F-1/A 1 formf1.htm F-1/A China Oumei real Estate Inc.: Form F-1 - Filed by newsfilecorp.com

As filed with the Securities and Exchange Commission on December 6, 2011
Registration No. 333-166658

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________

AMENDMENT NO. 14
TO FORM S-1
ON
FORM F-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

CHINA OUMEI REAL ESTATE INC.
(Exact name of Registrant as specified in its charter)

Not Applicable
(Translation of Registrant’s Name into English)

Cayman Islands 6552 Not Applicable
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)  
   __________________________________  

Floor 28, Block C
Longhai Mingzhu Building
No.182 Haier Road, Qingdao 266000
People’s Republic of China
(86) 532 8099 7969
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
  __________________________________
 
Mr. Zhaohui John Liang
634 Donna Ct.
River Vale, NJ 07675
(201) 497-5400
  __________________________________
 
(Names, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Louis A. Bevilacqua, Esq.
Thomas M. Shoesmith, Esq.
Joseph R. Tiano, Jr., Esq.
Pillsbury Winthrop Shaw Pittman LLP
2300 N Street, N.W.
Washington, D.C. 20037
(202) 663-8000

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

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

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 the same offering. [_]


CALCULATION OF REGISTRATION FEE




Title of each class of securities to be registered


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

Amount of
registration
fee
Ordinary Shares, $0.002112 par value per share 765,000(4) $4.00(2) $3,060,000 $219
Ordinary Shares Underlying 6% Convertible Preference Shares, $0.002112 par value per share 2,774,700(5) $4.00(2) $11,098,800 $792
Ordinary Shares Underlying Warrants, $0.002112 par value per share 1,387,350(6) $6.00(3) $8,324,100 $594
Ordinary Shares Underlying Warrants, $0.002112 par value per share 138,735(7) $5.00(3) $693,675 $50
TOTAL     $23,176,575 $1,655(8)

(1) In accordance with Rule 416(a), the registrant is also registering hereunder an indeterminate number of additional ordinary shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457, based on the last private sales price for ordinary shares of the registrant as there is currently no public market price for the registrant’s ordinary shares. Management considered the total number of shares outstanding post offering, the public offering of ordinary shares, estimated market capitalization, forward looking net income, the targeted price-to-earnings ratio and the effect of the current global economic crisis to determine the offering price per share. Accordingly, taking the foregoing factors into consideration, the registrant arrived at the proposed offering price per share, which is the effective price per share paid by the investors in the registrant’s April 2010 private placement.

(3) Calculated in accordance with Rule 457(g) based upon the exercise price of the warrants held by selling stockholders named in this registration statement.

(4) Represents the registrant’s ordinary shares being registered for resale that have been issued to the selling stockholders named in this registration statement.

(5) Represents ordinary shares underlying 6% convertible preference shares being registered for resale that have been issued to the selling stockholders named in this registration statement.

(6) Represents ordinary shares issuable upon exercise of five-year warrants to purchase ordinary shares being registered for resale that have been issued to certain selling stockholders named in this registration statement.

(7) Represents ordinary shares issuable upon exercise of three-year warrants to purchase ordinary shares being registered for resale that such warrants have been issued to certain selling stockholder named in this registration statement.

(8) Previously paid.

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



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

Subject to completion, dated December 6, 2011

5,065,785 Ordinary Shares

This prospectus relates to 5,065,785 ordinary shares that may be sold from time to time by the selling stockholders named in this prospectus, which includes:

  • 765,000 ordinary shares;
  • 2,774,700 ordinary shares underlying the 6% Convertible Preference Shares, par value $0.002112 per share; and
  • 1,526,085 ordinary shares issuable to the selling stockholders upon the exercise of warrants.

We will not receive any proceeds from the sales of outstanding ordinary shares by the selling stockholders, but we will receive funds from the exercise of warrants held by the selling stockholders, if exercised for cash.

Our ordinary shares are not currently listed or quoted for trading on any national securities exchange or national quotation system. We intend to apply for the quotation of our ordinary shares on OTC Bulletin Board maintained by the Financial Industry Regulatory Authority, Inc. The selling stockholders will sell our shares at a price per share equal to $4.00 until our shares are quoted on the OTC Bulletin Board, and thereafter at prevailing market prices or at privately negotiated prices.

The purchase of the securities involves a high degree of risk. See section entitled “Risk Factors” beginning on page 8.

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

 ______________________

The date of this prospectus is                         , 2011.


TABLE OF CONTENTS

  Page
   
Prospectus Summary 1
Risk Factors 8
Special Note Regarding Forward-Looking Statements 21
Use Of Proceeds 22
Determination Of Offering Price 22
Expenses Related To This Offering 23
Market For Our Our Ordinary Shares 24
Dividend Policy 25
Exchange Rate Information 26
Selected Consolidated Financial Data 27
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 29
Corporate History And Structure 48
Our Industry 52
Our Business 61
Management 78
Principal Shareholders 85
Related Party Transactions 87
Description Of Share Capital 88
Shares Eligible For Future Sale 97
Taxation 98
Enforceability Of Civil Liabilities 101
Selling Stockholders 102
Plan Of Distribution 106
Legal Matters 108
Experts 108
Where You Can Find More Information 108
Financial Statements F-1

You should rely only on the information provided in this prospectus. Neither we nor the selling stockholders have authorized anyone to provide you with additional or different information. The selling stockholders are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should assume that the information in this prospectus is accurate only as of the date on the front of the document.

i


PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements, the notes thereto and matters set forth under “Risk Factors.”

USE OF TERMS

Except as otherwise indicated by the context, references in this prospectus to “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of China Oumei Real Estate Inc., a Cayman Islands company, and its consolidated subsidiaries, Leewell, Oumei, Oumei Weiye, Caoxian Industrial, Longhai Hotel, Longhai Real Estate, Qingdao Xudong, Weifang Longhai Industry, Weifang Longhai Zhiye, Weifang Qilu, Weihai Economic and Weihai Mingwei.

In addition, unless the context otherwise requires and for the purposes of this prospectus only:

  • “Caoxian Industrial” refers to Caoxian Industrial Properties Co., Ltd., a PRC limited company;

  • “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

  • “Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China;

  • “Leewell” refers to Leewell Investment Group Limited, a Hong Kong company;

  • “Longhai Hotel” refers to Longhai Hotel Co., Ltd., a PRC limited company;

  • “Longhai Real Estate” refers to Longhai Real Estate Properties Co., Ltd., a PRC limited company;

  • “Oumei” refers to Qingdao Oumei Real Estate Development Co., Ltd., a PRC limited company;

  • “Oumei Weiye” refers to Qingdao Oumei Weiye Project Management Co., Ltd., a PRC limited company;

  • “PRC,” “China,” and “Chinese,” refer to the People’s Republic of China;

  • “Qingdao Xudong” refers to Qingdao Xudong Real Estate Development Co., Ltd., a PRC limited company;

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

  • “SEC” refers to the Securities and Exchange Commission;

  • “Securities Act” refers to the Securities Act of 1933, as amended;

  • “U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States;

  • “Weifang Longhai Industry” refers to Weifang Longhai Industry Co., Ltd., a PRC limited company;

  • “Weifang Longhai Zhiye” refers to Weifang Longhai Zhiye Co., Ltd., a PRC limited company;

  • “Weifang Qilu” refers to Weifang Qilu Guotai Properties Co., Ltd., a PRC limited company;

  • “Weihai Economic” refers to Weihai Economic & Technology Development Zone Longhai Properties Co., Ltd., a PRC limited company; and

  • “Weihai Mingwei” refers to Weihai Mingwei Industry Co., Ltd., a PRC limited company.

In this prospectus we are relying on and we refer to information and statistics regarding the real estate industry in China that we have obtained from various cited public sources. Any such information is publicly available for free and has not been specifically prepared for us for use or incorporation in this prospectus or otherwise.

In addition, at present, there is no uniform standard to categorize the different types and sizes of cities in China. In this prospectus, we refer to Beijing, Shanghai, Guangzhou and Shenzhen as tier one cities, which are the most populous, affluent and competitive cities in the country. They also represent the highest standard and concentration of real estate development activities in China. Tier two cities are cities that generally meet the following criteria, excluding the four aforementioned tier one cities:

  • Gross Domestic Product, or GDP, over RMB 200 billion (US$29 billion);

  • GDP per capita over RMB 14,000 (US$2,050);

  • Population with permanent residency in urban area over 1 million;

  • Urban area over 100 km2;

  • Annual sales in residential real estate over 1.5 million square meters; and

  • Average unit selling price of residential real estate over RMB 3,000 (US$439) per square meter.

Tier three cities are the cities that do not meet one or more criteria listed above.

1


THE COMPANY

Overview of Our Business

We are one of the leading real estate development companies located in Qingdao, Shandong province, China. We began operations in 2001, and in 2010 we were recognized in the official City of Qingdao Commission of Development & Construction’s evaluation as one of the ten most outstanding real estate developers in Qingdao, measured by a combination of revenue, customer satisfaction, as well as several other factors.

We develop and sell residential and commercial properties, targeting middle and upper income customers in the coastal region of the Shandong peninsula (Greater Qingdao) located in northeastern China, including the cities of Qingdao, Weihai and Yantai, as well as other inland locations, such as Weifang.

Substantially all of the architecture, engineering, and construction of our projects are outsourced to third-party professional service providers and contractors. Our third-party contractors are responsible for providing labor and procuring all of the raw materials used in our projects. To ensure construction quality, our construction contracts contain quality warranties and penalty provisions for poor work quality. See “Our Business — Architecture, Engineering and Construction” and “Quality and Performance” for more information.

Since our inception, we have completed 18 projects having a gross floor area, or GFA, of 1,513,898 square meters, of which approximately 95% has been sold. In addition, we have six projects under construction with a total GFA of 488,299 square meters.

In the fiscal year ended December 25, 2010, our total sales increased 17.2% to $110.5 million from $94.3 million in fiscal year 2009, and our net income increased 65.2% to $34.9 million in fiscal year 2010 from $21.2 million in fiscal year 2009. In the six months ended June 25, 2011, our total sales decreased 45.1% to $31.0 million from $56.5 million in the same period in 2010, and our net income decreased 28.8% to $5.7 million in the six months ended June 25, 2011 from $8.0 million in the same period in 2010.

Our Competitive Strengths

We believe the following strengths allow us to compete effectively in the Chinese real estate development industry:

  • We have a proven track record of successful large-scale properties development. Since our inception in 2001, we have sold approximately 95% of our completed 18 projects, which have a GFA of 1,513,898 square meters in aggregate. Our ability to cater to our customers’ preferences has been a major factor in the growth of our business. By leveraging our experience and track record, we believe that we can penetrate into the real estate markets in other tier two and tier three cities in China.

  • We have a widely recognized brand name in an attractive coastal market. We have received many awards that acknowledge the quality of our real estate developments. We believe that the quality of our real estate developments and the recognition of our brand name by our customers are important to our success.

  • We have an experienced management team. We have an experienced management team with extensive operating experience and industry knowledge. Our Chairman, Mr. Antoine Cheng, has many years of experience in working with businesses and has developed good business contacts, including in the real estate development business in China. Our Chief Executive Officer, Mr. Weiqing Zhang, has more than 15 years of experience in real estate development and our Chief Financial Officer, Mr. Zhaohui John Liang, has over 15 years of experience in real estate finance, investment and development. Mr. Yang Chen, our President, has more than 17 years of experience in accounting and financial management. In addition, our staff is well trained and is motivated by our incentive programs.

  • We have substantial land reserves at premier locations for use as new development projects. We believe that our ownership of premium land reserves and the fact that we have already planned the development of specific projects for some of those land reserves gives us an advantage over our competitors who do not have similar reserves and must acquire land before commencing their next projects.

2


  • We have a strong financial profile and excellent credit record. Through credit facilities with top Chinese banks, including Industrial and Commercial Bank of China, who has given us an AA rating, we are able to prudently leverage our business and take advantage of business opportunities.

  • We have a compelling growth strategy. We expect to continue our growth by achieving higher returns on projects, continuing development of large middle income residential projects, expanding operations to other tier two and tier three cities in China and acquiring projects from distressed developers.

Our Growth Strategy

We intend to increase our market share in the Shandong Province and in other provinces in China by pursuing the following strategies:

  • We plan to continue to expand in Shandong Province through new urban development projects. In the next five years we will continue to focus on real estate development along the coastline of the Shandong peninsula, particularly in the Qingdao and Weihai regions. We believe that the real estate market in the Qingdao-Weihai region will remain strong over the next several years, not only due to the market awareness created by the global media coverage of Qingdao and its Olympic sailing events, but also because of the unique attraction the region holds for international customers, travelers and investors.

  • We plan to continue to provide cost-effective properties for middle income customers. We intend to capitalize on growth opportunities by continuing to offer high-quality mid-sized residential units featuring modern designs and convenient facilities at competitive prices to middle-income consumers in China.

  • We plan to penetrate the high-end real estate market. We intend to penetrate into the high-end real estate market by developing villas, hotels, and commercial and office buildings that generate high returns. We expect these high- end projects to generate higher returns on investment than middle-income residential properties.

  • We plan to improve project management and cost control. We expect to improve our project management by adopting more stringent financial disciplines in our operations at each stage that will help us to increase our returns on our project investments. We will use our capital more effectively by better managing our assets, receivables and expenditures to attain pre-set targets. We will better anticipate the best land rights reserves for development and will be able to capture them at the lowest prices to maximize our potential returns on our land and on our project investments.

Our Corporate History and Background

We were organized under the laws of the Cayman Islands on March 10, 2006 as a blank check development stage company formed for the purpose of acquiring an operating business, through a stock exchange, asset acquisition or similar business combination. From our inception until we completed our reverse acquisition of Leewell on April 14, 2010, our operations consisted entirely of identifying, investigating and conducting due diligence on potential businesses for acquisition.

On April 14, 2010, we completed a reverse acquisition transaction through a share exchange with Leewell whereby we acquired 100% of the issued and outstanding capital stock of Leewell. As a result of the reverse acquisition, Leewell became our wholly-owned subsidiary and Longhai Holdings Company Limited, or Longhai Holdings, the former shareholder of Leewell, became our controlling shareholder. The share exchange transaction with Leewell was treated as a reverse acquisition, with Leewell as the acquirer and China Oumei Real Estate Inc. as the acquired party.

On April 14, 2010, we also completed a private placement transaction with a group of accredited investors. Pursuant to a subscription agreement with the investors, or the Subscription Agreement, we issued to the investors an aggregate of 2,774,700 units, or the Units, for a purchase price of $11,098,800, or $4.00 per Unit. Each Unit consists of one Preference Share, and one warrant to purchase 0.5 ordinary shares, or the Warrants. See “Corporate History and Structure” below for a detailed description of the reverse acquisition and the private placement transaction.

3


Our Corporate Structure

All of our business operations are conducted through our Chinese subsidiaries. The chart below presents our corporate structure:


Corporate Information

Our principal business office is located in China at Floor 28, Block C Longhai Mingzhu Building, No. 182 Haier Road, Qingdao 266000. The telephone number at our executive offices is (86) 532 8099 7969. Our registered office is PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands and our registered agent is Maples Corporate Services Limited. Our agent for service of process in the United States is Mr. Zhaohui John Liang, 634 Donna Ct., River Vale, NJ 07675. Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. We maintain a website at http://www.chinaoumeirealestate.com that contains information about our company, but that information is not part of this prospectus.

4


THE OFFERING

Ordinary shares offered by selling stockholders

5,065,785 shares, consisting of 765,000 ordinary shares, 2,774,700 ordinary shares underlying the Preference Shares, and 1,526,085 ordinary shares issuable upon the exercise of warrants held by the selling stockholders. This number represents 14.34% of our current outstanding ordinary shares, on a fully diluted basis (based on 31,020,062 ordinary shares issued and outstanding as of the date of this prospectus).

Ordinary shares outstanding after the offering, assuming all the Preference Shares are converted into ordinary shares and all the warrants are exercised for cash

35,320,847 shares

Use of proceeds

We will not receive any proceeds from the sale of ordinary shares by the selling stockholders. We will, however, receive approximately $7.9 million from the exercise of the warrant held by the selling stockholders, if exercised for cash.

Risk factors

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

Trading market

We intend to apply for the quotation of our ordinary shares on OTC Bulletin Board. There can, however, be no assurance that our ordinary shares will be accepted for quotation on the OTC Bulletin Board.

5


SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following summary historical financial information should be read in conjunction with our consolidated financial statements and related notes and the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. The summary consolidated statement of operations data for the years ended December 25, 2008, 2009 and 2010 and the summary balance sheet data as of December 25, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary balance sheet data as of December 25, 2008 are derived from our unaudited consolidated financial statements not included in this prospectus. We derived our summary consolidated financial data as of June 25, 2011 and for the six months ended June 25, 2010 and 2011 from our unaudited consolidated financial statements included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that our management considers necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods presented.

Our audited consolidated financial statements for the fiscal years ended December 25, 2008, 2009 and 2010 and our unaudited consolidated financial statements for the fiscal years ended December 25, 2006 and 2007 and for the six months ended June 25, 2010 and 2011 are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The summary financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes contained elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance. Except as disclosed elsewhere in this prospectus, we have not experienced any significant changes since the date of our unaudited consolidated financial statements for the six months ended June 25, 2010 and 2011.

U.S. dollars, except shares   Fiscal Year Ended December 25,     Six Months Ended June 25,  
    2008     2009     2010     2010     2011  
Statements of Operations Data                     (unaudited)     (unaudited)  
Total sales $  77,032,561   $  94,315,500   $  110,518,421   $  56,461,539   $  31,012,048  
Total cost of sales   (46,321,251 )   (58,296,408 )   (77,209,814 )   (40,146,847 )   (18,239,846 )
Gross profit   30,711,310     36,019,092     33,308,607     16,314,692     12,772,202  
Advertising expenses   (112,263 )   (268,222 )   (217,596 )   (149,909 )   (56,130 )
Commission expenses   (574,262 )   (84,982 )   (214,566 )       (75,685 )
Selling expenses   (81,415 )   (49,800 )   (61,967 )   (31,280 )   (39,778 )
Bad debt recovery (expense)   (1,198,942 )   (207,523 )   987,374     180,833     (729,762 )
General and administrative expenses   (2,283,744 )   (4,655,596 )   (7,390,963 )   (3,779,215 )   (2,906,924 )
Income from operations   26,460,684     30,752,969     26,410,889     12,535,121     8,963,923  
Miscellaneous income (expense)(1)   91,945     327,294     23,899,865     181,224     (363,635 )
Interest expense   (968,710 )   (866,751 )   (325,969 )   (234,529 )   (22,990 )
Income before income taxes and extraordinary item 25,583,919 30,213,512 49,984,785 12,481,816 8,577,298
Income taxes   (6,602,194 )   (9,058,226 )   (15,042,327 )   (4,436,498 )   (2,845,108 )
Income before extraordinary item   18,981,725     21,155,286     34,942,458     8,045,318     5,732,190  
Extraordinary item, net   12,499,576                  
Net income $  31,481,301   $  21,155,286   $  34,942,458   $  8,045,318   $ 5,732,190  
Preference stock dividends                   476,184  
Net earnings applicable to common shareholders $ 31,481,301 $ 21,155,286 $ 34,942,458 $ 8,045,318 $ 5,256,006
Earnings per common share basic $  1.04   $  0.70   $  1.14   $  0.26   $  0.18  
Earnings per common share diluted $  1.04   $  0.70   $  1.07   $  0.25   $ 0.17  
Weighted average common shares outstanding basic 30,235,062 30,235,062 30,770,172 30,541,903 31,020,062
Weighted average common shares outstanding diluted 30,235,062 30,235,062 32,708,661 31,654,832 33,794,762

(1)

Included in miscellaneous income for the fiscal year ended December 25, 2010 is the sale of a land use right. On December 16, 2010, we executed a buyout transaction with the government of Licang District, Qingdao, in which the government agreed to pay us approximately $23.7 million in exchange for the pre-development land use right in connection with our planned Dongli Garden 2 project. We had previously planned to build residential units on the land, subject to the government’s re-zoning procedure. See Note 21 to our consolidated financial statements included elsewhere in this prospectus for more information

6



    As of December 25,     As of  
    2008     2009     2010     June 25, 2011  
Balance Sheet Data   (unaudited)                 (unaudited)  
Working capital $  18,831,257   $  44,207,072   $  102,581,083   $  115,152,180  
Total assets   178,648,355     196,332,843     260,120,259     281,268,182  
Total liabilities   115,401,647     101,981,897     115,479,273     127,506,305  
Stockholders’ equity   63,246,708     94,350,946     144,640,986     153,761,877  

7


RISK FACTORS

The ordinary shares being offered by us are highly speculative in nature, involve a high degree of risk and should be purchased only by persons who can afford to lose the entire amount invested in our ordinary shares. Before purchasing any of our ordinary shares, you should carefully consider the following factors relating to our business and prospects. You should pay particular attention to the fact that we conduct all of our operations in China and are governed by a legal and regulatory environment that in some respects differs significantly from the environment that may prevail in the U.S. and other countries. If any of the following risks actually occurs, our business, financial condition or operating results will suffer, the trading price of our ordinary shares could decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

The recent financial crisis could negatively affect our business, results of operations, and financial condition.

The recent credit crisis and turmoil in the global financial system may have an impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. Our business requires access to substantial financing. If we are not able to obtain adequate financing in a timely manner, our ability to complete existing projects and expand our business could be materially adversely affected. In addition, these economic conditions also impact levels of consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future. Real estate market generally declines during recessionary periods and other periods where disposable income is adversely affected. If demand for our products fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.

Our business is susceptible to fluctuations in the real estate market of China, especially in certain areas of eastern China where our operations are concentrated, which may adversely affect our sales and results of operations.

Our business depends substantially on the conditions of the PRC real estate market. Demand for real estate in China has grown rapidly in the recent decade but such growth is often coupled with volatility in market conditions and fluctuations in real estate prices. For example, the rapid expansion of the real estate market in major provinces and cities in China in the early 1990s, such as Shanghai, Beijing and Guangdong Province, led to an oversupply in the mid-1990s and a corresponding fall in real estate values and rentals in the second half of the decade. Following a period of rising real estate prices and transaction volume in most major cities, the industry experienced a severe downturn in 2008, with transaction volume in many major cities declining by more than 40% compared to 2007.

Average selling prices also declined in many cities during 2008. Fluctuations of supply and demand in China’s real estate market are caused by economic, social, political and other factors. To the extent fluctuations in the real estate market adversely affect real estate transaction volumes or prices, our financial condition and results of operations may be materially and adversely affected.

We are heavily dependent on the performance of the residential property market in China, which is at a relatively early development stage.

The residential property industry in the PRC is still in a relatively early stage of development. Although demand for residential property in the PRC has been growing rapidly in recent years, such growth is often coupled with volatility in market conditions and fluctuation in property prices. It is extremely difficult to predict how much and when demand will develop, as many social, political, economic, legal, and other factors, most of which are beyond our control, may affect the development of the market. The level of uncertainty is increased by the limited availability of accurate financial and market information and the overall low level of transparency in the PRC, especially in tier-two cities that have lagged in progress in these aspects when compared to tier-one cities.

The lack of a liquid secondary market for residential property may discourage investors from acquiring new properties. The limited amount of property mortgage financing available to PRC individuals may further inhibit demand for residential developments.

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The PRC government has recently introduced certain policy and regulatory measures to control the rapid increase in housing prices and cool down the real estate market and our business may be materially and adversely affected by these government measures.

Since the second half of 2009, the PRC real estate market has experienced strong recovery from the financial crisis and housing prices rose rapidly in certain cities. In response to concerns over the scale of the increase in property investments, the PRC government has implemented measures and introduced policies to curtail property speculation and promote the healthy development of the real estate industry in China. On January 7, 2010, the PRC State Council issued a circular to control the rapid increase in housing prices and cool down the real estate market in China. It reiterated that the purchasers of a second residential property for their households must make down payments of no less than 40% of the purchase price and real estate developers must commence the sale within the mandated period as set forth in the pre-sale approvals and at the publicly announced prices. The circular also requested the local government to increase the effective supply of low-income housing and ordinary commodity housing and instructed the People’s Bank of China, or PBOC, and the China Bank Regulatory Commission to tighten the supervision of the bank lending to the real estate sector and mortgage financing. On February 25, 2010, the PBOC increased the reserve requirement ratio for commercial banks by 0.5% to 16.5% and has further increased it from 16.5% to 17.0% effective May 10, 2010. Further, in order to implement the requirements set out in the State Council’s circular, the Ministry of Land and Resources, or the MLR, issued a notice on March 8, 2010 in relation to increasing the supply of, and strengthening the supervision over, land for real estate development purposes. MLR’s notice stipulated that the floor price of a parcel of land must not be lower than 70% of the benchmark land price set for the area in which the parcel is located, and that real estate developers participating in land auctions must pay a deposit equivalent to 20% of the land parcel’s floor price.

In April 2010, the PRC State Council issued a further circular, which provided as follows: purchasers of a first residential property for their households with a gross floor area of greater than 90 square meters must make down payments of no less than 30% of the purchase price; purchasers of a second residential property for their households must make down payments of no less than 50% of the purchase price and the interest rate of any mortgage for such property must equal at least the benchmark interest rate plus 10%; and for purchasers of a third residential property, both the minimum down payment amount and applied interest rate must be significantly higher than the relevant minimum down payment and interest rate which would have been applicable prior to the issuance of the circular (the specific figures shall be decided by the relevant bank on a case-by-case based on the principle of proper risk management). Moreover, the circular provided that banks can decline to provide mortgage financing to either a purchaser of a third residential property or a non-resident purchaser.

In September 2010, the PRC’s seven state ministries and regulatory agencies jointly issued a further circular, which provided that commercial banks should suspend loans to third home buyers across the country and buyers who fail to provide proof of at least one year of local social security tax payments. It also provided that a 30% down payment requirement is applied to all purchasers of a first residential property. The circular also adjusted property transaction taxes and personal income taxes. It cut in half the transaction tax for buyers of non-luxury homes which are used as sole residence. The rate will be 1% for residential units of 90 square meters or smaller. In addition, for those who purchase a new home within one year of old home sales, income tax will be applied (it was previously exempted). The new policy limits the total number of properties bought by a single family within a certain period in some cities where price inflation is rapid, such as Beijing, Shanghai, Shenzhen and Hangzhou, etc. Property tax may start piloting in select cities in the near future, though we still expect issues relating to property tax implementation. Our major markets are not among the cities currently subject to the policy limits.

On January 26, 2011, the PRC State Council announced a new round of real estate tightening policies. The new policies increased the minimum down-payment requirements for second homes to 60% from 50%, with the loan interest rate to be set at no less than 1.1 times the benchmark lending rate, and also limited the total number of properties that can be bought by a single family in an increasing number of cities. Only one additional unit can be bought by local residents who already own one unit or non-locals who can provide proof of at least one year's social security tax payments. No further units can be purchased by local residents who own two or more units and non-locals who own one unit or fail to provide such proof. Home buyers who sell properties within a five-year period will be taxed (business tax) based on total sales proceeds, instead of capital gain. Local authorities were required to increase the supply and availability of affordable and public housing and announce a new home price control target by the first quarter of 2011. Land supply for affordable, public and small-medium commodity housing must exceed 70% of total land available for sale.

It is possible that the government agencies may adopt further measures to implement the policies outlined in the January and April circulars. The full effect of the circulars on the real estate industry and our business will depend in large part on the implementation and interpretation of the circulars by governmental agencies, local governments and banks involved in the real estate industry. The PRC government’s policies and regulatory measures on the PRC real estate sector could limit our access to required financing and other capital resources, adversely affect the property purchasers’ ability to obtain mortgage financing or significantly increase the cost of mortgage financing, reduce market demand for our properties and increase our operating costs. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures or that agencies and banks will not adopt restrictive measures or practices in response to PRC governmental policies and regulations, which could substantially reduce pre-sales of our properties and cash flow from operations and substantially increase our financing needs, which would in turn materially and adversely affect our business, financial condition, results of operations and prospects.

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Our sales will be affected if mortgage financing becomes more costly or otherwise becomes less attractive.

Substantially all purchasers of our residential properties rely on mortgages to fund their purchases. An increase in interest rates may significantly increase the cost of mortgage financing, thus affecting the affordability of residential properties. Since October 20, 2010, PBOC has raised the lending rates four times. As a result, the benchmark lending rate for loans with a term of over five years, which affects mortgage rates, was increased to 6.80% on April 6, 2011. The PRC government and commercial banks may also increase the down payment requirement, impose other conditions or otherwise change the regulatory framework in a manner that would make mortgage financing unavailable or unattractive to potential property purchasers. If the availability or attractiveness of mortgage financing is reduced or limited, many of our prospective customers may not be able to purchase our properties and, as a result, our business, liquidity and results of operations could be adversely affected.

If we are prevented from guaranteeing loans to prospective home purchasers, our sales and pre-sales may decline.

In line with industry practice, we provide guarantees to PRC banks with respect to loans procured by the purchasers of our properties, in the form of a transfer of 5% of the home purchasers’ loan amount from our bank account to a bank designated account, as collateral for the home purchasers’ timely debt service payments. The bank will release these deposits after construction is completed, final deliveries are made, and home purchasers have obtained the ownership documents necessary to secure a mortgage loan. If there are changes in laws, regulations, policies, and practices that would prohibit property developers from providing guarantees to banks in respect of mortgages offered to property purchasers and as a result, banks would not accept any alternative guarantees by third parties, or if no third party is available or willing in the market to provide such guarantees, it may become more difficult for property purchasers to obtain mortgages from banks and other financial institutions during sales and pre-sales of our properties. Such difficulties in financing could result in a substantially lower rate of sale and pre-sale of our properties, which would adversely affect our cash flow, financial condition, and results of operations. We are not aware of any impending changes in laws, regulations, policies, or practices that will prohibit such practice in China. However, there can be no assurance that such changes in laws, regulations, policies, or practices will not occur in China in the future.

We may be unable to acquire land use rights from the government through Longhai Group as we currently do which could increase our cost of sales.

Our revenue depends on the completion and sale of our projects, which in turn depends on our ability to acquire land use rights for such projects. Our land use rights costs are a major component of our cost of real estate sales and increases in such costs could diminish our gross margin. From time to time, we acquire our land use rights through companies owned by Longhai Group, a company wholly-owned by Mr. Antoine Cheng, our Chairman. Longhai Group’s primary business is infrastructure and building construction. Through its infrastructure construction business, Longhai Group works with local governments and often finances (by agreeing to be paid sometime following the completion of construction instead of being paid as construction progresses) the government’s public infrastructure projects that can include old city relocation projects. In exchange for such financing, the local governments invite Longhai Group to bid for premium parcels of land for residential use at public auction as a preferred candidate or grant Longhai Group the right of first refusal to bid for industrial parcels for which the Longhai Group already has land use rights, but whose use has been changed to real estate development. Since Longhai Group does not have the necessary license to engage in residential development in China, it typically sold companies owning these land use rights to us so that we could develop these parcels using our real estate development license.

Although we believe that the aforementioned way in which Longhai Group obtains land use rights is consistent with the PRC government’s long-term policy to develop healthy real estate market, we cannot assure you that the local government will continue to provide Longhai Group land use rights in this way in the future. If this happens, we will have to acquire our land use rights primarily through a public tender, auction or listing-for-sale. Competition in these bidding processes can result in higher land use rights costs for us. In addition, we may not successfully obtain desired land use rights at commercially reasonable costs due to the increasingly intense competition in the bidding processes. We may also need to acquire land use rights through acquisition, which could increase our costs.

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We have significant short-term debt obligations, which mature in less than one year. Failure to extend those maturities of, or to refinance, that debt could result in defaults, and in certain instances, foreclosures on our assets. Moreover, we may be unable to obtain financing to fund ongoing operations and future growth.

The real estate development industry is capital intensive, and development requires significant up-front expenditures to acquire land and begin development. Accordingly, we incur substantial indebtedness to finance our development activities.

At June 25, 2011, we had short-term bank loans outstanding of $1,444,517, long-term bank loans of $34,460,042 maturing within one year, long-term bank loans of $0 maturing in more than one year, and notes payable of $0, which were secured by our land use rights and projects under construction. Failure to obtain extensions of the maturity dates of, or to refinance, these obligations or to obtain additional equity financing to meet these debt obligations would result in an event of default with respect to such obligations and could result in the foreclosure on the collateral. The sale of such collateral at foreclosure would significantly disrupt our business, which could significantly lower our sales and profitability. We may be able to refinance or obtain extensions of the maturities of all or some of such debt only on terms that significantly restrict our ability to operate, including terms that place additional limitations on our ability to incur other indebtedness, to pay dividends, to use our assets as collateral for other financing, to sell assets or to make acquisitions or enter into other transactions. Such restrictions may adversely affect our ability to finance our future operations or to engage in other business activities. If we finance the repayment of our outstanding indebtedness by issuing additional equity or convertible debt securities, such issuances could result in substantial dilution to our stockholders.

While we believe that our revenue growth projections and our ongoing cost controls will allow us to generate cash and achieve profitability in the foreseeable future, there is no assurance as to when or if we will be able to achieve our projections. Our future cash flows from operations, combined with our accessibility to cash and credit, may not be sufficient to allow us to finance ongoing operations or to make required investments for future growth. We may need to seek additional credit or access capital markets for additional funds. There is no assurance that we would be successful in this regard.

Our practice of pre-selling projects may expose us to substantial liabilities.

It is common practice by property developers in China, including us, to pre-sell properties (while still under construction), which involves certain risks. For example, we may fail to complete a property development that may have been fully or partially pre-sold, which would leave us liable to purchasers of pre-sold units for losses suffered by them without adequate resources to pay the liability if funds have been used on the project. In addition, if a pre-sold property development is not completed on time, the purchasers of pre-sold units may be entitled to compensation for late delivery. If the delay extends beyond a certain period, the purchasers may be entitled to terminate the pre-sale agreement and pursue a claim for damages that exceeds the amount paid and our ability to recoup the resulting liability from future sales.

