20-F 1 m42213220f.htm FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012 m42213220f.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F
 
(Mark One)
     
o
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                                 to
OR
     
o
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number:   333-183624                            
 
MAXCLEAN HOLDINGS LTD
(Exact Name of Registrant as Specified in Its Charter)
 
N/A
(Translation of Registrant’s Name Into English)

Cayman Islands
(Jurisdiction of Incorporation or Organization)

88 Yu Feng Road, Shuo Fang Town, New District, Wuxi City
Jiangsu Province, P. R. China
(Address of Principal Executive Offices)

Mr. Jeffrey Lo
88 Yu Feng Road, Shuo Fang Town, New District, Wuxi City
Jiangsu Province, P. R. China
Tel: +86 510 85261966
Fax: +86 510 85261977
 E-mail: jeffrey.lo@maxcleangroup.com
 (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of Each Class
 
Name of Each Exchange on Which Registered
     
None
 
None

 
 

 
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:

Ordinary shares, par value US$0.0001 per share
 (Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

Ordinary shares, par value US$0.0001 per share
 (Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
305,178,500 ordinary shares, par value $0.0001 per share, as of December 31, 2012.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer þ

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board þ Other o

* If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o
 

Under the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), Maxclean Holdings Ltd is classified as an "Emerging Growth Company". Under the JOBS Act, Emerging Growth Companies are exempt from certain reporting requirements, including the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. Under this exemption, the company’s auditor will not be required to attest to and report on management’s assessment of the company’s internal controls over financial reporting during a five-year transition period.  The Company is also exempt from certain other requirements, including the requirement to adopt certain new or revised accounting standards until such time as those standards would apply to private companies. The Company will remain an Emerging Growth Company for up to five years, although it will lose that status earlier if revenues exceed US$1 billion, or if the Company issues more than US$1 billion in non-convertible debt in a three year period, or if the market value of the common stock held by non-affiliates exceeds US$700 million.
 


 
 

 
 
TABLE OF CONTENTS
 
Introduction
1
Forward-Looking Statements
2
Part I
2
 
Item 1. Identity of Directors, Senior Management and Advisers
2
 
Item 2. Offer Statistics and Expected Timetable
2
 
Item 3. Key Information
2
 
Item 4. Information on the Company
17
 
Item 4A. Unresolved Staff Comments
29
 
Item 5. Operating and Financial Review and Prospects
29
 
Item 6. Directors, Senior Management and Employees
47
 
Item 7. Major Shareholders and Related Party Transactions
50
 
Item 8. Financial Information
53
 
Item 9. The Listing
53
 
Item 10. Additional Information
54
 
Item 11. Quantitative and Qualitative Disclosures about Market Risk
59
 
Item 12. Description of Securities Other than Equity Securities
60
Part II
61
 
Item 13. Defaults, Dividend Arrearages and Delinquencies
61
 
Item 14. Material Modifications of the Rights of Security Holders and Use of Proceeds
61
 
Item 15. Controls and Procedures
61
 
Item 16A. Audit Committee Financial Expert
61
 
Item 16B. Code of Ethics
62
 
Item 16C. Principal Accountant Fees and Services
63
 
Item 16D. Exemptions from the Listing Standards for Audit Committees
63
 
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
63
 
Item 16F. Change in Registrant’s Certifying Accountant
63
 
Item 16G. Corporate Governance
63
 
Item 16H. Mine Safety Disclosure
63
Part III
64
 
Item 17. Financial Statements
64
 
Item 18. Financial Statements
64
 
Item 19. Exhibits
64
Audited Financial Statements
F-1
 
EX-4.3
 
   
EX-4.5
 
   
EX-11.1
 
   
EX-12.1
 
   
EX-12.2
 
   
EX-13.1
 
   
EX-13.2
 

 
 

 
 
Introduction

Unless the context otherwise requires, in this annual report on Form 20-F:
 
● 
“We,” “us,” “our company,” “our” and “Maxclean Holdings” refer to Maxclean Holdings Ltd, a company incorporated in the Cayman Islands, and its subsidiaries;
 
● 
“Maxclean (China)” refers to Maxclean (China) Holdings Limited, a company incorporated in Hong Kong. A wholly owned subsidiary of Maxclean Holdings;
 
● 
“Maxclean Chengdu” refers to Chengdu representative office of Maxclean (Wuxi) Technology Co. Ltd;
 
● 
“Maxclean Global” refers to Maxclean Global Enterprises Company Limited, a company incorporated in Hong Kong that is wholly owned by Maxclean (China);

● 
“Maxclean Shenzhen” refers to Shenzhen representative office of Maxclean (Wuxi) Technology Co. Ltd;

● 
“Maxclean (Wuxi)” refers to Maxclean (Wuxi) Technology Co. Ltd, a company incorporated in China that is wholly owned by Maxclean (China).
 
● 
“China” and the “PRC” are to the People’s Republic of China, excluding for the purposes of this annual report Hong Kong, Macau and Taiwan;
         
● 
“HK$” and “Hong Kong dollars” are to the legal currency of the Hong Kong Special Administrative Region of China;
         
● 
“Hong Kong” is to the Hong Kong Special Administrative Region of China;
       
● 
“IFRS” are to “International Financial Reporting Standards”;
 
● 
“RMB” and “Renminbi” are to the legal currency of China;
         
● 
“shares” are to our shares, par value $0.0001 per share;
         
● 
“$” and “U.S. dollars” are to the legal currency of the United States of America; and
         
● 
Our financial information presented in this annual report has been prepared in accordance with IFRS.
 

 
Solely for your convenience, this annual report contains translations of certain Renminbi amounts into U.S. dollar amounts at specified rates. Unless otherwise indicated in the section entitled “Item 3. Key Information – A. Selected Financial Data – Exchange Rate Information” conversions of Renminbi into U.S. dollars in this annual report are based on the exchange rate set forth in the H.10 weekly statistical release of the Federal Reserve Bank of New York, or the exchange rate, on December 31, 2012. We make no representation that the Renminbi or U.S. dollar amounts and/or HK dollar to Renminbi amounts referred to in this annual report could have been or could be converted into U.S. dollars, Renminbi or HK dollars, as the case may be, at any particular rate or at all. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding. See “Item 3. Key Information – D. Risk Factors – Risks Related to Doing Business in China – Governmental control of currency conversion may limit our ability to utilize our revenue effectively and affect the value of your investment” and “– Fluctuations in the value of the RMB may have a material adverse effect on your investment” for discussions of the effects of currency control and fluctuating exchange rates on the value of our shares.

 
1

 
 
Forward-Looking Statements

This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections about us and our industry.  The forward-looking statements included in this annual report relate to, among others:
 
 
·
our business prospects and future results of operations;
 
·
the implementation of our business strategy;
 
·
our capital expenditure plans and future production capacities;
 
·
statements as to our financing strategy and our ability to meet anticipated cash needs based on our current business plan;
 
·
the maintenance of our relationships with customers;
 
· 
the competitive nature of the industries in which we operate;
 
·
the growth and size of the clean-room industry, including the growth of the electronics and semiconductor industries;
 
·
the cost and availability of financing;
 
·
the future demand for the products we produce;
 
·
statements regarding our future performance, expenses, costs and revenues;
 
·  
future demand for the products we produce;
 
· 
the performance of China and world economies; and
 
·
developments in, or changes to, the laws, regulations and governmental policies governing our business, including environmental laws and regulations.

These statements may be found throughout this annual report, specifically in the sections entitled “Item 3. Key Information – D. Risk Factors,” “Item 4. Information on the Company”, “Item5. Operating and Financial Review and Prospects” and other sections in this annual report.  Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Item 3. Key Information – D. Risk Factors” and elsewhere in this annual report.

Statements that use the terms “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this annual report reflect our current views about future events and are based on assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from future results expressed or implied by the forward-looking statements. Many of these factors are beyond our ability to control or predict and include all the risks discussed in “Item 3. Key Information – D. Risk Factors” and elsewhere in this annual report. You should not put undue reliance on any forward-looking statements. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.
 
Part I

 
Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

The following selected consolidated financial data as of and for the years ended December 31, 2010, 2011 and 2012, respectively, has been derived from our audited consolidated financial statements included in this annual report beginning on page F-1. The selected consolidated financial data as of and for the year ended December 31, 2009 has been derived from our audited consolidated financial statements not included in this annual report. You should read the following selected financial data in conjunction with the section “Item 5. Operating and Financial Review and Prospects” and our audited financial statements and related notes included elsewhere in this annual report. Our financial statements have been prepared in accordance with IFRS, as adopted by the International Accounting Standards Board.

 
2

 
 
 Selected Consolidated Statements of Comprehensive Income
 
   
Year ended December 31,
 
         
2012
   
2011
   
2010
   
2009
 
   
USD
 
   
RMB
 
   
% of
total
revenue
   
RMB
 
   
% of
total
revenue
   
RMB
 
   
% of
total
revenue
   
RMB
 
   
% of
total
revenue
 
   
(in thousands, except for percentages and per share data)
 
Sales
    9,515.2       59,280.3       100       58,778.3       100       53,278.3       100       41,126.7       100  
Cost of sales
    (7,718.7 )     (48,088.1 )     (81.1 )     (50,154.7 )     (85.3 )     (45,043.8 )     (84.5 )     (32,575.5 )     (79.2 )
Gross profit
    1,796.5       11,192.2       18.9       8,623.6       14.7       8,234.5       15.5       8,551.2       20.8  
Other revenue
    4.7       29.5      
0.1
      386.0       0.7       47.9       0.1       411.6       1.0  
Other net gain/(loss)
    (77.6 )     (483.2 )     (0.8 )     (408.0 )     (0.7 )     1,117.5       2.1       (402.8 )     (1.0 )
Selling and distribution costs
    (1,065.1 )     (6,635.6 )     (11.2 )     (6,068.5 )     (10.3 )     (5,730.9 )     (10.8 )     (2,011.8 )     (4.9 )
Administrative expenses
    (2,511.0 )     (15,643.5 )     (26.4 )     (29,076.0 )     (49.5 )     (10,608.1 )     (19.9 )     (8,859.3 )     (21.5 )
Operating loss
    (1,852.5 )     (11,540.6 )     (19.4 )     (26,542.9 )     (45.1 )     (6,939.1 )     (13.0 )     (2,311.1 )     (5.6 )
Finance costs
    (483.7 )     (3,013.3 )     (5.1 )     (3,915.4 )     (6.7 )     (2,650.1 )     (5.0 )     (2,242.0 )     (5.5 )
Loss before tax
    (2,336.2 )     (14,553.9 )     (24.5 )     (30,458.3 )     (51.8 )     (9,589.2 )     (18.0 )     (4,553.1 )     (11.1 )
Tax credit/(expense)
    -       -       -       (144.7 )     (0.3 )     117.1       0.2       17.4       0.1  
Net loss
    (2,336.2 )     (14,553.9 )     (24.5 )     (30,603.0 )     (52.1 )     (9,472.1 )     (17.8 )     (4,535.7 )     (11.0 )
Less:  Net loss attributable
to non-controlling interests
    -       -       -       -       -       107.4       0.2       249.1       0.6  
Net loss attributable to equity holders
    (2,336.2 )     (14,553.9 )     (24.5 )     (30,603.0 )     (52.1 )     (9,364.7 )     (17.6 )     (4,286.6 )     (10.4 )
                                                                         
NET LOSS FOR THE YEAR
    (2,336.2 )     (14,553.9 )     (24.5 )     (30,603.0 )     (52.1 )     (9,472.1 )     (17.8 )     (4,535.7 )     (11.0 )
Other comprehensive loss
                                                                       
