portion of revenues from other services, primarily the sales of group-buying deals for travel products since 2011, and our participation in Google’s AdSense program to display text links of Google’s advertising customers on our website, which we discontinued in December 2010. Our revenues from these services consist of the net commissions we retain from the sale of group-buying vouchers after paying the agreed-upon amount to vendors of group-buying services and fees paid to us by Google for clicks of these text links on our website. Revenues from other services also include commissions received from third party payment service providers since the second half of 2011.

 

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Cost of revenues

Cost of revenues primarily consists of (i) data acquisition costs incurred when we retrieve air ticket information from TSPs; (ii) bandwidth and server hosting costs, (iii) depreciation expenses, (iv) other miscellaneous costs, and (v) sales tax and related surcharges imposed by the government. The following table sets forth the components of our cost of revenues by amount and as a percentage of total revenues for the periods presented:

 

    For the Year Ended December 31,     For the Six Months Ended June 30,  
    2010     2011     2012     2012     2013  
    RMB     % of
revenues
    RMB     % of
revenues
    RMB     US$     % of
revenues
    RMB     % of
revenues
    RMB     US$     % of
revenues
 
    (in thousands, except percentages)  

Data acquisition costs

    9,405        7.6        13,714        5.2        27,784        4,527        5.5        13,075        6.4        18,664        3,041        5.2   

Bandwidth and server hosting costs

    3,581        2.9        5,577        2.1        9,381        1,528        1.9        4,947        2.4        4,996        814        1.4   

Depreciation

    1,114        0.9        2,966        1.1        6,075        990        1.2        2,591        1.3        4,111        670        1.1   

Others

    1,905        1.5        5,384        2.1        12,289        2,002        2.5        4,389        2.1        11,196        1,824        3.1   

Sales tax and related surcharges

    7,081        5.7        16,041        6.1        40,258        6,559        8.0        15,172        7.4        33,923        5,527        9.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    23,086        18.6        43,682        16.6        95,787        15,607        19.1        40,174        19.6        72,890        11,876        20.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Data acquisition costs. We incur data acquisition costs when we retrieve information from TSPs to confirm the availability and authenticity of air tickets searched on our platform. Our data acquisition costs increased significantly from 2010 to 2012, and from the first six months of 2012 to the first six months of 2013, as a result of the increase in the search queries for air tickets. We expect th