We may not be able to successfully execute our strategy of expanding into new geographical markets in China, which could have a material adverse effect on our business and results of operations.

We plan to continue to expand our business into new geographical areas in China. Since China is a large and diverse market, consumer trends and demands may vary significantly by region and our experience in the markets in which we currently operate may not be applicable in other parts of China. As a result, we may not be able to leverage our experience to expand into other parts of China. When we enter new markets, we may face intense competition from companies with greater experience or an established presence in the targeted geographical areas or from other companies with similar expansion targets. Therefore, we may not be able to grow our sales in the new cities we enter due intense competitive pressures and or the substantial costs involved.

We are dependent on third-party subcontractors, manufacturers, and distributors for all architecture, engineering and construction services, and construction materials. A discontinued supply of such services and materials will adversely affect our projects.

We are dependent on third-party subcontractors, manufacturers, and distributors for all architecture, engineering and construction services, and construction materials. Services and materials purchased from our five largest subcontractors or suppliers accounted for 86.9% for the year ended December 25, 2010. A discontinued supply of such services and materials will adversely affect our construction projects and the success of the Company.

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We are subject to extensive government regulation that could cause us to incur significant liabilities or restrict our business activities.

Regulatory requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to statutes and rules regulating, among other things, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations, such as building permit allocation ordinances and impact and other fees and taxes, that may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from government agencies to grant us necessary licenses, permits, and approvals could have an adverse effect on our operations.

We depend on the availability of additional human resources for future growth.

We are currently experiencing a period of significant growth in our sales volume. We believe that continued expansion is essential for us to remain competitive and to capitalize on the growth potential of our business. Such expansion may place a significant strain on our management and operations and financial resources. As our operations continue to grow, we will have to continually improve our management, operational, and financial systems, procedures and controls, and other resources infrastructure, and expand our workforce. There can be no assurance that our existing or future management, operating and financial systems, procedures, and controls will be adequate to support our operations, or that we will be able to recruit, retain, and motivate our employees. Further, there can be no assurance that we will be able to establish, develop, or maintain the business relationships beneficial to our operations, or to do so or to implement any of the above activities in a timely manner. Failure to manage our growth effectively could have a material adverse effect on our business and the results of our operations and financial condition.

We may be adversely affected by the fluctuation in raw material prices and selling prices of our products.

The land and raw materials used in our projects have experienced significant price fluctuations in the past. There is no assurance that they will not be subject to future price fluctuations or pricing control. The land and raw materials used in our projects may experience price volatility caused by events such as market fluctuations or changes in governmental programs. The market price of land and raw materials may also experience significant upward adjustment, if, for instance, there is a material under-supply or over-demand in the market. These price changes may ultimately result in increases in the selling prices of our products, and may, in turn, adversely affect our sales volume, sales, operating income, and net income.

We face intense competition from other real estate developers.

The property industry in the PRC is highly competitive. In the tier-two cities we focus on, local and regional property developers are our major competitors, and an increasing number of large state-owned and private national property developers have started entering these markets. Many of our competitors, especially the state-owned and private national property developers, are well capitalized and have greater financial, marketing, and other resources than we have. Some also have larger land banks, greater economies of scale, broader name recognition, a longer track record, and more established relationships in certain markets. In addition, the PRC government’s recent measures designed to reduce land supply further increased competition for land among property developers.

Competition among property developers may result in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled contractors, oversupply of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which new property developments will be approved and/or reviewed by the relevant government authorities and an increase in administrative costs for hiring or retaining qualified personnel, any of which may adversely affect our business and financial condition. Furthermore, property developers that are better capitalized than we are may be more competitive in acquiring land through the auction process. If we cannot respond to changes in market conditions as promptly and effectively as our competitors, or effectively compete for land acquisition through the auction systems and acquire other factors of production, our business and financial condition will be adversely affected.

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In addition, risk of property over-supply is increasing in parts of China, where property investment, trading and speculation have become overly active. We are exposed to the risk that in the event of actual or perceived over-supply, property prices may fall drastically, and our revenue and profitability will be adversely affected.

We could be adversely affected by the occurrence of natural disasters.

From time to time, our developed sites may experience strong winds, storms, flooding and earth quakes. Natural disasters could impede operations, damage infrastructure necessary to our constructions and operations. The occurrence of natural disasters could adversely affect our business, the results of our operations, prospects and financial condition.

We have limited insurance coverage against damages or loss we might suffer.

The insurance industry in China is still in an early stage of development and business interruption insurance available in China offers limited coverage compared to that offered in many developed countries. We carry insurance for potential liabilities related to our vehicles, but we do not carry business interruption insurance and therefore any business disruption or natural disaster could result in substantial damages or losses to us. In addition, there are certain types of losses (such as losses from forces of nature) that are generally not insured because either they are uninsurable or insurance cannot be obtained on commercially reasonable terms. Should an uninsured loss or a loss in excess of insured limits occur, our business could be materially adversely affected. If we were to suffer any losses or damages to our properties, our business, financial condition and results of operations would be materially and adversely affected.

Our operating subsidiaries must comply with environmental protection laws that could adversely affect our profitability.

We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of the PRC. Some of these regulations govern the level of fees payable to government entities providing environmental protection services and the prescribed standards relating to construction. Although our construction technologies allow us to efficiently control the level of pollution resulting from our construction process, due to the nature of our business, wastes are unavoidably generated in the processes. If we fail to comply with any of these environmental laws and regulations in the PRC, depending on the types and seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, or an order to close down our business operations and suspension of relevant permits.

Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lost their services.

Our future success heavily depends on the continued service of our senior executives and other key employees. In particular, we rely on the expertise and experience of Mr. Antoine Cheng, our Chairman, Mr. Weiqing Zhang, our Chief Executive Officer, Mr. Zhaohui John Liang, our Chief Financial Officer, and Mr. Yang Chen, our President. If one or more of our senior executives are unable or unwilling to continue to work for us in their present positions, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating the replacements into our operations, which would substantially divert management’s attention from our business and severely disrupt our business. This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior executives joins a competitor or forms a competing company, we may lose customers, suppliers, know-how, and key employees.

Our management has identified a material weakness in our internal control over financial reporting, which if not properly remediated could result in material misstatements in our future interim and annual financial statements and have a material adverse effect on our business, financial condition and results of operations and the price of our ordinary shares.

We are subject to reporting obligations under the U.S. securities law. The SEC as required by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which must also contain management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, the independent registered public accounting firm auditing the financial statements of a company that is not a non-accelerated filer under Rule 12b-2 of the Exchange Act must also attest to the operating effectiveness of the company’s internal controls.

Our management assessed our internal control over financial reporting as of December 25, 2010 and concluded that that our internal controls over financial reporting as of December 25, 2010 were not effective due to a material weakness relating to our lack of sufficient staff with the appropriate level of experience or knowledge of U.S. GAAP to be able to prepare U.S. GAAP financial statements without outside consultants. Our independent registered public accounting firm was not required to attest to the operating effectiveness of our internal controls since we are a non-accelerated filer.

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We are in the process of implementing certain initiatives to address the above weakness such as arranging necessary training for our accounting department staff and recruiting qualified personnel to bolster our internal audit functions. In January and February of 2011, we engaged Price Waterhouse Coopers, or PWC, to conduct a thorough review of our internal controls. At the completion of the review, we received a written report from PWC that included detailed analyses of areas for improvement and recommendations for improvement. We have begun the implementation of the measures recommended by PWC and are in the process of strengthening our internal controls in our daily operations. We have also recently begun the recruiting process for a person who is English speaking and trained in both U.S. GAAP and Chinese GAAP to be in a management role in the accounting department under the supervision of our chief financial officer. We have incurred and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with SOX 404 and other requirements of the Sarbanes-Oxley Act.

However, there is no guarantee that these initiatives will remediate the inadequacy completely. Failure to achieve and maintain an effective internal control environment could result in us not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial and other information pursuant to the reporting obligations we have as a public company, which could have a material adverse effect on our business, financial condition and results of operations. This could further reduce investors’ confidence in our reported financial information, which in turn could result in lawsuits being filed against us by our shareholders, otherwise harm our reputation or negatively impact the trading price of our ordinary shares.

RISKS RELATED TO DOING BUSINESS IN CHINA

Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, most of our executive officers and directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

You may have difficulty enforcing judgments against us.

Most of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law, has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. 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 basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

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The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Future inflation in China may inhibit our ability to conduct business in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8% . These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.

Restrictions on currency exchange may limit our ability to receive and use our sales effectively.

The majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

Because our business transactions are denominated in RMB and our funding and results of operations will be denominated in USD, fluctuations in exchange rates between USD and RMB will affect our balance sheet and financial results. Since July 2005, RMB is no longer solely pegged to the USD but instead is pegged against a basket of currencies as a whole in order to keep a more stable exchange rate for international trading. With the very strong economic growth in China in the last few years, RMB is facing very high pressure to appreciate against USD. Such pressure could result more fluctuations in exchange rates and in turn our business would be suffered from higher exchange rate risk. There are very limited hedging tools available in China to hedge our exposure in exchange rate fluctuations. The hedging tools that are available are also ineffective in the sense that these hedges cannot be freely preformed in the PRC financial market, and more important, the frequent changes in PRC exchange control regulations would limit our hedging ability for RMB.

Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.

Substantially all of our sales are earned by our PRC subsidiaries. However, as discussed more fully under “Our Business — PRC Government Regulations — Dividend Distributions,” PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

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Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75. Circular 75 and its implementing guidelines, issued in June 2007 (known as Notice 106), require PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China. See “Our Business — PRC Government Regulations — Circular 75” for a detailed discussion of Circular 75 and its implementation.

We have asked our shareholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 75 and Notice 106. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 and Notice 106 by our PRC resident beneficial holders.

In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75 and Notice 106. We also have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident shareholders to comply with Circular 75 and Notice 106, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Oumei constitutes a Round-trip Investment without MOFCOM approval.

On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors which were further amended by PRC Ministry of Commerce, or MOFCOM, on June 22, 2009, or the 2006 M&A Rule. Among other things, the 2006 M&A Rule regulates “Round-trip Investments,” defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). See “Our Business — PRC Government Regulations — Mergers and Acquisitions” for a detailed discussion of the 2006 M&A Rule.

Leewell acquired Oumei in 2007 from Mr. Weiqing Zhang and Ms. Xiaoyan Cheng. At the time of the acquisition, Leewell was owned and controlled by Mr. Li Zhou, a citizen of the Commonwealth of Australia, who was acting as a nominee for Mr. Zhang and Ms. Cheng. The PRC authorities could take the position that this transaction therefore constituted a “Round-Trip Investment” requiring the prior approval of the central office of MOFCOM in Beijing, which we did not obtain. If the PRC authorities take this position, they could invalidate our acquisition and ownership of our Chinese subsidiaries. If this were to happen, we would replace our ownership structure of Oumei with a series of contractual arrangements which would give us control over, and the economic benefit of, the operations of our Chinese subsidiaries. These arrangements are described more fully under “Our Business — PRC Government Regulations — Merger and Acquisition.”

Additionally, the PRC regulatory authorities may take the view that these transactions require the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, the PRC regulatory authorities may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.

16


Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.

China passed a New Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. See “Our Business — PRC Government Regulations — Taxation” and “Our Business — PRC Government Regulations — Dividend Distributions” for a detailed discussion of the New EIT Law.

It remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practices Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

RISKS RELATED TO THIS OFFERING AND THE MARKET FOR OUR ORDINARY SHARES GENERALLY

There is no current trading market for our ordinary shares, and there is no assurance of an established public trading market, which would adversely affect the ability of our investors to sell their securities in the public market.

Our ordinary shares are not currently listed or quoted for trading on any national securities exchange or national quotation system. We intend to apply for the quotation of our ordinary shares on the OTC Bulletin Board maintained by the Financial Industry Regulatory Authority, Inc., or FINRA. However, there is no guarantee that the OTC Bulletin Board, or any other quotation system, will permit our shares to be quoted and traded. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the New York Stock Exchange or NASDAQ Stock Market. The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade our shares, could depress the trading price of our ordinary shares and could have a long-term adverse impact on our ability to raise capital in the future. In addition, FINRA has enacted changes that limit quotations on the OTC Bulletin Board to securities of issuers that are current in their reports filed with the SEC. The effect on the OTC Bulletin Board of these rule changes and other proposed changes cannot be determined at this time.

17


The price of our ordinary shares could be volatile and could decline following this offering at a time when you want to sell your holdings.

We intend to apply to have our ordinary shares quoted on the OTC Bulletin Board. Although we believe that this offering and the quotation the OTC Bulletin Board will improve the liquidity for our ordinary shares, there is no assurance that the offering will improve volume, reduce volatility and stabilize our share price. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly. These factors include:

  • expiration of lock-up agreements;
  • our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
  • changes in financial estimates by us or by any securities analysts who might cover our stock;
  • speculation about our business in the press or the investment community;
  • significant developments relating to our relationships with our customers or suppliers;
  • stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the Chinese real estate industry;
  • customer demand for our products;
  • investor perceptions of the Chinese real estate industry in general and our company in particular;
  • the operating and stock performance of comparable companies;
  • general economic conditions and trends;
  • major catastrophic events;
  • announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
  • changes in accounting standards, policies, guidance, interpretation or principles;
  • loss of external funding sources;
  • failure to maintain compliance with OTC Bulletin Board rules;
  • sales of our ordinary shares, including sales by our directors, officers or significant shareholders; and
  • additions or departures of key personnel.

Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.

Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, from September 2008 until June 2009, securities markets in the United States, China and throughout the world experienced a historically large decline in share price. These market fluctuations may adversely affect the price of our ordinary shares and other interests in our company at a time when you want to sell your interest in us.

Future sales or perceived sales of our ordinary shares could depress our stock price.

The registration statement of which this prospectus is a part covers 765,000 ordinary shares, 2,774,700 ordinary shares underlying the Preference Shares and 1,526,085 ordinary shares underlying the Warrants issued in a private placement closed on April 14, 2010. These shares will become eligible for sale in the public market, subject to limitations imposed by Rule 144 under the Securities Act. See “Shares Eligible for Future Sale.” If the holders of these shares were to attempt to sell a substantial amount of their holdings at once, the market price of our ordinary shares could decline. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short the ordinary shares, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares of our ordinary shares being offered for sale to increase, our ordinary shares market price would likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

We may be subject to penny stock regulations and restrictions and you may have difficulty selling our ordinary shares.

The SEC has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our ordinary shares become a “penny stock”, we may become subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

18


For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

There can be no assurance that our ordinary shares will qualify for exemption from the Penny Stock Rule. In any event, even if our ordinary shares were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock if the SEC finds that such a restriction would be in the public interest.

We may use these proceeds in ways with which you may not agree.

We will not receive any proceeds from the sale of the ordinary shares by the selling stockholders. However, if the warrants are exercised for cash, then we will receive approximately $7.9 million in proceeds payable by the selling stockholders upon exercise of the warrants. While we currently intend to use these proceeds for working capital and general corporate purposes, we have considerable discretion in the application of the proceeds. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used in a manner agreeable to you. You must rely on our judgment regarding the application of these proceeds. The proceeds may be used for corporate purposes that do not immediately improve our profitability or increase the price of our shares.

We do not intend to pay dividends for the foreseeable future.

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our ordinary shares. Accordingly, investors must be prepared to rely on sales of their ordinary shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our ordinary shares. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.

Holders of our ordinary shares may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, and by the Companies Law (2010 Revision), or the Companies Law, and the common law of 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 under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, shareholders may have more difficulty in protecting their interests in the face of actions by our management or board of directors than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less developed nature of Cayman Islands law in this area.

Shareholders of Cayman Islands exempted companies have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of our shareholders. Our directors have discretion under our amended and restated memorandum and articles of association to determine whether and to what extent and at what times and places and under what conditions or regulations our accounts, books and documents, or any of them, shall be open to the inspection of shareholders not being directors, and no shareholder (not being a director) shall have any right of inspecting any account, book or document except as conferred by applicable law or the relevant code, rules and regulations of the exchange on which our shares are listed (if any), or authorized by our directors or by ordinary resolution of our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

19


Provisions of our articles of association and Cayman Islands corporate law may impede a takeover or make it more difficult for shareholders to change the direction or management of the Company, which could reduce shareholders’ opportunity to influence management of the Company.

Our articles of association permit our board of directors to issue up to 20,000,000 preference shares from time to time, with such rights and preferences as they consider appropriate. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights and redemption rights provisions. The issuance of any preference shares could reduce the value of such ordinary shares. In addition, specific rights granted to future holders of preference shares could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the board of directors to issue preference shares could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent shareholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our ordinary shares.

20


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business”. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” above.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:

  • our anticipated growth strategies and our ability to manage the expansion of our business operations effectively;
  • our dependence on the growth of the real estate market in China and in the local areas in which we do business; and
  • our ability to maintain or increase our market share in the competitive markets in which we do business.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus, or that we filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

21


USE OF PROCEEDS

We will not receive any proceeds from the sale of the ordinary shares by the selling stockholders. If the warrants are exercised for cash, then we will receive approximately $7.9 million in proceeds payable by the selling stockholders upon exercise of the warrants.

We have no specific plan for such proceeds except to generate funds for working capital and general corporate purposes, including to fund potential future acquisitions, and to create a public market for our common stock. As of the date of this prospectus, we have not entered into any purchase agreements, understandings or commitments with respect to any acquisitions.

We will have broad discretion in the way that we use these proceeds. See “Risk Factors — Risks Related to this Offering and the Market for Our Ordinary Shares Generally — We may use these proceeds in ways with which you may not agree.”

DETERMINATION OF OFFERING PRICE

The selling stockholders will determine at what price they may sell the offered shares, and such sales may be made at prevailing market prices or at privately negotiated prices.

22


EXPENSES RELATED TO THIS OFFERING

The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of ordinary shares being registered. All amounts, other than the SEC registration fee, are estimates.

    Amount to be Paid  
SEC Registration Fee $  1,655  
Printing Fees and Expenses   2,500  
Legal Fees and Expenses   75,000  
Accounting Fees and Expenses   50,000  
Transfer Agent and Registrar Fees   5,000  
Blue Sky Fees and Expenses   4,000  
Miscellaneous   5,000  
Total $  143,155  

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MARKET FOR OUR OUR ORDINARY SHARES

There currently is no market for our ordinary shares. We intend to apply for the quotation of our ordinary shares on OTC Bulletin Board maintained by FINRA as soon as practicable. However, there is no guarantee that the OTC Bulletin Board, or any other quotation system, will permit our shares to be quoted and traded. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the New York Stock Exchange or NASDAQ Stock Market and investors may find it difficult to obtain accurate quotations as to the market value of our ordinary shares and trading of our ordinary shares may be extremely sporadic. For example, several days may pass before any shares may be traded. A more active market for our ordinary shares may never develop. In addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our ordinary shares, which may further affect its liquidity and could make it more difficult for us to raise additional capital.

As of December 5, 2011, there were approximately 515 holders of record of our ordinary shares. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.

24


DIVIDEND POLICY

On December 10, 2008, our board of directors authorized a special dividend of $0.7174 per share to our shareholders of record. Two of our shareholders, Access America Fund, LP and Mid-Ocean Consulting Limited, did not accept the dividend, which resulted in a total dividend payment of $166,074.80.

On December 31, 2010, we paid a dividend to the holders of our Preference Shares in the amount of $476,184. See “Description of Share Capital — Rights and Obligations of Shareholders” for a description of our Preference Shares, which were issued to the investors in our April 14, 2010 private placement, and the rights of the holders thereof to annual dividends.

Other than the foregoing, we have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends on our ordinary shares. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

25


EXCHANGE RATE INFORMATION

Our business is primarily conducted in China, and the financial records of our PRC subsidiaries are maintained in RMB, their functional currency. However, we use the U.S. dollar as our reporting currency. The assets and liabilities of our PRC subsidiaries are translated from RMB into U.S. dollar at the exchange rates on the balance sheet date, shareholders’ equity is translated at the historical rates and the revenues and expenses are translated at the weighted average exchange rate for the period. 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 December 5, 2011, the exchange rate was ¥1 to $0.1581.

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.

    InterBank Buying Rate(1)  
    Period End     Average(2)   High     Low  
    (U.S. Dollar per RMB)  
Fiscal Year Ended December 25:                        
2006   0.1281     0.1255     0.1281     0.1234  
2007   0.1360     0.1315     0.1360     0.1276  
2008   0.1462     0.1440     0.1466     0.1356  
2009   0.1468     0.1466     0.1468     0.1455  
2010   0.1507     0.1479     0.1508     0.1461  
2011 (through December 5, 2011)   0.1581     0.1547     0.1651     0.1502  
                         
Most Recent Six Months Ended:                        
June 25, 2011   0.1547     0.1530     0.1547     0.1502  
July 25, 2011   0.1559     0.1536     0.1651     0.1510  
August 25, 2011   0.1568     0.1543     0.1651     0.1517  
September 25, 2011   0.1564     0.1550     0.1576     0.1530  
October 25, 2011   0.1570     0.1556     0.1577     0.1536  
November 25, 2011   0.1569     0.1562     0.1585     0.1540  
December 25, 2011 (through December 5, 2011)   0.1581     0.1566     0.1585     0.1543  
________________

(1)

The exchange rates are based on daily RMB to U.S. Dollar Interbank Exchange Rate published on OANDA.com.

   
(2)

Weighted averages for a period are calculated by using the average of the exchange rates on the end of each month during the period.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected historical financial information should be read in conjunction with our consolidated financial statements and related notes and the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

The selected consolidated statement of operations data and statement of cash flows data for the years ended December 25, 2008, 2009 and 2010 and the selected balance sheet data as of December 25, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data for the years ended December 25, 2006 and 2007 and the selected balance sheet data as of December 25, 2006, 2007 and 2008 are derived from our unaudited consolidated financial statements not included in this prospectus. We derived our selected consolidated financial data as of June 25, 2011 and for the six months ended June 25, 2010 and 2011 from our unaudited consolidated financial statements included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that our management considers necessary for a fair presentation of our financial position and results of operations as of the dates and for the periods presented.

Our audited consolidated financial statements for the fiscal years ended December 25, 2008, 2009 and 2010 and our unaudited consolidated financial statements for the fiscal years ended December 25, 2006 and 2007 and for the six months ended June 25, 2010 and 2011 are prepared and presented in accordance with U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements and related notes contained elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance. Except as disclosed elsewhere in this prospectus, we have not experienced any significant changes since the date of our unaudited consolidated financial statements for the six months ended June 25, 2010 and 2011.

U.S. dollars, except shares   Fiscal Year Ended December 25,     Six Months Ended June 25,  
    2006     2007     2008     2009     2010     2010     2011  
Statements of Operations Data   (unaudited)     (unaudited)                       (unaudited)     (unaudited)  
Total sales $  54,291,244   $  51,850,312   $  77,032,561   $  94,315,500   $  110,518,421   $  56,461,539   $  31,012,048  
Total cost of sales   (33,703,168 )   (36,243,778 )   (46,321,251 )   (58,296,408 )   (77,209,814 )   (40,146,847 )   (18,239,846 )
Gross profit   20,588,076     15,606,534     30,711,310     36,019,092     33,308,607     16,314,692     12,772,202  
Advertising expenses   (47,051 )   (46,492 )   (112,263 )   (268,222 )   (217,596 )   (149,909 )   (56,130 )
Commission expenses   (789,497 )   (134,989 )   (574,262 )   (84,982 )   (214,566 )       (75,685 )
Selling expenses   (6,192 )   (2,187 )   (81,415 )   (49,800 )   (61,967 )   (31,280 )   (39,778 )
Bad debt recovery (expense)   (154,710 )   (245,243 )   (1,198,942 )   (207,523 )   987,374     180,833     (729,762 )
General and administrative expenses   (4,092,355 )   (807,589 )   (2,283,744 )   (4,655,596 )   (7,390,963 )   (3,779,215 )   (2,906,924 )
Income from operations   15,498,271     14,370,034     26,460,684     30,752,969     26,410,889     12,535,121     8,963,923  
Miscellaneous income (expense)   16,022     10,280     91,945     327,294     23,899,865     181,224     (363,635 )
Interest expense   (121,597 )   (70,963 )   (968,710 )   (866,751 )   (325,969 )   (234,529 )   (22,990 )
Income before income taxes and extraordinary item   15,392,696     14,309,351     25,583,919     30,213,512     49,984,785     12,481,816     8,577,298  
Income taxes   (5,130,644 )   (5,090,161 )   (6,602,194 )   (9,058,226 )   (15,042,327 )   (4,436,498 )   (2,845,108 )
Income before extraordinary item   10,262,052     9,219,190     18,981,725     21,155,286     34,942,458     8,045,318     5,732,190  
Extraordinary item, net           12,499,576                  
Net income $  10,262,052   $  9,219,190   $  31,481,301   $  21,155,286   $  34,942,458   $  8,045,318   $  5,732,190  
Preference stock dividends                           476,184  
Net earnings applicable to common shareholders $  10,262,052   $  9,219,190   $  31,481,301   $  21,155,286   $  34,942,458   $  8,045,318   $  5,256,006  
Foreign currency translation adjustment   687,566     2,107,856     3,486,204     474,414     3,470,209     (9,925 )   3,864,883  
Comprehensive income $  10,949,618   $  11,327,046   $  34,967,505   $  21,629,700   $  38,412,667   $  8,035,393   $  9,597,073  
Earnings per common share basic $  0.34   $  0.30   $  1.04   $  0.70   $  1.14   $  0.26   $  0.18  
Earnings per common share diluted $  0.34   $  0.30   $  1.04   $  0.70   $  1.07   $  0.25   $  0.17  
Weighted average common shares outstanding basic   30,235,062     30,235,062     30,235,062     30,235,062     30,770,172     30,541,903     31,020,062  
Weighted average common shares outstanding diluted   30,235,062     30,235,062     30,235,062     30,235,062     32,708,661     31,654,832     33,794,762  

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Cash Flow Data                                          
Net cash provided by (used in)                            
Operating Activities $  (5,953,059 ) $  1,212,951   $  61,015,081   $  11,250,820   $  27,325,191   $  6,584,162   $  7,406,397  
Investing Activities   (59,164 )   (13,689,661 )   (58,521,630 )   234,814     (136,156 )   (103,220 )   273,376  
Financing Activities   5,759,286     14,167,583     (3,805,052 )   (9,866,408 )   3,435,399     3,645,863     (2,260,285 )
Effect of exchange rate changes on cash   (57,807 )   9,891     16,518     6,573     701,545     2,891     938,760  
Net increase (decrease) in cash $  (310,744 ) $  1,700,764   $  (1,295,083 ) $  1,625,799   $  31,325,979   $  10,129,696   $  6,358,248  

    As of December 25,     As of  
                                  June 25,  
    2006     2007     2008     2009     2010     2011  
Balance Sheet Data   (unaudited)     (unaudited)                       (unaudited)  
Current assets $  92,211,870   $  69,443,412   $  105,072,009   $  133,002,971   $  194,356,501   $  215,828,183  
Total assets   94,711,799     87,822,788     178,648,355     196,332,843     260,120,259     281,268,182  
Current liabilities   57,741,400     59,977,634     86,240,752     88,795,899     91,775,418     100,676,003  
Long-term liabilities   7,686,000         29,160,895     13,185,998     23,703,855     26,830,302  
Total liabilities   65,427,400     59,977,634     115,401,647     101,981,897     115,479,273     127,506,305  
Stockholders’ equity   29,284,399     27,845,154     63,246,708     94,350,946     144,640,986     153,761,877  

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

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those which we discuss under “Risk Factors” and elsewhere in this prospectus.

Overview

We are one of the leading real estate development companies located in Qingdao, Shandong province, China. In 2010, we were recognized in the official City of Qingdao Commission of Development & Construction’s evaluation as one of the ten most outstanding real estate developers in Qingdao, measured by a combination of revenue, customer satisfaction, as well as several other factors.

Through our Chinese subsidiaries, we develop and sell residential and commercial properties, targeting middle and upper income customers in the coastal region of the Shandong peninsula (Greater Qingdao) located in northeastern China, including the cities of Qingdao, Weihai and Yantai, as well as other inland locations, such as Weifang.

Since our inception, we have completed 18 projects having a GFA of 1,513,898 square meters, of which approximately 95% has been sold. In addition, we have six projects under construction with a total GFA of 488,299 square meters.

In the fiscal year ended December 25, 2010, our total sales increased 17.2% to $110.5 million from $94.3 million in fiscal year 2009, and our net income increased 65.2% to $34.9 million in fiscal year 2010 from $21.2 million in fiscal year 2009. In the six months ended June 25, 2011, our total sales decreased 45.1% to $31.0 million from $56.5 million in the same period in 2010, and our net income decreased 28.8% to $5.7 million in the six months ended June 25, 2011 from $8.0 million in the same period in 2010.

Our mission is to provide high-quality, comfortable, and convenient living space to middle and upper income customers, primarily in Shandong Province and in other provinces in China, while also earning for our shareholders an internal rate of return that exceeds our cost of capital. We expect to increase our market share through aggressive internal growth and prudent acquisitions in Shandong Province and in other provinces in China. Our goal is to be one of the top two real estate developers in Greater Qingdao in the next five years by capturing and exploiting the growth opportunities in Shandong Province and by providing the most desirable coastal and inland apartments to middle and upper income customers, as well as by increasing our development of commercial properties.

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

  • Growth in the Chinese economy. We operate in China and derive almost all of our revenues from sales to customers in China. Economic conditions in China, therefore, affect virtually all aspects of our operations, including the demand for our properties, the availability and prices of our raw materials, and our other expenses. China has experienced significant economic growth, achieving a compound annual growth rate of more than 10% in gross domestic product from 1996 through 2008. In 2009 the annual growth rate was 9.2% and in 2010 it was 10.3%. China is expected to experience continued growth in all areas of investment and consumption. However, if the global economic recession were to become more protracted, China’s growth might be somewhat more modest, since China has not been entirely immune to the global economic slowdown and has been experiencing a slowing in its growth rate.

  • Growth of the Chinese real estate market and the local markets in which our properties are sold. China’s real estate bull market began more than six years ago. According to the National Bureau of Statistics of China, the total GFA of residential and commercial properties sold increased from 224.1 million square meters in 2001 to 937.1 million square meters in 2009, a compound annual growth rate, or CAGR, of 19.6%.Qingdao’s real estate market has also experienced strong growth. According to the Qingdao Statistics Yearbooks 2004 – 2010 and the Qingdao Municipal Bureau of Statistics, the CAGR in Qingdao from 2003 to 2009 for GFA completed was 6.7% and the CAGR for GFA sold was 17.9%. Weihai’s real estate market has seen similar increases. According to the Weihai Statistics Yearbooks 2004 – 2010 and the Weihai Municipal Bureau of Statistics, the CAGR from 2003 to 2009 for GFA completed was 22.4% and for the GFA sold was 22.9%. Despite moderations in growth caused by the current global economic weakness in 2008 and 2009, we believe the structural forces in China and in the markets in which we sell our properties support continuing good demand for real estate during the next 10 years, however there can be no assurance that current trends will continue.

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  • China’s Economic Stimulus Programs. In response to the global financial and economic crisis, the Chinese government announced an RMB 4 trillion stimulus program on November 27, 2008. Within the RMB 4 trillion package, about RMB 400 billion will go toward civil works, including low-income housing and renovation, which we believe will benefit Shandong Province. Two additional categories (technology advances and industry restructuring, which together will be allocated RMB 370 billion, and infrastructure, which will be allocated RMB 1.5 trillion) are also expected to benefit industries in Qingdao, Weihai, Weifang, and the entire Shandong Province. On February 26, 2009, China’s State Council reinforced China’s 2008 stimulus package by announcing further measures to stimulate specific industries in 2009. The industries included automobile, iron and steel, textiles, equipment manufacturing, shipbuilding, electronics and information technology, petrochemicals, light industries, nonferrous metals, and logistics. After it raised the statutory deposit reserve ratio consecutively in recent years, the People’s Bank of China reduced the reserve ratio by 0.5 percentage point, taking the level to 21% for major banks, effective from December 5, 2011, the first such cut since December 2008. It is expected that the move would free up around RMB 390 billion yuan (approximately $61 billion) in funds for the banks to lend. We believe that the stimulus plan and the recent reduction of reserve ratio will benefit us both directly and indirectly in three ways. First, from a macro-economic perspective, the RMB 400 billion will mainly be invested in the development of infrastructure in China, which will most likely create more jobs, improve people’s living standard, and accelerate the process of Chinese urbanization, which will in turn increase demand for urban housing at all income levels and continue to bolster the long-term growth of China’s real estate market. Second, we also believe that the stimulus package and its further efforts focused on 10 industries will improve Greater Qingdao’s economy, further strengthen the region’s long-term competitive ability, and support the demand for middle and upper income housing, as well as the need for better commercial and office space, and a few world-class hotels. Third, increased government spending on low-income housing will provide us with various opportunities for development, even though our general strategy focuses on middle and upper income customers. For example, as indicated under “Our Business — Project Development Process,” the government’s public infrastructure projects, including old city relocation projects, afford us the opportunity to acquire additional land for our future development projects, which would normally not have been otherwise available. Although individuals and governments around the world hope that government stimulus efforts are starting to have the desired effects, the true benefits of these and perhaps additional stimulus efforts by local, provincial, and national governments in China, as well as by other countries, is not yet assured, since the sustainability of the global economic recovery is yet to be proven.

  • Recent Efforts by the Chinese Government to Cool Down the Real Estate Industry. As discussed in “Our Industry — The Real Estate Industry in China — Recent Efforts by the Chinese Government to Cool Down the Real Estate Industry,” in response to concerns over the scale of the increase in property investments, the PRC government has implemented certain measures and introduced policies to curtail property speculation and promote the healthy development of the real estate industry in China. We believe that we have the ability, willingness, and flexibility to provide housing across all the price ranges in our target markets in China. We believe that demand will continue to grow reasonably for primary housing across the range of incomes, as China’s overall economy grows at a more sustainable pace and the government continues its nationwide policy to promote urbanization. In addition, we believe that targeting middle-income customers in second-tier and third-tier cities and offering affordable products make our properties less of a target for real estate speculation. Moreover, because we have consistently adopted a strategy of conducting much of our operations in second-tier and third-tier cities, focusing on middle-income families in these second-tier and third-tier cities, and offering affordable, “bread and butter” type of housing for the vast majority of the population in under-served markets, we believe that our properties have been and will continue to be less of a target for real estate speculation. We also believe that the government’s efforts to curb speculative activity in the housing market will in fact benefit us in that they provide a long-term, healthy, and sustainable policy environment for our growth strategy. However, there can be no assurance that China’s current more restrictive approach to the economics of housing, especially in the speculative or over- invested parts of the housing market, would not have a negative influence on our business, especially in the near term.