- Translation adjustments
    14.2      
 
88.1
      0.2       (27.5 )     (0.05 )     (18.9 )     (0.04 )     (3.0     (0.007 )
Total comprehensive loss for the year
    (2,322.0 )     (14,465.8 )     (24.3 )     (30,630.5 )     (52.1 )     (9,491.0 )     (17.8 )     (4,538.7 )     (11.0 )
Comprehensive loss attributable to the non-controlling interests
    -       -       -       -       -       107.4       0.2       249.1       0.6  
Comprehensive loss attribute to equity holders of the Company
    (2,322.0 )     (14,465.8 )     (24.3 )     (30,630.5 )     (52.1 )     (9,383.6 )     (17.6 )     (4,289.6 )     (10.4 )
                                                                         
Net loss per share
                                                                       
Basic
    (0.01 )     (0.05 )             (0.13 )             (0.04 )             (0.02 )        
Diluted
    (0.01 )     (0.05 )             (0.13 )             (0.04 )             (0.02 )        
Weighted average number of shares
                                                                       
Outstanding
                                                                       
Basic
    305,175,500      
305,175,500
             
240,130,058
             
216,705,230
             
216,705,230
         
Diluted
    305,175,500      
305,175,500
             
240,130,058
             
216,705,230
             
216,705,230
         

 
3

 
 
Selected Consolidated Statements of Financial Position

   
As of December 31,
 
   
2012
   
2012
   
2011
   
2010
 
2009
 
   
USD’000
   
RMB’000
   
RMB’000
   
RMB’000
 
RMB’000
 
Non-Current Assets
                           
Property, plant and equipment, net
   
6,203.0
     
38,645.3
     
36,522.1
     
37,527.6
 
40,402.0
 
Prepayments for acquisition of property, plant and equipment
   
114.0
     
710.0
     
1,464.2
     
906.3
 
709.7
 
Prepaid land lease payments
   
358.4
     
2,233.3
     
2,290.0
     
2,346.7
 
2,403.3
 
Intangible assets, net
   
13.0
     
80.9
     
45.4
     
70.2
 
41.9
 
Deferred tax assets
   
-
     
-
     
-
     
112.8
 
-
 
Total non-current assets
   
6,688.4
     
41,669.5
     
40,321.7
     
40,963.6
 
43,556.9
 
                                     
Current Assets
                                   
Inventories
   
1,214.3
     
7,565.1
     
8,874.9
     
10,713.0
 
16,278.0
 
Trade receivables
   
2,559.3
     
15,944.7
     
14,683.4
     
12,412.6
 
10,511.0
 
Due from a related party
   
-
     
-
     
-
     
-
 
427.5
 
Bills receivables
   
-
     
-
     
84.4
     
-
 
-
 
Amount due from shareholders
   
4.3
     
26.9
     
51.8
     
-
 
-
 
Other receivable and current assets
   
267.4
     
1,666.3
     
1,037.0
     
1,348.6
 
6,683.5
 
Prepaid expenses
   
71.4
     
444.7
     
654.6
     
86.7
 
204.5
 
Tax recoverable
   
-
     
-
     
-
     
-
 
715.9
 
Restricted cash
   
-
     
-
     
-
     
2,500.0
 
-
 
Cash and bank balances
   
661.5
     
4,121.0
     
22,884.1
     
4,129.9
 
7,845.8
 
Non-current assets held for sale
   
-
     
-
     
-
     
-
 
1,066.1
 
     
4,778.2
     
29,768.7
     
48,270.2
     
31,190.8
 
43,732.3
 
Total assets
   
11,466.6
     
71,438.2
     
88,591.9
     
72,154.4
 
87,289.2
 
                                     
Current Liabilities
                                   
Trade payables
   
1,049.4
     
6,537.5
     
7,549.7
     
6,805.3
 
7,190.4
 
Accruals and Other payables
   
411.9
     
2,566.0
     
3,782.5
     
5,883.0
 
7,052.0
 
Interest-bearing bank borrowings
   
6,741.5
     
42,000.0
     
42,000.0
     
37,000.0
 
37,000.0
 
Due to a related party
   
-
     
-
     
425.7
     
-
 
 
Due to a director
   
642.0
     
4,000.0
     
3,983.6
     
9,913.3
 
11,405.8
 
Tax payable
   
37.3
     
232.6
     
409.3
     
163.5
 
 
Liabilities held for sale
   
-
     
-
     
-
     
-
 
116.4
 
     
8,882.1
     
55,336.1
     
58,150.8
     
59,765.1
 
62,764.6
 
Net current liabilities
   
(4,103.9)
     
(25,567.4)
     
(9,880.6)
     
(28,574.3)
 
(19,032.3
                                     
Deferred tax liabilities
   
-
     
-
     
-
     
-
 
0.8 
 
Net assets
   
2,584.5
     
16,102.1
     
30,441.1
     
12,389.3
 
24,523.8
 
                                 
  
 
Equity
                                   
Issued share capital
   
31.7
     
197.4
     
197.4
     
43,015.5
 
43,015.5 
 
Share premium
   
6,284.7
     
39,154.9
     
39,028.1
     
-
 
 
Reserves
   
(3,731.9)
     
(23,250.2)
     
(8,784.4)
     
(30,626.2)
 
(21,242.6
Total equity of Maxclean Holdings
   
2,584.5
     
16,102.1
     
30,441.1
     
12,389.3
 
21,772.9
 
Non-controlling interests
   
-
     
-
     
-
     
-
 
2,750.9
 
Total equity
   
2,584.5
     
16,102.1
     
30,441.1
     
12,389.3
 
24,523.8
 
 
Selected Consolidated Statements of Cash Flows
 
   
Year ended December 31,
 
   
2012
   
2012
   
2011
   
2010
 
2009
 
   
USD’000
   
RMB’000
   
RMB’000
   
RMB’000
 
RMB’000
 
                             
Net cash used in operating activities
   
(2,021.1
)    
(12,591.4
)    
(14,017.8
)    
(3,952.6
)
(6,433.3
Net cash (used in) generated from investing activities
   
(1,010.6
)    
(6,296.5
)    
(1,391.0
   
803.9
 
(4,063.1
Net cash generated from (used in) financing activities
   
6.4
     
40.0
     
34,208.1
     
(469.8
15,704.5
 
Net (decrease)/increase in cash and cash equivalents
   
(3,025.3
)    
(18,847.9
)    
18,799.3
     
(3,618.5
5,208.1
 
Cash and cash equivalents at beginning of year
   
3,673.2
     
22,884.1
     
4,129.9
     
7,845.8
 
2,641.0
 
Effect of foreign exchange rate changes
   
13.6
     
84.8
     
(45.1
   
(97.4
)
(3.3
Cash and cash equivalents at end of year
   
661.5
     
4,121.0
     
22,884.1
     
4,129.9
 
7,845.8
 

 
4

 

Exchange Rate Information

Our functional and reporting currency is expressed in Renminbi. A substantial portion of or revenues and expenses are denominated in Renminbi, however, we are exposed to foreign currency exchange rate risk mainly with respect to the U.S. dollar and Hong Kong dollar. Foreign currency exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. We do not hedge our foreign exchange exposure. For the convenience of the reader, certain Renminbi amounts included in our annual report and the consolidated financial statements as of December 31, 2012 and for the year ended December 31, 2012 have been translated into U.S. dollars at the rate of US$1.00 to RMB6.2301. This convenience translation is not intended to imply that the Renminbi amounts could have been, or could be, converted into U.S. dollars at the rate on December 31, 2012, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of the Renminbi into foreign exchange through restrictions on foreign trade. On December 31, 2012, the daily exchange rate reported by the Federal Reserve Board was US$1.00 to RMB6.2301.
 
The Renminbi
 
The People’s Bank of China, or the PBOC, sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against a basket of currencies in the market during the prior day. The PBOC also takes into account other factors such as the existing general conditions in the international foreign exchange markets. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to that of the U.S. dollar, to allow the value of the Renminbi to fluctuate within a narrow and managed band based on market supply and demand and by reference to a basket of currencies. This change in policy has resulted in a significant appreciation of the Renminbi against the U.S. dollar. The PRC government has since made and in the future may make further adjustments to the exchange rate system. The PBOC announces the closing price of a foreign currency traded against the Renminbi in the inter-bank foreign exchange market after the closing of the market on each working day, and makes it the central parity for the trading against the Renminbi on the following working day. Although the PRC governmental policies have been introduced in recent years to reduce restrictions on the convertibility of the Renminbi into foreign currency for current account items, conversion of the Renminbi into foreign currency for capital items, such as foreign direct investment, loans or security, requires the approval for the State Administration of Foreign Exchange and other relevant authorities.
 
The following table sets forth the noon buying rate for U.S. dollars in New York City for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York for the periods indicated:


 
 
Noon Buying Rate
 
Period
 
Period end
   
Average(1)
   
High
   
Low
 
 
 
(RMB per US$1.00)
 
2008
    6.8225       6.9193       7.2946       6.7800  
2009
    6.8259       6.8295       6.8470       6.8176  
2010
    6.6000       6.7696       6.8330       6.6000  
2011
    6.2939       6.4630       6.6364       6.2939  
2012
    6.2301       6.2990       6.3879       6.2221  
October
    6.2372       6.2627       6.2877       6.2372  
November
    6.2265       6.2338       6.2454       6.2221  
December
    6.2301       6.2328       6.2502       6.2251  
2013
                               
January
    6.2186       6.2215       6.2303       6.2134  
February
    6.2213       6.2323       6.2438       6.2213  
March
    6.2108       6.2154       6.2246       6.2105  
April (through April 19)
    6.1772       6.1830       6.2078       6.1720  

Source: Federal Reserve Bank of New York and Federal Reserve Board

 (1)
Exchange rates between the Renminbi and the U.S. dollar for all periods through December 31, 2012 represent the noon buying rates for U.S. dollars in New York City for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. Exchange rates between the Renminbi and the U.S. dollar from January 1, 2013 represent the daily rates as set forth in the H.10 statistical release of the Federal Reserve Board. Annual averages are calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are calculated by using the average of the daily rates during the relevant month.
 
B.        Capitalization and Indebtedness

Not applicable.

C.        Reasons for the Offer and Use of Proceeds
 
Not applicable.

 
5

 
 
D.        Risk Factors

Risks Related to Our Business and Industry
 
We are dependent on our major customers and are exposed to the risk of delays, claims, reductions or cancellations of orders from customers in general
 
We are dependent on our major customers, with Elektroskandia Logistics (Shanghai) Co., Ltd. being our largest customer in terms of revenue. Our top five customers in aggregate accounted for approximately 30.2%, 35.1% and 39.1% of our revenue in 2010, 2011 and 2012, respectively. We sell our products under the short term purchase orders our customers issue to us. We do not enter long-term contracts with our customers. As a result, our customers may reduce or cease purchasing from us at any time. There is no assurance that we will continue to retain these customers or that they will maintain or increase their current level of business with our group. In addition, our business is affected by how well our major customers perform. Therefore, any decline in the business of our major customers could reduce their purchases of our products. In the event there is a material delay, cancellation, reduction and/or cessation of orders and/or claims by any of our major or other customers and we are unable to obtain substitute orders of a comparable size or in a timely manner, our results of operations will be adversely affected.
 
We are experiencing liquidity pressure and may continue to operate our business under such pressure
 
We have experienced net cash outflows from operating activities in 2010, 2011 and 2012. We have relied on bank and shareholder financings to maintain sufficient working capital for our operations and capital expenditures. Despite raising RMB39.2 million in cash in the October 2011 Equity Financing, we continue to experience liquidity pressures as we have been highly leveraged relative to our cash flow historically. As of December 31, 2012, we had suffered recurring losses from operations and negative operating cash flows and incurred an accumulated deficit of RMB82.9 million as of December 31, 2012. These conditions indicate the existence of an uncertainty which may cast doubt on our ability to continue as a going concern.
 
We expect that there will be additional and continuing liquidity pressure, which is difficult to forecast with precision, as a result of our obligations to repay bank loans, borrowings from directors and incurred interest. We plan to satisfy our financial obligations with our existing cash balance, expected cash flow from our business operations and additional and renewed bank borrowings.  The Board of Directors expects that, in the absence of unforeseeable circumstances, we will be able to meet our short term financial obligations and our working capital needs.  Please see section in “Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources” for further details.
 
However, the sufficiency of these additional sources of liquidity cannot be assured, and even if we are successful in implementing all of the actions described above, our ability to satisfy liquidity and capital needs may be affected by additional factors and events (such as interest rate fluctuations and our inability to renew borrowings due to market conditions) that increase our cash needs making us face continuing or greater liquidity pressure.
 
Any disruption to the supply of and any increase in the prices of our raw materials could adversely affect our production, turnover and profitability.
 
Our production requires large quantities of raw materials, including polyethylene pellets, non-woven fabric and other materials such as nylon, cotton, cellulose, natural rubber and nitrile latex. As we further expand our operations, we anticipate that we will require increasing volumes of raw materials. We purchase our raw materials from external suppliers, and as we currently do not have long-term supply agreements with our suppliers, there can be no assurance that they will not, without notice or penalty, delay deliveries for a significant period of time, reduce their supplies to us, or terminate their relationships with us. In addition, our competitors who also purchase from our suppliers may have stronger relationships with, and have greater purchasing power and bargaining leverage over, some of our suppliers. Furthermore, our supply of raw materials is subject to the business risk of our suppliers, one or more of whom could go out of business for reasons beyond our control in the current economic environment. If any supplier is unwilling or unable to meet our production needs consistently, in required quantities, at acceptable prices, or on a timely basis, we may be unable to find alternative sources at commercially acceptable prices, on satisfactory terms, in a timely manner, or at all. Our inability to find or develop alternative sources could result in delays or reductions in production or a reduction in our profit margins.
 
Any sudden shortage of supply or reduction in the allocation of raw materials to us from our suppliers or any increase in raw material prices may result in us having to pay a higher price for these raw materials, which may adversely affect our results of operations. In the event that we are unable to find a comparable source of supply at similar rates or pass on the increase in the costs of such raw materials to our customers on a timely basis, the profit margins for our products may be adversely affected.
 
Furthermore, we are vulnerable to increases in the prices of inputs and packaging materials, particularly our primary raw materials of polyethylene pellets and non-woven fabric, our primary raw materials. These primary raw materials accounted for an aggregate of approximately 83%, 82% and 74% of our total cost of sales for the years ended December 31, 2010, 2011 and 2012, respectively.
 
 
6

 
 
Any increase in the price of polyethylene pellets and non-woven fabric could have a material adverse effect on our profitability. Furthermore, the prices of inputs to our raw materials may affect our raw material prices. For example, polyethylene pellets and non-woven fabric are used in the production of our clean-room sticky mats and PE bags and are petroleum-based products. Any increase in oil prices may therefore result in an increase in prices for polyethylene pellets and non-woven material and consequently, an increase in our production costs. For example, the market price of polyethylene pellets increased significantly by approximately 19% in year 2010 along with the increase in crude oil price. The price of polyethylene pellets remained relatively stable in 2011. The price of polyethylene pellets decreased by approximately 3.5% in 2012 along with a decrease in crude oil price. In addition, we also purchase and maintain an inventory of raw materials ahead of our receiving orders from our customers. We usually maintain an inventory of raw materials of approximately 25 days for our operating requirements. Accordingly, any significant decrease in raw material prices during the inventory period may adversely affect our profit margins and profitability as we may have to lower our selling prices for new orders.
 
We operate in a highly competitive market, and our competitors may have various advantages, including the ability to draw upon a greater depth and breadth of resources than those available to us. Our failure to compete successfully in the market could have a material adverse effect on our business, financial condition and results of operations.
 
The clean-room consumables markets in China and worldwide are competitive and rapidly evolving, and we expect competitions to intensify. We compete with major international integrated manufacturers of clean-room consumables, such as KM Corporation, Contec, Inc. and ITW Texwipe, as well as companies located in China such as Dongguan Suorec Electronic Materials Co., Ltd, Suzhou Selen Cleanroom Technology Co., Ltd., and X & Y International Industrial Co., Ltd. Our competitiveness depends on a number of factors, including the quality and pricing of our products, the effectiveness of our marketing activities, and the breadth and depth of our distribution and sales network. In addition, product innovation and technical advancement may render our existing and potential applications and products and our own research and development efforts obsolete or non-competitive. Some of our existing and future competitors may have greater financial sources and technical resources than we do. Such competitors may also have a longer operating history, stronger brand name recognition, better access to raw materials, greater economies of scale, more established distribution and sales networks, or more extensive knowledge of our target consumers and target markets. As a result, our competitors may be able to devote greater resources to the research, development, promotion and sale of their products. They may also respond more quickly to evolving industry standards, changes in customer needs and market conditions than we do. It is possible that there will be consolidation or alliances among our competitors and as a result, our market share may be adversely affected. In addition, despite what we believe are significant barriers of entry such as high initial set-up costs, technology know-how and research and development capability, there can be no assurance that other market participants will not enter or increase their presence in this industry. As a result, our business, financial condition and results of operations will be adversely affected if we are not able to compete effectively to maintain and gain market share.

Please refer to the section “Item 4. Information on the Company — B. Business Overview —Competition” of this annual report for additional information.
 
 We are subject to risks associated with technological changes, and our research and development initiatives may fail to enhance our manufacturing efficiency or the quality of our products.
 
Our business is subject to technological innovation. With the advancement of technology and continual research and development in the production process for clean-room consumables, new manufacturing techniques for clean-room consumables may be developed. Potential competitors in the future may adopt newer and cheaper alternatives to replace the raw materials currently used in our products. Competitors may eventually achieve lower production costs per unit. In addition, alternative technologies may lead customers to require less clean-room consumables or not at all. If we are unable to adapt our production processes to compete with these new efficient manufacturing techniques and raw materials alternatives, we may lose market share. As a result, our business, financial condition and results of operations may be adversely affected.
 
We are working towards increasing the efficiency of our manufacturing processes and improving the quality of our products. We plan to focus our research and development efforts on improving each step of our production process, thereby becoming an industry leader in technological innovation. In addition, we also plan to continue research and development efforts to enhance the quality of our products. We cannot assure you that such efforts will improve the efficiency of our manufacturing processes or yield products with the expected quality. In addition, potential failure to realize the intended benefits from our research and development initiatives could limit our ability to keep up with rapid technological changes, which in turn would hurt our business and prospects.
 
We may be adversely affected by cyclical fluctuations in demand for our products.
 
We may be adversely affected by cyclical fluctuations in demand for our products. Demand for our products may be affected by numerous factors, including changes in the demand for electronic medical products, technological changes, changes in industry manufacturing capacity and output levels, changes in the cost of producing clean-room consumables, general clean-room consumables industry conditions and cyclical changes in the global and Chinese economies, any of which can have a significant impact on the sales price of clean-room consumables. These activities are, in turn, subject to fluctuations due to other factors including:
 
 
7

 
 
 
l
changes in domestic and international economic conditions;
 
 
l
changes in market prices of polyethylene pellets and other raw materials;
 
 
l
governmental regulations and policies;
 
 
l
interest rates;
 
 
l
population growth and changing demographics; and
 
 
l
seasonal cycles and other factors affecting downstream industry growth.
 
Any adverse change in demand for our clean-room consumables may materially and adversely affect the average selling price of our products and our business, financial condition and operations results.
 
There are factors beyond our control that could affect our expansion and upgrade plans and failure to successfully execute our business plans would have a material adverse effect on the growth of our sales and earnings
 
Our future success depends, to a large extent, on our ability to expand and upgrade our production capacity to accommodate additional production needs. Our capacity expansion and upgrade plans are subject to significant business, economic and competitive risks and uncertainties, many of which are beyond our control. In particular, we may not be able to:
 
 
l
obtain necessary equipment;
 
 
l
avoid cost overruns, construction delays, equipment problems, including delays in manufacturing equipment deliveries or deliveries of equipment that do not meet our specifications, and other operating difficulties;
 
 
l
have sufficient management resources to properly oversee our capacity expansion as currently planned; or
 
 
l
obtain necessary funding on a timely basis to finance our capital expenditure requirements.
 
Any of these or similar difficulties could significantly delay or otherwise constrain our ability to expand and upgrade our production capacity as currently planned, which in turn would limit our ability to increase sales, reduce marginal manufacturing costs or otherwise improve our prospects and profitability. This could materially and adversely affect our business, financial condition and results of operations.
 
Shortage or disruption of electricity supply may adversely affect our business.
 
Electricity is one of the major utilities we consume. With the rapid development of the PRC economy, demand for electricity has continued to increase. While electricity supply has been stable for the group’s business, there have been shortages or disruptions in electricity supply in various regions across China, especially during peak seasons, such as the summer, or when there are severe weather conditions. Any disruption in the power supply to our facilities could result in a loss of an entire production line. We cannot assure you that there will not be disruptions or shortages in our electricity supply in the future or that there will be sufficient electricity available to us to meet our future requirements. Shortages or disruptions in electricity supply may significantly disrupt our normal operations, cause us to incur additional costs and adversely affect our profitability.
 
Fluctuations in exchange rates could adversely affect our results of operations.
 
Most of our revenue is denominated in Renminbi and a small portion of our revenue is denominated in U.S. dollars and Hong Kong dollars. Most of our expenditure is denominated in Renminbi, and we have a small portion of expenditure denominated in U.S. Dollars being our purchase of raw materials from foreign vendors. In addition, we have outstanding debt obligations, and may continue to incur debts from time to time, denominated and repayable in foreign currencies. We cannot predict the impact of future exchange rate fluctuations on our results of operations and we may incur net foreign currency losses in the future. In addition, we make advance payments in U.S. dollars to overseas suppliers of raw materials from time to time, and we may incur foreign exchange losses if we request our suppliers to return such advance payments due to changes in our business plans. We incurred foreign exchange transaction losses of approximately RMB161,491, RMB203,333 and RMB67,769, for the years ended December 31, 2010, 2011 and 2012, respectively. Fluctuations in exchange rates, particularly among Renminbi and U.S. Dollars, may affect our gross and net profit margins and could result in foreign exchange and operating losses.
 
 
8

 
 
Our business is dependent on the general state of the electronics industry, namely the hard disk drive and semiconductor sectors, as well as the medical industry.
 
Our products are mainly used in the hard disk drive, semiconductor and pharmaceutical sectors. Most of our major customers are in these industries as well. Please refer to the sections “Item 4. Information on the Company — B. Business Overview ― Customers” and “Item 4. Information on the Company — B. Business Overview ― Sales and Marketing” for further details. The hard disk drive and semiconductor sectors within the electronics industry have historically been cyclical, characterized by fluctuations in product supply and demand. Downturns in these sectors occur rapidly owing to macroeconomic influences such as severe global economic slowdowns, rapid technological changes and intense competition within these sectors, as well as to microeconomic influences such as product obsolescence and changes in product life cycles. The hard disk drive sector is also facing competition from new storage technologies such as flash memory devices. In the event of downturns, our customers who are manufacturers in these sectors are likely to respond immediately by adjusting their production downward. A prolonged downturn could result in our customers further reducing production activity or going out of business. Any material decrease in demand from our customers will have a material adverse impact on our business, financial condition and results of operations.
 