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Taxation

Cayman Islands

The Government of the Cayman Islands does not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon us or our shareholders. The Cayman Islands are not party to a double tax treaty with any country that is applicable to any payments made to or by us.

We have received an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, for a period of 20 years from April 2006 no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable (i) on or in respect of our shares, debentures or other obligations or (ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by us to our shareholders or a payment of principal or interest or other sums by us due under a debenture or other obligation.

Hong Kong

Our direct subsidiary, Leewell, was incorporated in Hong Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5% . No provision for Hong Kong Profits Tax has been made as Leewell has no taxable income.

China

Under the New EIT Law, Oumei and its subsidiaries are subject to an earned income tax of 25.0% . See “Our Business — PRC Government Regulations — Taxation” for a detailed description of the New EIT Law and tax regulations applicable to our Chinese subsidiaries.

Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments to determine if there will be any change in the statutory income tax rate.

Results of Operations

Comparison of Six Months Ended June 25, 2011 and June 25, 2010

The following table shows key components of our results of operations during the six months ended June 25, 2011 and 2010, in both dollars and as a percentage of our total sales.

    Six Months Ended     Six Months Ended  
U.S. dollars, except percentages   June 25, 2011     June 25, 2010  
          Percent of           Percent of  
    Dollars     Total Sales     Dollars     Total Sales  
Total sales $  31,012,048     100.00%   $  56,461,539     100.00%  
Cost of sales   (18,239,846 )   (58.82)%     (40,146,847 )   (71.10)%  
Gross profit   12,772,202     41.18%     16,314,692     28.90%  
Advertising expenses   (56,130 )   (0.18)%   (149,909 )   (0.27)%
Commission expenses   (75,685 )   (0.25)%        
Selling expenses   (39,778 )   (0.13)%   (31,280 )   (0.06)%
Bad debt recovery (expense)   (729,762 )   (2.35)%   180,833     0.32%  
General and administrative expenses   (2,906,924 )   (9.37)%   (3,779,215 )   (6.69)%
Income from operations   8,963,923     28.90%     12,535,121     22.20%  
Miscellaneous income (expenses)   (363,635 )   (1.17)%   181,224     0.32%  
Interest expense and finance charges (net of interest income)   (22,990 )   (0.07)%   (234,529 )   (0.42)%
Income before income taxes   8,577,298     27.66%     12,481,816     22.11%  
Income taxes   (2,845,108 )   (9.18%)     (4,436,498 )   (7.86%)
Net income $  5,732,190     18.48%   $  8,045,318     14.25%  
Preference stock dividends   (476,184 )   (1.54%)          
Net earnings applicable to common shareholders $  5,256,006     16.94%   $  8,045,318     14.25%  
Foreign currency translation adjustment   3,864,883     12.47%     (9,925 )   (0.02)%

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Comprehensive income $  9,597,073     30.95%   $  8,035,393     14.23%  

Sales. Our total sales decreased 45.1% to $31.0 million in the six months ended June 25, 2011 from $56.5 million in the same period in 2010. The decline was mainly attributable to the Dongli Garden Phase I project, which contributed $28.2 million in sales, or 49.9% of total sales, in the six months ended June 25, 2010, but only $1.6 million in sales in the same period in 2011. For Dongli Garden Phase I, the fourth quarter of 2009 and first half of 2010 were the peak season of the government-sponsored villagers (residents who were the prior holders of the land use rights) relocation process, which tapered off in the second half of 2010. Meanwhile, in the six months ended June 25, 2011, our new project Jiangshan Dijing has not met all the revenue recognition criteria. Sales were also negatively impacted by additional restrictive government policies issued in the first quarter to curb housing prices and speculation, as buyers became increasingly cautious due to new government tightening measures.

We apply the percentage of completion method of accounting for revenue recognition of our development properties. See “Critical Accounting Policies — Revenue Recognition” below for a detailed discussion of how we recognize revenue under the percentage of completion method of accounting.

The following table sets forth the aggregate GFA and the related revenues recognized by project (finished projects) for the six months ended June 25, 2011 and 2010:

          GFA Delivered     Percentage of                          
          for six     Total GFA                          
          Months Ended     Delivered as of     Revenues Recognized for  
    Total     June 25,     June 25, (2)     Six Months Ended June 25, (3)
    GFA(1)   2011     2010     2011     2010     2011     2010  
                %     %     US$     %     US$     %  
Fuxiang Huayuan 1   52,830             100%     100%             71,567     0.1%  
Fuxiang Huayuan 2   18,392             100%     100%     19,639     0.1%          
Xingfu Renjia 1   85,551             100%     100%     287,330     0.9%     7,882,729     14%  
Oumei Complex 1   91,778             100%     100%     587,412     2%     349,280     0.6%  
Longhai Lidu 1   51,451             100%     100%             50,482     0.1%  
Longhai Lidu 2   79,308         65,490     100%     100%     447,571     1%     3,616,500     6%  
Longhai Mingzhu   51,902     51,902         100%         8,162,837     26%     9,795,364     17%  
Qilu Textile Centre (comm.)   139,510             100%     100%     460,059     1%     71,625     0.1%  
Total   570,722     51,902     65,490               $ 9,964,848         $  21,837,547        

(1) The amounts for “total GFA” in this table and the other tables in this section are the amounts of total saleable GFA and are derived on the following basis: (a) for properties that are sold, since total GFA of buildings includes sellable GFA and unsellable GFA (such as common areas and property management spaces, etc.), the total GFA is based on the sale contracts relating to such property; (b) for unsold properties that are completed or under construction, the total GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and (c) for properties that are under planning, the total GFA is calculated based on the floor area ratio approved in the land grant contract and our internal projections, subject to adjustments upon completion of construction blueprints.
(2) Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA. This calculation does not apply to projects in which 100% of GFA had been completed and delivered prior to the current period.
(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the percentage of completion, the percentage sold and related revenues for our projects for the six months ended June 25, 2011 and 2010.

                      Percentage Sold                          
          Percentage of                              
          Completion     Accumulated                          
          as of     as of     Revenues Recognized for  
    Total     June 25,     June 25, (1)     Six Months Ended June 25, (2)  
    GFA     2011     2010     2011     2010     2011     2010  
        %     %     %     %     US$     %     US$     %  
Qilu Textile Centre (Residential) 67,942 98% 93% 92% 84% 299,346 0.1% 321,568 0.6%
Weihai International Plaza   45,827     95%     60%     31%     14%     4,976,298     16%     4,152,722     7%  
Dongli Garden 1   213,315     69%     55%     56%     54%     1,612,573     5%     28,096,411     50%  
Oumei Complex 2   38,949     80%         48%         7,360,071     24%          
Xingfu Renjia 2   58,768     85%     25%     62%         5,634,283     18%          
Total   424,801                           $ 19,882,571         $ 32,570,701        

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(1) Percentage sold is calculated by dividing contracted sales value from property sales by total estimated sales value of the relevant project, estimated as of the time of preparation of our interim financial statements as of and for the applicable period.
(2) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the square meters sold and average selling price per square meter by each project on a consolidated basis for the six months ended June 25, 2011 and 2010.

  For Six Months Ended June 25, 2011   For Six Months Ended June 25, 2010  
          Revenues           Remaining                       Revenues           Remaining              
          Recognized      Revenues     Contract                     Recognized     Revenues     Contract              
          from Prior      Recognized     Amounts     Square     Average           from Prior      Recognized     Amounts     Square Average        
    Contract     Contract     in Current     to be     Meters     Selling     Contract     Contract     in Current     to be     Meters     Selling  
    Sales(1)     Sales(2)     Period(3)     Recognized(4)     Sold(5)     Price(6)     Sales(1)     Sales(2)     Period(3)     Recognized (4)     Sold(5)     Price(6)  
    US$     US$     US$     US$         US$/m²     US$     US$     US$     US$         US$/m²  
Fuxiang Huayuan 1                           71,567         71,567              
Fuxiang Huayuan 2   19,639         19,639                                      
Xingfu Renjia 1   287,330         287,330         1,032     278     7,882,729         7,882,729         27,293     289  
Xingfu Renjia 2   14,018,888     7,939,415     5,634,283     445,190     36,407     385                          
Longhai Lidu 1                           50,482         50,482         123     410  
Longhai Lidu 2   447,571         447,571         1,011     443     20,011,354     16,394,854     3,616,500         53,026     377  
Qilu Textile Centre (Comm)   460,059         460,059         948     485     158,184     80,788     71,625     5,771     578     274  
Qilu Textile Centre (Residential)   299,346         299,346         675     443     931,339     569,120     321,568     40,651     3,110     299  
Weihai International Plaza   18,261,631     12,372,252     4,976,298     913,081     14,307     1,276     6,921,202         4,152,721     2,768,481     6,281     1,102  
Dongli Garden 1   1,612,573         1,612,573         1,151     1,401     28,096,411         28,096,411         78,619     357  
Longhai Mingzhu   64,046,779     55,883,942     8,162,837         42,159     1,519     33,439,491     21,972,152     9,795,364     1,671,975     23,530     1,421  
Oumei Complex 1   587,572         587,412         1,606     366     349,280         349,280         1,186     295  
Oumei Complex 2   7,360,071         7,360,071         16,049     459                          
Sales of Inventory(1)   1,164,629         1,164,629         3,788     307     2,053,290         2,053,290         5,760     356  
Total   108,566,088     76,195,610     31,012,048     1,358,272     119,133      911     99,965,329     39,016,914       56,461,539       4,486,878     199,506     501  

(1) “Contract Sales” are comprised of two sub-groups: (a) contracts entered into prior to the current period that, as of the beginning of the current period, still have unrecognized portions (these are the total amounts, including previously recognized and unrecognized); and (b) brand new contracts entered into in the current period.
(2) “Revenues recognized from prior contract sales” are revenues recognized prior to the current period from prior contracts. In this column, we demonstrate the portion within the above-listed “sub-group (1)” that had previously been recognized as revenues prior to the current period. In other words, the amount shown in this column is part of the amount in the above-listed “sub-group (1).” We think this disclosure is relevant because it enables the reader to focus on the potential revenues as of the beginning of the current period, by eliminating previously recognized revenues from the total contract sales stated in the first column.
(3) “Revenues recognized in current period” include the revenues recognized in the current period, both from the un-recognized portion of previous contracts and from new contracts signed in the current period.
(4) “Remaining contract amounts to be recognized” represents the revenues that remain to be recognized as of the end of the current period, ie., (4) = (1) – (2) – (3).
(5) “Square meters sold” are the total GFA of all contract sales reflected in (1) above. (6) “Average selling price” is defined as (1) divided by (5) above.
(7) The sales of inventory are defined as the sale of unsold properties from projects completed prior to the applicable period, in which a very small number of units remained unsold at the beginning of the current period and the Company had withdrawn active selling activity.

Cost of sales. Our total cost of sales decreased 54.6% to $18.2 million in the six months ended June 25, 2011 from $40.1 million in the same period in 2010, mainly due to the decrease in sales.

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Gross profit and gross profit margin. Our gross profit decreased 21.7% to $12.8 million in the six months ended June 25, 2011 from $16.3 million in the same period in 2010. Gross profit as a percentage of total sales (gross margin) was 41.2% for the six months ended June 25, 2011 and 28.9% for the six months ended June 25, 2010. The decrease in the gross profit was due to the decrease in total sales as noted above, offset by an improved gross profit margin. The improvement in gross profit margin is mainly attributable to the fact that the Dongli Garden Phase I project, which had a low gross profit margin because of villager relocation efforts, contributed approximately 48.1% of total sales in the six months ended June 25, 2010, compared with only 5.2% in the same period of 2011. Dongli Garden was a joint effort between us and local government agencies, and Phase I of the project mainly involved relocating villagers previously residing on the parcel designated for Phase II. Therefore, as part of the government’s urban modernization initiatives, the government strictly regulated the selling prices of all Phase I units, which were on average considerably below would-be market prices and in turn resulted in a lower profit margin. Meanwhile, we were required by the government to offer pricing concessions to relocated former villagers based on the sizes of parcels they previously resided on. On the other hand, the Longhai Mingzhu project, whose sales represented 26.3% of total sales in the six months ended June 25, 2011, had a gross margin of 61.9% due to higher average selling price than the same period of 2010. In the same period of 2010, Longhai Mingzhu contributed approximately 17.3% of total sales and had a gross margin of 56.8% .

Advertising expenses. Advertising expenses decreased 62.6% to $0.06 million in the six months ended June 25, 2011 from $0.15 million in the same period in 2010, mainly due to the fact that, as more of the existing projects were completed by the end of 2010, we reduced our advertising efforts in the six months ended June 25, 2011 on existing projects.

Commission expenses. Commissions paid to independent sales agents amounted to $0.08 million in the six months ended June 25, 2011, while we paid no commissions in the same period in 2010. In addition to our salaried internal salespersons, we used temporary independent sales agents to maximize our sales efforts for commercial/office projects such as Weihai International Plaza and Longhai Mingzhu in the six months ended June 25, 2011. We did not rely as heavily on these temporary sales agents during the same period in 2010.

Selling expenses. Our selling expenses increased 27.2% to $0.04 million in the six months ended June 25, 2011 from $0.03 million in the same period in 2010, mainly due to the increased selling effort for the Weihai International Plaza project.

Bad debt recovery (expense). Our bad debt expense in the six months ended June 25, 2011 was $0.7 million, compared to bad debt recovery of $0.2 million in the same period in 2010, primarily due to an additional provision for doubtful accounts receivable made in accordance with our bad debt allowance policy.

General and administrative expenses. General and administrative expenses decreased 23.1% to $2.9 million in the six months ended June 25, 2011 from $3.8 million in the same period in 2010, primarily due to fact that we had greater expenses in the 2010 period related to the April 14, 2010 reverse acquisition and private placement transactions.

Interest expense and finance charges (net of interest income). Interest expense decreased 90.2% to $0.02 million in the six months ended June 25, 2011 from $0.23 million in the same period in 2010, primarily due to an increase in interest income resulted from a higher cash balance and an increase in the proportion of capitalized interest among all interest paid as more projects went into the construction phase. Please refer to Notes 12 and 13 to our unaudited consolidated financial statements for detailed information on our short-term and long-term borrowings.

Income taxes. Income taxes decreased 35.9% to $2.8 million in the six months ended June 25, 2011 from $4.4 million in the same period in 2010, due to lower income before taxes.

Net income. As a result of the foregoing factors, net income decreased 28.8% to $5.7 million in the six months ended June 25, 2011 from $8.0 million in the same period in 2010.

34


Comparison of Fiscal Years Ended December 25, 2010 and December 25, 2009

The following table shows key components of our results of operations during the fiscal years ended December 25, 2010 and 2009, in both dollars and as a percentage of our total sales.

    Fiscal Year Ended     Fiscal Year Ended  
U.S. dollars, except percentages   December 25, 2010     December 25, 2009  
          Percent of           Percent of  
    Dollars     Total Sales     Dollars     Total Sales  
Sales $  109,816,618     99.4%   $  91,041,042     96.5%  
Sales to related party   701,803     0.6%     3,274,458     3.5%  
Total sales   110,518,421     100.0%     94,315,500     100.0%  
Cost of sales   (77,065,740 )   (69.8)%   (57,442,457 )   (60.9)%
Cost of sales to related party   (144,074 )   (0.1)%   (853,951 )   (0.9)%
Total cost of sales   (77,209,814 )   (69.9)%   (58,296,408 )   (61.8)%
Gross profit   33,308,607     30.1%     36,019,092     38.2%  
Advertising expenses   (217,596 )   (0.2)%   (268,222 )   (0.3)%
Commission expenses   (214,566 )   (0.2)%   (84,982 )   (0.1)%
Selling expenses   (61,967 )   (0.1)%   (49,800 )   (0.1)%
Bad debt recovery (expense)   987,374     0.9%     (207,523 )   (0.2)%
General and administrative expenses   (7,390,963 )   (6.6)%   (4,655,596 )   (4.9v
Income from operations   26,410,889     23.9%     30,752,969     32.6%  
Miscellaneous income   23,899,865     21.6%     327,294     0.3%  
Interest expense and finance charges (net of interest income)   (325,969 )   (0.3)%   (866,751 )   (0.9)%
Income before income taxes   49,984,785     45.2%     30,213,512     32.0%  
Income taxes   (15,042,327 )   (13.6)     (9,058,226 )   (9.6)%
Net income   34,942,458     31.6%     21,155,286     22.4%  
Foreign currency translation adjustment   3,470,209     3.1%     474,414     0.5%  
Comprehensive income $  38,412,667     34.7%   $  21,629,700     22.9%  

Sales. Our total sales increased 17.2% to $110.5 million in the fiscal year ended December 25, 2010 from $94.3 million in the fiscal year ended December 25, 2009, primarily as a result of our sales of new units in our Weihai International Plaza and Xingfu Renjia projects in the 2010 fiscal year. No revenue was recognized for these projects in 2009.

We apply the percentage of completion method of accounting for revenue recognition of our development properties. See “Critical Accounting Policies — Revenue Recognition” below for a detailed discussion of how we recognize revenue under the percentage of completion method of accounting.

The following table sets forth the aggregate GFA and the related revenues recognized by project (finished projects) for the fiscal years ended December 25, 2010 and 2009:

          GFA Delivered     Percentage of        
          for Twelve     Total GFA        
          Months Ended     Delivered as of     Revenues recognized for  
    Total     December 25,     December 25, (2)     Twelve Months Ended December 25, (3)  
    GFA(1)   2010     2009     2010     2009     2010     2009  
                %     %     US$     %     US$     %  
Fuxiang Huayuan 1   52,830                     101,999     0.1%          
Fuxiang Huayuan 2   18,392         18,392         100%             5,530,848     6%  
Xingfu Renjia 1   85,551         85,551         100%     11,605,811     11%     11,664,726     12%  
Oumei Complex 1   91,778         39,624         100%     2,015,980     2%     7,093,081     8%  
Longhai Lidu1   51,451                     270,591     0.2%     192,788     0.2%  
Longhai Lidu 2   79,308     65,491     13,817     100%     17%     6,261,968     6%     20,508,323     22%  
Qilu Textile Centre (comm.)   139,510     2,204     6,735     100%     99%     2,827,457     3%     488,946     0.5%  
Total   518,820     67,695     164,119               $  23,083,806         $  45,478,712        

35


(1) The amounts for “total GFA” in this table and the other tables in this section are the amounts of total saleable GFA and are derived on the following basis: (a) for properties that are sold, since total GFA of buildings includes sellable GFA and unsellable GFA (such as common areas and property management spaces, etc.), the total GFA is based on the sale contracts relating to such property; (b) for unsold properties that are completed or under construction, the total GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and (c) for properties that are under planning, the total GFA is calculated based on the floor area ratio approved in the land grant contract and our internal projections, subject to adjustments upon completion of construction blueprints.
(2) Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA. This calculation does not apply to projects in which 100% of GFA had been completed and delivered prior to the current period.
(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the percentage of completion, the percentage sold and related revenues for our projects for the fiscal years ended December 25, 2010 and 2009.

                Percentage Sold        
          Percentage of            
          Completion     Accumulated        
          as of     as of     Revenues recognized for  
    Total     December 25,     December 25, (1)     Twelve Months Ended December 25, (2)
    GFA     2010     2009     2010     2009     2010     2009  
        %     %     %     %     US$     %     US$     %  
Qilu Textile Centre (Residential)   67,942     98%     90%     90%     86%     2,024,932     2%     8,342,029     9%  
Weihai International Plaza   45,828     75%         27%         11,956,609     11%          
Dongli Garden 1   213,315     69%     48%     55%     17%     29,708,882     27%     16,142,992     17%  
Longhai Mingzhu   51,902     97%     80%     74%     40%     31,856,112     29%     21,961,666     23%  
Oumei Complex 2   70,587     68%         4%         1,361,844     1%          
Xingfu Renjia 2   58,768     95%         37%         7,672,692     7%          
Total   508,342                           $  84,581,071         $  46,446,687        

(1) Percentage sold is calculated by dividing contracted sales value from property sales by total estimated sales value of the relevant project, estimated as of the time of preparation of our interim financial statements as of and for the applicable period.
(2) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the square meters sold and average selling price per square meter by each project on a consolidated basis for the fiscal years ended December 25, 2010 and 2009.

    For Twelve Months Ended December 25, 2010     For Twelve Months Ended December 25, 2009  
                      Remaining                                   Remaining              
          Revenues           contract                       Revenues           contract              
          recognized      Revenues     amounts                       recognized     Revenues     amounts              
          from prior     recognized     to be     Square     Average           from prior     recognized     to be     Square     Average  
    Contract     contract     in current      recognized     meters     selling     Contract     contract     in current     recognized     meters       selling  
    Sales(1)   sales(2)   period(3)   (4)   sold(5)   price(6)   Sales(1)   sales(2)   period(3)   (4)   sold(5)    price(6)
    US$     US$     US$     US$         US$/m²     US$     US$     US$     US$         US$/m²  
Fuxiang Huayuan   101,999         101,999                                      
Fuxiang Huayuan                           5,530,847         5,530,847         18,392     301  
Xingfu Renjia   11,605,811         11,605,811         38,772     299     11,664,726         11,664,726         43,811     266  
Xingfu Renjia   8,076,518         7,672,692     403,826     21,707     372                          
Longhai Lidu   270,591         270,591         678     399     192,788         192,788         578     334  
Longhai Lidu   22,789,841     16,527,873     6,261,968         58,905     387     23,917,534         20,508,323     3,409,211     63,640     376  
Qilu Textile Centre (Comm)   2,908,901     81,444     2,827,457         7,400     393     523,563         488,946     34,617     1,405     373  
Qilu Textile Centre (Residential)   2,717,852     573,737     2,024,932     119,183     8,288     328     8,585,811         8,342,029     243,782     29,765     288  
Weihai International Plaza   15,942,145         11,956,609     3,985,536     12,582     1,267                          
Dongli Garden   29,708,882         29,708,882         80,414     369     16,142,992         16,142,992         36,855     438  
Longhai Mingzhu   55,676,839     22,150,422     31,856,112     1,670,305     38,612     1,442     27,452,082         21,961,666     5,490,416     20,533     1,337  
Oumei Complex   2,082,483         2,015,980     66,503     7,156     291     7,093,081         7,093,081         35,346     201  
Oumei Complex   1,361,844         1,361,844         2,619     520                          
Sales of Inventory(7)   2,853,544         2,853,544         8,417     339     2,390,102         2,390,102         4,613     518  
Total   156,097,250     39,333,476     110,518,421     6,245,353     285,550     547     103,493,526         94,315,500     9,178,026     254,938     406  

36



(1) “Contract Sales” are comprised of two sub-groups: (a) contracts entered into prior to the current period that, as of the beginning of the current period, still have unrecognized portions (these are the total amounts, including previously recognized and unrecognized); and (b) brand new contracts entered into in the current period.
(2) “Revenues recognized from prior contract sales” are revenues recognized prior to the current period from prior contracts. In this column, we demonstrate the portion within the above-listed “sub-group (1)” that had previously been recognized as revenues prior to the current period. In other words, the amount shown in this column is part of the amount in the above-listed “sub-group (1).” We think this disclosure is relevant because it enables the reader to focus on the potential revenues as of the beginning of the current period, by eliminating previously recognized revenues from the total contract sales stated in the first column.
(3) “Revenues recognized in current period” include the revenues recognized in the current period, both from the un-recognized portion of previous contracts and from new contracts signed in the current period.
(4) “Remaining contract amounts to be recognized” represents the revenues that remain to be recognized as of the end of the current period, ie., (4) = (1) – (2) – (3).
(5) “Square meters sold” are the total GFA of all contract sales reflected in (1) above.
(6) “Average selling price” is defined as (1) divided by (5) above.
(7) The sales of inventory are defined as the sale of unsold properties from projects completed prior to the applicable period, in which a very small number of units remained unsold at the beginning of the current period and the Company had withdrawn active selling activity.

Cost of sales. Our total cost of sales increased 32.4% to $77.2 million in fiscal year 2010 from $58.3 million in fiscal year 2009, mainly due to the increase in sales and an increase of certain costs described more fully under “Gross profit and gross profit margin” below.

Gross profit and gross profit margin. Our gross profit decreased 7.5% to $33.3 million in fiscal year 2010 from $36.0 million in fiscal year 2009. Gross profit as a percentage of total sales (gross margin) was 30.1% for fiscal year 2010 and 38.2% for fiscal year 2009. The decrease in the gross profit margin was partially due to sales of new properties related to villager relocation efforts for our Dongli Garden project, which contributed approximately 26% of total sales in 2010 (compared with only 12% in 2009). The project was a joint effort between us and local government agencies, and Phase I of the project mainly involved relocating villagers previously residing on the parcel designated for Phase II. Therefore, as part of the government’s urban modernization initiatives, the government strictly regulated the selling prices of all Phase I units, which were on average considerably below would-be market prices and in turn resulted in a lower profit margin. Meanwhile, we are required by the government to offer pricing concessions to relocated former villagers based on the sizes of parcels they previously resided on. In addition, in fiscal year 2010, for the Longhai Mingzhu project, we booked an additional $2.1 million in cost of sales to account for a portion of the difference between book value and the fair market value of the assets when we acquired the entity that owned the project, which significantlly contributed to the decrease in the gross profit margin. Another contributing factor is the fact that in fiscal year 2009 we sold a significantly higher amount of accessory spaces (storage and garages), to which no construction cost was allocated, leading to a higher gross profit margin in fiscal year 2009 than in 2010.

Advertising expenses. Advertising expenses decreased 18.9% to $0.22 million in fiscal year 2010 from $0.27 million in fiscal year 2009, mainly due to the fact that most of the existing projects were completed by the end of 2009 and we reduced our advertising efforts in the 2010 fiscal year on existing projects.

Commission expenses. Commission paid to independent sales agents amounted to $0.21 million in fiscal year 2010, as compared to $0.08 million in fiscal year 2009, an increase of 152.5% . In addition to our salaried internal salespersons, we used temporary independent sales agents to maximize our pre-sales in the first phase of sales for our Weihai International Plaza project in the 2010 fiscal year. We did not rely as heavily on these temporary sales agents during fiscal year 2009.

Selling expenses. Our selling expenses increased 24.4% to $0.06 million in fiscal year 2010 from $0.05 million in fiscal year 2009, mainly due to selling expenses related to our Weihai International Plaza, Longhai Mingzhu and Xingfu Renjia projects. Most of our projects are residential projects. As commercial/office projects, our Weihai International Plaza and Longhai Mingzhu projects naturally involved more selling and marketing efforts and costs than a typical residential project, including rental and fit out of the sales center, production of posters, brochures and other media advertisement, and hiring and training of sales personnel.

Bad debt recovery (expense). Our bad debt recovery in fiscal year 2010 was $0.99 million, compared to bad debt expense of $0.20 million in fiscal year 2009, primarily due to the fact that management has been putting more effort in receivables collection, particularly focusing on those projects that previously had high receivable amounts such as Qilu Textile Centre, Fuxiang Huayuan, and Longhai Lidu, during the past year, while during 2009, we made a provision for doubtful accounts receivable in accordance with our bad debt allowance policy.

37


General and administrative expenses. General and administrative expenses increased 58.8% to $7.4 million in fiscal year 2010 from $4.7 million in fiscal year 2009, primarily due to expenses related to new subsidiaries that we acquired since 2009, including Caoxian Industrial and Longhai Real Estate, and expenses related to the April 14, 2010 reverse acquisition and private placement transactions, as well as our public offering registration.

Miscellaneous income. Included in miscellaneous income for the fiscal year ended December 25, 2010 is the sale of land use rights. On December 16, 2010, we executed a buyout transaction with the government of Licang District, Qingdao, in which the government agreed to pay us approximately $23.7 million in exchange for the pre-development land use right in connection with our planned Dongli Garden 2 project. We had previously planned to build residential units on the land, subject to the government’s re-zoning procedure. Prior to the transaction, the historical cost of the land use right was zero due to the fact that it was categorized as “state allocated land,” allocated to the Company at no cost by the local government for helping the government relocate and provide affordable housing for villagers previously residing on the parcel, as part of a government-sponsored master-planned urban modernization project. The parcel had no value until re-zoned by the government for commercial development. Therefore, no cost was incurred in connection with this transaction, and the income of approximately $23.7 million was included in miscellaneous income.

According to Section 2-22 of the PRC “Urban Real Estate Administration Law” passed in 1994 and most recently amended in 2007, “state allocated land” is defined as “land use right that is transferred to certain land users free of charge, upon the approval of the people's government above the county level, after the transferee has paid related relocation expenses.” Section 2-22 also provides that “land use right transferred in accordance with this section shall have no lifetime limit, notwithstanding additional laws and administrative regulations.” In the particular case of the Dongli Garden project, the land use right associated with the parcel for the previously planned Dongli Garden 2 project was granted to us by the local government in accordance with Section 2-22, as part of the master-planned urban modernization project to relocate and provide affordable housing for villagers previously residing on the subject parcel. Since we relocated all villagers to the Dongli Garden 1 project, all expenses in connection with the relocation have been accounted for in the cost of sales for Dongli Garden 1. As a result, we incurred no cost (both original acquisition cost and relocation expenses) in connection with the buyout transaction. The acquisition of land use right at no cost is not a common occurrence for us, since we typically participate in public bidding processes to acquire land use right owned by the government. Please refer to “Our Business — Project Development Process — Acquisition of Land Use Rights” for details.

Interest expense and finance charges (net of interest income). Interest expense decreased 62.4% to $0.3 million in fiscal year 2010 from $0.9 million in fiscal year 2009, primarily due to a decrease in the average balance of our borrowings and an increase in the proportion of capitalized interest among all interest paid as more projects went into the construction phase. Please refer to Notes 12 and 13 to our consolidated financial statements for detailed information on our short-term and long-term borrowings.

Income taxes. Income taxes increased 66.1% to $15.0 million in fiscal year 2010 from $9.1 million in the fiscal year 2009, due to higher income before taxes.

Net income. Net income increased 65.2% to $34.9 million in fiscal year 2010 from $21.2 million in 2009, mainly due to the increase in total sales and the sale of land use rights noted above.

Comparison of Fiscal Years Ended December 25, 2009 and December 25, 2008

The following table shows key components of our results of operations during the fiscal years ended December 25, 2009 and 2008, in both dollars and as a percentage of our total sales.

    Fiscal Year Ended     Fiscal Year Ended  
U.S. dollars, except percentages   December 25, 2009     December 25, 2008  
          Percent of           Percent of  
    Dollars     Total Sales     Dollars     Total Sales  
Sales $  91,041,042     96.5%   $  77,032,561     100.0%  
Sales to related party   3,274,458     3.5%          
Total sales   94,315,500     100.0%     77,032,561     100.0%  
Cost of sales   (57,442,457 )   (60.9 )%   (46,321,251 )   (60.1 )%
Cost of sales to related party   (853,951 )   (0.9)%        
Total cost of sales   (58,296,408 )   (61.8v   (46,321,251 )   (60.1)%
Gross profit   36,019,092     38.2%     30,711,310     39.9%  
Advertising expenses   (268,222 )   (0.3)%   (112,263 )   (0.1)%
Commission expenses   (84,982 )   (0.1)%   (574,262 )   (0.7)%
Selling expenses   (49,800 )   (0.1)%   (81,415 )   (0.1)%
Bad debt expense   (207,523 )   (0.2)%   (1,198,942 )   (1.6)%
General and administrative expenses   (4,655,596 )   (4.9)%   (2,283,744 )   (3.0)%
Income from operations   30,752,969     32.6%     26,460,684     34.4%  
Miscellaneous income   327,294     0.3%     91,945     0.1%  
Interest expense   (866,751 )   (0.9)%   (968,710 )   (1.3)%
Income before income taxes and extraordinary items   30,213,512     32.0%     25,583,919     33.2%  
Income taxes   (9,058,226 )   (9.6)%   (6,602,194 )   (8.6)%
Income before extraordinary items   21,155,286     22.4%     18,981,725     24.6%  
Extraordinary items, net           12,499,576     16.3%  
Net income   21,155,286     22.4%     31,481,301     40.9%  
Foreign currency translation adjustment   474,414     0.5%     3,486,204     4.5%  
Comprehensive income $  21,629,700     22.9%   $  34,967,505     45.4%  

38



Sales
. Our total sales increased 22.4% to $94.3 million in the fiscal year ended December 25, 2009 from $77.0 million in the fiscal year ended December 25, 2008, mainly due to sales by two project development companies that we acquired during this period, the completion and sales of the Xingfu Renjia project phase 1 and the Fuxiang Huayuan project phase 2, in addition to a higher average selling price per square meter for both residential and commercial properties delivered in fiscal year 2009 compared with fiscal year 2008.

Effective December 26, 2008, we adopted the percentage of completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than 12 months at that date. The full accrual method was used before that date for all of our residential and commercial projects. We changed to the percentage of completion method for contracts longer than one year because this method more accurately reflects how revenue is earned on these contracts, particularly for interim reporting purposes. ASC 250 requires retrospective application of a change in accounting principle unless impracticable. The change to the percentage of completion method had no effect on our December 25, 2008 financial statements. See “— Critical Accounting Policies — Revenue Recognition” below for a detailed discussion of how we recognize revenue under the percentage of completion method of accounting.