Non-renewal of permits and business licenses will have a material adverse effect on our operations.
 
As a pre-requisite for conducting our business activities, we are required to obtain certain permits, licenses and certificates from various governmental authorities. Although we have obtained all material permits and business licenses for our business operations, some of these permits and business licenses are subject to periodic renewal and reassessment by the relevant government authorities. The standards of compliance required for these renewals or reassessments may be subject to future changes. Non-renewal of our existing permits, licenses and certificates could have a material adverse effect on our operations as we may not be able to carry on our business without such permits, licenses and certificates. The PRC government may issue modifications or new restrictions to compliance standards in the future, and the costs of compliance with new standards could be substantial. If we fail to comply with new standards, we may be required to pay fines, suspend production, or terminate our operations. In addition, our future development or business activities may require us to obtain new approvals or permits. We may be unable to renew or obtain the requisite approvals, permits and licenses required by government authorities on a timely basis, or at all. In the event that we are not able to maintain necessary licenses, rights, permits or land rights within expected timeframes, or at all, our financial condition, results of operations, expansion plans and expected production targets may be adversely affected.
 
We have limited insurance coverage which may not completely cover the risks related to our business and operations, including losses resulting from product liability claims, business interruptions or natural disasters.
 
We are exposed to inherent risks in the operation and development of our business. We have purchased insurance coverage of the type and in the amount that we consider necessary for our operations, including general property insurance, fire insurance, vehicle insurance and traffic insurance. We do not have business interruption insurance or natural disaster insurance. There can be no assurance that our insurance policies are or will be sufficient to cover all possible losses and liabilities that could arise in our business activities. We do not maintain product liability insurance for our clean-room consumable products, and any successful assertion of product liability claim against us could result in potentially significant monetary damages and require us to make significant payments. We may not have adequate resources to satisfy a judgment in the event of a successful claim against us. In addition, our manufacturing facilities are exposed to natural calamities which could cause significant damage to our manufacturing facilities and delays or disruptions to our operations. In addition, if the relevant insurance premium levels increase, we may not be able to maintain insurance coverage comparable to that currently in effect or may only be able to do so at a significantly higher cost. An increase in insurance premium costs could have an adverse effect on our business, financial condition and results of operations. We may seek to obtain insurance coverage in the future in relation to future development projects; however, there is no guarantee that we will be able to secure adequate levels of insurance coverage on economically viable terms or at all. If we were to incur a substantial uninsured loss, or a loss above the limits of our existing insurance policies, the resulting cost could have a material adverse effect on our business, financial condition and results of operations.
 
Our financial condition is exposed to the credit risks of our customers and dependent on the credit terms given by our suppliers
 
We usually extend to our customers credit terms of around 60 days to 120 days.  In the event that our customers face cash flow problems, such problems may impair their ability to promptly settle trade debts due to us and they may default on their payments. There is no assurance that our trade receivables can be collected fully or within a reasonable period of time, and failure to do so could adversely affect our cash flow and financial performance. We are also given credit terms by our suppliers. Our suppliers typically grant us credit terms of 30 days to 60 days. In the event that our suppliers terminate or shorten the credit terms granted to us due to poor economic conditions or any other reasons, our cash flow and financial condition may be adversely affected. Please refer to the sections entitled “Item 4. Information on the Company — B. Business Overview― Customers” and “Item 4. Information on the Company — B. Business Overview —Sales and Marketing” of this annual report for more details.
 
 
9

 
 
Our risk management and internal control systems may not be effective and have deficiencies or material weaknesses
 
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. We are also subject to reporting obligations under U.S. securities laws. We are subject to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, and the related rules of the Securities and Exchange Commission, or SEC, which generally require our management and independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting. However, for so long as we remain as an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting. We will remain as an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our public offerings, (b) in which we have a total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Our management has concluded that under the rules of Section 404, our internal controls over financial reporting were not effective as of December 31, 2012. A material weakness is a deficiency, or a combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement of our company’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal controls that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The material weaknesses we identified are our lack of independent audit committee or audit committee financial expert, and our limited staffing within our accounting operations.
 
We are in the process of implementing measures to resolve the material weakness and improve our internal and disclosure controls. However, we may not be able to successfully implement the remedial measures. The implementation of our remedial initiatives may not fully address the material weakness and significant deficiencies in our internal controls over financial reporting.
 
Unfavourable publicity or consumer perception of our products, of similar products sold by other companies, or of the whole clean-room consumables industry, could have a material adverse effect on our business.
 
Our business is highly dependent upon consumer perception regarding the safety and quality of our products. Consumer perceptions can be significantly influenced by factors beyond our control, such as scientific research or findings, national media attention, internet articles and commentaries, some of which may be negative. Any negative research reports, findings or publicity could have a material adverse effect on the effectiveness of our marketing campaigns, the demand for our products, our business and results of operations. For example, the publication of reports asserting or alleging that clean-room consumables, such as face masks, may cause allergies or adverse reactions, may have a negative effect on our sales regardless of whether such reports are substantiated scientifically or whether the harmful effects are restricted to the products sold by other companies. Although we have not been the subject of negative publicity in the past, any complaints or product liability claims by consumers may also affect public confidence in our brands and products. In the event of unfavorable publicity, complaints or product liability claims, our corporate image, financial conditions and results of operations may be adversely affected.
 
Our trademarks, trade names and other intellectual property are valuable assets, and any failure to protect our intellectual property rights could undermine our competitive position, and litigation to protect our intellectual property rights may be costly and ineffective. We may also be subject to claims for infringement of third parties’ intellectual property rights.
 
We consider our trade secrets, trademarks, trade names and other intellectual property important to our business. Please refer to the section “Item 4. Information on the Company — B. Business Overview —Intellectual Property” for additional details. Our trademarks have been used without authorization in the past by third parties on products that do not meet our quality standard and this may still happen in the future. This can affect our brand name and business reputation adversely. Preventing intellectual property infringement, particularly in China, is difficult, costly and time-consuming. Continued unauthorized use of our intellectual property by unrelated third parties may damage our reputation and brand. The measures we take to protect our intellectual property rights may not be adequate to prevent unauthorized use by third parties. If we are unable to adequately protect our intellectual property rights, we may lose these rights, our brand name, competitive position and business may be harmed. The foregoing could have a material adverse effect on our business, financial condition and results of operations.
 
In addition, third parties may initiate litigation against us alleging infringement of their intellectual property rights. While we are unaware of any of our products currently infringing on any intellectual property rights of third parties, we cannot be certain of this and we cannot assure you that our products will not be subject to any patents or proprietary rights claim brought by third parties in the future. In the event of any material claim or litigation involving infringement of intellectual property rights of third parties, with or without merit, we will have to expend considerable resources, including time, effort and money, to defend ourselves in such legal proceedings. In addition, our business may be severely disrupted due to such legal proceedings. In such an event, our financial results or operations may be adversely affected.
 
Our success and business operations are largely dependent on Mr. Yu Chunming and certain other key personnel, as well as our ability to attract and retain talented personnel.
 
Our future success depends heavily on the continued services of our directors, senior management, and a small number of skilled and experienced personnel. On April 9, 2013, Mr. Wong Siu Hong resigned as our chief executive officer, effective immediately. The Board of Directors appointed Mr. Yu Chunming, our executive director, as the interim chief executive officer. If there are further changes in management, such changes could be disruptive and could negatively affect our operations, our culture and our strategic direction.

 
10

 
 
We do not maintain key person insurance for any of our key personnel. If one or more of our senior executives or other key employees are unable or unwilling to continue with their present positions, we may not be able to replace them on a timely basis or at all, which may severely disrupt our business and affect our results of operations and future prospects. Moreover, we may not be able to attract or retain skilled and experienced employees in connection with our business operation. The competition for skilled and experienced workers in China may also increase our labour costs, which would in turn increase our operational costs and affect our profitability. This could have a material adverse effect on our business, financial condition and results of operations.
 
Most of our directors, senior management and other key personnel have entered into employment agreements with us that contain non-competition provisions, non-solicitation and non-disclosure covenants. However, if any dispute arises between our directors, senior management and other key personnel and us, such non-competition, non-solicitation and confidentiality provisions may not be enforceable.
 
Rising labor costs in China could adversely affect our profit margins
 
We experienced in the past and may continue to experience in the future an increase in labor costs, which would have a material and adverse effect on our business and profit margins. Labor costs in China have been increasing and may continue to increase in the future. For the three years ended December 31, 2010, 2011 and 2012, our labor cost, including pension scheme contributions but excluding share based compensation, amounted to RMB8,899.1 thousand, RMB12,645.8 thousand and RMB15,040.3 thousand, respectively, which represented 16.7%, 21.5% and 25.4% of our revenue for the periods indicated, respectively. There is no assurance that we will not experience an increase in labour costs in the future. Any material increase in our labor costs may, if the same cannot be passed onto customers, adversely affect our profit margins. In addition, for risks relating to changes in labor laws in the PRC, please refer to the section headed “Item 3. Key Information—D. Risk Factors — The enforcement of the Labor Contract Law and other labor-related regulations in China may adversely affect our business and our results of operations.”
 
Risks Related to Doing Business in China
 
Our operations may be adversely affected by changes in China’s political, economic and social conditions.
 
Currently, substantially all of our operations are conducted in China, and approximately 69.4%, 77.8% and 81.9% of our revenue for the years ended December 31, 2010, 2011 and 2012 respectively, are derived from China. Accordingly, our business, financial condition, results of operations, prospects and certain transactions that we may undertake are subject to political, economic and social developments in China.
 
The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rates, foreign exchange controls and allocation of resources. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to exercise significant control over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Our results of operations and financial condition may be materially and adversely affected by a tightening of or change in these policies and controls.
 
China’s social and political conditions are also not as stable as those of the United States or other developed countries. Any sudden change to China’s political system or the occurrence of widespread social unrest could have material adverse effects on our business and results of operations.
 
In addition, while the Chinese economy has experienced significant growth in the past several decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for our services depends remarkably on economic conditions in China. Any slowdown in China’s economic growth may cause our potential customers to delay or cancel their plans to purchase our products, which in turn could reduce our revenue.
 
There are significant uncertainties under the EIT Law relating to the withholding of tax liabilities by our PRC subsidiary, and dividends payable from our PRC subsidiary to our Hong Kong subsidiary may not qualify for the treaty benefits.
 
 
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Under the PRC Enterprise Income Tax Law (“EIT Law”) and the EIT Implementation Rules, the profits of a foreign invested enterprise generated in 2008 and onwards which are distributed to its immediate holding company outside the PRC will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate may be lowered to 5% if a Hong Kong resident enterprise owns over 25% of a PRC company. Our PRC subsidiary is currently wholly-owned by our Hong Kong subsidiary. However, the 5% withholding tax rate does not automatically apply and approvals from competent local tax authorities are required before an enterprise can enjoy any benefit under the relevant tax treaties. Moreover, according to the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, for a tax treaty to be applicable, certain requirements must be satisfied, including: (1) the taxpayer must be the beneficial owner of the relevant dividends; and (2) for corporate recipients to enjoy the favorable tax treatment as direct owners of a PRC enterprise, such corporate recipients must satisfy the direct ownership thresholds at all times during the 12 consecutive months preceding the receipt of the dividends. On August 24, 2009, the State Administration of Taxation issued the Administrative Measures for Non-resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), which became effective on October 1, 2009, requiring non-resident enterprises to obtain an approval from the competent tax authority in order to enjoy the treatments under tax treaties. Further, the State Administration of Taxation promulgated the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties on October 27, 2009, which limits the “beneficial owner” to individuals, enterprises or other organizations normally engaged in substantive operations, and set forth certain adverse factors on the recognition of such “beneficial owner”. Our PRC subsidiary has not yet applied for such approvals because they have not declared or paid dividends. We currently do not have any plan to pay cash dividends, although this is subject to change. Our PRC subsidiary may apply for such approvals if and when it intends to declare and pay dividends. There is no assurance that the PRC tax authorities will approve the 5% withholding tax rate on dividends received by our subsidiary in Hong Kong from our PRC subsidiary.
 
Under the EIT Law, we may be classified as a “resident enterprise” of China. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders.
 
Under the EIT Law and the EIT Implementation Rules, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and is subject to enterprise income tax at the rate of 25% on its global income. The EIT Implementation Rules define the term “de facto management bodies” as “establishments that carry out substantial management and control over the manufacturing and business operations, personnel, accounting, properties, of an enterprise”. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China. However, Circular 82 applies only to offshore enterprises controlled by PRC enterprises, not those invested in by PRC individuals, like our company. Currently there are no additional rules or precedents applicable to us governing the procedures and specific criteria for determining “de facto management body” status for a company of our type. If the PRC authorities were to subsequently determine that we should be treated as a PRC resident enterprise, we would be subject to a 25% enterprise income tax on our global income, which will significantly increase our tax burden and could materially and adversely affect our financial condition and results of operations.
 
Therefore, if we are regarded as a PRC resident enterprise, the amount of dividends, if any, we may pay to our shareholders may be decreased. However, dividends distributed from our PRC subsidiary, Maxclean (Wuxi), to us could be exempted from the PRC dividend withholding tax, since such income is exempted under the EIT Law and the EIT Implementation Rules to a PRC resident recipient. If we are considered a PRC resident enterprise for enterprise income tax purposes, dividends we pay with respect to our shares may be considered income derived from sources within the PRC and subject to PRC withholding tax of 10%. In addition, non-PRC shareholders may be subject to PRC tax on gains realized on the sale or other disposition of shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their tax residence and the PRC in the event that we are considered as a PRC resident enterprise.

The enforcement of the Labor Contract Law and other labor-related regulations in China may adversely affect our business and our results of operations.
 
On June 29, 2007, the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. Compared to the laws that it replaced, the Labor Contract Law establishes more restrictions and increases costs for employers who dismiss employees under certain circumstances, including specific provisions related to fixed-term employment contracts, non-fixed-term employment contracts, task-based employment, contract-based employment, probation, consultation with the labor union and employee representative’s council, employment without a contract, dismissal of employees, compensation upon termination and for overtime work and collective bargaining. According to the Labor Contract Law, unless otherwise provided by law, an employer is obliged to sign a labor contract with a non-fixed term with an employee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contracts or if the employee has worked for the employer for ten consecutive years. Severance pay is required if a labor contract expires without renewal because the employer refused to renew the labor contract or provided less favorable terms for renewal. In addition, under the Regulations on Paid Annual Leave for Employees , which became effective on January 1, 2008, employees who have worked more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on the number of years the employee has worked for the employer. Employees who waive such vacation time at the request of employers are entitled to compensation equal to three times their regular daily salary for each waived vacation day. As a result of these new measures designed to enhance labor protection, our labor costs have increased and could further increase, which may adversely affect our business and our results of operations. In addition, the PRC government in the future may enact more labor-related legislation that could increase our labor costs and restrict our operations.
 
The PRC legal system embodies uncertainties which could limit the legal protections available to you and us.
 
 
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As our main operating entities and a substantial majority of our assets are located in China, PRC laws and the PRC legal system in general may have a significant impact on our business operations. Although China’s legal system has developed over the last several decades, PRC laws, regulations and legal requirements remain underdeveloped relative to those of the United States. Moreover, PRC laws and regulations change frequently and their interpretation and enforcement involve uncertainties, and in particular, the interpretation or enforcement of PRC laws and regulations may be subject to government rules or policies, (some of which are not published on a timely basis or at all) that may have retroactive effect. For example, in December 2009, the State Administration of Taxation issued a circular, commonly referred to as Circular 698, to strengthen the PRC tax authorities’ scrutiny over any indirect transfer of equity interests in a PRC tax resident enterprise by a non-resident enterprise, which became effective retroactively on January 1, 2008. Circular 698 specifies that the State Administration of Taxation is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed for tax-avoidance purposes and without reasonable commercial purpose. The State Administration of Taxation is also entitled to impose a PRC withholding tax at the rate of up to 10% to gains derived from such indirect transfer. Although several issues related to Circular 698 were clarified through the Public Notice dated March 28, 2011 by the State Administration of Taxation, there is little guidance and practical experience regarding the application of this tax circular. If our Company conducts any indirect transfers within the meaning of Circular 698 as deemed by PRC tax authorities, we may be required to report to and assist PRC tax authorities with respect to such indirect transfer and may be required to spend valuable resources to comply with Circular 698. In addition, the relative inexperience of China’s judiciary in some cases may add to the uncertainty as to the outcome of litigation. These uncertainties could limit our ability to enforce our legal or contractual rights or otherwise adversely affect our business and operations. Furthermore, due to the existence of unpublished rules and policies, and since newly issued PRC laws and regulations may have a retroactive effect, we may not be aware of our violation of certain PRC laws, regulations, policies or rules until after the fact.
 
Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
 
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive most of our revenues in Renminbi. Under our current corporate structure, our holding company may rely on dividend payments from our current and future PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (SAFE) as long as certain procedural requirements are met. Therefore, our current and future PRC subsidiary can pay dividends in foreign currencies to us without prior approval from SAFE. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as repayments of loans denominated in foreign currencies. This could affect the ability of our current and future PRC subsidiary to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our shares.
 
A failure by our shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and financial condition.
 
In October 2005, SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 75 states that PRC citizens or residents must register with the relevant local SAFE branch or central SAFE in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must amend their SAFE registrations when the offshore special purpose company undergoes material changes relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees or other material events. Since May 2007, SAFE has issued guidance to its local branches regarding the operational procedures for such registration, including the new guidance issued by SAFE in 2009, which provides more specific and stringent requirements on the registration relating to SAFE Circular 75. The guidance imposes obligations on onshore subsidiaries of an offshore special purpose company to coordinate with and supervise the beneficial owners of the offshore entity who are PRC citizens or residents in order to complete the SAFE registration process. While our beneficial owners who are known to us to be PRC residents are currently in the process of amending their registrations under SAFE Circular 75, if any of our beneficial owners fails to comply with SAFE Circular 75, our onshore subsidiaries are required to report the non-compliance to the local branch of SAFE. Failure to comply with the registration procedures may also result in restrictions on the relevant onshore entity, including restrictions on the payment of dividends and other distributions to its offshore parent or affiliate as well as restrictions on the capital inflow from the offshore entity. Relevant PRC residents may also be subject to penalties under the PRC foreign exchange administration regulations.
 
It may be difficult to effect service of process on us or our directors or senior management who live outside of the United States.
 
 
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Our operating subsidiary was incorporated in the PRC. Our operations are conducted and our assets are located outside of the United States. In addition, all of our directors and our senior management personnel reside outside of the United States. You may experience difficulties in effecting service of process upon us, our directors or our senior management as it may not be possible to effect such service of process outside the United States. In addition, China does not have treaties with the United States and many other countries providing for reciprocal recognition and enforcement of court judgments. Therefore, recognition and enforcement in the PRC of judgments of a court in the United States or certain other jurisdictions may be difficult or impossible.
 
We are a foreign private issuer and, as a result, we are not be subject to US proxy rules and are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a US issuer.
 
Because we qualify as a foreign private issuer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are exempt from certain provisions of the Exchange Act that are applicable to US public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time, and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while US domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual report on Form 10-K within 90 days after the end of each fiscal year.  Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information.
 
Our auditor, like other independent registered public accounting firms operating in China and - to the extent their audit clients have operations in China - Hong Kong, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit report included in this annual report filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States) (the “PCAOB”), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.
 
However, our operations are mainly located in the PRC, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of relevant PRC authorities. Our auditor, like other independent registered public accounting firms operating in China and Hong Kong (to the extent their audit clients have operations in China), is currently not subject to inspection conducted by the PCAOB.
 
Inspections of some other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures. Certain deficiencies revealed in the inspection process can be addressed to improve future audit quality. The inability of the PCAOB to conduct full inspections of auditors operating in China makes it difficult to evaluate our auditor’s audit procedures and quality control procedures. As a result, our investors may be deprived of the benefits of the PCAOB inspections.
 
Inflation in China could negatively affect our profitability and growth.
 
While the PRC economy has experienced rapid growth, it has been uneven among various sectors of the economy and in different geographic areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products do not rise at a rate that is sufficient to fully absorb inflation-driven increases in our costs of supplies, our profitability can be adversely affected. These fluctuations and economic factors have led the Chinese government to adopt, from time to time, various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. In order to control inflation in the past, the PRC government imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. The implementation of these and other similar policies can impede economic growth and thereby harm the market for our products.
 
Fluctuations in the value of the RMB may have a material adverse effect on your investment.
 
The change in 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. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the revised policy, which was suspended in 2008 due to the worldwide financial crisis, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. In June 2010, the PRC government announced its intentions to again allow the RMB to fluctuate within the 2005 parameters. Since July 21, 2005, there has been approximately 32% appreciation of the RMB against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the RMB against the U.S. dollar.
 
 
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Any significant revaluation of the RMB may have a material adverse effect on the value of, and any dividends payable on, our shares in foreign currency terms. More specifically, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. To the extent that we need to convert the U.S. dollars we receive from our public offerings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount that we would receive from the conversion. Consequently, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.

A failure to comply with PRC regulations regarding the registration of shares and share options held by our employees who are PRC citizens may subject such employees or us to fines and legal or administrative sanctions.
 
Pursuant to the Implementation Rules of the Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Rules promulgated by SAFE on January 5, 2007, and the Operating Procedures on Administration of Foreign Exchange Regarding PRC Individuals’ Participation in Employee Share Incentive Plans and Employee Stock Option Plans of Overseas Listed Companies issued by SAFE on March 28, 2007, PRC citizens who are granted shares or share options by an overseas-listed company according to its employee share option or share incentive plan are required, through the PRC subsidiary of such overseas-listed company or other qualified PRC agents, to file with the applicable local branch of SAFE and complete certain other procedures related to the share option or other share incentive plan. In addition, the overseas-listed company or its PRC subsidiary or other qualified PRC agent is required to appoint an asset manager or administrator and a custodian bank, and open special foreign currency accounts to handle transactions relating to the share option or other share incentive plan. Under the Foreign Exchange Administration Rules (1996), as amended in 2008, the foreign exchange proceeds of domestic entities and individuals can be remitted into China or deposited abroad, subject to the terms and conditions to be issued by SAFE. However, the implementation rules in respect of depositing the foreign exchange proceeds abroad have not been issued by SAFE. Currently, the foreign exchange proceeds from the sales of stock or dividends distributed by the overseas-listed company can be converted into RMB or transferred to such individuals’ foreign exchange savings account after the proceeds have been remitted back to the special foreign currency account opened at a PRC domestic bank. In the case of an exercise of the options on a non-cash basis, PRC citizens are required to remit the proceeds to special foreign currency accounts. We and our PRC citizen employees are subject to these rules. If we or our PRC option holders fail to comply with these rules, we or our PRC option holders may be subject to fines and legal or administrative sanctions. See “Item 4. Information on the Company – B. Business Overview – Regulations — Foreign Currency Exchange” and “Item 4. Information on the Company – B. Business Overview – Regulations — Regulation of Foreign Exchange in Certain Return Investment Activities” for more information.
 