The following table sets forth the aggregate GFA and the related revenues recognized by project (finished projects) for the fiscal years ended December 25, 2009 and 2008:

          GFA Delivered     Percentage of        
          for Twelve     Total GFA        
          Months Ended     Delivered as of     Revenues recognized for  
    Total     December 25,     December 25, (2)   Twelve Months Ended December 25, (3)
    GFA(1)   2009     2008     2009     2008     2009     2008  
                %     %     US$     %     US$     %  
Fuxiang Huayuan 1   52,830         52,830         100%             13,682,009     18%  
Fuxiang Huayuan 2   18,392     18,392         100%         5,530,847     6%          
Xingfu Renjia 1   85,551     85,551         100%         11,664,726     12%          
Oumei Complex 1   91,778     39,624     52,154     100%     57%     7,093,081     8%     9,421,360     12%  
Total   248,551     143,567     104,984               $  24,288,654         $  23,103,369        

(1) The amounts for “total GFA” in this table and the other tables in this section are the amounts of total saleable GFA and are derived on the following basis: (a) for properties that are sold, since total GFA of buildings includes sellable GFA and unsellable GFA (such as common areas and property management spaces, etc.), the total GFA is based on the sale contracts relating to such property; (b) for unsold properties that are completed or under construction, the total GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and (c) for properties that are under planning, the total GFA is calculated based on the floor area ratio approved in the land grant contract and our internal projections, subject to adjustments upon completion of construction blueprints.
(2) Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA. This calculation does not apply to projects in which 100% of GFA had been completed and delivered prior to the current period.
(3) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

39


The following table sets forth the percentage of completion, the percentage sold and related revenues for our projects for the fiscal years ended December 25, 2009 and 2008.

                Percentage Sold        
          Percentage of            
          Completion     Accumulated        
          as of     as of     Revenues recognized for  
    Total     December 25,     December 25, (1)   Twelve Months Ended December 25, (2)
    GFA     2009     2008     2009     2008     2009     2008  
        %     %     %     %     US$     %     US$     %  
Longhai Lidu 1   51,450     100%     100%     96%     95%     192,788     0.2%     17,787,318     23%  
Longhai Lidu 2   79,308     86%     67%     80%         20,508,323     22%          
Qilu Textile Centre (Comm)   139,510     99%     98%     79%     78%     488,946     0.5%     25,720,880     33%  
Qilu Textile Centre (Residential)   67,942     90%     37%     79%     37%     8,342,029     9%     7,049,269     9%  
Weihai International Plaza   45,828                                  
Dongli Garden 1   213,315     48%         17%         16,142,992     17%          
Longhai Mingzhu   51,902     80%         40%         21,961,666     23%          
Oumei Complex 2   70,587                                  
Total   719,842                           $  67,636,744         $  50,557,467        

(1) Percentage sold is calculated by dividing contracted sales value from property sales by total estimated sales value of the relevant project, estimated as of the time of preparation of our interim financial statements as of and for the applicable period.
(2) Percentage of all real estate sales revenues for the financial period, including finished goods and work-in-process inventory.

The following table sets forth the square meters sold and average selling price per square meter by each project on a consolidated basis for the fiscal years ended December 25, 2009 and 2008.

    For Twelve Months Ended December 25, 2009     For Twelve Months Ended December 25, 2008  
                      Remaining                                   Remaining              
          Revenues           contract                       Revenues           contract              
          recognized     Revenues     amounts                       recognized     Revenues     amounts              
          from prior     recognized       to be     Square     Average           from prior     recognized     to be     Square     Average  
    Contract     contract     in current     recognized     meters     selling     Contract     contract     in current     recognized     meters     selling  
    Sales(1)   sales(2)   period(3)   (4)     sold(5)      price(6)   Sales(1)   sales(2)     period(3)   (4)   sold(5)   price(6)   
    US$     US$     US$     US$         US$/m²     US$     US$     US$     US$         US$/m²  
Fuxiang Huayuan 1                           13,682,010         13,682,010         52,830     259  
Fuxiang Huayuan 2   5,530,848         5,530,848         18,392     301                          
Xingfu Renjia 1   11,664,726         11,664,726         43,811     266                          
Oumei Complex 1   7,093,081         7,093,081         35,346     201     9,421,360         9,421,360         37,622     250  
Longhai Lidu 1   192,788         192,788         578     334     17,787,318         17,787,318         48,656     366  
Longhai Lidu 2   23,917,534         20,508,323     3,409,211     63,640     376                          
Qilu Textile Centre (Comm)   523,563         488,946     34,617     1,405     373     25,720,880         25,720,880         108,373     237  
Qilu Textile Centre (Residential)   8,585,811         8,342,029     243,782     29,765     288     7,049,269         7,049,269         26,427     267  
Weihai International Plaza                                                
Dongli Garden 1   16,142,992         16,142,992         36,855     438                          
Longhai Mingzhu   27,452,082         21,961,666     5,490,416     20,533     1,337                          
Oumei Complex 2                                                
Sales of Inventory(7)   2,390,102         2,390,102         4,613     518     3,371,725         3,371,725         9,039     373  
Total   103,493,527         94,315,500     9,178,026     254,938     406     77,032,562         77,032,562         282,947     272  

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(1) “Contract Sales” are comprised of two sub-groups: (a) contracts entered into prior to the current period that, as of the beginning of the current period, still have unrecognized portions (these are the total amounts, including previously recognized and unrecognized); and (b) brand new contracts entered into in the current period.
(2) “Revenues recognized from prior contract sales” are revenues recognized prior to the current period from prior contracts. In this column, we demonstrate the portion within the above-listed “sub-group (1)” that had previously been recognized as revenues prior to the current period. In other words, the amount shown in this column is part of the amount in the above-listed “sub-group (1).” We think this disclosure is relevant because it enables the reader to focus on the potential revenues as of the beginning of the current period, by eliminating previously recognized revenues from the total contract sales stated in the first column.
(3) “Revenues recognized in current period” include the revenues recognized in the current period, both from the un-recognized portion of previous contracts and from new contracts signed in the current period.
(4) “Remaining contract amounts to be recognized” represents the revenues that remain to be recognized as of the end of the current period, ie., (4) = (1) – (2) – (3).
(5) “Square meters sold” are the total GFA of all contract sales reflected in (1) above.
(6) “Average selling price” is defined as (1) divided by (5) above.
(7) The sales of inventory are defined as the sale of unsold properties from projects completed prior to the applicable period, in which a very small number of units remained unsold at the beginning of the current period and the Company had withdrawn active selling activity.

Cost of sales. Our total cost of sales increased 25.9% to $58.3 million in the fiscal year 2009 from $46.3 million in the fiscal year 2008, mainly in support of the increase in sales, plus higher costs in constructing high rise tower office buildings in fiscal year 2009, which are more expensive to construct than the low rise buildings completed in fiscal year 2008.

Gross profit and gross profit margin. Our gross profit increased 17.3% to $36.0 million in the fiscal year 2009 from $30.7 million in the fiscal year 2008. Gross profit as a percentage of total sales (gross margin) was 38.2% for the fiscal year 2009 and 39.9% for the fiscal year 2008. The decline in the gross margin was primarily due to the Fuxiang Garden Phase 2 and the Xingfu Renjia Phase 1 projects, both of which had lower than average selling prices. Additionally, the costs of construction of high rise office tower buildings in fiscal year 2009 are relatively higher than the projects sold in fiscal year 2008.

Advertising expenses. Advertising expenses increased 138.9% to $0.3 million in the fiscal year 2009 from $0.1 million in the fiscal year 2008, mainly due to our increased advertising efforts to create buyer awareness and interest in our newly available properties at our Qilu Textile Center and Weihai Longhai International Plaza projects, as well as in our Xingfu Renjia residential project.

Commission expenses. Commissions paid to independent sales agents decreased 85.2% between fiscal year 2009 ($0.1 million) and fiscal year 2008 ($0.6 million) since we used temporary independent sales agents to maximize our pre-sales in the first phase of sales for residential and commercial properties in 2008. In 2009, we did not rely as heavily on these temporary sales agents.

Selling expenses. Our selling expenses decreased 38.8% to $0.05 million in the fiscal year 2009 from $0.08 million in the fiscal year 2008, mainly due to the absence in 2009 of the sales and marketing materials purchased for the intense selling effort in the first phase of pre-sales for residential and commercial properties in 2008.

Bad debt expense. Our bad debt expense declined 82.7% in fiscal year 2009 ($0.2 million) from fiscal year 2008 ($1.2 million), primarily due to the write back of an allowance against other receivables which was recorded in 2008. This was partially offset by an additional provision for doubtful accounts receivable made in accordance with the Company’s bad debt allowance policy.

General and administrative expenses. General and administrative expenses increased 103.9% in fiscal year 2009 ($4.7 million) from fiscal year 2008 ($2.3 million), primarily due to the increase in Land Appreciation Tax and the expenses incurred in anticipation of the reverse acquisition transaction with Leewell and related private placement.

Interest expense. Interest expense decreased 10.5% to $0.9 million in the fiscal year 2009 from $1.0 million in fiscal year 2008, primarily due to lower average borrowings in 2009.

Income taxes. Income taxes increased 37.2% to $9.1 million in the fiscal year 2009 from $6.6 million in the fiscal year 2008, mainly due to higher income before taxes.

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Income before extraordinary items. Income before extraordinary items was up 11.5% to $21.2 million in the fiscal year 2009 compared with $19.0 million in 2008, as a result of the factors described above.

Extraordinary items, net. In fiscal year 2008, we acquired four project companies (Qingdao Xudong, Weifang Longhai Industry, Weifang Longhai Zhiye and Weifang Qilu) and recorded a gain of $12.5 million as an extraordinary item, based on the differences between our purchase prices and the estimated fair market values of the acquisitions.

Net income. Net income decreased 32.7% to $21.2 million in fiscal year 2009 from $31.5 million in 2008, primarily due the absence in fiscal year 2009 of a gain from extraordinary items that occurred in fiscal year 2008, and due to higher income taxes in 2009.

Liquidity and Capital Resources

As of June 25, 2011, we had cash and cash equivalents of approximately $39.9 million. The following table provides a summary of our net cash flows from operating, investing, and financing activities. To date, we have financed our operations primarily through net cash flow from operations, augmented by cash proceeds from recent financing activities, short-term bank borrowings and equity contributions by our shareholders.

    Six Months Ended     Fiscal Year Ended  
U.S. Dollars   June 25,     December 25,  
    2011     2010     2010     2009     2008  
Net cash provided by operating activities $  7,406,397   $  6,584,162   $  27,325,191   $  11,250,820   $  61,015,081  
Net cash provided by (used in) investing activities   273,376     (103,220 )   (136,156 )   234,814     (58,521,630 )
Net cash provided by (used in) financing activities   (2,260,285 )   3,645,863     3,435,399     (9,866,408 )   (3,805,052 )
Effects of exchange rate change in cash   938,760     2,891     701,545     6,573     16,518  
Net increase (decrease) in cash and cash equivalents   6,358,248     10,129,696     31,325,979     1,625,799     (1,295,083 )
Cash and cash equivalents at beginning of the period   33,590,417     2,264,438     2,264,438     638,639     1,933,722  
Cash and cash equivalent at end of the period $  39,948,665   $  12,394,134   $  33,590,417   $  2,264,438   $  638,639  

Net cash flow from operating activities

In accordance with Accounting Standards Codification, or ASC, 230, Statement of Cash Flows, cash flows from our operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Net cash provided by operating activities was $7.4 million in the six months ended June 25, 2011, compared with $6.6 million in the same period last year. Net income after adjustment for noncash items was $9.1 million in the six months ended June 25, 2011. This increase was augmented by a reduction of $7.0 million in income recognized but where no payment was received, a reduction of $1.7 million of loans to a related party, a decrease of $2.4 million of other receivables, an increase in accounts payable of $8.5 million, an increase in related party payables of $0.04 million, an increase in taxes incurred but not paid of $0.04 million, and an increase in other payables and other current liabilities of $1.7 million. This total increase of $21.4 million was offset by an increase in inventories of $2.2 million, an increase in income recognized but not billed of $4.7 million, an increase in advance payments to contractors and vendors of $14.6 million, an increase of $0.5 million in prepaid expenses, a decrease of $1.2 million in deposits received from customers, and an increase of $0.01 million in restricted cash.

Net cash provided by operating activities was $27.3 million in fiscal year 2010, compared with $11.3 million in fiscal year 2009. Net income after adjustment for noncash items was $49.9 million in fiscal year 2010. This increase was augmented by a reduction in inventories of $37.6 million, an increase in taxes incurred but not paid of $4.2 million, a reduction of $1.3 million of loans to a related party, an increase in accounts payable of $1.3 million, and an increase of $0.8 million in deposits received from customers. This total increase of $95.1 million was offset by an increase in income recognized but not billed of $15.0 million, an increase of $23.1 million of other receivables, a decrease in other payables and other current liabilities of $3.4 million, an increase of $1.4 million in prepaid expenses, a $24.4 million income recognized but where no payment was received, and an increase of $0.3 million in restricted cash.

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Net cash provided by operating activities was $11.3 million in fiscal year 2009, compared with $61.0 million in fiscal year 2008. Net income after adjustment for noncash items was $30.3 million in fiscal year 2009. This increase was augmented by a reduction in inventories of $24.6 million, related party receivables collected of $7.3 million, expenditures made in previous years but expensed in fiscal year 2009 of $2.3 million, and an increase in taxes incurred but not paid of $3.8 million. This total increase of $68.3 million was offset by a decrease in deposits received from customers of $38.0 million, income recognized of $10.7 million but either not billed or received in cash, and payments for accounts payable of $9.3 million.

Net cash flow from investing activities

Net cash provided by investing activities in the six months ended June 25, 2011 was $0.3 million, compared with $0.1 million net cash used in investing activities in the same period last year. The increase in net cash provided by investing activities was mainly due to proceeds from sales of assets and less expenditure on purchasing fixed assets in the six months ended June 25, 2011, compared with the same period in 2010.

Net cash used in investing activities in fiscal year 2010 was $0.1 million, compared with $0.2 million net cash provided by investing activities in fiscal year 2009. The decrease in net cash provided by investing activities was mainly due to more expenditures on purchasing fixed assets in fiscal year 2010, compared with fiscal year 2009.

Net cash provided by investing activities in fiscal year 2009 was $0.2 million, compared with $58.5 million net cash used in investing activities in fiscal year 2008. The increase was mainly due to the absence in fiscal year 2009 of the purchase of four subsidiaries acquired in fiscal year 2008.

Net cash flow from financing activities

Net cash used in financing activities in the six months ended June 25, 2011 was $2.3 million, compared with $3.6 million net cash provided by financing activities in the same period last year. The increase in net cash used in financing activities was mainly due to the increase in short-term borrowing in the six months ended June 25, 2011 and the payment of a dividend on preferred stock. See “Dividend Policy” for more details. In addition, cash proceeds from the April 14, 2010 private placement transaction contributed to the large amount of net cash provided by financing activities in the six months ended June 25, 2010.

Net cash provided by financing activities in fiscal year 2010 was $3.4 million, compared with $9.9 million net cash used in financing activities in fiscal year 2009. The increase in net cash provided by financing activities was mainly from cash proceeds from the April 14, 2010 private placement transaction, partially offset by repayments of short-term and long-term borrowings.

Net cash used in financing activities in fiscal year 2009 was $9.9 million, compared with $3.8 net cash used in financing activities in fiscal year 2008. The increase was mainly due to repayments of long-term borrowings in fiscal year 2009, partly offset by proceeds received from long-term borrowings in 2009.

As of June 25, 2011, the amount, maturity date and term of each of our loans were as follows:

Lender Amount Outstanding Interest Rate Maturity Date Duration
Rural Credit Cooperatives Fangzi Branch RMB 9,000,000 (approximately $1,392,300) 9.04% December 07, 2011 1 year
Employee Loan (China Agricultural Bank Laixi Branch) RMB 337,540 (approximately $52,217) 12.76% December 25, 2011 1 year
China Industry and Commercial Bank Chengyang Branch RMB 184,000,000 (approximately $28,464,800) 7.68% November 25 2011 3 years
China Construction Bank Weihai Branch RMB 38,754,000 (approximately $5,955,242) 6.40% December 2, 2011 2 years
Total RMB 232,091,540 (approximately $35,904,559

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We do not intend to use the proceeds from this offering to pay off our debt that is due within the next 12 months. As the majority of our outstanding loans are real estate development loans, we believe that our operating cash provided by general sales is sufficient to repay the portion of such loans that is due within the next 12 months. We also believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least the next twelve months. We may, however, in the future require additional cash resources due to changed business conditions, implementation of our strategy to expand our business, or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

Obligations Under Material Contracts

The table below shows our contractual obligations as of June 25, 2011.

U.S. Dollars   Payments Due by Period  
          Less than                 More than  
Contractual Obligations   Total     1 year     1-3 years     3-5 years     5 years  
Long-term and short-term debt obligations $  35,905,000   $  35,905,000   $  —   $  —   $  —  
Interest expense obligations for outstanding debt   1,161,000     1,161,000              
Other obligations*   464,000     271,000     193,000          
Total $  37,530,000     37,337,000     193,000   $  —   $  —  

* Operating lease for company cafeteria. See Note 20 to our unaudited consolidated financial statements.

Inflation

Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and the real estate industry and continually maintain effective cost controls in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

Seasonality

Our operating results and operating cash flows historically have not been subject to dramatic seasonal variations, although there is an increase in advertising and selling expenses when we begin pre-sales of new projects under construction. New market opportunities or new project introductions could change any perceived patterns, seasonal or operational.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:

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Revenue Recognition

Real estate sales are reported in accordance with the provisions of ASC 360-20, Property, Plant and Equipment, Real Estate Sales, Sales Other Than Retail Land Sales. Revenue from the sales of development properties where the construction period is twelve months or less is recognized by the full accrual method when the sale is consummated. A sale is not considered consummated until (1) the parties are bound by the terms of a contract or agreement, (2) all consideration has been exchanged, (3) any permanent financing of which the seller is responsible has been arranged, (4) all conditions precedent to closing have been performed, (5) the seller does not have substantial continuing involvement with the property, and (6) the usual risks and rewards of ownership have been transferred to the buyer. Revenue recognized to date in excess of amounts received from customers is classified as current assets under contracts receivable. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.

Effective December 26, 2008, the Company adopted the percentage-of-completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than twelve months at that date. The full accrual method was used before that date for all of our residential and commercial projects. The Company changed to the percentage-of-completion method for contracts longer than one year as this method more accurately reflects how revenue is earned on these contracts, particularly for interim reporting purposes.

ASC 250, Accounting Changes and Error Corrections, requires retrospective application of a change in accounting principle unless impracticable. The change to the percentage-of-completion method had no material effect on our December 25, 2008 financial statements.

Revenue and profit from the sale of development properties where the construction period is more than twelve months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met: (1) construction is beyond a preliminary stage; (2) the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit; (3) sufficient units have already been sold to assure that the entire property will not revert to rental property; (4) sales prices are collectible and (5) aggregate sales proceeds and costs can be reasonably estimated. If any of these criteria are not met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.

Under the percentage of completion method, revenues from units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of completion and applying that ratio to the contracted sales amounts. This ratio of completion is determined by the Company using data reported by licensed independent third party construction supervising firms hired by the Company as the contractors employed by the Company request advance payments and do not specifically allocate these costs to the various projects. Cost of sales is recognized by multiplying the ratio by the total budgeted costs. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of cash received from customers is classified as current assets under revenue in excess of billings. Amounts received from customers in excess of revenue recognized to date are classified as current liabilities under customer deposits.

Any losses incurred or identified on a real estate transaction are recognized in the period in which the transaction occurs.

From time to time, the Company participates in government-sponsored old city redevelopment projects, which typically involve villager relocation programs. Because of the fact that the relocated residents, who are the purchasers of new apartment units, are not assigned their units and do not make payments until the completion of the particular project according to the agreement with the government, it is impractical to use the percentage of completion method even though the construction period usually exceeds twelve months. In such cases, revenues are recognized under the full accrual method for the residential portion of the project. Revenue recognized to date in excess of amounts received from customers is classified as current assets under contracts receivable.

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Real Estate Capitalization and Cost Allocation

Properties under construction or held for sale consist of residential and commercial units under construction and units completed.

Properties under construction or held for sale are stated at cost or estimated net realizable value, whichever is lower. Costs include costs of land use rights, direct development costs, including predevelopment costs, interest on indebtedness, construction overhead and indirect project costs. Total estimated costs of multi-unit developments are allocated to individual units based upon specific identification methods.

Costs of land use rights include land premiums and deed tax and are allocated to projects on the basis of acreage and GFA.

Allowance for Doubtful Accounts

The Company recognizes an allowance for doubtful accounts to ensure contracts receivable, revenue in excess of billings, related party receivables and other receivables are not overstated due to uncollectibility. We typically apply a two-step approach in recording allowances for doubtful accounts. First, as a general policy, we record a specific percentage allowance for contracts receivable based on the age and amount of the receivable, and an allowance for contracts receivable is established as follows: 50% of the balances aged between one and two years and over RMB100,000 (approximately $15,000); 10% of the balances aged between one and two years and under RMB100,000 (approximately $15,000); and 100% of the balances aged over two years. As a second step, we perform further analyses on all contracts receivable and make adjustments, if necessary, based on a variety of factors, including, in addition to the amount and length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s or debtor’s inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer’s or debtor’s operating results or financial position. If circumstances related to customers or debtors change, estimates of the recoverability of receivables would be further adjusted. All accounts receivable are reviewed periodically, and if the Company determines that a specific doubtful account has become uncollectible, the account is written off by removing the amount from the receivable account. As an exception to the above-mentioned formula, the Company has not recognized an allowance for doubtful accounts for contracts receivable and other receivables owed by the City Government of Qingdao related to the Dongli Garden project, considering the city government’s substantial creditworthiness, high collectibility, and its overall track record of fulfilling all of its monetary obligations.

For the six months ended June 25, 2011 and 2010, we have not recorded such write-off for uncollectibility. As of June 25, 2011 and December 25, 2010, the allowances for doubtful accounts are $1,545,096 and $786,353 for contracts receivable and revenue in excess of billings, and $150,882 and $146,980 for other receivables, respectively.

Land Appreciation Tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures, including borrowing costs and all property development expenditures. The tax rules to implement the laws stipulate that the whole project must be completed before the LAT obligation can be assessed, and also give tax authorities the additional option to make the LAT assessment when 85% of the sellable area of a completed project has been sold or when a project has held a pre-sale permit for more than three years. The Company records the liability and the related expense at the stage of a project when total revenues and deductible LAT costs related to the project can be reasonably estimated, unless the tax authorities impose an assessment at an earlier date. Any accruals made will be adjusted in later periods if the estimates of total revenues and deductible LAT expenditures materially change. Deposits made against the eventual obligation are included in prepaid expenses.

Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans and long-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans, are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the six months ended June 25, 2011.

A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings as of June 25, 2011, would decrease net income before provision for income taxes by approximately $182,000 for the six months ended June 25, 2011. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

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Foreign Exchange Risk

While our reporting currency is the U.S. Dollar, all of our consolidated sales and virtually all our consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB, except for a small portion of cash, which is denominated in U.S. dollars. As a result, we are exposed to foreign exchange risk as our sales and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If RMB depreciates against the U.S. Dollar, the value of our RMB sales, earnings and assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or Euro in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.

Inflation

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material effect on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

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CORPORATE HISTORY AND STRUCTURE

Our Corporate History

We organized under the laws of the Cayman Islands on March 10, 2006 under the name “Dragon Acquisition Corporation” as a blank check development stage company formed for the purpose of acquiring an operating business, through a stock exchange, asset acquisition or similar business combination. From our inception until we completed our reverse acquisition of Leewell on April 14, 2010, our operations consisted entirely of identifying, investigating and conducting due diligence on potential businesses for acquisition.

Reverse Acquisition of Leewell

On April 14, 2010, we completed a reverse acquisition transaction through a share exchange with Leewell whereby we acquired 100% of the issued and outstanding capital stock of Leewell, in exchange for 29,235,000 ordinary shares, par value $0.002112 per share, which shares constituted 94.31% of our issued and outstanding shares on a fully-diluted basis, as of and immediately after the consummation of the reverse acquisition. As a result of the reverse acquisition, Leewell became our wholly-owned subsidiary and Longhai Holdings, the former shareholder of Leewell, became our controlling shareholder. The share exchange transaction with Leewell was treated as a reverse acquisition, with Leewell as the acquirer and China Oumei Real Estate Inc. as the acquired party. Unless the context suggests otherwise, when we refer in this prospectus to business and financial information for periods prior to the consummation of the reverse acquisition for accounting purposes, we are referring to the business and financial information of Leewell and its consolidated subsidiaries.

Upon the closing of the reverse acquisition on April 14, 2010, Mr. David Richardson resigned from our board of directors, effective immediately, and Mr. Joseph Rozelle submitted a resignation letter in which he resigned from all offices that he held effective immediately and from his position as our director on May 1, 2010.

Also upon the closing of the reverse acquisition, our board of directors increased its size from two (2) to three (3) members and appointed Mr. Antoine Cheng, Mr. Weiqing Zhang, and Mr. Zhongbo Zhou to fill the vacancies created by the resignations of Messrs. Richardson and Rozelle and such increase. In addition, our board of directors appointed Mr. Antoine Cheng to serve as the Chairman of the Board, Mr. Weiqing Zhang to serve as our Chief Executive Officer and President, and Mr. Yang Chen to serve as our Chief Financial Officer and Vice President, effective immediately at the closing of the reverse acquisition.

As a result of our acquisition of Leewell, we now own all of the issued and outstanding capital stock of Leewell, which in turn owns Oumei and its Chinese subsidiaries and Oumei Weiye. Leewell was established in Hong Kong on August 10, 2007 to serve as an investment holding company. Oumei was established in the PRC on May 15, 2001. Its principal activities include the development and sales of residential and commercial properties in Qingdao and its nearby cities, or Greater Qingdao, and other cities in Shandong Province, China.

On September 20, 2007, Leewell acquired 100% of the equity interests in Oumei from its shareholders, including Mr. Weiqing Zhang, Oumei’s Chief Executive Officer, for RMB 97,010,000 (approximately $13.1 million). In October 2007, the acquisition was approved by the appropriate Chinese authorities, and Oumei’s status changed from a Chinese domestic company to a wholly-owned foreign enterprise.

Oumei has three branch offices, located in Jimo, Pingdu, and Laixi, and has purchased the following nine Chinese subsidiaries:

  • Weihai Mingwei, purchased on January 19, 2008 for RMB 110,000,000 (approximately $15 million);
  • Longhai Hotel, purchased on January 22, 2008 for RMB 110,000,000 (approximately $15 million);
  • Weihai Economic, purchased on January 23, 2008 for RMB 140,000,000 (approximately $19 million);
  • Qingdao Xudong, purchased on January 24, 2008 for RMB 60,000,000 (approximately $8.3 million);
  • Weifang Longhai Industry, purchased on August 27, 2008 for RMB 30,000,000 (approximately $4.4 million);
  • Weifang Longhai Zhiye, purchased on August 28, 2008 for RMB 30,000,000 (approximately $4.4 million);
  • Weifang Qilu, purchased on August 29, 2008 for RMB 40,000,000 (approximately $5.8 million);
  • Caoxian Industrial, purchased on June 25, 2009 for RMB 15,000,000 (approximately $2.2 million); and
  • Longhai Real Estate, purchased on September 25, 2009 for RMB 20,000,000 (approximately $2.9 million).

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On March 5, 2010, Leewell established Oumei Weiye in the PRC as a vehicle to seek future acquisition opportunities in Laoshan District.

As a result of our reverse acquisition of Leewell, we have assumed the business and operations of Leewell and its Chinese subsidiaries. On August 6, 2010, we changed our name from “Dragon Acquisition Corporation” to “China Oumei Real Estate Inc.” to more accurately reflect our new business operations.

Financing Transaction

On April 14, 2010, we also completed a private placement transaction with a group of accredited investors. Pursuant to the Subscription Agreement with the investors, we issued to the investors an aggregate of 2,774,700 Units for a purchase price of $11,098,800, or $4.00 per Unit. Each Unit consists of one Preference Share and one Warrant to purchase 0.5 ordinary shares. See “Description of Share Capital — Rights and Obligations of Shareholders” below for a description of our Preference Shares. The Warrants have a term of 5 years, are exercisable on a net exercise or cashless basis and are exercisable by investors at any time after the closing date. The Warrants had an initial exercise price of $6.00 per share (subject to customary adjustments), however, the exercise price of the Warrants has been adjusted as described below.

Pursuant to the Subscription Agreement, we were obligated to file a registration statement covering the resale of the ordinary shares underlying the Preference Shares and the Warrants no later than thirty (30) days following the closing date and use our best efforts to cause the registration statement to be declared effective under the Securities Act as promptly as possible, but in no event later than 180 days following the closing date, or October 11, 2010. Under the Subscription Agreement, if we did not timely file the required registration statement, or if it was not declared effective by the SEC in a timely manner, then we were obligated to pay to each investor a liquidated damages fee of 1% of such investor’s investment per month, for up to a maximum of 10% of each investor’s investment pursuant to the Subscription Agreement. Pursuant to an amendment to the Subscription Agreement that we entered into with the investors on October 11, 2010, we amended the Subscription Agreement to provide that, in lieu of the cash liquidated damages amount that would otherwise have been payable by us for our failure to cause the registration statement to be declared effective within the prescribed period, we were required to reduce the initial exercise price of the Warrants issued to each investor in the private placement by $0.08 per calendar month, or portion thereof, until such time that the registration statement is declared effective by the SEC; provided that, in no event would we be obligated to reduce the initial exercise price of the Warrants by more than $0.80 in aggregate. Since the registration statement was not declared effective within such time, the exercise price of the Warrants has been reduced to $5.20.

In connection with the private placement, we entered into a make good escrow agreement, or the Make Good Escrow Agreement, with Longhai Holdings, our controlling shareholder, Collateral Agents, LLC, the escrow agent, and Access America Investments, LLC, as representative of the investors, pursuant to which the parties agreed to certain “make good” provisions in the event that we do not meet certain financial performance thresholds for fiscal years 2010 and 2011. Pursuant to the Make Good Escrow Agreement, the parties agreed to the establishment of an escrow account and Longhai Holdings delivered into escrow certificates evidencing 7,500,000 ordinary shares held by it, to be held for the benefit of the investors. Under the Make Good Escrow Agreement, we established minimum after tax net income thresholds (as determined in accordance with GAAP and excluding any non-cash expenses and one-time expenses related to the reverse acquisition of Leewell and the private placement transaction) of $40 million for fiscal year 2010 and $60 million for fiscal year 2011 and minimum earnings per share thresholds (calculated on a fully diluted basis and including adjustment for any stock splits, stock combinations, stock dividends or similar transactions, and for shares issued in one public offering or pursuant to the exercise of any warrants, options, or other securities issued during or prior to the calculation period) of $1.13 for fiscal year 2010 and $1.70 for fiscal year 2011. If our after tax net income or earnings per share for either fiscal year 2010 or fiscal year 2011 is less than 90% of the applicable performance threshold, then the performance threshold will be deemed not to have been achieved, and the investors will be entitled to receive ordinary shares based upon a pre-defined formula agreed to between the parties. The parties agreed that, for purposes of determining whether or not any of the performance thresholds is met, the release of any of the escrowed shares and any related expense recorded under GAAP shall not be deemed to be an expense, charge, or any other deduction from revenues even if GAAP requires contrary treatment or the annual report for the respective fiscal years filed with the SEC by the Company may report otherwise. We met such financial performance thresholds for fiscal year 2010.

On September 27, 2011, the parties entered into Amendment Number 1 to the Make Good Escrow Agreement to add a new provision to the Make Good Escrow Agreement, pursuant to which, at any time on or before December 15, 2011, we have a right to redeem the then outstanding Units at a price equal to the aggregate investment amount delivered by the investors to purchase such Units on April 14, 2010, together with accrued but unpaid dividends thereon. Upon the redemption of all, but no less than all, Units surrendered by the investors, provided that such Units constitute no less than a majority of the outstanding Units, and the payment of the redemption price by us to the redeeming investors, all of the shares deposited by Longhai Holdings and remaining in the escrow account pursuant to the Make Good Escrow Agreement will be released back to Longhai Holdings and no investors will have any rights to such shares under the Make Good Escrow Agreement.

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Also in connection with the private placement, we entered into a holdback escrow agreement, or the Holdback Escrow Agreement, with Collateral Agents, LLC, the escrow agent, Brean Murray, Carret & Co., LLC, the placement agent, and Access America Investments, LLC, as representative of the investors, pursuant to which $1,000,000 was deposited with the escrow agent to be released to us in incremental amounts to pay for fees and expenses relating to our obligations as a public company and $2,219,760 was deposited with the escrow agent to be distributed upon the satisfaction of certain covenants set forth in the Subscription Agreement. Pursuant to the Subscription Agreement, we were required to, as soon as possible, but no later than three (3) months after the closing of the reverse acquisition of Leewell, (i) nominate a five (5) member board of directors, a majority of which shall be independent (as defined for SEC purposes and NASDAQ rules and regulations) and (ii) hire an English-speaking chief financial officer who shall have experience with financial reporting companies under the Sarbanes-Oxley Act of 2002 and other federal or state securities laws and shall also meet the approval, which shall not be unreasonably withheld, and requirements of Access America Investments, LLC, the lead investor. On June 22, 2010, we hired a new chief financial officer and elected independent directors to satisfy these covenants and $2,219,760 was released to us in accordance with the terms of the Holdback Escrow Agreement.

We also entered into an investor relations escrow agreement with Collateral Agents, LLC, the escrow agent, Brean Murray, Carret & Co., LLC, the placement agent, and Access America Investments, LLC, as representative of the investors, pursuant to which $120,000 was deposited with the escrow agent to be distributed in incremental amounts to pay our investor relations firm, the choice of which is subject to the placement agent’s approval.

In connection with the private placement, we also entered into a lock-up agreement, or the Lock-up Agreement, with Longhai Holdings and each of our directors and officers, pursuant to which each of them agreed not to transfer any of our capital stock held directly or indirectly by them for an eighteen-month period following the closing of the private placement.