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we receive from any public offerings we conduct in the future, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
 
In utilizing the proceeds we receive from any future public offerings, as an offshore holding company of our PRC subsidiary, we may make loans to our PRC subsidiary, or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary or consolidated PRC affiliated entities are subject to PRC regulations and approvals or registration. For example, loans by us to our PRC subsidiary to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local counterparts. In addition, loans by us to our PRC subsidiary must be approved by the relevant government authorities and must also be registered with SAFE or its local counterparts. Any capital contribution to our PRC subsidiary is subject to the approvals of Ministry of Commerce of the PRC or its local counterparts. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our PRC subsidiary. If we fail to receive such registrations or approvals, our ability to use the proceeds of our public offerings and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
 
In addition, on August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of its capital contribution in foreign currency into RMB. The notice requires that the capital of a foreign-invested company settled in RMB and converted from foreign currencies may be used only for purposes within the business scope stated on the business license of the company and, unless otherwise permitted by other regulations, may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the capital of a foreign-invested company settled in RMB and converted from foreign currencies. The use of such RMB capital may not be changed without SAFE’s approval and may not be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, including the substantial fines set forth in the Foreign Exchange Administration Rules (1996), as amended. Furthermore, SAFE promulgated Circular 59 on November 19, 2010, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents.
 
 
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Restrictions under PRC law on our PRC subsidiary’s ability to make dividend payments and other distributions could materially and adversely affect our ability to make investments or acquisitions, pay dividends or other distributions to you, and otherwise fund and conduct our other businesses.
 
We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders or meet other potential future cash needs, we will rely on dividend payments and other distributions made by our PRC subsidiary. As of the date of this annual report, our PRC subsidiary has not paid any dividend to us. PRC regulations restrict the ability of our PRC subsidiary to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC accounting standards to a statutory reserve fund until the cumulative amount in such fund reaches 50% of the company’s respective registered capital. As a result, not all funds of our PRC subsidiary are available to us and our access to such funds is restricted. These and any other limitations on the ability of our PRC subsidiary 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.
 
The Provisions regarding the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors established more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisition in China.
 
The Provisions regarding the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors in the PRC established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that Ministry of Commerce of the PRC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Complying with the requirements of the M&A Regulations in such transactions could be time-consuming, and any required approval processes, including obtaining approval from Ministry of Commerce of the PRC, may delay or inhibit our ability to complete such transactions, which could adversely affect our ability to grow our business through acquisitions in China.
 
Risks Related to Our Shares
 
We currently have no plans to pay dividends to our shareholders. Our shares may never reach or maintain a price higher than the price investors pay for the shares and investors may never receive a return on their investment in our company.

We currently have no plans to pay dividends to our shareholders, although this is subject to change based on our operations, earnings, financial condition, cash requirements and availability and other factors that may be relevant at the time. We currently have no distributable reserves and our accumulated losses as of December 31, 2012 are approximately RMB82.9 million. Thus, it is unlikely we would be able to distribute any dividends in the near future. Any declaration and payment as well as the amount of dividends will be subject to our constitutional documents and the laws of the Cayman Islands, including the approval of our shareholders. If we do not pay dividends, the only way for investors to realize a return on their investment in our company would be through the sale of the shares at a price higher than the price they paid for our shares. Our shares may never reach or maintain such a share price and investors may never receive a positive return on their investment in our company.
 
Your percentage ownership in us may be diluted by future issuances of our shares, which could reduce your influence over matters on which shareholders vote.

Subject only to any applicable shareholder approval requirements, our Board of Directors has the authority to issue all or any part of our authorized but unissued shares. Issuances of our shares would reduce your influence over matters on which our shareholders vote.
 
Since our ordinary shares have been successfully quoted on the OTC Bulletin Board, holders of our ordinary shares may be subject to the Penny Stock Rules of the SEC and the trading market in our shares would be very limited, which will make transactions in our stock cumbersome and may reduce the value of an investment in our shares. These rules may affect your ability to resell your shares.

The SEC has adopted regulations that generally define a “penny stock” to be any equity security other than a security excluded from such definition by Rule 3a51-1 under the Securities Exchange Act of 1934, as amended. For our purposes, penny stock is any equity security that has a market price of less than US$5.00 per share, subject to certain exceptions.

 
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On August 30, 2012, we filed a Form F-1 Registration Statement under the Securities Act of 1933 with the SEC to register certain of our shares for resale. Our Form F-1 Registration Statement was declared effective by the SEC on September 20, 2012. On October 24, 2012, FINRA cleared Maxclean’s request for an unpriced quotation in the United States, and the trading symbol for Maxclean “MAXAF” was confirmed. Our shares may be regarded as penny stock to the extent that the market price for our shares is less than US$5.00 per share. The penny stock rules require a broker-dealer that wishes to engage in transactions in our shares to deliver a standardized risk disclosure document prepared by the SEC, provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, provide monthly account statements showing the market value of each penny stock held in the customer’s account, make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. To the extent these requirements are applicable they will reduce the level of trading activity in the secondary market for our shares and may severely and adversely affect the ability of broker-dealers to sell our shares.

Our shares are not considered to be readily tradable and investors may be unable to liquidate their investment.

Our shares are considered to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which do not presently include the OTC Bulletin Board (the only exchange on which our shares are currently quoted). As a result of the foregoing, investors may be unable to liquidate their investment for any reason.

We may be classified as a passive foreign investment company, or PFIC, which could result in adverse United States federal income tax consequences to U.S. holders of our shares.

Depending upon the value of our shares and the nature and composition of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes. We were not a PFIC for the year ended on December 31, 2012. However, there can be no assurance that we will not be a PFIC for any future taxable year as PFIC status is tested each taxable year and depends on the composition of our assets and income in such taxable year.

We will be classified as a PFIC for any taxable year if either (i) at least 75% of our gross income for the taxable year is passive income or (ii) at least 50% of the value of our assets (based on an average of the quarterly values of the assets during the taxable year) is attributable to assets that produce or are held for the production of passive income. In determining the average percentage value of our gross assets, the aggregate value of our assets will generally be deemed to be equal to our market capitalization (determined by the sum of the aggregate value of our outstanding equity) plus our liabilities. Therefore, a drop in the market price of our shares would cause a reduction in the value of our non-passive assets for purposes of the asset test. Accordingly, we would likely become a PFIC if our market capitalization were to decrease significantly while we hold substantial cash and cash equivalents. If we are classified as a PFIC in any taxable year in which U.S. Holders (as defined in “Item 10. Additional Information — E. Taxation — United States Federal Income Taxation”) hold our shares, certain adverse United States federal income tax consequences could apply to such U.S. Holders. See “Item 10. Additional Information — E. Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”

Item 4. Information on the Company
  
Our principal executive offices are located at 88 Yu Feng Road, Shuo Fang Town, New District, Wuxi City Jiangsu Province, P. R. China. The telephone number is +86 510 8526 1996. Our registered office in the Cayman Islands is located at the offices of Appleby Trust (Cayman) Ltd., Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman KY1-1108, Cayman Islands, or at such other place within the Cayman Islands as our directors may decide. Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 1001. Investors should contact us with any inquiries through the address and telephone number of our principal executive offices.
      
A. History and Development of the Company
  
Maxclean Holdings Ltd is the holding company for our group and was established on May 30, 2011 as an exempted company incorporated with limited liability under the laws of the Cayman Islands. Our directly wholly-owned subsidiary Maxclean (China) was incorporated as a limited liability company on September 6, 2002 under the laws of Hong Kong and conducts substantially all of its business through its wholly-owned subsidiaries, Maxclean (Wuxi) and Maxclean Global.
 
Maxclean (Wuxi) is a limited liability company incorporated under the laws of the PRC on December 16, 2002 and is mainly engaged in the business of manufacturing and production of clean-room products. Maxclean Global is a limited liability company incorporated under the laws of Hong Kong on August 16, 2002 and is mainly engaged in the business of trading of our clean-room products in the international markets. Maxclean Shenzhen was established by Maxclean (Wuxi) as a branch company (without separate legal personality) under the laws of the PRC on June 13, 2006 to carry on a sales and marketing business. Maxclean (Wuxi) also established a sales and marketing office in Chengdu in 2011.
 
On August 30, 2012, we filed a Form F-1 Registration Statement under the Securities Act of 1933 with the U.S. Securities and Exchange Commission to register certain of our shares for resale. Our Form F-1 Registration Statement was declared effective by the SEC on September 20, 2012. On October 24, 2012, our shares were successfully quoted on the OTC Bulletin Board, and the trading symbol for Maxclean “MAXAF” was confirmed.

Recent Developments
 
            Appointment of Chief Financial Officer

On August 1, 2012, we announced the appointment of Mr. Wu Xin Hui as interim chief financial officer, effective immediately. Mr. Wu served as interim chief financial officer pending the completion of the search process of a new chief financial officer. On October 8, 2012, we announced the appointment of Mr. Wei Zhong, as our Chief Financial Officer, effective immediately. Under the terms of his employment, Mr. Wei Zhong was granted an annual salary payment of RMB600 thousand.  For a detailed biography of Mr. Wei Zhong, please see “Item 6. Directors, Senior Management and Employees A. Directors and Senior Management Appointment of Chief Financial Officer” and appointment of interim Chief Executive Officer.
  
 
17

 
 
Departure of Chief Executive Officer and appointment of interim Chief Executive Officer
  
On April 9, 2013, Mr. Wong Siu Hong resigned as chief executive officer, effective immediately. Mr. Wong’s resignation was for personal reasons and not in connection with any known disagreement with the Company on any matter. The Board of Directors has approved his resignation and appointed Mr. Yu Chunming to function as interim chief executive officer until we find a suitable replacement for Mr. Wong. For further details, please see “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management — Departure of Chief Executive Officer”

Capacity Expansion
 
In 2012, we further invested in our Wuxi plant by expanding its manufacturing capacity and product range, in order to meet expected the demand from high-end customers; the investment is expected to enhance our competitive advantage in the clean room products market. The breakdown of the investments made in 2012 is illustrated in the table below:

Machine / Equipment
 
Quantity
 
Investment Amount
(RMB’000)
Wiper Cutting Machine
 
8
 
 341.9
Washing/Drying Machine
 
6
 
   789.7
Cleaning Room (Class 1001)
 
1
 
2,626.9
Cleaning Room (Class 10002)
 
1
 
   844.2
Total
 
 
 
4,602.7

Capacity expansion after the above investments:

Process
 
Before Investment
 
After Investment
 
% Capacity increase by
Cutting
 
20,000 pcs per 8 hours
 
23,000 pcs per 8 hours
 
  15
Washing
 
720,000 pcs per 8 hours
 
1,500,000 pcs per 8 hours
 
108
Drying
 
1,010,000 pcs per 8 hours
 
1,670,000 pcs per 8 hours
 
  65

 _________________
1 clean-room which has no more than 100 particles/ft3 of a size 0.5um and larger as set out in Federal Standard 209E Airborne Particulate Cleanliness Classes in Clean-rooms and Clean Zones approved by the U.S. General Services Administration
2 clean-room which has no more than 1000 particles/ft3 of a size 0.5um and larger as set out in Federal Standard 209E Airborne Particulate Cleanliness Classes in Clean-rooms and Clean Zones approved by the U.S. General Services Administration
 
Our principal executive offices are located at 88 Yu Feng Road, Shuo Fang Town, New District, Wuxi City Jiangsu Province, P. R. China. The telephone number is +86 510 8526 1996. Our registered office in the Cayman Islands is located at the offices of Appleby Trust (Cayman) Ltd., Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman KY1-1108, Cayman Islands, or at such other place within the Cayman Islands as our directors may decide. Our agent for service of process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 1001. Investors should contact us with any inquiries through the address and telephone number of our principal executive offices.
  
B. Business Overview

Overview

Mr. Yu Chunming (余春明), our chairman and director, is one of the pioneers in the development and manufacture of contamination control supplies and critical cleaning products in China, with over 20 years of success in the industry. Mr. Yu started his career in the cleanroom industry as a manager of Hang Kai Plastic Manufacturing Company Limited (航凯塑胶制品有限公司) from 1992 to 1994 where he was primarily responsible for the operation of the cleanroom plastic bag production lines and held some senior management responsibilities. Mr. Yu then set up his own factory, Zhao Run Plastic Manufacturing Company Limited (召润塑胶制品(深圳)有限公司), in 1994. In 2002, Maxclean (China) Holdings Limited was founded in Hong Kong, and in the same year, Mr. Yu joined the company as executive director. Mr. Yu and his team have been actively developing, manufacturing and distributing for sale products used for contamination control in highly controlled and critical environments, or clean-rooms. Our comprehensive range of disposable clean-room consumable products includes wipes, PE bags, sticky mats, face masks and other clean-room consumables, including swabs and caps, which we supply to our customers in the PRC domestic and overseas markets. Our products are marketed under our trade name “Maxclean” and are employed in high-technology manufacturing industries, which require certain manufacturing and assembly processes to be carried out in highly controlled, dust-free and electrostatic-free critical environments. In particular, we seek to maximize purity levels for clean-room environments for customers in the hard disk drive, optics, semi-conductor, TFT-LCD, electronics, biotechnology, pharmaceutics and food processing industries.
 
 
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All of our products are manufactured at our modern facilities located in Wuxi. Our production lines have been certified to international ISO9001 and ISO14001 standards. Our products are sold through our four sales and marketing offices located in Hong Kong, Wuxi, Shenzhen and Chengdu.

Our Products
 
We develop, manufacture and sell consumable contamination control supplies for use in clean-rooms under our trade name “Maxclean”. Following our strategic plan of becoming a worldwide leading integrated producer of clean-room consumables, we have been striving to diversify and expand our product range throughout the past decade. Currently, we manufacture and sell the following product lines: wipes, PE bags, sticky mats, face masks, and other products including anti-static swabs, disposable gloves and caps. Each of our product lines includes numerous tailored solutions to meet the specific needs of customers in diverse industries. In 2012, we introduced new products, including BOPP bags and micro-fiber wipes designed for optical clean-room application. We are also currently in the process of developing a new generation of more efficient and user-friendly wipes with a lower particle count, which is expected to be used in highly sensitive environments.
 
 The following table sets forth details of the sales of our products for each of the periods indicated:
 
   
Year ended December 31,
 
   
2012
   
2011
   
2010
 
   
Sales
volume
   
Revenue
   
Sales
volume
   
Revenue
   
Sales
volume
   
Revenue
 
   
thousand
pieces
   
RMB
‘000
   
thousand
pieces
   
RMB
‘000
   
thousand
pieces
   
RMB
‘000
 
                                     
Wipes
    67,215.0       16,035.2       122,072.8       20,285.2       78,667.5       16,063.0  
PE bags
    70,231.0       8,287.9       114,173.4       12,452.5       125,024.6       13,396.8  
Face masks
    46,257.0       5,690.4       39,068.0       4,992.0       30,533.7       4,791.7  
Sticky mats
    311.0       8,006.5       355.8       7,933.4       434.3       8,685.2  
Others products:-
                                               
Swabs
    50,382.0       5,219.9       21,804.5       1,789.9       27,145.6       2,386.4  
Disposable gloves
    2,917.6       2,255.6       3,104.1       1,966.6       2,583.5       2,421.5  
Bopp bags
    99,641       2,742.3       29,365.0       768.9       101.6       4.1  
Epoxy boards
    13.3       1,728.5       18.7       1,145.8       -       -  
Others (1)
            9,314.0               7,444.0               5,529.6  
Total
            59,280.3               58,778.3               53,278.3  
_________________________
(1)
Others mainly include static control products and caps. Volume and other information in this category is not provided as it consists of various products.
 
Wipes — We produce a wide range of launderable and non-woven clean-room wipes for general wiping, cleaning and spill control in critical working environments.
 
Launderable wipes. Our launderable wipes are widely employed in highly critical areas and are available in numerous varieties of filament polyester and nylon fabrics. Our launderable wipes are processed using various cutting methods, namely, laser sealed edge, ultrasonic sealed edge, heat sealed edge, or normal cut.
 
Non-woven wipes. Our non-woven wipes are more economical than launderable wipes and are designed for use in environments with less-stringent particle requirements, such as ISO Class 6 and 7 clean-rooms. They are produced from a variety of non-woven cotton, polyester or nylon fabrics and other options to achieve desired absorption, low-lint, soft texture, anti-static or anti-abrasive specifications.
 
PE bags — Our PE bags are designed for packaging critical products that require packaging with ultra-low ionic contamination and outgassing, such as semiconductor, hard disk drive, electronics, medical and pharmaceutical accessories. Accordingly, our PE bags are produced in Class 100 modular clean-rooms using pure, high quality resins which are free from amide, amine, silicone oil and phthalate esters. Our bags have ultra-low particle counts and non-volatile residue and are certified in accordance with Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, a regulation enforced by the National Measurement Office Enforcement Authority in the United Kingdom as free from heavy metals and hazardous chemicals. They are available in varying sizes, thicknesses, lengths, widths and colors.
 
Face masks — We produce a range of superior quality surgical and critical area face masks available in varying specifications. These face masks are made out of one of five different categories of fabric, specifically: (i) spunbond, non-woven polypropylene which is ideal for general purpose and medical or clinical usage (ii) combined polymer fabric, which is ideal for a Class 10 to 100 clean-room (iii) cellulose composite, which is also ideal for a Class 104 to 100 clean-room (iv) specialist spunbond polymer, for use in hazardous environments, and (v) die cut polymer spunlace, which is ideal for use in the food industry. Our face masks are available in earloop, overloop and tie-on design. Face masks are also available in varying sizes, colors and plies.
 
Sticky mats — Our adhesive-coated contamination control mats are designed to meet stringent clean-room specifications and for use in entryways, walkways and traffic areas where contamination must be controlled. Each mat is composed of multiple layers of polyethylene films coated with custom high tack adhesive laminated together into a stack. When the top layer becomes soiled, it can be peeled off to expose the next clean sheet of the mat. Our mats capture 99% of all foot-borne and wheel-borne particulates from entering the controlled working environment. The sticky mats employ a water-based acrylic adhesive, with a pH of 7 to 8. Our mats are certified by RoHS as free from heavy metals and hazardous chemicals. Our sticky mats are available in standardized as well as customized sizes and colors.
 
Other products  — In addition to our key products listed above, we also produce a wide range of other products such as swabs, disposable gloves, bopp bags and epoxy board.
 
Swabs. Our swabs are widely used in electronics industry, to clean places where normal wiper cannot reach. Our swabs are processed with class 100 cleaning cycle. They are produced from polypropylene and polyester.
 
Disposable gloves. Our disposable gloves are widely used with our wipe products and sticky mat products since personnels who enter into a cleanroom needs to wear gloves. They are produced either from Nitrile or Latex material.
 
Bopp bags. Our bopp bags are widely used in cleanroom packaging. They are produced from polypropylene.
 
Epoxy boards. Our epoxy boards are widely used in cleanroom construction. They are produced from epoxy resin.
 
 
19

 
 
Seasonal factor affects our product sales. We generate higher revenue during the period from September to January each year, because that is the high season of respiratory system diseases such as the flu in China, which creates greater demand for our clean-room consumables such as wipes and face masks.
 
Manufacturing
 
The diagram below illustrates principal procedures involved in our production process of our key products.
 


 
Wipes
 
As a preliminary matter, raw material fabrics are inspected to ensure adequate width, length, weight, texture and other critical measurements. In order to produce launderable wipes, fabrics are cut to size using proprietary laser edged and/or ultrasonic sealed edge technologies which seal the edges to minimize particle and lint contamination. Thereafter, fabrics undergo multiple cleaning and drying processes, the former employing distilled water to ensure minimum particle and fiber contamination. Wipes are thereafter packaged in a clean Class 100 environment. A similar process is used in producing non-woven wipes except that no cleaning and drying process is required.
 
Face Masks
 
Our face masks are produced within a Class 10,000 clean-room equipped with high-speed mask and ribbon making machines. The production of our face masks involves meltblowing, followed by slitting and cutting the fabric to the requisite specification and attachment of the binding and ear loops. The masks are passed through an air shower box for micro-contamination removal and packaged under a Class 100 vertical laminar flow clean hood.
 
PE bags
 
As a preliminary matter, we check the raw material fabrics to ensure adequate texture and color and that they are not damaged or stained. The raw materials are mixed and preset to have correct weight of resins and correct film thickness. In order to produce our clean-room packaging bags, low or/and high density polyethylene is fed into a blower machine which is equipped with molds necessary to wipe off the dust, clean the surface of the resins, correct the thickness, transparency and width of the resins to achieve the desired size and thickness of the bag. The blower machine processes the polyethylene into a roll form output which is subsequently placed on a cutting machine to cut into the desired size.
 
 
20

 
 
Sticky mats
 
To produce sticky mats, polyethylene pellets are first pressurized and blown into continuous series of polyethylene film which is cut to the desired specification. Once cooled, each layer of film is laminated with an acrylic-based adhesive. Each piece of sticky mats is composed of 30 to 60 layers of polyethylene film, with a thickness range of 30mm to 45mm. 

Research and Development
 
We believe that the continual improvement of our research and development capability is vital to maintaining our long-term competitiveness. As of December 31, 2012, we employed 19 experienced engineers at our research and development laboratory, focusing on enhancing our product quality and improving production efficiency. Through our processing technology, we have implemented production processes that enable us to reduce particle and fiber content through sophisticated washing techniques and increase the product quality of our wipes through the usage of innovative edge-sealing technologies. Our research and development team is, as of the date of this annual report, focused on developing a new generation of wipes with a lower particle count appropriate for use in more highly sensitive environments and which many of our customers currently import from more developed markets. Our research and development personnel also work with our customers to develop tailored products.
 
We intend to continue to devote management and financial resources to research and development to further enhance the diversity and quality of our products, increase productivity and lower our overall production costs.
 
Quality Control and Certification
 
We employ strict quality control procedures at each stage of the manufacturing process in accordance with ISO 9001 quality management standards to ensure the consistency of our product quality and compliance with our internal production benchmarks. We have also received RoHS certification, which indicates compliance with the European Directive on the Restriction of Hazardous Substances, for our sticky mats and PE bags. We have received various other certificates with respect to our products and manufacturing processes.
 