On April 14, 2010, we also issued an aggregate of 300,000 ordinary shares and warrants for the purchase of an aggregate of 138,735 ordinary shares, exercisable for a period of 3 years at an exercise price of $5.00 per share, to Brean Murray, Carret & Co., LLC and/or its designees, as partial compensation for services provided by them in connection with the private placement transaction. The estimated grant date fair value of these shares is $3.39 per share. Both the shares and warrants issued to Brean Murray, Carret & Co., LLC were considered direct expenses of the offering and charged to additional paid-in capital. The warrants are outstanding as of December 25, 2010. Brean Murray, Carret & Co., LLC also received a cash fee of $775,759.39 for its services in connection with the private placement.

On April 14, 2010, we also issued an aggregate of 465,000 ordinary shares to Beijing Allstar Business Consulting, Inc. and/or its designees, as partial compensation for services provided by them in connection with the reverse acquisition of Leewell and the private placement transaction. The estimated grant date fair value of these shares is $3.39 per share and the estimated compensation recognized is $1,576,350, which will be charged to operations.

Our Corporate Structure

All of our business operations are conducted through our Chinese subsidiaries. The chart below presents our corporate structure:

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OUR INDUSTRY

The Real Estate Industry in China

China’s real estate sector is in the early stage of a long-term growth cycle, supported by growth in its gross domestic product, or GDP, rising demand for housing, and substantial structural changes.

China has experienced rapid economic growth in the last 20 years. According to the National Bureau of Statistics, from 2004 to 2009, China’s GDP achieved an annualized growth rate of 16.4% and its GDP per capita achieved an annualized growth rate of 15.7% . In 2009, China’s GDP was RMB 34.1 trillion and its per capita GDP was RMB 25,575. In 2010, China’s GDP was RMB 39.8 trillion. The official per capita GDP data for 2010 is not yet available as of the date of this prospectus.

Despite the recent global economic recession, China is expected to achieve relatively good economic growth in the next several years, compared to many other major economies in the world.

China’s real estate bull market began more than six years ago. Despite the moderations in growth caused by the global economic weakness in 2008 and 2009, we believe the structural forces in China support continuing good demand for real estate in China during the next 10 years. The two primary drivers for this long-term real estate demand in China are urbanization (which includes both the expansion and development of cities and the dramatic migration of people from rural to urban areas) and the rising disposable income per capita in the cities.

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Increasing Urbanization

At the end of 2009, 621 million people were living in urban areas, accounting for 46.6% of total population of 1.33 billion, according to the National Bureau of Statistics of China. The Ministry of Housing and Urban-Rural Development of China estimated in 2007 that China’s urban population in 2015 would exceed 800 million people.

Another source, the United Nations’ State of World Population 2007, reported that approximately 18 million people in China are expected to migrate from rural to urban areas each year, and that the urban population would reach about 870 million people in the next 10 years.

The rural to urban migration is likely to continue, both because of the potential for higher income and greater wealth accumulation, and because of the evolution of China’s farming toward larger-scale and more efficient methods that require fewer people to do the agricultural work.

With the substantial housing demand created by the structural shift of the migration, the urban real estate market has been thriving. That long-term trend is expected to continue.

Increasing Disposable Incomes

According to the 2010 annual report of the National Bureau of Statistics of China, disposable income per capita in urban areas between 2000 and 2009 has grown at a compound average annual growth rate of 11.8%, from RMB 6,280 (approximately $919) in 2000 to RMB 17,175 (approximately $2,583) in 2009. As disposable income per capital increases, urban residents are motivated to improve their living conditions by purchasing new or larger properties, demonstrated by urban living expenses per capita in the same years that have steadily increased at a compound annual growth rate of 10.5%, from RMB 4,998 (approximately $732) in 2000 to RMB 12,265 (approximately $1,845) in 2009, which is the most recent year available for this measurement in the government’s official database.

Rural dwellers are drawn to cities primarily by the potential of higher incomes and greater wealth, because urban jobs generally pay higher wages and salaries.

The latest data from the National Bureau of Statistics of China shows that both disposable income and wealth accumulation are higher for urban dwellers and confirms the economic attractiveness of the migration from rural to urban areas.

Annual per capita disposable income and expenses (RMB) 2002 2003 2004 2005 2006 2007 2008 2009
Urban per capita                
Disposable income of urban households 7,703 8,472 9,422 10,493 11,760 13,786 15,781 17,175
Consumption expenditures of urban households 6,030 6,511 7,182 7,943 8,697 9,998 11,243 12,265
Net increase in wealth, urban 1,673 1,961 2,240 2,550 3,063 3,789 4,538 4,910
Rural per capita                
Net income of rural households 2,476 2,622 2,936 3,255 3,587 4,140 4,761 5,153
Living expenditures of rural households 1,834 1,943 2,185 2,555 2,829 3,224 3,661 3,993
Net increase in wealth, rural 642 679 751 700 758 917 1,100 1,160

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Growth of the Chinese Real Estate Industry

The growth in China’s real estate industry is reflected in the growth of investment in real estate development, total GFA sold, and average home prices. According to the National Bureau of Statistics of China, total investment on real estate development in 2009 was RMB 4.307 trillion (approximately $630 billion), up 19.9% from 2008.

According to the National Bureau of Statistics of China, the total GFA of residential and commercial properties sold increased from 224.1 million square meters in 2001 to 937.1 million square meters in 2009, a compound annual growth rate of 19.6% .

Rising disposable income in the second-tier cities has lured top luxury goods manufacturers, including LVMH Group (one of the world’s largest luxury goods companies), to expand aggressively into key second-tier cities. The Chinese government has also been instrumental in stimulating regional growth by designating certain second-tier regions as priority zones. These actions are benefitting the Greater Qingdao area, our primary market. According to the Qingdao Municipal Bureau of Statistics, between 2000 and 2009, Qingdao’s urban disposable income per capita grew by a compound annual growth rate of 12.1% to RMB 22,368.

Recent Efforts by the Chinese Government to Cool Down the Real Estate Industry

In response to concerns over the scale of the increase in property investments, the PRC government has implemented measures and introduced policies to curtail property speculation and promote the healthy development of the real estate industry in China. On January 7, 2010, the PRC State Council issued a circular to control the rapid increase in housing prices and cool down the real estate market in China. It reiterated that the purchasers of a second residential property for their households must make down payments of no less than 40% of the purchase price and real estate developers must commence the sale within the mandated period as set forth in the pre-sale approvals and at the publicly announced prices. The circular also requested the local government to increase the effective supply of low-income housing and ordinary commodity housing and instructed the PBOC and the China Bank Regulatory Commission to tighten the supervision of the bank lending to the real estate sector and mortgage financing.

On February 25, 2010, the PBOC increased the reserve requirement ratio for commercial banks by 0.5% to 16.5% and has further increased it from 16.5% to 17.0% effective May 10, 2010. Further, in order to implement the requirements set out in the State Council’s circular, the MLR issued a notice on March 8, 2010 in relation to increasing the supply of, and strengthening the supervision over, land for real estate development purposes.

In April 2010, the PRC State Council issued a further circular, which provided as follows: purchasers of a first residential property for their households with a gross floor area of greater than 90 square meters must make down payments of no less than 30% of the purchase price; purchasers of a second residential property for their households must make down payments of no less than 50% of the purchase price and the interest rate of any mortgage for such property must equal at least the benchmark interest rate plus 10%; and for purchasers of a third residential property, both the minimum down payment amount and applied interest rate must be significantly higher than the relevant minimum down payment and interest rate which would have been applicable prior to the issuance of the circular (the specific figures shall be decided by the relevant bank on a case-by-case based on the principle of proper risk management). Moreover, the circular provided that banks can decline to provide mortgage financing to either a purchaser of a third residential property or a non-resident purchaser.

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In September 2010, the PRC’s seven state ministries and regulatory agencies jointly issued a further circular, which provided that commercial banks should suspend loans to third home buyers across the country and buyers who fail to provide proof of at least one year of local social security tax payments. It also provided that a 30% down payment requirement is applied to all purchasers of a first residential property. The circular also adjusted property transaction taxes and personal income taxes. It cut in half the transaction tax for buyers of non-luxury homes which are used as sole residence. The rate will be 1% for residential units of 90 square meters or smaller. In addition, for those who purchase a new home within one year of old home sales, income tax will be applied (it was previously exempted). The new policy limits the total number of properties bought by a single family within a certain period in some cities where price inflation is rapid, such as Beijing, Shanghai, Shenzhen and Hangzhou, etc. Property tax may start piloting in select cities in the near future, though we still expect issues relating to property tax implementation. Our major markets are not among the cities currently subject to the policy limits.

On January 26, 2011, the PRC State Council announced a new round of real estate tightening policies. The new policies increased the minimum down-payment requirements for second homes to 60% from 50%, with the loan interest rate to be set at no less than 1.1 times the benchmark lending rate, and also limited the total number of properties that can be bought by a single family in an increasing number of cities. Only one additional unit can be bought by local residents who already own one unit or non-locals who can provide proof of at least one year's social security tax payments. No further units can be purchased by local residents who own two or more units and non-locals who own one unit or fail to provide such proof. Home buyers who sell properties within a five-year period will be taxed (business tax) based on total sales proceeds, instead of capital gain. Local authorities were required to increase the supply and availability of affordable and public housing and announce a new home price control target by the first quarter of 2011. Land supply for affordable, public and small-medium commodity housing must exceed 70% of total land available for sale.

The purpose of these measures appears to be to curb price speculations in certain housing markets from two sides. On the demand side, the objective appears to be to constrain speculative trends by requiring tighter conditions and stricter bank loans for “second, third, fourth, or more” homes than are typical for primary home buyers. The policy makes it more difficult and more costly to purchase homes only for price speculation.

On the supply side, the government is endeavoring to push for a higher quantity of homes to meet the needs of low-income and middle-income buyers of primary homes.

In considering all the government’s housing policies, given (a) the supply of affordable housing is likely to increase in the next year, (b) the government regulation of loans to developers to reduce speculative building for speculative buyers, (c) pressures for supplying affordable housing for primary buyers, (d) possible competitive market pressures for lower pricing as speculative owners of existing but unoccupied homes try to sell before the market weakens, and (e) bank loan restrictions that reduce the cash available for non-primary homes, we believe that the likely result will be incentives for and market pressures on developers to supply affordable housing in higher volumes, while at the same time moderating or lowering both the prices and the number of housing units available in the speculative portion of the housing market.

We have not kept records as to the portion of our prior sales that were made to purchasers who made down payments that were less than the increased minimum, or to those who already owned a home prior to their purchase, because such records were unnecessary at the time. Therefore, we are unable to ascertain how these new regulations may directly affect our future sales. However, recent evidence has indicated that although the government’s stated goal was to curb high-flying property prices and speculation activities in cities where property bubbles are clearly developing, the broad-brush control measures taken by the government, even in second and third tier cities in our markets, have inadvertently imposed a great deal of constraint on our potential customers, even though our typical customers are middle-income owners/occupiers, and per-capita GDP and income growths in our markets have outpaced increases in property prices. In some recent cases, our apartment and office customers have had difficulty in obtaining mortgage financing from banks, most of which are state-owned and are subject to the real estate lending restrictions imposed by the government. In addition, sentiment of potential buyers has also suffered, as they have become increasingly cautious and have typically decided to remain on the sidelines to see whether there will be additional restrictive policies that might impact their ability to purchase a home, as well as to see whether prices would decline significantly in the near future. Because our properties, which primarily target middle-income owners/occupiers, have always been reasonably and conservatively priced, and our markets have not seen the kind of excessive speculative activities as seen in major tier-one cities, the impact of the government’s recent tightening policies on our operations is more related to buyers’ sentiment, which may in turn lead to lower showroom traffic and lower sales volume.

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Shandong Province

We conduct most of our operations in Shandong Province, including the city of Qingdao and two other smaller cities, Weihai and Weifang. Shandong Province, which includes Greater Qingdao, is located in northeastern China, on the gulf called the Bohai Sea and on the Yellow Sea. It includes the Shandong peninsula in the east and a central hilly complex surrounded by part of the intensively cultivated northern China Plain. The flood-prone Yellow River crosses northern sections. Wheat and soybeans are the chief crops, and wild silk is important on the peninsula. Major resources are the Shengli petroleum fields in the north and extensive coal deposits at Zibo, Boshan, and Zaozhuang. Jinan, the capital, and the Qingdao and Zibo municipalities are major urban areas. Settled as early as the 3rd century BC, Shandong was part of China during the Shang dynasty and played a major role in ancient Chinese history. It was venerated as the birthplace of the philosophers Confucius and Mencius. Shandong Province is approximately 153,300 square kilometers in area, with a population density of 1,859.9 people per square kilometer.

Greater Qingdao

Greater Qingdao includes the cities of Qingdao, Jimo, Laixi, Pingdu, and three smaller cities. Located in the China-Japan-Korea triangle, Qingdao is a one-hour flight from Seoul and a two-hour flight from Tokyo.

Qingdao is a major naval base, an industrial center, and a port on the Yellow Sea at the entrance to sheltered Jiaozhou Bay. The port, which rarely freezes over, serves the industrialized northern China Plain and was expanded in 1976 to include an oil terminal for large tankers on Huang Island.

The leading manufactured goods of the city include textiles, railroad equipment, rubber goods, fertilizer, and chemicals. Tsingtao beer, brewed here since Germany leased the Kiaochow territory (1898 – 1914), is sold around the world. Qingdao was transformed by the Germans from a small fishing village into a modern European-style industrial port in the early 20th century. As a result of the reform and industrial restructuring in the past two decades, major industries, including electronics and information technology, appliances, engineered materials, brewing, automobiles, and shipbuilding, have grown dramatically in Qingdao. The Shandong Oceanography College is also located here.

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Qingdao is considered one of the most livable cities in China as reported by various Chinese media outlets including CCTV. As one of China’s top ten economically dynamic cities ranked by the National Bureau of Statistics of China, Qingdao has an excellent environment for investment and living. It offers fairly priced markets, good infrastructure facilities, comfortable living conditions, efficient government operations, sound public security, good personal and property safety, and glorious days in the city, at the beach, sailing, or hiking in the mountains.

Economic Growth

Shandong has experienced rapid economic growth in the last 20 years. According to National Bureau of Statistics of China, Shandong’s GDP per capita increased from RMB 10,195 (approximately $1,492) in 2001 to 35,796 (approximately $5,232) in 2009, a compound annual growth rate of 17.0% .

Qingdao is the leading city in the Shandong peninsula, measured by GDP and GDP growth rate. As one of China’s top ten economically dynamic cites, GDP per capita in Qingdao exceeded $8,000 in 2009, making it the seventh most economically competitive city in China, according to the Qingdao Municipal Commission of Development and Reform.

Compared to tier-one cities, we believe Qingdao will continue its growth momentum for quite a few years. Its strong economic fundamentals should provide a solid foundation for growth in the real estate sector.


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Qingdao hosted the sailing competitions of the Olympic and Paralympic Games in August and September 2008, which boosted the city’s economy due to the Olympic participants and visitors, as well as to the new fixed assets built to support the Olympic games and festivities, especially the Qingdao International Marina & Olympic Sailing Center. Built on the site of the former Beihai shipyard on Fushan Bay, the new Qingdao International Marina & Olympic Sailing Center covers a total area of 450,000 square meters, plus major and secondary breakwaters, an embankment, a quay, and the renovation of the shore wall. The facility serves as the home port of several sailing organizations. Qingdao hosted the Volvo Ocean Race 2008 – 2009 as the Chinese port city on the world circuit.

Economic Stimulus Plans

In response to the global financial and economic crisis, the Chinese government announced a RMB 4 trillion stimulus program on November 27, 2008. Subsequently, on March 6, 2009, the National Development and Reform Commission Director announced a reshaping of that economic stimulus package that retained the investment total of RMB 4 trillion but adjusted its focus. Within the RMB 4 trillion package, about RMB 400 billion will go toward civil works, including low-income housing and renovation, which we believe will benefit Shandong Province. Two additional categories (technology advances & industry restructuring for RMB 370 billion and infrastructure for RMB 1.5 trillion) are also expected to benefit industries in Qingdao, Weihai, Weifang, and the entire Shandong Province.

On February 26, 2009, China’s State Council reinforced China’s 2008 stimulus package by further measures to stimulate specific industries in 2009. The industries include automobile, iron and steel, textiles, equipment manufacturing, shipbuilding, electronics and information technology, petrochemicals, light industries, nonferrous metals, and logistics.

We believe China’s RMB 4 trillion stimulus package and its further efforts focused on 10 industries will improve Qingdao’s economy, further strengthen the region’s long-term competitive ability, and support the demand for middle and upper income housing, as well as the need for better commercial and office space, and a few world-class hotels. However, although individuals and governments around the world hope that government stimulus efforts will have the desired effects, the true benefit from these and perhaps additional stimulus efforts by local, provincial, and national governments in China, as well as by other countries, still remain uncertain.

The Qingdao Real Estate Market

Qingdao’s real estate market has experienced strong growth since 2001. The table below shows housing demand in Qingdao between 2003 and 2009. In 2009, GFA completed was 8.14 million square meters, and GFA sold was 12.62 million square meters, with an average price per square meter of RMB 5,576.

  2003 2004 2005 2006 2007 2008 2009 CAGR
GFA completed (millions m2) 5.52 6.35 8.11 6.54 6.41 6.72 8.14 6.7%
GFA sold (millions m2) 4.69 5.16 7.40 7.19 8.33 7.70 12.62 17.9%
Average price per sq. meter (RMB) 2,392 2,967 3,604 4,249 5,202 5,096 5,576 15.1%
Source: Qingdao Statistics Yearbook 2004 – 2010 & Qingdao Municipal Bureau of Statistics 

Good demographic and economic factors, including emerging high-tech industries and increasing foreign capital inflow, bode well for Qingdao’s future growth.

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Growth factors include the transition of certain industries to higher value-added business (especially high-technology and services), rising GDP per capita, increasing foreign investment, and expanding foreign retailing and hotel operations. Between 2000 and 2009, Qingdao’s GDP per capita achieved a 15.2% compound annual growth rate, while Qingdao’s urban disposable income per capita grew at a point-to-point compound annual growth rate of 12.1% from 2000 to 2009. The official GDP per capita data for 2010 is not yet available as of the date of this prospectus.

In addition, efforts by Qingdao’s local government to create clear strategies, institute attractive policies, and invest in the necessary infrastructure are focused on creating favorable investment environments.

Qingdao is focused on expanding its three relatively new industries: its modernized seaport, tourism, and marine science. The city also continues to enlarge its traditional industries of electronics and home appliances; petrochemicals; automobile; locomotive; ship building; and engineered materials. With Qingdao’s base as a seaport, this robust city is also building a regional shipping center, a logistics center, a service center, a financial center, and a high-technology industry development center.

Qingdao’s thrust to expand its industries and its recent experience as the world’s host for the sailing events of the Olympics and Paralympics are combining to grow this energetic city as it increases its role in the global marketplace. Qingdao’s development is based on the concept of “three-point layout,” “one-line planning,” and “group development strategy.”

The “three-point layout” refers to the development of the Jiaozhou Bay region relying on the three basic points of the old urban districts of Qingdao, Huangdao, and Hongdao, and the construction of the new urban district by connecting the three points with a transoceanic bridge or undersea tunnel and the Jiaozhou Bay Expressway.

The “one-line planning” refers to building a coastal highway from Langyatai in Jiaonan to Tianhengdao Island in Jimo, which will connect all parts of the city to form a main urban development belt.

The “group development strategy” refers to the expansion of business groups on both sides of the coastal highway. There will be seven development groups respectively in Tianhengdao Island, Aoshan, Zhucheng, Hongdao, Huangdao, Jiaonan, and Langyatai, which will push forward the urbanization of the adjacent regions. To carry out the west coast development strategy and construct those seven areas, the municipal government will relocate ports to the western coast, and plans to establish an international port and an international transshipment port.

The Qingdao Economic and Technological Development Zone, or QETDZ, is one of the state-level economic and technological development zones approved by China’s State Council. The zone is located on the west coast of Jiaozhou Bay, which is connected to the Bohai Sea Economic Belt. It is in the center of the Greater Qingdao strategy that aims to create huge development potential. In the recent assessement report by the Department of Commerce of China, the Qingdao Economic Technology Development Zone was ranked fifth overall. The Qingdao Economic Technology Development Zone was regarded among the top ten in the areas of comprehensive competitiveness, infrastructure facilities, human resources supply, social and environment protection, and environment for technical innovation.

According to the official website of the Qingdao Economic Technology Development Zone, so far, a total of more than RMB 30 billion has been invested in the construction of infrastructure facilities in the zone. The Qianwan international port, inside the QETDZ, has a 100 million ton capacity, is the largest modern container deep-water dock in China, and links with more than 100 shipping routes to all parts of the world.

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With the approval of the Shandong Provincial Government, Qingdao has established six provincial-level economic and technological development zones, including the development zones in Jimo, Laixi, Pingdu, Jiaonan, and Jiaozhou, and the Coastal economic and technology development zone. These development zones have complete infrastructure facilities with beneficial investment policies and convenient transportation.

The Weihai Real Estate Market

According to the Weihai Bureau of Statistics, approximately 4.0 million square meters of GFA were sold in Weihai in 2007, up 57.5% from 2006; approximately 4.0 million square meters were sold in 2008, down 1.0% from 2007; and approximately 5.7 million square meters were sold in 2009, up 42.1% from 2008.

The table below shows Weihai’s recent GFA completed, GFA sold, and average price per square meter for all commercial and residential property transactions in the city.

  2003 2004 2005 2006 2007 2008 2009 CAGR
GFA completed (millions m2) 1.73 1.55 2.39 2.66 3.91 4.06 5.82 22.4%
GFA sold (millions m2) 1.64 1.96 2.25 2.55 4.02 3.98 5.66 22.9%
Average price (RMB) 1,590 1,800 2,028 2,301 2,915 2,993 3,472 13.9%
Source: Weihai Statistical Yearbooks 2004 to 2010 & Weihai Municipal Bureau of Statistics  

As reflected in the above chart, supply and demand have been almost matched in Weihai’s property market and both have increased over the last five years.

With total GFA sold of about 4.0 million square meters in 2008, the Weihai housing market has grown at a compound annual growth rate of 19.4% in the six years between 2003 and 2009.

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OUR BUSINESS

Overview

We are one of the leading real estate development companies located in Qingdao, Shandong province, China. We began operations in 2001, and in 2010 we were recognized in the official City of Qingdao Commission of Development & Construction’s evaluation as one of the ten most outstanding real estate developers in Qingdao, measured by a combination of revenue, customer satisfaction, as well as several other factors.

We develop and sell residential and commercial properties, targeting middle and upper income customers in the coastal region of the Shandong peninsula (Greater Qingdao) located in northeastern China, including the cities of Qingdao, Weihai and Yantai, as well as other inland locations, such as Weifang.

Since our inception, we have completed 18 projects having a GFA of 1,513,898 square meters, of which approximately 95% has been sold. In addition, we have six projects under construction with a total GFA of 488,299 square meters.

In the fiscal year ended December 25, 2010, our total sales increased 17.2% to $110.5 million from $94.3 million in fiscal year 2009, and our net income increased 65.2% to $34.9 million in fiscal year 2010 from $21.2 million in fiscal year 2009. In the six months ended June 25, 2011, our total sales decreased 45.1% to $31.0 million from $56.5 million in the same period in 2010, and our net income decreased 28.8% to $5.7 million in the six months ended June 25, 2011 from $8.0 million in the same period in 2010.

Our mission is to provide high-quality, comfortable, and convenient living space to middle and upper income customers, primarily in Shandong Province and in other provinces in China, while also earning for our shareholders an internal rate of return that exceeds our cost of capital. We expect to increase our market share through aggressive internal growth and prudent acquisitions in Shandong Province and in other provinces in China. Our goal is to be one of the top two real estate developers in Greater Qingdao in the next five years by capturing and exploiting the growth opportunities in Shandong Province and by providing the most desirable coastal and inland apartments to middle and upper income customers, as well as by increasing our development of commercial properties.

Our Competitive Strengths

We believe the following strengths allow us to compete effectively in the Chinese real estate development industry:

  • We have a proven track record of successful large-scale properties development. Since our inception in 2001, we have successfully completed 18 projects having a GFA of 1,513,898 square meters, of which approximately 95% has been sold. In addition, we have six projects under construction with a total GFA of 488,299 square meters. All of our projects have featured modern facilities and attractive landscaping that provides comfortable and convenient lifestyles. Since our inception, we have focused on providing mid-sized apartments for middle- income residents and have gained an in-depth understanding of the preferences of our target customers. Most of the apartments we develop are units ranging from 40 square meters to 100 square meters, with an average price of less than RMB 4,000 per square meter (approximately $585 per square meter). Our ability to cater to our customers’ preferences has been a major factor in the growth of our business. By leveraging our experience and track record, we believe that we can penetrate into the real estate markets in other tier two and tier three cities in China.

  • We have a widely recognized brand name in an attractive coastal market. We have received many awards that acknowledge the quality of our real estate developments. For example, in 2010, we were recognized in the official City of Qingdao Commission of Development & Construction’s evaluation as one of the ten most outstanding real estate developers in Qingdao, measured by a combination of revenue, customer satisfaction, as well as several other factors. In March 2007, the Company was named one of the nation’s elite “Trustworthy Homebuilders” by the National Commission of Housing Market Oversight and National Commission of Consumer Right Protection. In the same year, the Company’s Jiangnan Garden development project was voted one of the country’s “Top 100 Housing Development Projects” in terms of consumer satisfaction. In December 2006, the Company was ranked among China’s top 500 developers by the National Bureau of Statistics’ Department of Fixed Asset Statistics. We believe that the quality of our real estate developments and the recognition of our brand name by our customers are important to our success.

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  • We have an experienced management team. Our management team has extensive operating experience and industry knowledge. Our Chairman, Mr. Antoine Cheng, has many years of experience in working with businesses and has developed good business contacts, including in the real estate development business in China. Our Chief Executive Officer, Mr. Weiqing Zhang, has more than 15 years of experience in real estate development, during which he has successfully developed more than two million square meters of GFA and has also served in strategic planning and general administration functions. Our Chief Financial Officer, Mr. Zhaohui John Liang, has over 15 years of experience in real estate finance, investment and development, and previously oversaw the real estate portfolio of one of the largest U.S. retail chains with $9 billion in annual sales. This extensive industry experience is combined with extensive operating experience. For example, Mr. Yang Chen, our President, has more than 17 years of experience in accounting and financial management. All of executive officers have bachelor’s or master’s degrees in business administration or accounting. In addition, our staff is well trained and is motivated by our incentive programs. We offer employees a variety of relevant training programs.

  • We have substantial land reserves at premier locations for use as new development projects. We believe that our ownership of premium land reserves and the fact that we have already planned the development of specific projects for some of those land reserves gives us an advantage over our competitors who do not have similar reserves and must acquire land before commencing their next projects. We characterize our locations as “premier” or “premium” because they have the following attributes: (1) irreplaceable location and high barrier to entry resulting from a very involved zoning process (a good example is the Longhai International Hotel site, located 10 meters away from the biggest city public beach of Northern China and on the very last commercial parcel on this stretch of beachfront); (2) location in high-density, downtown or center-city areas, with close proximity to commercial activity within the inner circles of traditional and established urban settings, with convenient transportation; and (3) land that commands considerably higher prices than its acquisition cost. Please see “Projects” for details about our land reserves.

  • We have a strong financial profile and excellent credit record. Through credit facilities with top Chinese banks, including Industrial and Commercial Bank of China, who has given us a AA rating, we are able to prudently leverage our business and take advantage of business opportunities.

  • We have a compelling growth strategy. We expect to continue our growth by: (i) achieving higher returns on projects by developing hotels and villas for upper income customers; (ii) continuing development of large middle income residential projects; (iii) expanding operations to other tier two and tier three cities in the Shandong Province and in other provinces in China; and (iv) acquiring projects from distressed developers.

Our Growth Strategy

We intend to increase our market share through aggressive internal growth and prudent acquisitions that are primarily focused on outstanding land or projects in the Shandong Province and in other provinces in China. We intend to achieve this objective by pursuing the following strategies:

  • We plan to continue to expand in Shandong Province through new urban development projects. In the next five years we will continue to focus on real estate development along the coastline of the Shandong peninsula, particularly in the Qingdao and Weihai regions. Given our knowledge and experience, we expect to increase our market share in those areas. For example, our strategic plan includes construction of an office building and a large upper-income community of villas in coastal Weihai. We also plan to create a high-rise resort hotel on the Stone Old Man beach in Qingdao, where we already own the land rights. We believe that the Qingdao-Weihai region is one of the most suitable and beautiful living areas in China. The region also features good economic growth. We believe that the real estate market in the Qingdao-Weihai region will remain strong over the next several years, not only due to the market awareness created by the global media coverage of Qingdao and its Olympic sailing events, but also because of the unique attraction the region holds for international customers, travelers and investors.

  • We plan to continue to provide cost-effective properties for middle income customers. The growing number of middle-income consumers in China has provided attractive and sustainable growth opportunities for real estate developers. As disposable incomes for urban residents increase, we believe they have strong motivation and sufficient financial capacity to improve their living conditions by purchasing new or better properties. We intend to capitalize on the growth opportunities by continuing to offer high-quality mid-sized residential units featuring modern designs and convenient facilities at competitive prices.

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  • We plan to penetrate the high-end real estate market. We intend to penetrate into the high-end real estate market by developing villas, hotels, and commercial and office buildings that generate high returns. We have three projects in planning in that category. The first is a large community of villas and hotel-serviced apartments on the beach in Weihai. The second is an office building in Weihai, the Weihai International Plaza, that we believe will generate both sales and continuing rental income for us. The third, the most interesting of our plans, is the luxury resort hotel, the Longhai Hotel, which will be located just across the street from the Stone Old Man beach in Qingdao. Construction for the hotel is expected to start in August 2011. The construction of Weihai International Plaza is nearly finished and we have obtained all necessary permits and licenses for this project. The other two projects are still in the planning stage and we have obtained the certificates for land use right regarding these two projects. We will obtain all other necessary permits and licenses when we move to the development phase. We do not anticipate any significant impediments to beginning construction of these two projects. The architectural and engineering firm we have selected is Epstein, headquartered in Chicago, a city famous for innovative architecture. We believe the upscale business and tourist volume in Qingdao will provide the sustained demand for such a beautiful luxury hotel. These high-end projects should generate higher returns on investment than middle-income residential properties.

  • We plan to improve project management and cost control. We will improve our project management by adopting more stringent financial disciplines in our operations at each stage that will help us to increase our returns on our project investments. We will use our capital more effectively by better managing our assets, receivables and expenditures to attain pre-set targets. We will better anticipate the best land rights reserves for development and will be able to capture them at the lowest prices to maximize our potential returns on our land and on our project investments. Further benefits should include a more consistent cash flow from our pre-sales to achieve both better cash availability for our projects and a prudent debt-to-total-capital ratio that will keep us in the optimum range for our cost of capital. The results should be lower effective interest rates on our debt and better cost competitiveness for our company.

Project Development Process

We have adopted a systematic approach to real estate development that includes land rights acquisition, site planning and development, architecture and engineering, construction, marketing and pre-sales.

Acquisition of Land Use Rights

We acquire land rights by (1) participating in public tender, auction, and listing for sales of land; (2) mergers or acquisitions of companies, including related companies, owning land use rights; and (3) purchasing distressed projects that have not been completed. After we have obtained the development rights for land, we usually are required to pay a land premium to acquire the land rights, in accordance with laws and regulations.

Specifically, we acquire many of our land rights from companies owned by Longhai Group, a company wholly-owned by Mr. Antoine Cheng, our Chairman. Longhai Holdings and Longhai Group are under common control, but do not have any other relationship. Longhai Group’s primary business is infrastructure and building construction. Through its infrastructure construction business, Longhai Group works with local governments and often finances (by agreeing to be paid sometime following the completion of construction instead of being paid as construction progresses) the government’s public infrastructure projects that can include old city relocation projects. In exchange for such financing, the local governments invite Longhai Group to bid for premium parcels of land for residential use at public auction or grant Longhai Group the right of first refusal to bid for industrial parcels for which Longhai Group already has land use rights, but whose use has been changed to real estate development. Such rights are provided to Longhai Group on a continuous basis by local governments, which is consistent with the government’s long-term policy. Since Longhai Group does not have the necessary license to engage in residential development in China, it often sells companies owning these land use rights to us so that we may develop these parcels using our real estate development license.

We acquired the following four subsidiaries that were wholly-owned or majority-owned by our affiliate, Longhai Group: Qingdao Xudong; which owns the land use rights for Dongli Garden Phase 1 and Phase 2; Weifang Longhai Industry, which owns the land use rights for Fuxiang Huayuan 1 & 2; Caoxian Industrial, which owns the land use rights for Xingfu Renjia 1 & 2; and Longhai Real Estate, which owns the land use rights for Longhai Mingzhu. The purchase terms for these four acquisitions are summarized as follows:

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  • On January 24, 2008, we acquired from Longhai Group and other unaffiliated shareholders of Qingdao Xudong 100% of their equity interests in Qingdao Xudong for RMB 60,000,000 (approximately $8.3 million). Longhai Group owned approximately 74% of Qingdao Xudong.

  • On August 27, 2008, we acquired from the shareholders of Weifang Longhai Industry 100% of their equity interests in Weifang Longhai Industry for RMB 30,000,000 (approximately $4.4 million). Longhai Group owned approximately 95% of Weifang Longhai Industry. Mr. Antoine Cheng had substantive control over 100% of the acquired entity.

  • On June 25, 2009, we acquired from the shareholders of Caoxian Industrial 100% of their equity interests in Caoxian Industrial for RMB 15,000,000 (approximately $2.2 million). Mr. Antoine Cheng had substantive control over 100% of the acquired entity.

  • On September 25, 2009, we acquired from the shareholders of Longhai Real Estate 100% of their equity interest in Longhai Real Estate for RMB20,000,000 (approximately $2.9 million). Longhai Group funded the purchase. Mr. Antoine Cheng had substantive control over 100% of the acquired entity.

See Note 2, Acquisition of Subsidiaries, to our audited consolidated financial statements for the years ended December 25, 2010, 2009 and 2008 for detailed description of these transactions. Because the above acquisitions are considered as acquisitions from a related party, Mr. Antoine Cheng, the controlling person of both Longhai Group and our Company, determined the purchase price in each instance. In each case, Mr. Cheng determined that the purchase price should be at least the book value of each subsidiary (i.e., the total assets minus its intangible assets and liabilities), as adjusted for reasonable historical carrying costs and other expenses.

Longhai Group has not sold land use rights to other entities since our inception. Longhai Group is not obligated to present land use rights to us for purchase.

We also directly acquired the land use rights for the following projects from public auctions: Jiangnan Garden 1, 2, 3, 6 & 7, Decorative Materials Center, Shanghai Garden 1 – 3, Fenglin Oasis, Yuyuan Fengjing, Longze Yuyuan, Jiangshan Dijing, Shanshui Longyuan, Sunshine, and Huashan Town. In some cases, because Longhai Group does not have the necessary license to engage in residential development in China, and we hold the Level 1 Certificate of the Qualifications of Real Property Development Enterprises, Longhai Group allows us to directly participate in these auctions on its behalf as a related party under common control. The Company did not pay consideration to Longhai Group or parties related to Longhai Group for its right to participate in the public auctions on Longhai Group’s behalf. In these cases, the governmental land bureau holding the auction is given full disclosure that Longhai Group and the Company are related parties under common control, and that Longhai Group wishes to have us participate in the auction on its behalf. Our projects that utilize or utilized land use rights that we won from in this manner include: Jiangnan Garden 1, 2, 3, 6 & 7, Decorative Materials Center, Shanghai Garden 1 – 3, Fenglin Oasis, Yuyuan Fengjing, Longze Yuyuan, Jiangshan Dijing, and Shanshui Longyuan. The land use rights for the projects of Sunshine and Huashan Town were acquired solely by us from public auctions. We do not have any other related parties under common control that have the requisite licenses to develop residential property.

In addition, we acquired the following four subsidiaries, which own land use rights, through arms-length transactions from entities not related to Longhai Group or Antoine Cheng: Weihai Economic, which owns land use rights of Longhai International Plaza and Longhai Lidu 1&2; Weihai Mingwei, which owns land use right of Weihai Beach Resort; Weifang Longhai Zhiye, which owns land use right of Oumei Complex 1 & 2; and Weifang Qilu, which owns land use right of Qilu Textile Centre. See Note 2, Acquisition of Subsidiaries, to our audited consolidated financial statements for the years ended December 25, 2010, 2009 and 2008 for more details.

The government’s long term policy is to engage in on-going cooperation relationships with trusted and qualified contractors, such as Longhai Group, who has a proven track record in public projects, in order to meet the local municipalities’ long-term urban development, redevelopment and revitalization needs. Typically, the public projects involved are large-scale urban development, redevelopment, relocation, or revitalization undertakings that include land development, build-out of major highway systems, bridges and other infrastructure networks, and major public/governmental buildings. As part of these projects’ master planning, a portion of the land in the overall projects is zoned for real estate development uses. Due to insufficient governmental/public funding resources, many local governments enter into agreements with selected contractors, such as Longhai Group and its subsidiaries, in which the contractors agree to receive deferred payments for the development costs of the public portion. As the public portion of the projects is completed, the government proceeds to an auction process on the land use rights in connection with the land zoned for development uses. In Longhai Group’s case, the local governments invite Longhai Group to bid for parcels of land as a preferred candidate or grant Longhai Group the right of first refusal to bid for industrial parcels for which the Longhai Group already has land use rights, but whose use has been changed to real estate development. Very often we participate in these auctions on behalf of Longhai Group as a related party under common control. Regardless of who wins the auction, part of the governments’ proceeds from the auction is returned to Longhai Group to repay its pre-paid development costs. As long as these needs exist, and as long as Longhai Group provides financial benefit, we believe that the government will continue to consider Longhai Group and us preferred candidates in the bidding process of land parcels. Currently, Longhai Group’s subsidiaries continue to be engaged by local governments in on-going infrastructure projects.

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Longhai Group always has to compete with other contractors and developers to participate in the development of public portions of development and redevelopment plans. The construction industry in China does not require a formal public bidding process for each development project. Local government agencies in various municipalities have different processes in selecting contractors to participate in public projects. Sometimes the process involves competitive formal bidding, in which case Longhai Group has to compete with other contractors based on various government-set criteria and participate in formal public bidding processes, while at other times local authorities simply select contractors based on specific qualification criteria, such as track record, experience in cooperating with the government in public projects, and/or financial capability in providing financing to local governments. In the latter case, there is no formal public bidding process involved. As a result, in both cases Longhai Group has to compete with other contractors for development of the public portions although a formal bidding process is not involved when the local government agencies select contractors simply based on specific qualification criteria as described above. Due to its long-term track record and deep experience in cooperating with the government in public projects, as well as its rare financial capability in providing financing to local governments from its own resources, in many cases, Longhai Group is very competitive and often selected by local governments.

Based upon our experience in the market in which we operate, while the government previously allowed land to be transferred from the government to private holders by agreement, regulations now provide that all land use rights are granted by way of a public auction, held by the land bureau of the relevant local government. A public invitation to bid is published in major newspapers and a deadline is set. The land bureau then appoints a project-specific task team to evaluate qualifications and bids submitted by developers. Qualification credentials examined by the government typically include: track record of development activity, financial strength, development qualification level under Certificates of the Qualifications of Real Property Development Enterprises issued by the Ministry of Housing and Urban-Rural Development (levels are 1 – 4), and experience/history in cooperating with the government in public projects. There is typically a comprehensive ranking system with points assigned to each qualification category. Bidders who do not meet all of the qualification requirements are disqualified. Both the bid amount and the overall points received in the ranking system are used to select which bidder is to be granted the land use rights. In many cases, the Company is one of very few bidders who meets all the requirements and scores very high in the ranking system. For example, in the markets we operate in, only a very small percentage of registered developers have been able to achieve the Level 1 Certificate of the Qualifications of Real Property Development Enterprises, which is the highest level of certificate granted by the Ministry of Housing and Urban-Rural Development. According to recent statistics conducted by the City of Qingdao Center of Housing Trade, as of November 1, 2010, there are 631 real estate developers registered in the City of Qingdao, while according to a December 2009 report by the governmental agency China Real Estate Association, only 9 real estate development companies (including us) in Qingdao have obtained the Level 1 Certificate. Nationwide, only 696 real estate development companies (including us) in China have obtained the Level 1 Certificate (the National Bureau of Statistics’ most recently published statistics shows that as of December 2008, there were 87,562 registered real estate developers in China). In addition, we have a long history of cooperating with Longhai Group in urban redevelopment projects that had public portions. In the scoring system, we also benefit from the fact that Longhai Group is our related entity under common control and we often participate in public auctions on behalf of Longhai Group. All of these factors, along with Longhai Group’s long-term track record with local governments, enable us to have a competitive advantage over other real estate developers in the public auction process. The successful bidder will be asked to enter into a written contract providing for the grant of the land use rights. Upon signing the contract, the grantee is required to pay the land premium and the contract is submitted to the local bureau, which then issues the land use right certificate.

Project Financing

We usually finance our real estate development projects through a combination of four sources: company cash, capital from investors, bank loans, and cash paid by customers when they sign pre-sales purchase agreements for their apartments. The proportion of the funding sources varies by project.

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First, we select the site, acquire the land use rights, and cover the preliminary development costs using our own cash and capital from investors.

We next obtain loans from commercial banks and/or from investors to continue the project.

As our construction progresses, we reach the stage where we are permitted to begin selling the apartments and to complete pre-sales agreements with our customers. Our customers, in most cases, pay 100% of the apartment price in cash (including their mortgage financing, if needed) when they sign the purchase agreement. We have access to 95% of that cash, with 5% of the price retained by the bank until the apartment ownership is transferred to the buyer. The cash payments by our customers provide the remaining cash needed to complete the project.

The net proceeds from the sales of the properties are used to compensate investors and to add to our retained earnings. The cash cycle then begins again with the selection of new sites and the acquisition of the development and land rights.

Projects

Since our inception, we have completed 18 projects having a GFA of 1,513,898 square meters, of which approximately 95% has been sold. All of our housing projects have featured secured parking, cable TV access, hot water, heating systems and access to natural gas. Sales from those 18 projects have totaled $438 million.

We have six residential and commercial project phases under construction with a total GFA of 488,299 square meters and expected sales of $257.8 million.

We have significant land use rights, consisting of three properties with a total land area of 172,511 square meters. On these properties, we plan to construct, among others, a luxury high-rise beach hotel, high-rise residential and commercial buildings and residential villas.

We classify our projects into three categories:

  • Projects in planning, where we have obtained the land use rights and the construction has yet to start;
  • Projects under construction, in which all buildings have not been completed; and
  • Completed projects, where the construction of all buildings has been finished.

Projects in Planning

Our projects in planning, including land reserves, total three properties with a land area of 172,511 square meters.

Projects in Planning

        Land GFA
  Project Name Location Type sq. m. sq. m.
1 Longhai Hotel Qingdao Hotel 7,572 80,000
2 Weihai Beach Resort Weihai Low Density Residential 127,082 81,200
        134,654 161,200

Land reserves are essential for our future developments. Currently we have in inventory three parcels for which we own the land use rights. Those land use rights were acquired mainly through our purchase in 2008 of our project companies and subsidiaries that already owned the rights. The registration of those land use rights was completed in August 2008. Some of the land has been selected for specific projects while the projects for the other parcels are to be determined. The following table lists the land rights we own.

Our land reserves shown below include some of the projects in planning shown in the table above.

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Land Reserves for Projects in Planning

U.S. dollars in millions
            Land
          Land Cost(1)
  Land or Project Name Location Type Date Acquired sq. m. $
1 Longhai Hotel Qingdao Hotel November 2006 7,572 12.6
2 Weihai Beach Resort Weihai Low Density Residential May 2000 127,082 40.4
3 Huashan Town Jimo Industrial April 2007 37,857 1.3
          172,511 54.3

_________________________
(1) Land cost reflects the price (historical cost or book value) we paid at the time of purchase of the land.

Projects Under Construction

We have six residential and commercial project phases under construction with a total GFA of 488,299 square meters and expected sales of $257.8 million.

The table below titled “Projects Under Construction” includes our estimated total sales, estimated total gross profit, and estimated gross profit margin for each project currently under construction.

The estimates are based on the following factors: At the time construction starts, the costs per square meter for each project under construction are reasonably predictable because the construction costs are generally specified in the construction contracts. The selling prices per square meter are estimated using a combination of (1) a selection from a typical range of estimated percentage markups from the estimated costs per square meter, (2) the selling prices per square meter for comparable properties currently selling in the market, and (3) the estimated potential change in the selling prices during the period in which the apartments are being sold. The period of sales for each project can range from six months to approximately six years. We estimate that approximately 80 percent of the units will be sold in the first three years and the remaining 20 percent will be sold in years four through six. Typically, projects with a longer construction/sales period are often those constructed in sequential phases. Additionally, in China, apartments are generally pre-sold during construction, unlike in the United States where apartments are usually sold only after the construction has been completed. This sales method often accounts for the higher percentage of sales in the earlier years of the multi-phase projects.

In estimating potential changes in selling prices during construction and prior to sales, we also consider our estimate of the direction and magnitude for the economy in China and in the local geographic region where each project is located, the change in consumers’ buying power that result from potential economic changes, and potential changes in taxation, available purchase financing, and government policies that influence housing and commercial property purchases, as well as likely changes in the market inventory of apartments or commercial space to be sold. We also consider our experience in selling prices and construction costs for projects that have been recently completed and for our other projects currently under construction.

Estimated total sales, total gross profit, and gross profit margin shown in projects under construction assume that 100% of the total available gross floor area will be sold during the project’s selling period, which can extend up to two years or so after construction has been completed. In some cases, after most of the apartments or commercial space have been sold, a few units will remain unsold, at which point we typically lease out the space to have it generate revenue while still keeping the unit listed as available for sale but under lease. After a period of leasing, we typically will sell the unit at a large discount to complete the sales of all the units.

Because the estimated gross profit for projects under construction is subject to changes in selling prices, market demand, and the other factors listed above, and because we do not know the number of ordinary shares that would be outstanding in the future years when the projects under construction may reach completion, we have not provided potential or estimated earnings per share contributions for each project because they are unlikely to be accurate and could be misleading. The Company did not retain an outside firm to review the projections. The numbers shown are single best estimates. The Company expects to update the data in the Projects Under Construction table at least annually in its earnings news release, related Report on Form 6-K and its Annual Report on Form 20-F. If the Projects Under Construction change materially during the year, the Company expects to update the table in its quarterly earnings news release and its related Report on Form 6-K.

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Projects Under Construction

U.S. dollars in millions As of      
                  June 25, 2011 Estimated Total
                             
                    Total Gross   Total Gross
                  Total  gross profit Total gross profit
          Land GFA Total Units sales  profit margin sales profit margin(1)
  Project Name Location Start Finish sq. m. sq. m. units sold $ $ % $ $ %
1 Qilu Textile Centre residential Weifang 2007.03 2011.04 72,056 67,942 705 665 18.3 9.7 53% 19.8 10.5 53%
2 Weihai International Plaza Weihai 2009.09 2011.06 9,058 45,828 447 165 13.6 5.1 38% 68.1 33.2 49%(2)
3 Oumei Complex 2 Weifang 2010.03 2012.12 42,544 70,587 556 133 6.5 3.0 46% 34.3 13.4 39%
4 Dongli Garden Phase 1 Qingdao 2008.12 2012.12 175,508 213,315 2,280 1,370 49.1 19.3 39% 84.2 27.8 33%
5 Xingfu Renjia 2 Caoxian 2010.05 2011.09 99,234 58,768 540 283 11.2 5.7 51% 23 12.2 53%
6 Jiangshan Dijing Laixi 2010.10 2012.04 27,626 31,859 224 28.4 10.2 36%
          426,026 488,299 4,752 2,616 98.7 42.8 43% 257.8 107.3 41.6%
____________________

(1)

The gross profit margin for each project is subject to fluctuation during the development and selling periods, due to various factors such as general trends in selling prices discussed above, promotional campaigns in certain stages of the selling process, unit price variances caused by different design features from unit to unit and various selling schedules for different types of units in different stages of the development but within the same project.

   
(2)

For Weihai International Plaza, several factors contributed to the difference between the actual gross profit margin realized to date and the estimated gross profit margin for the entire project. In the early stage of the selling period, we launched a promotional campaign and offered significant discounts to several “block buyers” who purchased multiple units. Additionally, the majority of the units with higher-end design features, and thus higher unit prices, still remain to be constructed or sold as of the end of the reported period.

Completed Projects

Since our inception, we had completed 18 projects having a total GFA of 1,513,898 square meters, of which approximately 95% has been sold. Sales from those projects totaled $438 million, gross profit was $178 million, and the projects earned a consolidated return on investment of 68.5% .

Although our typical selling period lasts no more than 2 years after the completion of construction, which is evidenced by the selling history of the majority of our completed projects, we have extended the selling period of the Fenglin Oasis, Yuyuan Fengjing, Longze Yuyuan, and Shanghai Garden 3 projects. The remaining GFA for these projects still remains in the prolonged selling period as of June 25, 2011, and the selling period will end as soon as they are sold.

All projects have included secured parking, cable TV, hot water, heating systems, and access to natural gas.

Completed Projects

U.S. dollars in millions Sources of funding
                            Total      
                    Total   Total  Gross capital Pre-    
              GFA GFA   cost of Total gross profit required sale Bank Our
  Project       Land GFA sold  remaining Total sales sales(1) profit margin (1) cash loans cash
  Name City Type Finish sq. m. sq. m. % sq. m. units $ $ $ % $ $ $ $
1 Jiangnan Garden 1, 2 & 3 Jimo Apts 2004.11 61,230 91,539 100 762 13.8 20.9 7.1 34.0 13.8 3.0 4.4 6.4
2 Decorative Materials Center Jimo Apts 2004.12 75,466 38,868 100 223 7.6 11.7 4.1 35.0 7.6 3.4 4.2
3 Jiangnan Garden 6 Jimo Apts 2005.05 11,773 109,094 100 785 19.0 32.0 13.0 40.6 19.0 4.9 5.9 8.2
4 Sunshine Jimo Apts 2005.07 8,010 11,548 100 99 1.8 3.3 1.5 45.5 1.8 0.8 1.0
5 Shanghai Garden 1 & 2 Laixi Apts 2005.12 57,401 104,084 100 910 11.7 18.8 7.1 37.8 11.7 5.2 6.5
6 Fenglin Oasis Laixi Apts 2006.06 78,636 97,568 97 2,843 844 11.9 19.3 7.4 38.3 11.9 5.5 6.4
7 Yuyuan Fengjing Laixi Apts 2006.09 89,323 125,706 95 6,384 1,054 14.5 19.8 5.3 26.8 14.5 5.4 9.1
8 Jiangnan Garden 7 Jimo Apts 2006.1 3,553 12,936 100 90 2.4 5.7 3.3 57.9 2.4 1.0 1.4
9 Shanshui Longyuan Pingdu Apts 2007.1 225,914 257,762 100 1,830 41.5 55.3 13.8 25.0 41.5 9.6 13.2 18.7
10 Longze Yuyuan Laixi Apts 2007.1 120,223 78,146 99 579 804 11.3 17.9 6.6 36.9 11.3 0.9 8.8 1.6
11 Shanghai Garden 3 Laixi Apts 2007.12 11,055 16,055 96 580 125 1.7 4.2 2.5 59.5 1.7 0.7 1.0
12 Fuxiang Huayuan 1 Weifang Apts 2008.12 44,075 52,700 100 430 9.0 14.4 5.4 37.5 9.0 3.9 5.1
13 Fuxiang Huayuan 2 Weifang Apts 2009.12 10,400 18,392 100 125 3.1 5.1 2.0 39.2 3.1 1.4 1.7
14 Oumei Complex 1 Weifang Apts 2009.12 55,303 91,778 78 19,974 708 13.0 23.3 10.3 44.2 13.0 4.6 1.3 7.1
15 Xingfu Renjia 1 Caoxian Apts 2009.12 80,000 85,551 98 2,040 828 15.0 24.4 9.4 38.5 15.0 4.7 3.6 6.7
16 Longhai Lidu 1&2 Weihai Apts 2010.09 120,170 130,759 92 9,984 1,572 26.5 50.8 24.3 47.8 26.5 8.1 3.3 15.1
17 Oilu Textile Centre (comm) Weifang Comm 2010.09 128,924 139,510 84 21,665 1,337 18.9 30.1 11.2 37.2 18.9 5.1 5.5 8.3
18 Longhai Mingzhu Qingdao Comm 2011.06 9,186 51,902 81 9,743 356 36.6 80.3 43.7 54.4 36.6 12.9 10.9 12.8
          1,190,642 1,513,898 95 73,792 12,882 260 438 178 41 259.3 81.1 56.9 121.3

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________________________

(1)

“Cost of sales” and “total capital required” include land acquisition cost, construction cost (labor and materials), project-related legal, approval and permitting fees, project financing cost, professional fees, infrastructure cost and fees imposed by municipalities, business (sales) tax and various other project-specific soft costs. Excluded from the “cost of sales” and “total capital required” are selling, general and administrative expenses, income taxes and other non-project-specific costs. Due to the non-project-specific nature of these costs, it is impractical to perform an accurate computation of their allocation to each individual project and an accurate net profit disclosure for each project. Actual net profit for each project would be significantly less than the gross profit of each project if those items excluded from “cost of sales” were accounted for as costs.

Architecture, Engineering and Construction

We outsource the architecture, engineering, and construction of our projects to third-party professional service providers and contractors. Our third-party contractors are responsible for providing labor and procuring all of the raw materials used in our projects. Our engineering department, headed by the Vice General Manager of Engineering, with 45 employees as of December 25, 2010, primarily manages, administers, coordinates and supervises the planning, design and construction of all of our projects.

We work with several architecture and engineering companies. We collaborate with them on the site and building designs and rely on them for the detailed execution of the design concepts. Our engineering department works closely with our external engineers and architects to ensure that our designs comply with PRC laws and regulations and meet our design and other project objectives. Our senior management is also actively involved in the planning and design process of our projects.

We also outsource our project construction to qualified subcontractors who are the winners in our competitive bidding process, which is based on required quality and lowest price. Our contracts, typically fixed-priced, provide for periodic payments during construction.

Below is a list of some of the key companies to whom we outsource these services.

Name of Company Services Provided
Qingdao Zhongxing Construction Ltd. Construction
Longhai Construction Ltd. Construction

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Quality and Performance

We and our chosen architects and engineers supervise the construction by our contractors. In addition to the construction, our contractors are responsible for purchasing all building materials, including the two main building materials, steel and concrete. Contractors are required to perform to their working plan and adhere to the specifications in our construction plans and contracts. We have delivered all our projects to our customers on or before the due dates and at or above the quality specified in the customers’ purchase agreements.

Our contractors are also subject to our quality control procedures, including examination of materials and supplies, on-site inspection and creation of progress reports. We require our contractors to comply with relevant PRC laws and regulations, as well as our own standards and specifications. During the development process, we perform regular, periodic construction progress inspections, jointly conducted by three parties: our engineering department, the general contractor and an independent third-party construction supervisory firm.. All project progress determinations, including percentage of completion, actual materials/labor costs incurred and quality of the products, are jointly made by the three parties. As a result, although we outsource all of our construction work to independent construction companies, the construction costs, construction schedule and quality of the construction work are under our constant and close supervision.

Our finished construction includes the completed buildings with all public portions of the buildings fully finished and all of the common grounds landscaped. The apartment interiors typically are finished to the gray shell stage. This permits the apartment buyers to select their own interior design and finishing companies, so they can get all the features, fixtures, fittings, furnishings, textures, and colors they prefer. This separation of responsibilities between the real estate developer and the independent interior designers and finishers is traditional in China.

Sales and Marketing

In marketing our properties, we use our own marketing team, but occasionally outsource our marketing and sales efforts to independent sales agents. To market our properties, we use a combination of advertisements in newspapers, magazines, television, and outdoor billboards, in addition to news releases that generate media stories about our projects.

To help customers choose among the apartment layouts that we offer, we usually create fully finished and furnished show rooms that give them a sound basis for deciding exactly what they want. We pay for the completion of these marketing show rooms. After most of the units in the development have been sold, we sell the show rooms as residences, usually at premium prices.

Competition

The real estate development business in China is organized into four qualification levels under Certificates of the Qualifications of Real Property Development Enterprises issued by the Ministry of Housing and Urban-Rural Development.

The starting qualification level is Level 4 (see table below). A company may rise in its qualification level, depending on its registered capital, the number of years of industry experience, the area of land it has developed, and its safety record. Only one level may be ascended each year.

  Registered   Developed   Time for
  Capital Experience Area Other License to be
  ($ millions) (years) (square feet) Requirements Authorized
Level 1 6.25 5 3,229,278 No Severe Accident 20 Days
Level 2 2.5 3 1,614,639 No Severe Accident 20 Days
Level 3 1.0 2 538,213 No Severe Accident 20 Days
Level 4 0.125 1 not applicable    

We obtained the Level 1 Certificate of the Qualifications of Real Property Development Enterprises on November 11, 2008, which was valid until November 7, 2011. Our extension application for Level 1 Certificate has been approved by the local authorities in Shandong Province, pending final approval from the PRC Ministry of Housing and Urban-Rural Development, which will extend our Level 1 Qualification through November 7, 2014. We fully expect that this final approval will be granted. We gained Level 2 Qualification in 2006.

The real estate market in which we operate is highly competitive. Typically, the housing and land development industry is a regional business with mostly local players competing with us for small- to medium-size projects. Our major competitors are other large-scale local real estate companies that include state-owned and private real estate developers. In addition, some large-scale national real estate developers are entering the Greater Qingdao market. Based on the City of Qingdao Commission of Development & Construction’s evaluation, in 2010 we were recognized as one of the ten most outstanding real estate developers in Qingdao, measured by a combination of sales, customer satisfaction, and several other factors.

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Our major competitors include:

  • Hisense Real Estate Development Co., Ltd. Hisense Real Estate Development Co., Ltd., or Hisense, was founded in 1995 and is the strongest real estate company with the highest development capacity among the top 10 in the Qingdao market. Hisense holds a Level 1 Qualification Certificate for real estate development, a Level 1 Qualification for property management, and Class A Certificate for design. It has developed more than 1 million square meters of projects each year for several years. Its completed development projects include Hisense-Huiyuan housing, Hisense-Yandao international apartments, Hisense-Qingquan villas, a high-end office building, and the Hisense information technology industrial park, plus other similar developments. Hisense is focused on land reserves and projects in Qingdao and is absent in other cities in the Shandong Province and in other provinces in China.

  • Haier Real Estate Development Co., Ltd. Established in 2002, Haier Real Estate Development Co., Ltd., or Haier, is engaged in real estate development and investment within the Haier Group and has embraced the Haier group’s beliefs, spirit, style, focus on clients, and objectives that include creating a solid foundation for long-term development.At the end of 2007, the company had seven real estate development subsidiaries, one property management company, and one branch company. Haier’s real estate development and investment projects are located in Qingdao, as well as in Jinan, Beijing, Chongqing, Taiyuan, Suzhou, and other locations. In these cities, Haier owns a number of land reserves and has more than 10 projects competed or under construction. Haier ranks second in Qingdao’s top 10 real estate development companies, according to the government’s comprehensive competitiveness evaluation. We believe that Haier’s real estate weaknesses include (1) its relative inexperience in real estate in Greater Qingdao due to a rather recent start in the region and (2) its subordination to the Haier Group, which we believe has led to a complicated management structure and a decision-making system burdened by unnecessary complexity and lengthy processing time, both of which are likely to limit Haier’s effectiveness and growth in the Qingdao real estate market.

  • Qingdao Construction Corporation of China. Qingdao Construction Corporation of China, or Qingdao Construction, is a government owned construction company. In the last few years, Qingdao Construction has expanded into real estate development, which has become the company’s second biggest operation, but is still a modest business. It mainly focuses on the construction of affordable low-income and low-rent apartments. Although it has been ranked by the government among the top 10 developers in Qingdao recently, primarily due to its construction business, Qingdao Construction still lacks extensive experience in real estate development. We believe the company will continue to expand its real estate development operations, but its market share in real estate development appears to be insufficient at the moment for sustainable operations as a stand-alone business.

  • Tiantai Group. Tiantai Group, or Tiantai, was an early participant in the real estate development business and is quite mature in its operations in Qingdao. It ranks about fifth among Qingdao’s top 10 developers, according to the government. Tiantai has focused on a branding and high-level development strategy, therefore its output and market share are relatively low. Founded 15 years ago, Tiantai has developed only seven projects with a total GFA of 1.3 million square meters. So far, Tiantai has kept its focus on the Qingdao city market.

Some of our competitors have greater financial and marketing resources than we do. Some also have larger land reserves, greater economies of scale, broader name recognition, and longer track records. For example, a major rival, Tiantai, is a large-scale private real estate developer engaged in real estate development and real estate management, with a proven track record and annual development GFA of about 700,000 square meters.

We differentiate ourselves from our competitors by (1) conducting much of our operations in second-tier and third-tier cities, (2) focusing on middle-income families in those second-tier and third-tier cities, (3) offering mid-sized apartments that range from 40 to 100 square meters and (4) leveraging our relationship with our affiliate.

We believe that these four strategies have given us a competitive advantage over other companies that can result in sustainable long-term growth and attractive returns on investment. The first three strategies make us significantly less vulnerable to the risks associated with the fast growing Chinese residential property market. Targeting middle-income customers in the tier two and tier three cities and offering affordable products make our properties less of a target for real estate speculation. Providing “bread and butter” type of housing for the vast majority of the population in under-served markets makes our sales more sustainable. The advantage of the fourth strategy is reflected in our unique ability to acquire premium land in a time and cost effective way, as described above under “Project Development Process.”

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We expect to increase our market share and return on investment by leveraging our premium land reserves by (1) continuing to build middle income housing, (2) developing high-end residential and commercial projects and landmark buildings, (3) broadening our geographic diversification, and (4) strengthening our brand recognition and reputation for high quality.

Employees

As of December 25, 2010, we had a total of 203 employees. The following table shows the number of our employees by function.

Function   Number Of Employees
Senior Management   13
Sales and Marketing   34
Development Strategies Department   12
Engineering Department   45
Quality Control   10
Human Resource & Administration   52
Accounting   37
Total   203

Subdivided by educational achievement, 2% of our employees hold advanced degrees, 21% have bachelor’s degrees, and 27% hold technical or vocational training certificates.

To increase the knowledge and performance of our employees, we have established an employee training and development program, which ranges from recruiting to advanced training. Our employee incentive plans and programs encourage and reward superior performance. In the next five years, three major employee development plans will be implemented to attract more talented and bilingual management staff and experienced sales people, to enhance employees’ on-the-job training, and to establish company-wide, performance-oriented incentive plans that may include stock awards or stock options.

We maintain a satisfactory working relationship with our employees, and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations. None of our employees is represented by a labor union.

Our employees in China participate in a state pension plan organized by Chinese municipal and provincial governments. We are required to make monthly contributions to the plan for each employee at the rate of 23% of his or her average assessable salary. In addition, we are required by Chinese law to cover employees in China with various types of social insurance. We believe that we are in material compliance with the relevant PRC laws.

Intellectual Property

We do not own or license any material intellectual property rights.

Foreign Corrupt Practices Act (FCPA)

We are subject to the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect their transactions and to devise and maintain an adequate system of internal accounting controls. The anti-bribery provisions of the FCPA are enforced primarily by the U.S. Department of Justice. The SEC is involved with enforcement of the books and records provisions of the FCPA.

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Our business activities in China create the risk of unauthorized payments or offers of payments by our employees, consultants, sales agents or distributors, because these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In additions, the U.S. government may seek to hold our Company liable for successor liability of FCPA violations committed by companies in which we invest or that we acquire.

PRC Government Regulations

We operate our business in China. This section summarizes the major PRC regulations relating to our business.

Permits and Certificates

As part of the project development process, we are required to obtain a number of certificates, permits, and licenses from different government agencies, including among others:

  • Land Use Rights Certificate that certifies the right of a party to use land;

  • Construction Land Planning Permit that authorizes a developer to begin the land survey, planning, and design for the land;

  • Construction Works Planning Permit that indicates the government’s approval of a developer’s overall planning and design for the project and allows the developer to apply for a Work Commencement Permit;

  • Work Commencement Permit that authorizes a developer to begin excavation and construction; and

  • Pre-sales Permit that authorizes a developer to begin completing pre-sales purchase agreements with customers and collect their cash for the apartments still under construction.

Housing and land development sales companies, including us, are regulated by the Ministry of Land & Natural Resources and authorized by the local office of the Ministry. Each project also has to be authorized and must obtain a “Commercial License for Housing Sale” from the Real Estate Bureau.

Environmental Regulations

Our business in China is subject to various pollution control regulations in China with respect to noise, water and air pollution and the disposal of waste. Specifically, the major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution, the PRC Law on the Prevention and Control of Air Pollution, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.

Taxation

On March 16, 2007, the National People’s Congress of China passed the New EIT Law, and on November 28, 2007, the State Council of China passed the EIT Law Implementing Rules which took effect on January 1, 2008. The EIT Law and its implementing rules impose a unified earned income tax, or EIT, rate of 25.0% on all domestic-invested enterprises and foreign invested enterprises, or FIEs, unless they qualify under certain limited exceptions. As a result, our PRC operating subsidiaries are subject to an earned income tax of 25.0% . Before the implementation of the New EIT Law, FIEs established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an EIT rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax.

In addition to the changes to the current tax structure, under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. In addition, a recent circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities.

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In addition, the recent circular mentioned above sets out criteria for determining whether “de facto management bodies” are located in China for overseas incorporated, domestically controlled enterprises. However, as this circular only applies to enterprises established outside of China that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “de facto management bodies” for overseas incorporated enterprises that are controlled by individual PRC residents like us and some of our subsidiaries. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In addition, dividends paid to us from our PRC subsidiaries and dividends we pay to our non-PRC shareholders may be subject to a 10% withholding tax.

Foreign Currency Exchange

All of our sales revenue and expenses are denominated in RMB. Under the PRC foreign currency exchange regulations applicable to us, RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of SAFE, by complying with certain procedural requirements. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the MOFCOM, or their respective local branches. These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing.

Dividend Distributions

Our revenues are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our PRC subsidiaries is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in such fund reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Our PRC subsidiaries have the discretion to allocate a portion of their after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

In addition, under the New EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006,and the Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, or Notice 601, which became effective on October 27, 2009, dividends from our PRC operating subsidiaries paid to us through our Hong Kong subsidiary may be subject to a withholding tax at a rate of 10%, or at a rate of 5% if our Hong Kong subsidiary is considered a “beneficial owner” that is generally engaged in substantial business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holder of the PRC subsidiary. Dividends declared and paid from before January 1, 2008 on distributable profits are grandfathered under the New EIT Law and are not subject to withholding tax.

Circular 75

In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an SPV for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire “control” over domestic companies or assets, even in the absence of legal ownership; (2) adding requirements relating to the source of the PRC resident’s funds used to establish or acquire the offshore entity; (3) covering the use of existing offshore entities for offshore financings; (4) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (5) making the domestic affiliate of the SPV responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore SPV jointly responsible for these filings. In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006. This date was subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.

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As we stated under “Risk factors — Risks Related to Doing Business in China — Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us,” we have asked our shareholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, many of the terms and provisions in Circular 75 and Notice 106 remain unclear and implementation by central SAFE and local SAFE branches of Circular 75 and Notice 106 have been inconsistent since their adoption. Therefore, we cannot predict how Circular 75 and Notice 106 will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 and Notice 106 by our PRC resident beneficial holders.

Mergers and Acquisitions

As we stated under “Risk factors — Risks Related to Doing Business in China — Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Oumei constitutes a Round-trip Investment without MOFCOM approval,” Leewell acquired Oumei in 2007 from Mr. Weiqing Zhang and Ms. Xiaoyan Cheng. Prior to the acquisition, Leewell was owned and controlled by Mr. Li Zhou, an Australian citizen. Mr. Zhou acted as a nominee for Mr. Weiqing Zhang and Ms. Xiaoyan Cheng, the daughter of Mr. Antoine Cheng. Mr. Cheng was a PRC citizen at the time, but has since become a Philippine citizen. The acquisition was approved by the local counterpart of the MOFCOM. Mr. Zhou also founded Longhai Holdings, a BVI company. In September 2009, ownership of Longhai Holdings was transferred to Mr. Cheng. After Mr. Cheng acquired ownership of Longhai Holdings, Longhai Holdings acquired all of Mr. Zhou’s equity interest in Leewell. We did not seek or obtain the approval from the central office of MOFCOM in Beijing because we believed that Mr. Zhou’s role in the transaction was only transient and that the ultimate substance of the transaction was the acquisition of Oumei by Mr. Cheng, our Chairman, who is no longer a PRC citizen. As a foreign citizen, Mr. Cheng’s ultimate ownership of Oumei is not prohibited by the 2006 M&A Rule. Although Mr. Zhou did not deliberately avoid compliance with the 2006 M&A Rule and believed in good faith that, given the transient nature of his ownership interest, no legal issue arose under the 2006 M&A Rule, the PRC regulatory authorities may still take the view that these transactions required the approval of the central office of MOFCOM in Beijing because Mr. Zhou was acting as a nominee for Mr. Zhang and Ms. Cheng, two PRC citizens, and avoided compliance with the 2006 M&A Rule (i.e., failure to obtain the approval of the central office of MOFCOM in Beijing as opposed to MOFCOM’s local office) through the use of a nominee arrangement, trust or similar means, which is prohibited. In other words, the PRC regulatory authorities may believe that, notwithstanding the transient nature of Mr. Zhou’s ownership, these transactions and the reverse acquisition of Leewell are part of an overall series of arrangements which constitute a Round-trip Investment and as a result, these transactions may be deemed invalid by the PRC regulatory authorities.

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If this were to take place, we would replace our ownership of Oumei with a series of contractual arrangements, which we refer to as the Contractual Arrangements. On January 21, 2010, Mr. Weiqing Zhang and Ms. Xiaoyan Cheng, or the Oumei Shareholders, entered into an agreement with Leewell that requires them to enter into the Contractual Arrangements if the PRC regulatory authorities invalidate the acquisition of Oumei by Leewell. The Contractual Arrangements would be implemented by first transferring ownership of Oumei from Leewell to the Oumei Shareholders, if that had not already occurred by regulatory action. We would then establish a new wholly-owned subsidiary in China, referred to as a wholly foreign-owned enterprise or WFOE. The WFOE would enter into a series of agreements with Oumei and the Oumei Shareholders, including an exclusive management, technical and consulting services agreement, an equity pledge agreement, an equity purchase option agreement and a power of attorney. Taken together, these agreements would give the WFOE complete control over and all of all the economic benefits of the operations of Oumei and its subsidiaries, or collectively, the Operating Entities. These agreements are described in more detail in the following paragraphs.

Under the exclusive management, technical and consulting services agreement, or the Service Agreement, our WFOE would act as the exclusive provider of a comprehensive set of services to the Operating Entities in exchange for the payment by the Operating Entities of service fees in an amount equal to up to the entire pre-tax profits of the Operating Entities. Oumei would agree to accept the corporate policy advice and guidance provided by the WFOE on Oumei’s daily operations, financial management and employment issues.

Under the equity pledge agreement, the Oumei Shareholders would pledge all of their equity interests in Oumei to the WFOE as collateral security for the WFOE’s collection of the consulting and service fees under the Service Agreement. During the term of the equity pledge agreement, the Oumei Shareholders would agree that without the WFOE’s prior written consent, they would not transfer any equity interest, create or permit to exist any pledge that may damage the WFOE’s rights or interests in the pledged equity interests, or cause Oumei’s meeting of shareholders or board of directors to pass any resolutions about the sale, transfer, pledge or other disposal of the lawful right to derive income from any equity interest in Oumei or about the permission of the creation of any other security interests thereon. The term of this agreement would be the same as the term of the Service Agreement. If the term of the Service Agreement is renewed, the term of this agreement will extend accordingly.

Under the equity purchase option agreement, the Oumei Shareholders would irrevocably, unconditionally and exclusively grant the WFOE a purchase option whereby, to the extent permitted under Chinese law, the WFOE would have the right to request the Oumei Shareholders to transfer to it or its designated entity or person, the total equity interests held by them in Oumei. The WFOE would have sole discretion to decide the specific time, method and number of the exercise of the purchase option. At the time of each exercise of the purchase option by the WFOE, the total consideration to be paid to the Oumei Shareholders would be the book value of Oumei. The equity purchase option agreement would have the same term as the Service Agreement. In connection with the equity purchase option agreement, each Oumei Shareholder would execute a power of attorney, which would grant the WFOE a power to exercise on his or her behalf all voting rights as a shareholder at the shareholders’ meetings of Oumei that have been given to him or her by law and by the Articles of Association of Oumei.

Through these agreements, we would receive all or substantially all of the pre-tax profits of the Operating Entities and have substantial if not complete control over their daily operations and financial affairs, election of senior executives and all matters requiring shareholder approval. Furthermore, we believe the Contractual Arrangements would satisfy the requirements of Section 210.3A -02 of Regulation S-X for consolidation of the Operating Entities’ financial results with ours under U.S. GAAP.

Properties

All urban land in China is owned by the State. Pursuant to Interim Regulations of the People’s Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas, which became effective on May 19, 1990, individuals and companies are permitted to acquire rights to use urban land or land use rights for specific purposes, including residential, industrial and commercial purposes. The land use rights are granted for a period of 70 years for residential purposes, 50 years for industrial purposes and 40 years for commercial purposes. These periods may be renewed at the expiration of the initial and any subsequent terms. Upon approval by both the land administrative authorities and city planning authorities, industrial parcel uses may be converted to other uses, and the duration and other clauses in the land use right granting agreement will be revised to match the new use. Granted land use rights are transferable and may be used as security for borrowings and other obligations.

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We have a bank of land use rights, consisting of three properties with a total land area of 172,511 square meters. On these properties, we plan to construct, among others, a luxury high-rise beach hotel, high-rise residential and commercial buildings, residential villas, and a high-rise office building. Land use rights relating our projects under construction and completed projects are not included in our bank of land use rights, as it is a generally accepted practice that as soon as a new project commences on the land reserve, the land use right is immediately re-categorized from intangible assets into work in progress inventory, and eventually into finished inventory when the project is completed. Therefore, land associated with projects under construction and completed projects are treated separately from our bank of land use rights. Please see “Our Business — Projects” for details about our land reserves and projects.

Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

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MANAGEMENT

Directors and Senior Management

The following sets forth information about our directors and executive officers as of the date of this prospectus:

NAME   AGE   POSITION
Antoine Cheng   56   Chairman of the Board of Directors
Weiqing Zhang   39   Chief Executive Officer and Director
Zhaohui John Liang   42   Chief Financial Officer
Yang Chen   40   President
Lawrence Lee   47   Director
Dr. Peter Linneman   60   Director
Ruiping Tao   60   Director

Mr. Antoine Cheng. Mr. Cheng has been the Chairman of our board of directors since the closing of our reverse acquisition of Leewell on April 14, 2010 and has served as the Chairman of Oumei since 2009. Since September 22, 2009, Mr. Cheng has been the sole shareholder and director of Longhai Holdings, our controlling shareholder, and since 2006 he has also been sole shareholder and director of Longhai Group, a PRC infrastructure and building construction company, and our related party. Longhai Holdings and Longhai Group are under common control, but do not have any other relationship. Prior to his retirement from governmental service in 2006, Mr. Cheng served as Chief Director of the Industry and Commerce Department of the Qingdao (Pingdu and Jimo) Municipal Government from 1998 to 2006 and as Vice Chief Director of the Public Security Bureau of the Pingdu Municipal Government from 1992 to 1998. Mr. Cheng received his Master’s degree in economics from Shandong Public Administration College in 2005.

Mr. Weiqing Zhang. Mr. Zhang has served as our Chief Executive Officer since the closing of our reverse acquisition of Leewell on April 14, 2010 and became a member of our board of directors on May 1, 2010. Mr. Zhang also served as our President from the closing of our reverse acquisition of Leewell on April 14, 2010 until June 22, 2010. Mr. Zhang has held the same positions with Oumei since its formation in May 2001. Prior to joining Oumei, he was responsible for properties development for Longhai Real Estate Development Co., Ltd., between August 1994 and May 2001. With more than 15 years of experience in real estate development, Mr. Zhang has successfully developed more than two million square meters of GFA and has also served in strategic planning and general administration functions. He graduated from Qingdao Construction Engineering College in 1994 with a Bachelor’s degree in Business.

Mr. Zhaohui John Liang. Mr. Zhaohui John Liang has served as our Chief Financial Officer since June 22, 2010. He has over 15 years of experience in real estate finance, investment and development. From June 2009 to June 2010, Mr. Liang was Senior Director of Real Estate at The Great Atlantic & Pacific Tea Company, Inc. (NYSE: GAP), where he oversaw the real estate portfolio of one of the largest U.S. retail chains with $9 billion in annual sales, managed real estate-oriented corporate financing, accounting and reporting, led major corporate divestures and acquisitions, and developed and implemented the company’s strategic real estate plan. Prior to that, he served in key positions at Lerner Heidenberg Properties, Inc., a real estate investment and development company, including Chief Financial Officer from January 2006 to February 2009 and Director of Finance and Acquisitions from December 2004 to January 2006. From May 2004 to December 2004, Mr. Liang was Senior Financial Analyst & Asset Manager at General Growth Properties, Inc. (NYSE: GGP), a public real estate investment trust. From May 2003 to September 2003, he served as an Equity Analyst in the Real Estate Group of Friedman Billings Ramsey & Co., an investment bank, and from January 1994 to April 2002, he was a Development Project Manager at THSSW Architects, P.C., an architectural and construction project management firm. Mr. Liang earned his Bachelor of Architecture from the University of Arkansas, and his MBA with a dual major in finance and real estate from the Wharton School at the University of Pennsylvania. He is a member of a number of professional organizations including the Chinese Finance Association, Zell/Lurie Real Estate Center of the Wharton School, Urban Land Institute, the American Institute of Architects, and the International Council of Shopping Centers. He is also a licensed architect.

Mr. Yang Chen. Mr. Chen has served as our President since June 22, 2010 and previously served as our Chief Financial Officer and Vice President from the closing of our reverse acquisition of Leewell on April 14, 2010 until June 22, 2010. He has also served as the Chief Financial Officer of Oumei since January 2008. Mr. Chen has more than 17 years of experience in accounting and financial management. Prior to joining Oumei, he served as chief financial officer for several companies, including Mudanjiang Dongxing Group Corporation, a retail-oriented diversified company (hotels, supermarkets, villas, and electrical equipment) from 2004 to 2008 and Harbin Guangyun Electrical Appliance Co., Ltd. prior to joining Mudanjiang Dongxing in 2004. Mr. Chen graduated from Harbin Institute of Technology with a Bachelor’s degree in industrial accounting in 1992.

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Mr. Lawrence Lee. Mr. Lawrence Lee has been a member of our board of directors since June 22, 2010. He is the founder and managing director of the Boardroom Advisors Company Limited, a Beijing-based financial advisory firm. He is currently also serving as a director of Universal Travel Group (NYSE: UTA), an online travel service company operating in China. From October 2007 to November 2009, Mr. Lee served as chief financial officer of Synutra International, Inc. (NASDAQ: SYUT), a consumer product company operating in China. From August 2004 to September 2007, Mr. Lee was a vice president and chief financial officer of Kasen International Holdings Limited, a public company listed on the Hong Kong Stock Exchange. Prior to that, Mr. Lee served as chief financial officer at Eagle Brand Holdings Limited, a company listed on the Singapore Stock Exchange. Mr. Lee’s experience also includes serving as a financial controller at the Korean division of Exel Plc, a multinational supply chain management firm, and serving as a senior auditor at Waste Management Inc.’s international department in London. Mr. Lee is a fellow member of the Association of Chartered Certified Accountants (ACCA). Mr. Lee received a bachelor’s degree in management and engineering from Beijing Institute of Technology, a master’s degree in economics from Renmin University of China, and a master’s degree in accounting and finance from the London School of Economics.

Dr. Peter Linneman. Dr. Peter Linneman has been a member of our board of directors since June 22, 2010. He is widely recognized as one of the leading strategic thinkers in the real estate industry, and was cited as one of the 25 most influential people in real estate by Realtor Magazine, and one of the 100 most powerful people in NY real estate by the NY Observer. For 30 years he has been the managing principal of Linneman Associates, providing strategic and financial advice to leading corporations, and also serves as the Albert Sussman Professor of Real Estate, Finance, and Public Policy at the Wharton School of Business, the University of Pennsylvania. A member of Wharton’s faculty since 1979, he served as the founding chairman of Wharton’s Real Estate Department and was the Director of Wharton’s Zell-Lurie Real Estate Center for 13 years. He is the founding co-editor of The Wharton Real Estate Review. His teaching and research focuses on real estate and investment strategies. He has published over 80 articles during his career and is a highly sought-after speaker, appearing as the keynote speaker at numerous major industry conferences. He is also a co-coordinator/sponsor/moderator (with Sam Zell) of the prestigious industry roundtable, The Marshall Bennett Classic. His quarterly research publication, The Linneman Letter, is widely read throughout the real estate industry and is viewed as a major thought leader in the business. His book, Real Estate Finance and Investments: Risks and Opportunities, has been adopted at over 50 leading universities and is the leading primary reference source for those interested in real estate finance and investment. Dr. Linneman holds both Masters and Doctorate degrees in economics from the University of Chicago. He currently serves on the Board of Directors and executive, compensation and governance committees of Equity One, Inc. (NYSE: EQY), an owner, developer and operating of shopping centers, and on the Board of Directors and executive and audit committees of JER Investors Trust Inc. (JERT), a commercial real estate finance company.

Mr. Ruiping Tao. Mr. Ruiping Tao has been a member of our board of directors since June 22, 2010. He is regarded as one of the pioneers in shaping the City of Qingdao’s urban planning strategy, and widely recognized in China as a leading expert in the field of urban planning, development and public policy. He currently serves as the Chairman of the City of Qingdao Urban Planning Association. As a life-long public servant, Mr. Tao served as the Chief of Qingdao Urban Planning Bureau from February 2007 to March 2008, and as Vice Chief from April 2001 to February 2007. In April 2008, Mr. Tao was appointed by the Government of Qingdao to head a special task force in charge of developing a comprehensive urban development plan for Yongwan Bay, which is the geographic and strategic focal point of the city’s next 5-year development strategy. Mr. Tao previously served as a Navy officer from December 1970 to April 2001. He officially retired from all governmental positions in March 2010. Mr. Tao is frequently invited to speak at national and international urban planning industry conferences, such as the International Society of City and Regional Planners Convention, and provides advisory service to numerous governmental and educational institutions in China. Mr. Tao received his Bachelor of Electrical and Mechanical Engineering from the College of Naval Engineering, and his EMBA from the Cheung Kong Graduate School of Business.

The address of our directors and executive officers is c/o the Company, Floor 28, Block C Longhai Mingzhu Building, No. 182 Haier Road, Qingdao 266000, People’s Republic of China. Other than indicated above, no family relationship exists between any of our directors and executive officers. There are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was selected as a director or member of senior management.

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Significant Employees

In addition to the foregoing named officers and directors, the following employees are also key to our business and operations:

NAME   AGE   POSITION
Zhongbo Zhou   36   Vice General Manager of Engineering Department of Oumei
Yalei Chen   35   Vice General Manager of Development Strategies Department of Oumei

Mr. Zhongbo Zhou. Mr. Zhou has served as Oumei’s Vice General Manager of Engineering Department since 2007 and is responsible for project and sales management. From the closing of our reverse acquisition of Leewell on April 14, 2010 until June 22, 2010, he served as a member of our board of directors. He joined Oumei in 2001 and served as its Vice General Manager of Administration from 2005 to 2007. Mr. Zhou holds a Bachelor’s degree in civil engineering from Qingdao Technical University.

Mr. Yalei Chen. Mr. Chen has served as Oumei’s Vice General Manager of Development Strategies Department since 2007 and is in charge of its development strategies. He joined Oumei in 2001 as a technician and assistant to General Manager. Prior to that, Mr. Chen worked as a technician in Qingdao Pingdu Construction Group Company Factory and ZTE Corporation. He graduated from China Agricultural University in 1997 with a college diploma

Duties of Directors

As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company, and therefore it is considered that he owes the following duties to the company: (i) a duty to act bona fide in the best interests of the company, (ii) a duty not to make a profit based on his position as director (unless the company permits him or her to do so) and (iii) a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. The duty of a director not to put himself or herself in a position of conflict may be modified by the company's articles of association. Our amended and restated articles of association permit our directors to have such a conflict and to participate and vote in respect of any decision in which they may have a conflict, provided their conflicting interests are adequately disclosed. This does not modify the directors' duty to act in a way they consider to be bona fide in the best interests of the Company.

A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards a dual objective/subjective standard with regard to the required skill and care, to the effect that a director must exercise the skill and care of a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same actions as our carried out by that direction in relation to the company and (b) the general knowledge, skill and experience that that particular director has. These authorities are likely to be followed in the Cayman Islands.

Terms of Directors and Executive Officers

Our board of directors currently consists of five directors: Mr. Antoine Cheng, Mr. Weiqing Zhang, Mr. Lawrence Lee, Dr. Peter Linneman and Mr. Ruiping Tao. The directors were elected to serve until their successors are duly elected and qualified. Directors may be elected by shareholders at any general meeting by a majority of votes cast. Each director so elected holds office for the term, if any, as may be specified in the resolution appointing him or until his earlier death, resignation or removal. The directors may appoint one or more directors to fill a vacancy on the board of directors. The directors may determine remuneration to be paid to the directors. We do not have any contracts with our directors providing for benefits upon termination of employment.

A director is not required to hold any shares in the Company by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested. A director may exercise all the powers of the Company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the Company or of any third party.

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Our executive officers are appointed by our board of directors. The executive officers shall hold office until their successors are duly elected and qualified, but any officer elected or appointed by the directors may be removed at any time, with or without cause, by a majority vote of the directors.

Board Committees

On June 22, 2010, our board of directors established three Committees: the Audit Committee, the Compensation Committee, and the Governance and Nominating Committee. Each of the Audit Committee, Compensation Committee and Governance and Nominating Committee is comprised entirely of our independent directors, Mr. Lawrence Lee, Dr. Peter Linneman and Mr. Ruiping Tao. From time to time, our board of directors may establish other committees. The board of directors has adopted a written charter for each of the committees which is available on the Company’s website www.chinaoumeirealestate.com. Printed copies of each of our committee charters may be obtained, without charge, by contacting the Chief Financial Officer at our executive office, Floor 28, Block C Longhai Mingzhu Building, No. 182 Haier Road, Qingdao 266000, People’s Republic of China.

Audit Committee

Our Audit Committee consists of three members: Mr. Lawrence Lee, Dr. Peter Linneman and Mr. Ruiping Tao. Mr. Lee serves as the Chair of the Audit Committee. Each member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and is an “independent director” within the meaning of applicable NASDAQ listing standards. Each Audit Committee member meets NASDAQ’s financial literacy requirements, and the board has further determined that Mr. Lawrence Lee (i) is the “audit committee financial expert” as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC, and (ii) also meets NASDAQ’s financial sophistication requirements.

The Audit Committee oversees our accounting and financial reporting processes and the audits of the financial statements of our Company. The Audit Committee is responsible for, among other things:

  • selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors;

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

  • reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;

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

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

  • annually reviewing and reassessing the adequacy of our Audit Committee charter;

  • meeting separately and periodically with management and our internal and independent auditors;

  • reporting regularly to the full board; and

  • such other matters that are specifically delegated to our Audit Committee by our board from time to time.

Compensation Committee

Our Compensation Committee consists of three members: Mr. Lawrence Lee, Dr. Peter Linneman and Mr. Ruiping Tao. Mr. Tao serves as the Chair of the Compensation Committee. The members of the Compensation Committee are all independent directors within the meaning of applicable NASDAQ listing standards.

Our Compensation Committee assists our board of directors in reviewing and approving the compensation structure of our executive officers, including all forms of compensation to be provided to our executive officers. Our chief executive officer may not be present at any Committee meeting during which his compensation is deliberated. The Compensation Committee is responsible for, among other things:

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  • approving and overseeing the compensation package for our executive officers;

  • reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on this evaluation; and

  • reviewing periodically and making recommendations to the board of directors regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans; and reviewing and making recommendations to the board of directors regarding succession plans for the chief executive officer and other senior officers.

Governance and Nominating Committee

Our Governance and Nominating Committee consists of three members: Mr. Lawrence Lee, Dr. Peter Linneman and Mr. Ruiping Tao. Dr. Linneman serves as the Chair of the Governance and Nominating Committee. The members of our Governance and Nominating Committee are all independent directors within the meaning of applicable NASDAQ listing standards.

The Governance and Nominating Committee assists our board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The Governance and Nominating Committee is responsible for, among other things:

  • identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy;

  • reviewing annually with the board the current composition of the board in light of the characteristics of independence, skills, experience and availability of service to us;

  • reviewing periodically the compensation paid to non-employee directors for annual retainers and meeting fees, if any, and making recommendations to the board for any adjustments; and

  • identifying and recommending to the board the directors to serve as members of the board’s committees

Code of Ethics

On June 22, 2010, our Audit Committee adopted a Code of Ethics that applies to all of the directors, officers and employees of the Company and its subsidiaries, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. A copy of the Code of Ethics is filed as Exhibit 14 to our current report on Form 8-K filed on June 23, 2010 and is also available on our website at www.chinaoumeirealestate.com.

Compensation of Directors and Senior Management

In 2010, the aggregate cash compensation to our executive officers was approximately $139,333 and the aggregate cash compensation to our non-executive directors was approximately $29,334.

Employment Agreements

Except for our Chief Financial Officer, each of our executive officers has entered into our standard employment agreement. Under these agreements, each of our executive officers is employed for a specified time period, but we may terminate his or her employment for cause, at any time, without notice or remuneration, for certain acts, including but not limited to, his or her conviction of crimes, his or her breach of material corporate policy and his or her failure to perform his or her duties to our material detriment. Furthermore, either we or an executive officer may terminate his or her employment at any time without cause upon advance written notice to the other party. Other than necessary social benefits required by the PRC government, which are defined in the employment agreements, we currently do not provide other benefits to these officers under our standard employment at this time. These officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.

On June 15, 2010, we entered into a separate employment agreement with our Chief Financial Officer, Mr. Zhaohui John Liang. In addition to his base salary specified in the agreement, we also agreed to provide Mr. Liang and his direct family members with medical insurance and Mr. Liang is also eligible to participate in any bonus, incentive and benefit plans established by us. The term of the employment agreement is for two (2) years and may be terminated by us for cause upon thirty (30) days’ notice and by either party without cause upon sixty (60) days’ notice. Mr. Liang will also receive four months’ salary, accrued benefits, and an opportunity to vest and exercise all stock options if he resigns for good reason or is terminated without cause or after a change in control (as such terms are defined in the employment agreement).

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Equity Incentive Plan

On October 12, 2010, our board of directors, Compensation Committee and shareholders adopted the China Oumei Real Estate Inc. 2010 Equity Incentive Plan, the 2010 Plan, which became effective on November 4, 2010. The 2010 Plan permits the grant of incentive share options, nonstatutory share options (i.e., options not intended to qualify as incentive share options), restricted shares, share grants, restricted share units, share appreciation rights, performance units and performance shares to employees, directors, and consultants of the Company and its affiliates.

Up to 3,000,000 ordinary shares may be issued under the 2010 Plan; provided that the number and class of shares available under the 2010 Plan are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, share splits, share dividends, or other similar events which change the number or kind of shares outstanding. Our board of directors may at any time amend, alter, suspend or terminate the 2010 Plan, provided that we will obtain shareholder approval of any amendment to the extent necessary and desirable to comply with applicable laws. No amendment, alteration, suspension or termination of the 2010 Plan will impair the rights of any participant, unless agreed to by the participant.

The 2010 Plan is administered by our Compensation Committee. The Compensation Committee has the authority to determine the specific terms and conditions of all awards granted under the 2010 Plan, including, without limitation, the number of shares subject to each award, the price to be paid for the shares and the applicable vesting criteria. The Compensation Committee, in its sole discretion, may impose vesting schedules, limitations on transferability and forfeiture conditions on any award granted under the 2010 Plan as it may deem advisable or appropriate, on the basis of such conditions, including but not limited to, achievement of Company-wide, business unit, or individual goals (including, but not limited to, continued status as a service provider), or any other basis the Compensation Committee may determine in its discretion. The Compensation Committee, in its discretion, may accelerate the time at which any such restrictions will lapse or be removed. The Compensation Committee may also provide for such complete or partial exceptions to an employment or service restriction as it deems equitable.

The Compensation Committee may reprice or terminate options or share appreciation rights at a lower purchase price per share than the original grant without prior shareholder approval. The Compensation Committee may also authorize the Company to issue new option or share appreciation right awards in exchange for the surrender and cancellation of any or all outstanding awards, subject to the consent of the holder whose rights would be impaired. In addition, the Compensation Committee may at any time repurchase options with payment in cash, shares or other consideration, based on such terms and conditions as the Compensation Committee and the holder shall agree.

Following is a description of the types of awards that may be issued under the 2010 Plan.

  • Option Grants. An option is the right to purchase our ordinary shares at a future date at a specified price. Options granted under the 2010 Plan may be either incentive share options, within the meaning of section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory share options (i.e., options not intended to qualify as incentive share options). The Compensation Committee determines the terms of each option at the time of grant, including the number of shares covered by, the exercise price of, and the conditions and limitations applicable to the exercise of each option (including vesting criteria); provided that (i) the exercise price of an option may not be less than the fair market value of a share or the par value of a share on the grant date and the term may not exceed ten years, (ii) incentive share options may only be granted to employees of the Company and of any parent or subsidiary of the Company; (iii) if the optionee owns more than 10% of the total combined voting power of all classes of our shares, the exercise price of an incentive share options may not be less than 110% of the fair market value of a share on the grant date and the option term may not exceed five years.

  • Restricted Share Awards. The Compensation Committee may, in its discretion, award restricted shares and may determine the number of shares awarded and the terms and conditions (including vesting criteria) of, and the amount of payment to be made by the recipient for such restricted shares. During the period of restriction determined by the Compensation Committee, restricted shares shall be subject to vesting or forfeiture (including a right of the Company to repurchase restricted shares at less than the then fair market value per share) arising on the basis of such conditions as the Compensation Committee may determine in its sole discretion. Any such risk of forfeiture may be waived or terminated, or the period of restriction shortened, at any time by the Compensation Committee on such basis as it deems appropriate.

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  • Share Grants. Share grants not subject to risk of forfeiture or restrictions on transferability are awarded solely in recognition of significant contributions to the success of the Company or its affiliates, in lieu of compensation otherwise already due and in such other limited circumstances as the Compensation Committee deems appropriate (provided that payment of not less than the par value per share shall be required). Share grants are made without forfeiture conditions of any kind.

  • Restricted Share Units. A restricted share unit is the right to receive one share at the end of a specified period of time. The Compensation Committee may, in its discretion, award restricted share units in such number and upon such terms and conditions (including vesting criteria) as determined by the Compensation Committee. During the period of restriction, restricted share unites shall be subject to vesting or forfeiture arising on the basis of such conditions as the Compensation Committee may determine in its sole discretion. Any such risk of forfeiture may be waived or terminated, or the period of restriction shortened, at any time by the Compensation Committee on such basis as it deems appropriate.

  • Share Appreciation Rights. A share appreciation right is the right to receive payment from the Company in an amount no greater than the excess of the fair market value of a share at the date the share appreciation right is exercised over a specified price fixed by the Compensation Committee, which shall not be less than the fair market value of a share on the date of grant. In the case of a share appreciation right which is granted in connection with an option, the specified price shall be the option exercise price. The Compensation Committee may award share appreciation rights in such number and upon such terms and conditions (including vesting criteria) as it may determine. At the discretion of the Compensation Committee, the payment upon exercise of a share appreciation right may be in cash, shares of equivalent value or some combination thereof.

  • Performance Units and Performance Shares. Performance shares and performance units are awards that may vest in whole or in part upon attainment of performance goals or other vesting criteria as the Compensation Committee may determine. Each performance share will have an initial value equal to the fair market value of a share on the grant date. Each performance unit will have an initial value established by the Compensation Committee on or before the grant date. The Compensation Committee shall, at its discretion, determine the performance objectives or other vesting provisions which will determine the number or value of the performance units or shares granted. After the applicable performance period has ended, the holder of performance units or performance shares will be entitled to receive a payout of the number of performance units or performance shares earned by the holder over the performance period as determined by the extent to which performance objectives were achieved.

As of December 25, 2010, a total of 1,430,000 ordinary shares remain available for issuance under the 2010 Plan.

Share Options

As of December 25, 2010, options to purchase a total of 1,550,000 of our ordinary shares have been granted under the 2010 Plan, all of which remained outstanding. The following table summarizes, as of December 25, 2010, the outstanding options granted to our executive officers and directors under our 2010 Plan.


Name
Ordinary Shares
Underlying Options
Exercise Price
(US$/Share)

Date of Grant

Expiration Date
Weiqing Zhang 434,000 5.00 11/04/2010 11/03/2020
Zhaohui John Liang 372,000 5.00 11/04/2010 11/03/2020
Yang Chen 434,000 5.00 11/04/2010 11/03/2020

Each option vests with respect to 50% of the shares underlying the option on December 15, 2010, and thereafter with respect to 5% of such shares on each successive one-month anniversary thereof, commencing with the first such anniversary; provided, however, that the executive officer remains an employee of the Company or any affiliate of the Company as of each vesting date. Mr. Liang’s option also vests in full if he is terminated without cause.

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PRINCIPAL SHAREHOLDERS

The following table sets forth information regarding beneficial ownership of each class of our voting securities as of December 5, 2011 (i) by each person who is known by us to beneficially own more than 5% of our voting securities; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, Floor 28, Block C, Longhai Mingzhu Building, No.182 Haier Road, Qingdao 266000, People’s Republic of China.



Name and Address of Beneficial
Owner



Office, If Any
Shares Beneficially Owned(1)
Ordinary Shares(2) Preference Shares(3) % Total
Voting
Power(4)

Shares
% of
Class

Shares
% of
Class
 Directors and Officers    
Antoine Cheng (5) Chairman 27,143,000 87.50% 0 * 80.32%
Weiqing Zhang (6) CEO and Director 444,000 1.41% 0 * 1.30%
Zhaohui John Liang (7) CFO 372,000 1.19% 0 * 1.09%
Yang Chen (8) President 444,000 1.41% 0 * 1.30%
Lawrence Lee Director 0 * 0 * *
Dr. Peter Linneman (9) Director 20,000 * 0 * *
Ruiping Tao Director 0 * 0 * *
All officers and directors as a group (7 persons named above) 28,423,000 88.11% 0 * 81.13%
 5% Security Holders    
Longhai Holdings Company Limited (5)   27,143,000 87.50% 0 * 80.32%
Jayhawk Private Equity Fund II, L.P. (10)
930 Tahoe Blvd., 802-281
Incline Village, NV 89451


375,000

1.19%

750,000

27.03%

3.29%

Access America Fund, LP (11)
11200 Westheimer Rd., Suite 508
Houston, TX 77042


404,164

1.30%

375,000

13.51%

2.29%

Hua-Mei 21st Century Partners, LP (12)
237 Park Avenue, 9th Floor
New York, NY 10017


446,500

1.43%

475,000

17.12%

2.71%

Guerrilla Partners, LP (13)
237 Park Avenue, 9th Floor
New York, NY 10017


258,500

*

275,000

9.91%

1.57%

Taylor International Fund, Ltd. (14)
714 S. Dearborn Street, 2nd Floor
Chicago, IL 60605
404,164 1.30% 375,000 13.51% 2.29%

* Less than 1%

(1)

Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our ordinary shares. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.

   
(2)

Based on 31,020,062 ordinary shares issued and outstanding as of December 5, 2011.

   
(3)

Based on 2,774,700 Preference Shares issued and outstanding as of December 5, 2011. Each Preference Share is convertible into one (1) ordinary share (subject to customary adjustments for stock splits, combinations, or equity dividends on ordinary shares). Holders of Preference Shares vote with the holders of ordinary shares on all matters on an “as converted” basis. See “Description of Share Capital — Rights and Obligations of Shareholders” below for more information regarding our Preference Shares.

   
(4)

Percentage of Total Capital Stock represents total ownership with respect to all shares of our ordinary shares and Preference Shares, as a single class and on an “as converted” basis.

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(5)

Includes 27,143,000 ordinary shares held by Longhai Holdings. Mr. Antoine Cheng is the sole shareholder and director of Longhai Holdings and has voting and dispositive control over the securities held by it. Pursuant to the Make Good Escrow Agreement, Longhai Holdings deposited 7,500,000 ordinary shares held by it into an escrow account for the benefit of the investors in the event that we fail to meet certain financial performance thresholds.

   
(6)

Includes 434,000 ordinary shares underlying an option to purchase our ordinary shares that may vest within 60 days. On November 4, 2010, we granted to Mr. Zhang an option to purchase 434,000 ordinary shares for an exercise price of $5.00 per share. The option vests with respect to 50% of such shares on December 15, 2010, and thereafter with respect to 5% of such shares on each successive one-month anniversary thereof, commencing with the first such anniversary; provided, however, that Mr. Zhang remains an employee of the Company or any affiliate of the Company as of each vesting date; and provided further, that the option cannot begin vesting until the consummation of the Company’s public offering. However, upon the consummation of our public offering, the option will have an immediate vesting of all shares that would have otherwise vested at such time.

   
(7)

Includes 372,000 ordinary shares underlying an option to purchase our ordinary shares that may vest within 60 days. On November 4, 2010, we granted to Mr. Liang an option to purchase 372,000 ordinary shares for an exercise price of $5.00 per share. The option vests with respect to 50% of such shares on December 15, 2010, and thereafter with respect to 5% of such shares on each successive one-month anniversary thereof, commencing with the first such anniversary; provided, however, that Mr. Liang remains an employee of the Company or any affiliate of the Company as of each vesting date; and provided further, that the option cannot begin vesting until the consummation of the Company’s public offering. However, upon the consummation of our public offering, the option will have an immediate vesting of all shares that would have otherwise vested at such time. The option will vest in full if Mr. Liang is terminated without cause.

   
(8)

Includes 434,000 ordinary shares underlying an option to purchase our ordinary shares that may vest within 60 days. On November 4, 2010, we granted to Mr. Chen an option to purchase 434,000 ordinary shares for an exercise price of $5.00 per share. The option vests with respect to 50% of such shares on December 15, 2010, and thereafter with respect to 5% of such shares on each successive one-month anniversary thereof, commencing with the first such anniversary; provided, however, that Mr. Chen remains an employee of the Company or any affiliate of the Company as of each vesting date; and provided further, that the option cannot begin vesting until the consummation of the Company’s public offering. However, upon the consummation of our public offering, the option will have an immediate vesting of all shares that would have otherwise vested at such time.

   
(9)

Includes 20,000 ordinary shares that may vest within 60 days. On November 4, 2010, we granted 20,000 ordinary shares to Mr. Linneman. 50% of the shares vest on the date of grant and the remaining shares vest on the twelve- month anniversary of the date of grant; provided, that the shares cannot begin vesting until the consummation of the Company’s public offering. However, upon the consummation of our public offering, all shares that would have otherwise vested at such time will vest in full.

   
(10)

Includes 375,000 shares underlying a warrant to purchase our ordinary shares. Kent C. McCarthy has sole voting and dispositive power over securities held by Jayhawk Private Equity Fund II, L.P.

   
(11)

Includes 187,500 shares underlying a warrant to purchase our ordinary shares. Christopher Efird is the Managing Partner of Access America Fund, LP and has voting and dispositive control over securities held by it.

   
(12)

Includes 237,500 shares underlying a warrant to purchase our ordinary shares. Peter Siris is the Managing Director of Hua-Mei 21st Century Partners, LP and has voting and dispositive control over securities held by it.

   
(13)

Includes 137,500 shares underlying a warrant to purchase our ordinary shares. Peter Siris is the Managing Director of Guerrilla Partners, LP and has voting and dispositive control over securities held by it.

   
(14)

Includes 187,500 shares underlying a warrant to purchase our ordinary shares. Robert J. Kirkland is the President of Taylor Asset Management, Inc., the general partner of Taylor International Fund, Ltd., and has voting and dispositive control over securities held by it.

None of our major shareholders have different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

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RELATED PARTY TRANSACTIONS

As December 25, 2010, the Company had a total of $1,159,577 due from Longhai Group and its subsidiaries. Longhai Group is wholly-owned by Mr. Antoine Cheng, our Chairman. These balances had no stated terms for repayment and were not interest bearing. As of June 25, 2011, these loans have all been repaid. The Company has no intention to extend similar loans to related parties in the future.

One of our major contractors for our construction services and construction materials is Longhai Construction Ltd., a subsidiary of Longhai Group. In the fiscal years ended December 25, 2010 and 2009, we made payments to Lonhgai Construction Ltd. of approximately $14,170,029 and $13,784,000, respectively.

For the fiscal years ended December 25, 2010, 2009 and 2008, we received rent payments of approximately $384,436, $381,160 and $372,962, respectively, from Longhai Group for a restaurant and banquet facility it leases from us. The lease is renewable annually. The annual rent may be subject to adjustments at the time of the renewal.

During the fiscal years ended December 25, 2010 and 2009, we sold two floors of a project for office use to Longhai Construction Ltd., a subsidiary of Longhai Group, recognizing revenues of approximately $702,000 and $3,274,000, respectively.

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DESCRIPTION OF SHARE CAPITAL

We were incorporated as an exempted company with limited liability under the Companies Law on March 10, 2006 (Registrar of Companies #164013). A Cayman Islands exempted company:

  • is a company that conducts its business outside the Cayman Islands;

  • is exempted from certain requirements of the Companies Law, including the filing of an annual return of its shareholders with the Registrar of Companies;

  • is not required to open its register of shareholders for inspection; and

  • may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for twenty years in the first instance).

We were originally incorporated under the name “Dragon Acquisition Corporation. On August 6, 2010, we changed our name to “China Oumei Real Estate Inc.”

Our affairs are governed by our amended and restated memorandum and articles of association, as supplemented or substituted from time to time, and the Companies Law. The following summarizes the material terms of our amended and resated memorandum and articles of association and the Companies Law insofar as they related to the material terms of our ordinary shares. Although by its very nature this summary is not a complete reproduction of our amended and restated memorandum and articles of association, and we therefore recommend that you read the form of our memorandum and articles of association, which has been filed as Exhibit 3.1 to our current report on Form 8-K filed on August 6, 2010, it does summarize all those aspects of shareholders rights which are material to shareholders, including an explanation of the principal differences between Cayman and U.S. law.

As used in this section, an “ordinary resolution” means a written resolution passed by a simple majority of shareholders (calculated on an as-if converted basis) or a resolution passed by a simple majority of shareholders as, being entitled to do so, vote in person or by proxy at a general meeting of shareholders. A “special resolution” means an unanimous written resolution or a resolution passed by not less than two-thirds of shareholders (calculated on an as-if converted basis) as, being entitled to do so, vote in person or by proxy at a general meeting of shareholders of which notice specifying the intention to propose the resolution as a special resolution has been duly given.

Objects and Purposes

Our amended and restated memorandum of association grants us full power and capacity to carry out any object not prohibited by the Companies Law or any other law of the Cayman Islands.

Directors

Our board of directors consists of a single class of directors who will serve until they resign or are removed in accordance with our amended and restated memorandum and articles of association. Directors are elected at a general meeting each year by an ordinary resolution of shareholders. Our board has the power at any time to appoint a person as a director either to fill a casual vacancy or as an addition to the existing board. A director may be removed from office, with or without cause, by an ordinary resolution of shareholders.

Directors have the powers necessary for managing, and for directing and supervising our business and affairs. Directors may engage in transactions with us and vote on such transactions, provided the nature of the interest is disclosed to the entire board of directors. With the prior or subsequent approval by an ordinary resolution of shareholders, the directors may, by a resolution of directors, fix the emoluments of directors with respect to services to be rendered in any capacity to us. The directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof and to issue debentures, debenture stock, mortgages, bonds and other such securities whether outright or as security for any debt, liability or obligation of the Company or of any third party. There are no age limit requirements for our directors and they are not required to hold shares in the Company.

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Rights and Obligations of Shareholders

Our authorized share capital consists of 100,000,000 ordinary shares, par value $0.002112 per share, and 20,000,000 preference shares, par value $0.002112 per share. On April 14, 2010, our board of directors established a series of our preference shares, designated as “6% Convertible Preference Shares” (which we refer to herein as the Preference Shares). With respect to rights upon liquidation, winding-up or dissolution, the Preference Shares rank senior to our ordinary shares and any other classes or series of stock of the Company not designated as ranking senior to or pari passu with the Preference Shares. As of the date of this prospectus, there are 31,020,062 ordinary shares and 2,774,700 Preference Shares issued and outstanding.

Dividends

The holders of our ordinary shares are entitled to such dividends as may be declared or paid by our board of directors subject to our amended and restated memorandum and articles of association and the Companies Law. No dividend may be declared or paid unless our directors determine that immediately after the payment, we will be able to satisfy our liabilities as they become due in the ordinary course of business, and we have funds lawfully available for such purpose.

Each Preference Share is entitled to receive cumulative dividends at the annual rate of six percent (6%) accruing on a daily basis on the purchase price of the Preference Share. Such dividends will be payable in cash annually on January 1 beginning with the first such date after April 14, 2010. If the six percent (6%) dividend is not timely paid in full, any such unpaid dividend amount will be increased by 6% per year, accruing on a daily basis.

Voting Rights

The holders of our ordinary shares have identical rights, as provided by our amended and restated memorandum and articles of association, and are entitled to one vote per share.

The holders of our Preference Shares vote on an “as converted” basis, together with the ordinary shares, as a single class, in connection with any proposal submitted to our shareholders. Each Preference Share is initially optionally convertible into one (1) fully paid and non-assessable ordinary share. We also have the right to convert outstanding Preference Shares into ordinary shares if, for a period of at least twenty (20) consecutive business days, (i) the volume weighted average price of our ordinary shares equals or exceeds US$6.00, (ii) average daily trading volume of our ordinary shares equals or exceeds 50,000 shares per day, and (iii) trading volume of our ordinary shares equals or exceeds 30,000 shares on every business day during this period. The number of ordinary shares into which each Preference Share may be converted into will be proportionally adjusted in the event of any stock splits, combinations, or equity dividends on ordinary shares. Upon certain reorganizations, reclassifications, mergers, or consolidations, the holders of Preference Shares may convert their shares into the securities or property that they would have been entitled to upon the consummation of such transaction if the holder had converted the Preference Shares immediately prior to such transaction.

Liquidation

On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), after payment in full of the amounts required to be paid to creditors and holders of any issued and outstanding preference shares, if any, all holders of ordinary shares are entitled to receive the same amount per share with respect to any distribution of assets to holders of ordinary shares.

In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the holders of the Preference Shares then outstanding will be entitled to receive, out of the assets of the Company available for distribution to its shareholders, an amount equal to the amount credited as paid up on the Preference Shares plus accrued but unpaid dividends, before any payment shall be made or any assets distributed to the holders of the ordinary shares or any other class or series of stock issued by the Company not designated as ranking senior to or pari passu with the Preference Shares in respect of the right to participate in distributions or payments upon a liquidation event.

Redemption

Our ordinary shares are not redeemable but, subject to the provisions of the Companies Law, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined pursuant to our amended and restated memorandum and articles of association.

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Our Preference Shares are not redeemable.

Modification of Rights of Shareholders

All or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied either with the consent of the holders of two-thirds of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.

Meetings

General meetings of shareholders are expected to be held annually and may be convened by the board of directors as it may consider necessary or desirable or upon a request of one or more shareholders holding in the aggregate not less than 33 1/3% of our voting share capital. If the board of directors does not convene a requisitioned meeting within 60 days of the deposit of the requisition notice, the requisitionists may themselves convene the general meeting.

Notice shall be given of any general meeting at least ten (10) days and not more than sixty (60) days in advance of the date of such general meeting. Such notice shall state the date, time, place and purposes of the general meeting to which it relates. The notice convening an annual general meeting shall specify the meeting as such, and the notice convening a meeting to pass a special resolution shall specify the intention to propose the resolution as a special resolution. Notice of every general meeting shall be given to all shareholders other than such as, under the provisions our amended and restated articles of association or the terms of issue of the shares they hold, are not entitled to receive such notice from the Company. The accidental omission to give notice of a general meeting to, or the non-receipt of notice of a meeting by, any person entitled to receive notice shall not invalidate the proceedings of that meeting.

A quorum for a general meeting of shareholders is considered present if there are one or more shareholders entitled to vote and present in person or by proxy holding in aggregate more than 50% of our voting share capital. If a quorum is not present within one hour after the time appointed for the general meeting, the general meeting shall stand adjourned to the same day in the next week at the same time and place. If at such adjourned general meeting a quorum is not present within one hour from the time appointed for holding the general meeting, the shareholder or shareholders present in person or by proxy shall be a quorum and may transact the business for which the general meeting was called.

An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to our shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to our shares. Pursuant to the Companies Law, special resolution is required for important matters such as amending the amended and restated memorandum and articles of association, a change of name and winding up. Holders of our shares may affect certain changes by ordinary resolution, including electing and removing directors.

A member may be represented at a meeting of members by a proxy (who need not be a member) who may speak and vote on behalf of the member. A written instrument giving the proxy such authority must be produced at the place appointed for such purpose before the time for holding the meeting.

Limitations on Ownership of Securities

There are no limitations on the right of non-residents or foreign persons to own our securities imposed by Cayman Islands law or by our amended and restated memorandum and articles of association

Anti-takover Provisions

Some provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders.

However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our amended and restated memorandum and articles of association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company.

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Ownership Threshold

There are no provisions governing the ownership threshold above which shareholder ownership must be disclosed imposed by Cayman Islands law or by our amended and restated memorandum and articles of association.

Differences in Corporate Law

The Companies Law is modeled after similar laws in the United Kingdom but does not follow recent changes in United Kingdom laws. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States.

Transactions with Interested Directors

Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and skill and owe a fiduciary duty to the companies for which they serve. Under our amended and restated memorandum and articles of association, so long as a director discloses the nature of his interest in any contract or arrangement which he is interested in, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such meeting.

Indemnification of Directors and Executive Officers and Limitation of Liability

Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as a provision purporting to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum and articles of association provide for indemnification of our directors and officers to the fullest extent permitted by law against any expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with any threatened, pending, or completed action, suit or proceeding; provided, however, that no director or officer is indemnified against any liability arising out of (a) any actual fraud or dishonesty in the performance of such person’s duty to us, (b) such person’s conscious, intentional or willful breach of his or her obligation to act honestly, lawfully and in good faith with a view to our best interests or (c) any claims or rights of action to recover any gain, personal profit or other advantage to which the director or officer is not legally entitled. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.

Directors' Fiduciary Duties

As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company, and therefore it is considered that he owes, among others, the following duties to the company: (i) a duty to act bona fide in the best interests of the company, (ii) a duty not to make a profit based on his position as director (unless the company permits him or her to do so) and (iii) a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. The duty of a director not to put himself or herself in a position of conflict may be modified by the company's articles of association. Our articles of association permit our directors to have such a conflict and to participate and vote in respect of any decision in which they may have a conflict, provided their conflicting interests are adequately disclosed. This does not modify the directors' duty to act in a way they consider to be bona fide in the best interests of the Company.

A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards a dual objective/subjective standard with regard to the required skill and care, to the effect that a director must exercise the skill and care of a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same actions as our carried out by that direction in relation to the company and (b) the general knowledge, skill and experience that that particular director has. These authorities are likely to be followed in the Cayman Islands.

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Variation of Rights of Shares

Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our amended and restated memorandum and articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the written consent of two-thirds of the holders of the issued shares of that class or with the solution of special resolution passed at general meeting of the holders of shares of that class.

Shareholder Proposals

Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. Cayman Islands law and our amended and restated articles of association allow our shareholders holding not less than 33 1/3% of our voting share capital to requisition a shareholder's meeting. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings.

Cumulative Voting

Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the laws of the Cayman Islands, but our amended and restated memorandum and articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any fewer protections or rights on this issue than shareholders of a Delaware corporation.

Removal of Directors

Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our amended and restated memorandum and articles of association, directors can be removed by an ordinary resolution of shareholders.

Transactions with Interested Shareholders

The Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target's outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target's board of directors.

Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.

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Dissolution; Winding Up

Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may the dissolution be approved by a simple majority of the corporation's outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under the Companies Law and our amended and restated memorandum and articles of association, our Company may be dissolved, liquidated or wound up by a special resolutions, or by an ordinary resolution on the basis that we are unable to pay our debts as they fall due.

Amendment of Governing Documents

Under the Delaware General Corporation Law, a corporation's governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law, our memorandum and articles of association may (subject to any provisions relating to modification of class rights) only be amended with a special resolution at a meeting of shareholders.

Mergers and Similar Arrangements

In certain circumstances, the Cayman Islands Companies Law allows for mergers or consolidations between two Cayman Islands companies or between a Cayman Islands company and a company incorporated in another jurisdiction (provided that it is permitted by the laws of that other jurisdiction).

Where the merger or consolidation is between two Cayman Islands companies, the directors of each company must approve a written plan of merger or consolidation containing certain prescribed information. That plan of merger or consolidation must then be authorized by either (a) a special resolution (usually a majority of 66 2/3% in value) of the shareholders of each company voting together as one class if the shares to be issued to each shareholder in the consolidated or surviving company will have the same rights and economic value as the shares held in the relevant constituent company or (b) a shareholder resolution of each company passed by a majority in number representing 75% in value of the shareholders voting together as one class. A shareholder has the right to vote on a merger or consolidation regardless of whether the shares that he or she holds otherwise give him or her voting rights. No shareholder resolution is required for a merger between a parent company (i.e., a company that owns at least 90% of the issued shares of each class in a subsidiary company) and its subsidiary company. The consent of each holder of a fixed or floating security interest of a constituent company must be obtained unless the court waives such requirement. If the Cayman Islands Registrar of Companies is satisfied that the requirements of the Companies Law (which includes certain other formalities) have been complied with, the Registrar of Companies will register the plan of merger or consolidation.

Where the merger or consolidation involves a foreign constituent company, and where the surviving company is a Cayman Islands company, the procedure is similar, save that, with respect to the foreign constituent company, the director of the surviving or consolidated company is required to make a declaration to the effect that, having made due enquiry, he or she is of the opinion that the requirements set out below have been met: (i) that the merger or consolidation is permitted, or not prohibited, by the constitutional documents of the foreign company and by the laws of the jurisdiction in which the foreign company is incorporated, and that those laws, and any requirements of those constitutional documents have been, or will be, complied with; (ii) that no petition or other similar proceeding has been filed and remains outstanding or order made or resolution adopted to wind up or liquidate the foreign company in any jurisdictions; (iii) that no receiver, trustee, administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the foreign company, its affairs or its property or any part thereof; (iv) that no scheme, order, compromise or other similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of the foreign company are, and continue to be, suspended or restricted; (v) that the foreign company is able to pay its debts as they fall due and that the merger or consolidation is bona fide and not intended to defraud unsecured creditors of the foreign company; (vi) that in respect of the transfer of any security interest granted by the foreign company to the surviving or consolidated company (a) consent or approval to the transfer has been obtained, released or waived; (b) the transfer is permitted by, and has been approved in accordance with, the constitutional documents of the foreign company; and (c) the laws of the jurisdiction of the foreign company with respect to the transfer have been ,or will be, complied with; (vii) that the foreign company will, upon the merger or consolidation becoming effective, cease to be incorporated, registered or exist under the laws of the relevant foreign jurisdiction; and (viii) that there is no other reason why it would be against the public interest to permit the merger or consolidation.

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Where the above procedures are adopted, the Companies Law provides for a right of dissenting shareholders to receive a payment of the fair value of their shares upon their dissenting to the merger or consolidation if they follow a prescribed procedure. In essence, that procedure is as follows: (a) the shareholder must give his or her written objection to the merger or consolidation to the constituent company before the vote on the merger or consolidation, including a statement that the shareholder proposes to demand payment for his or her shares if the merger or consolidation is authorized by the vote; (b) within 20 days following the date on which the merger or consolidation is approved by the shareholders, the constituent company must give written notice to each shareholder who made a written objection; (c) a shareholder must, within 20 days following receipt of such notice from the constituent company, give the constituent company a written notice of his or her intention to dissent, including, among other details, a demand for payment of the fair value of his or her shares; (d) within seven days following the date of the expiration of the period set out in paragraph (b) above, or seven days following the date on which the plan of merger or consolidation is filed, whichever is later, the constituent company, the surviving company or the consolidated company must make a written offer to each dissenting shareholder to purchase his or her shares at a price that the company determines is the fair value and, if the company and the shareholder agree the price within 30 days following the date on which the offer was made, the company must pay the shareholder such amount; and (e) if the company and the shareholder fail to agree a price within such 30-day period, within 20 days following the date on which such 30-day period expires, the company (and any dissenting shareholder) must file a petition with the Cayman Islands Grand Court to determine the fair value and such petition must be accompanied by a list of the names and addresses of the dissenting shareholders with whom agreements as to the fair value of their shares have not been reached by the company. At the hearing of that petition, the court has the power to determine the fair value of the shares together with a fair rate of interest, if any, to be paid by the company upon the amount determined to be the fair value. Any dissenting shareholder whose name appears on the list filed by the company may participate fully in all proceedings until the determination of fair value is reached. These rights of a dissenting shareholder may not be available in certain circumstances, for example, to dissenters holding shares of any class in respect of which an open market exists on a recognized stock exchange or recognized interdealer quotation system at the relevant date or where the consideration for such shares to be contributed are shares of any company listed on a national securities exchange or shares of the surviving or consolidated company.

Moreover, Cayman Islands law also has separate statutory provisions that facilitate the reconstruction or amalgamation of companies and, in certain circumstances, schemes of arrangement will generally be more suited for complex mergers or other transactions involving widely-held companies, commonly referred to in the Cayman Islands as a “scheme of arrangement”, which may be tantamount to a merger. In the event that a merger was sought pursuant to a scheme of arrangement (the procedures of which are more rigorous, and take longer to complete, than the procedures typically required to consummate a merger in the United States), the arrangement in question must be approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting. The convening of the meetings and, subsequently, the terms of the arrangement, must be sanctioned by the Grand Court of the Cayman Islands.

While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved, the court can be expected to approve the arrangement if it satisfies itself that:

  • we are not proposing to act illegally or beyond the scope of our corporate authority, and the statutory provisions as to majority vote have been complied with;

  • the shareholders have been fully informed and were fairly represented at the meeting in question;

  • the arrangement is such as a businessperson could reasonably approve; and

  • the arrangement would not amount to a “fraud on the minority.”

If a scheme of arrangement or takeover offer (as described below) is approved, any dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

Further, transactions similar to a merger, reconstruction and/or an amalgamation may, in some circumstances, be achieved through other means to these statutory provisions, such as a share capital exchange, asset acquisition or control, through contractual arrangements, of an operating business.

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Shareholders' Suits

Our Cayman Islands counsel is not aware of any reported class action having been brought in a Cayman Islands court. Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed their availability for such actions. In most cases, we will be the proper plaintiff in any claim based on a breach of duty owed to us, and a claim against (for example) our officers or directors usually may not be brought by a shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority and be applied by a court in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:

  • a company is acting, or proposing to act, illegally or beyond the scope of its authority;

  • the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more than the number of votes which have actually been obtained; or

  • those who control the company are perpetrating a “fraud on the minority.”

A shareholder may have a direct right of action against us where the individual rights of that shareholder have been infringed or are about to be infringed.

Alteration of Share Capital

Subject to the provisions of the amended and restated memorandum and articles of association and the Companies Law, our unissued shares shall be at the disposal of the directors who may, without prejudice to any rights previously conferred on the holders of any existing shares or class or series of shares, offer, allot, grant options over or otherwise dispose of the shares to such persons, at such times and upon such terms and conditions as we may by resolution of directors determine.

Subject to the provisions of the Companies Law, we may by an ordinary resolution of shareholders:

  • increase the share capital by such sum as the resolution shall prescribe and with such rights, priorities and privileges annexed thereto;

  • consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;

  • by subdivision of our existing shares or any of them divide the whole or any part of our share capital into shares of smaller amount than is fixed by our amended and restated memorandum of association or into shares without par value; and

  • cancel any shares that at the date of the passing of the resolution have not been taken or agreed to be taken by any person.

Subject to the provisions of the Companies Law, we may also by a special resolution of shareholders reduce our share capital and any capital redemption reserve fund.

Warrants

In connection with our private placement which was closed on April 14, 2010, we issued to the investors Warrants to purchase in aggregate 1,387,350 ordinary shares. The Warrants have a term of five years and are exercisable by investors on a net exercise or cashless basis at any time after the closing date. The Warrants had an initial exercise price of $6.00 per share (subject to customary adjustments), however, on October 11, 2010, we entered into Amendment No. 1 to the Subscription Agreement, pursuant to which we amended Section 8.1 to provide that, in lieu of the cash liquidated damages amount that would otherwise have been payable by us for our failure to cause the registration statement to be declared effective within the prescribed period, we were required to reduce the initial exercise price of the Warrants by $0.08 per calendar month, or portion thereof, until such time that the registration statement is declared effective by the SEC; provided that, in no event would we be obligated to reduce the initial exercise price of the Warrants by more than $0.80 in aggregate. Since the registration statement was not declared effective within such time, the exercise price of the Warrants has been reduced to $5.20.

On April 14, 2010, we also issued warrants for the purchase of an aggregate of 138,735 ordinary shares, exercisable for a period of three years at an exercise price of $5.00 per share, to Brean Murray, Carret & Co., LLC and/or its designees, as partial compensation for services provided by them in connection with the private placement transaction.

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As of the date of this prospectus, none of the above warrants have been exercised.

Transfer Agent and Registrar

Our independent stock transfer agent is Interwest Transfer Company, Inc., located in Salt Lake City, Utah. Their mailing address is 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117. Their phone number is (801) 272-9294.

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SHARES ELIGIBLE FOR FUTURE SALE

The 5,065,785 ordinary shares that we are registering for resale by the selling stockholders named in this prospectus will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by our “affiliates,” as that term is defined in Rule 144 of the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below.

In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours at the time of sale, or at any time during the preceding three months, and who has beneficially owned restricted shares for at least six months, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares or the average weekly trading volume of shares during the four calendar weeks preceding such sale. Sales under Rule 144 are subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. A person who has not been our affiliate at any time during the three months preceding a sale, and who has beneficially owned his shares for at least six months, would be entitled under Rule 144 to sell such shares without regard to any manner of sale, notice provisions or volume limitations described above. Any such sales must comply with the public information provision of Rule 144 until our ordinary shares have been held for one year.

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TAXATION

The following is a general summary of the material Cayman Islands, PRC and U.S. federal income tax consequences relevant to an investment in our ordinary shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address United States state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the PRC and the United States. We recommend that you consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ordinary shares.

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ordinary shares. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by the Company. There are no exchange control regulations or currency restrictions in the Cayman Islands.

Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Council:

(1)

that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations; and

   
(2)

that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other obligations.

The undertaking for us is for a period of twenty years from April 4, 2006.

PRC Taxation

In 2007, the PRC government promulgated the EIT Law and the relevant implementation rules, which became effective on January 1, 2008. Under the EIT Law and its implementation rules, all domestic and foreign investment companies will be subject to a uniform enterprise income tax at the rate of 25% and dividends from PRC subsidiaries to their non-PRC shareholders will be subject to a withholding tax at a rate of 20%, which is further reduced to 10% by the implementation rules, if the non-PRC shareholder is considered to be a non-PRC tax resident enterprise without any establishment or place within China or if the dividends payable has no connection with the non-PRC shareholder’s establishment or place within China, unless any such non-PRC shareholder’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

Under the Arrangement between the Mainland 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, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend withholding tax rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. As Leewell is a Hong Kong company and owns 100% of Oumei, under the aforesaid arrangement, any dividends that Oumei pays Leewell may be subject to a withholding tax at the rate of 5% if Leewell is no considered to be a PRC “resident enterprise” as described below. However, if Leewell is not considered to be the “beneficial owner” of such dividends under the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties promulgated by the State Administration of Taxation on October 27, 2009, and not a PRC “resident enterprise,” such dividends would be subject to the withholding tax rate of 10%. The withholding tax rate of 5% or 10% applicable to Leewell will have a significant impact on the amount of dividends to be received by the Company and ultimately by shareholders.

Pursuant to the EIT Law, enterprises established under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC, should be treated as resident enterprises for PRC tax purposes. However, it is currently uncertain whether we may be deemed a resident enterprise, or how to interpret whether any income or gain is derived from sources within China. See “Risk Factors—Risks Related to Doing Business in China—Under the Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.” If we, as a Cayman Islands company with substantially all of our management located in China, were treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which would have an impact on our effective tax rate.

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U.S. Federal Income Taxation

The following is a discussion of the material U.S. federal tax consequences of the ownership of our ordinary shares by U.S. Holders (as described below). It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation. The discussion applies to investors in shares that hold the shares as capital assets for U.S. federal income tax purposes and it does not describe all of the tax consequences that may be relevant to holders subject to special rules, such as:

  • certain financial institutions;
  • insurance companies;
  • dealers and traders in securities or foreign currencies;
  • persons holding shares as part of a hedge, “straddle,” integrated transaction or similar transaction;
  • persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
  • partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
  • persons liable for the alternative minimum tax;
  • tax-exempt organizations;
  • persons holding shares that own or are deemed to own 10% or more of our voting stock;
  • persons who hold the shares in connection with a trade or business outside the United States; or
  • persons who acquired our shares pursuant to the exercise of any employee stock option or otherwise as compensation.

PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.

This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, and can change on a retroactive basis. “U.S. Holder” means a beneficial owner of shares that, for U.S. federal income tax purposes, is: a citizen or resident of the United States; a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or an estate or trust the income of which is subject to U.S. federal income taxation, regardless of its source. This discussion assumes that we are not, and will not become, a PFIC for U.S. federal income tax purposes, as described below.

Taxation of Dividends

The gross amount of any distributions paid with respect to shares, other than certain pro rata distributions of shares, generally will be treated as foreign source dividend income for U.S. federal income tax purposes. U.S. Holders will not be entitled to claim a dividends-received deduction with respect to distributions paid by us. Dividends will be included in a U.S. Holder’s income on the date of such U.S. Holder’s receipt of the dividend.

If you are a non-corporate U.S. Holder, subject to applicable limitations, you may be eligible to be taxed at a maximum rate of 15% in respect of dividends received in taxable years beginning before January 1, 2011. Please consult your tax advisors to determine whether you are subject to any special rules that limit your ability to be taxed at this favorable rate.

In the event that we are deemed to be a Chinese “resident enterprise” under PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to the ordinary shares. In addition, subject to certain conditions and limitations, PRC withholding taxes on dividends not in excess of the rate allowed under the income tax treaty between the United States and the PRC, or the Treaty, if applicable, may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit in light of your particular circumstances.

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Taxation of Capital Gains

Upon sale or other disposition of the ordinary shares, a U.S. Holder will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between such holder’s tax basis in the shares sold or disposed of and the amount realized on the sale or other disposition. Such gain or loss will be long-term capital gain or loss if the U.S. Holder has held the shares for more than one year and will generally be U.S. source gain or loss for foreign tax credit purposes. However, if we are deemed to be a Chinese “resident enterprise” under PRC tax law, gains on disposal may be subject to PRC tax. In that event, a U.S. Holder may be eligible for the benefits of the Treaty. Under the Treaty, if any PRC tax were to be imposed on any gain from the disposition of the shares, the gain would be treated as PRC source income. We urge you to consult your tax advisors regarding the tax consequences if a foreign tax is imposed on gain on a disposition of our shares, including the availability of the foreign tax credit in light of your particular circumstances.

Passive Foreign Investment Company Rules (PFIC)

We believe that we were not a PFIC for United States federal income tax purposes for our taxable year ended December 25, 2010. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including goodwill) from time to time, there can be no assurance that we will not be a PFIC for any taxable year. In general, if we were a PFIC for any taxable year during which a U.S. Holder held shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the shares would be allocated ratably over the U.S. Holder’s holding period for the shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge would be imposed on the amount allocated to such taxable year. Similar rules would apply to any distribution in respect of shares in excess of 125% of the average of the annual distributions on shares received by a U.S. Holder during the preceding three years or such holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as a mark-to-market treatment) of the shares. U.S. Holders should consult their tax advisers to determine whether such elections are available and, if so, what the consequences of the alternative treatments would be in those holders' particular circumstances.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that backup withholding does not apply.

The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is furnished to the Internal Revenue Service.

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are registered in the Cayman Islands because of certain benefits associated with being a Cayman Islands corporation, such as political and economic stability, an established judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a significantly lesser extent. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States. You should also read the sections titled “Description of Share Capital—Differences in Corporate Law” and “Risk Factors” for additional information on the characteristics of a Cayman Islands company, including differences between shareholders’ rights under Cayman Islands law and U.S. law, the ability of a shareholder to bring an action against us, and the ability of shareholders to protect their rights through the U.S. federal courts.

A substantial portion of our assets are located in China. In addition, most of our directors and officers and our PRC legal counsel, Deheng Law Firm, are residents of the PRC and all or a substantial portion of their assets are located in the PRC. Our U.S. shareholders are able to originate actions against our directors and/or officers who have domiciles or distrainable assets in the PRC. However, it may be difficult for investors to effect service of process within the United States upon us or 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. It may also be difficult for you to enforce in United States courts judgments obtained in United States courts based on the civil liability provisions of the United States federal securities laws against us, our officers and directors and Deheng Law Firm.

Maples and Calder, our counsel as to Cayman Islands law, and Deheng Law Firm, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would, respectively, (1) recognize or enforce judgments of United States courts obtained against us or our directors or officers or Deheng Law Firm predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers or Deheng Law Firm predicated upon the securities laws of the United States or any state in the United States. Maples and Calder and Deheng Law Firm have further advised us that there are no treaties with respect to enforceability of civil liabilities, nor is there reciprocity practice, between the PRC and the Cayman Islands.

Maples and Calder has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable with respect to taxes, fines, penalties or similar fiscal or revenue obligations and which was neither obtained in a manner nor is of a kind enforcement which is contrary to natural justice or the public policy of the Cayman Islands, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation, which gives the courts of the Cayman Islands the power under common law to recognize and enforce a final judgment for a specific sum on the basis that it issues from a competent foreign court creating a debt which, at common law, the defendants have an obligation to satisfy.

Deheng Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. Deheng Law Firm has advised us further that under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity between China and the United States governing the recognition of judgments as of the date of this prospectus, including those predicated upon the liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts.

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SELLING STOCKHOLDERS

This prospectus relates to the resale by the selling stockholders named below from time to time of up to a total of 5,065,785 ordinary shares that were issued or are issuable to selling stockholders pursuant to transactions exempt from registration under the Securities Act. All of the ordinary shares offered by this prospectus is being offered by the selling stockholders for their own accounts.

On April 14, 2010, we completed a private placement transaction with a group of accredited investors. Pursuant to the Subscription Agreement with the investors, we issued to the investors an aggregate of 2,774,700 Units, for an aggregate purchase price of $11,098,800, or $4.00 per Unit. Each Unit consists of one share of our Preference Shares and one Warrant to pu