We have established systematic inspections and product testing at various stages of the production process, from raw material procurement to finished product testing, to identify product defects, administer preventive or corrective measures and ensure that our processes and products are in accordance with applicable standards and meet customer requirements. Raw materials that fail to pass our incoming inspection are returned to suppliers.
 
We believe that we are able to maintain the quality and reliability of our products through close monitoring of our manufacturing processes and product testing by our quality control team and scheduled maintenance of our machinery. To ensure the effectiveness of our quality control procedures, we also provide periodic training to our production line employees. As of December 31, 2012, our quality control team consisted of 18 employees and included engineers, equipment maintenance technicians and raw material inspectors. Our quality control team also works with our sales and marketing team to provide customer support services. Our quality control team uses advanced Fourier transform infrared spectroscopy, ion chromatograph and liquid particle counter equipment to test the quality of our products, including non-volatile residue, ion contamination, absorbency, particle count and other specified product characteristics. In addition, as part of our customer support services, we also regularly follow up with our customers regarding our product quality and incorporate their suggestions for process improvements.
 
On October 23, 2012, we invited Shanghai QA International Certification Co., Ltd. to audit our manufacturing process in accordance with Quality Management System (ISO9001). The annual audit went smoothly and was concluded in two days. 
   
Customers
 
Historically, we sold substantially all of our products to customers in China. Since the mid 1990s, we commenced the sale of our products in overseas markets through wholesale to the local distributors. Currently, our products are sold in China, Hong Kong, South Korea, Southeast Asian market and other overseas market, including Japan, Canada, the United States, Europe and Taiwan. The following table sets forth our revenue by geographic locations for the period indicated:
 
   
Year ended December 31,
       
Revenue by geography
 
2012
   
2011
   
Change
 
   
RMB’000
   
%
   
RMB’000
   
%
   
RMB’000
   
%
 
                                     
PRC
   
48,528.5
     
81.9
     
45,727.2
 
 
 
77.8
     
2,801.3
     
6.1
 
Hong Kong
   
1,631.3
     
2.8
     
9,201.9
 
 
 
15.7
     
(7,570.6)
     
(82.3)
 
South Korea
   
707.6
     
1.2
     
1,501.3
     
2.5
     
(793.7)
     
(52.9)
 
Southeast Asian market(1)
   
5,239.3
     
8.8
     
424.3
     
0.7
     
4,815.0
     
1134.8
 
Other overseas market (2)
   
3,173.6
     
5.3
     
1,923.6
 
 
 
3.3
     
1,250.0
     
65.0
 
Total
   
59,280.3
     
100.0
     
58,778.3
 
 
 
100.0
     
502.0
     
0.9
 
_______________________
(1)          Southeast Asian market mainly includes Thailand, Singapore and Malaysia.
(2)          Other overseas market mainly includes Japan, United States, Canada, Europe, and  Taiwan
 
 
21

 

   
For the year ended December 31,
       
Revenue by geography
 
2011
   
2010
   
Change
 
   
RMB’000
   
%
   
RMB’000
   
%
   
RMB’000
   
%
 
                                     
PRC
   
45,727.2
 
 
 
77.8
     
36,987.9
 
 
 
69.4
     
8,739.3
     
23.6
 
Hong Kong
   
9,201.9
 
 
 
15.7
     
11,285.9
 
 
 
21.2
     
(2,084.0)
     
(18.5)
 
Other overseas market (1)
   
3,849.2
 
 
 
6.5
     
5,004.5
 
 
 
9.4
     
(1,155.3)
     
(23.1)
 
Total
   
58,778.3
 
 
 
100.0
     
53,278.3
 
 
 
100.0
     
5,500.0
     
10.3
 
_____________________
(1)          Other overseas market mainly includes Japan, South Korea, United States, Canada, Europe, Taiwan, Vietnam, Singapore and Malaysia. We did not separately break out South Korea and other  Southeast Asian market in 2010 due to materiality.
 
We sell a range of clean-room consumable products. Our wipes are our largest revenue contributor, accounting for 27% of our total revenues in the year ended December 31, 2012, followed by PE bags, which accounted for 14.0% of total sales in the same period. As we continue to diversify and expand the range of our products, we expect that an increasing proportion of our revenues will be derived from our wipes and PE bags. As of December 31, 2012, we had an aggregate of approximately 240 customers for our clean-room consumable products in China and 40 from overseas markets.
 
The following table sets forth the information regarding our top five customers for the periods indicated:

Customer
 
For the year ended December 31, 2012
 
   
Amount (RMB’000)
   
% of revenue
 
             
Elektroskandia Logistics (Shanghai) Co., Ltd.
   
6,780.0
   
11.4
 
Xiamen Xinhan Manufacturing and Trading Company Limited
   
6,487.6
   
10.9
 
Sumitomo Electronics (Shen Zhen) Company Limited
   
3,592.3
   
6.1
 
[   Metalform (WUXI) Precision Engineering Co., Ltd.
   
3,426.5
   
5.8
 
Belton Electronics (Shen Zhen) Company Limited
   
2,881.1
   
4.9
 
Other customers
   
36,112.8
   
60.9
 
Total sales of 2012
   
59,280.3
   
100.0
 
 


Customer
 
For the year ended December 31, 2011
   
Amount (RMB’000)
   
% of revenue
         
  
Elektroskandia Logistics (Shanghai) Co., Ltd.
 
 
7,052.5
 
 
12.0
Xiamen Xinhanmei Manufacturing and Trading Company Limited
 
 
5,962.8
 
 
10.1
Jiangsu Zhongneng Polysilicon Technology Development Company Limited
 
 
2,154.7
 
 
3.7
Sumitomo Electronics (Shen Zhen) Company Limited
 
 
2,729.5
 
 
4.7
Zhuhai Zixing Electrics Company Limited
 
 
2,711.5
 
 
4.6
Other customers
 
 
38,167.3
 
 
64.9
Total sales of 2011
 
 
58,778.3
 
 
100.0
 

Customer
 
For the year ended December 31, 2010
   
Amount (RMB’000)
   
% of revenue
           
Elektroskandia Logistics (Shanghai) Co., Ltd.
 
 
5,084.2
 
 
9.5
Fuqun Electrics (Wuxi) Company Limited
 
 
3,639.1
 
 
6.8
Jiangsu Zhongneng Polysilicon Technology Development Company Limited
 
 
2,801.0
 
 
5.3
Xiamen Xinhanmei Manufacturing and Trading Company Limited
 
 
2,508.6
 
 
4.7
Zhuhai Zixing Electrics Company Limited
 
 
2,045.0
 
 
3.9
Other customers
 
 
37,200.4
 
 
69.8
Total sales of 2010
 
 
53,278.3
 
 
100.0
 
Sales and Marketing
 
We sell our products under our own brand “Maxclean”. Our customers for our clean-room consumable products include companies engaged in hard drive electronics, semiconductors, LED and TFT products manufacturing or processing businesses. To achieve expansion of our sales channels and broad market penetration, we sell our clean-room supplies through our four sales and marketing offices each located in Hong Kong, and three cities in China including Wuxi, Shenzhen and Chengdu. We are in the process of establishing three more sales and marketing offices each in Wuhan, Guangzhou and Nanjing, China. We have sales representatives in South Korea seeking out potential customers and promoting our products and brand recognition.
 
We have been able to establish strong relationships with a number of major customers, based on the quality of our products and our market reputation. Our major customers include subsidiary companies of leading multinational corporate groups such as Samsung Group and LG Corp.
 
 
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We sell our products primarily under short term purchase orders issued from our customers. The terms of the purchase orders are usually monthly or quarterly under which we deliver our products in installments every week. Price negotiation and sample testing often occurs prior to customers issuing a purchase order, and for new customers, they may visit our manufacturing base in Wuxi before issuing us their first purchase order. We review and adjust our product pricing system periodically as the purchase price of each individual purchase order is often further negotiated and determined on a case-by-case basis. Normally, we grant our customers a payment credit term of 60 days to 120 days upon product delivery. To a lesser extent, we have customers that make a deposit or full payment before or upon product delivery.
 
Raw Materials
 
The raw materials used in our manufacturing process consist primarily of polyethylene pellets and non-woven fabric. Polyethylene pellets are the main raw material in manufacturing sticky mats and PE bags. Non-woven fabric includes two types, being polypropylene and filament polyester. Polypropylene is used as the main raw material in producing non-woven wipes and face masks. Filament polyester is the main raw material in manufacturing launderable wipes. Other supplemental materials we use in our manufacturing process include nylon, cotton, cellulose, natural rubber, nitrile latex, etc. For the year ended December 31, 2012, wipes, PE bags, sticky mats, face masks and other clean-room consumables accounted for approximately 27.0%, 18.6%, 13.4%, 9.6% and 31.4% of our total raw material costs, respectively.
 
These raw materials together represented approximately 74% of our total cost of sales for the year ended December 31, 2012. The factors that influence the prices of our raw materials include the crude oil price and market demand and supply, among others. For example, the average purchase price of our polyethylene pellets decreased from RMB9.9 per kilogram in 2011 to RMB9.2 per kilogram in 2012 along with the decrease in the price of crude oil.

We purchase raw materials from our suppliers through issuing purchase orders to our suppliers. We have at least two suppliers for each type of our main raw materials. The transportation costs are usually borne by the suppliers. The suppliers usually grant us a credit term of 30 days to 60 days upon goods delivery. As the prices of polyethylene pellets and non-woven fabric fluctuate along with the crude oil price, we use short term purchase orders and spot market purchase from time to time to minimize pricing risk.
  
Property, Plant and Equipment
 
The table below lists the locations, square footage, principal use and lease expiration dates of the facilities used in our principal operations as of December 31, 2012.
 

Location
 
Approximate
Square Meters
 
Principal Use or
Presently Contemplated Use
 
Owned or Lease
Expiration Date
Hong Kong
 
46.0
 
Management, Administration, Sales and Marketing
 
Shared with related parties without any formal lease.
Wuxi, China
 
54,783.4
 
Management, Operation Warehouse, Sales and Marketing
 
Owned; land use right to expire on May 29, 2053
Shenzhen, China
 
485.0
 
Sales and Marketing, Warehouse
 
Leased to April 30, 2013
             
 
Manufacturing Facilities
 
Our manufacturing facilities are located in Wuxi, China, covering approximately 54,783 square meters. As of the date of this annual report, we had over 120 major machines used in our operations. None of these machines are encumbered. We maintain a high utilization rate in operating our major machines. Our production facilities in Wuxi currently have annual production capacity to produce approximately 276,000 thousand pieces of wipes, 1,500 tonnes PE bag film, 78,000 thousand pieces of face mask and 444.0 thousand pieces of sticky mats.
 
Planned Capital Expenditures
 
We expect to continue investing in capital expenditures in the future as we plan to increase our competitiveness and market share through developing new products, improving the quality of our products and increasing our production capacity.
 
We do not expect to incur any significant capital expenditures in connection with replacement of obsolete equipment for the year of 2013. We plan to invest RMB147.0 thousand for other capital expenditures such as upgrading our computer systems and equipment for quality testing.
 
 
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Intellectual Property
 
Our trademark is Maxclean. The following is an image of our trade mark:
 
 
 
We possess proprietary process technologies and know-how that allow us to develop and produce a broad range of clean-room consumable products, including those that are customized to meet the specifications of our customers. In addition, we integrate our proprietary know-how and technologies, such as static elimination, with the equipment purchased from equipment vendors to increase our production capacity and efficiency. We have made eleven patent applications pending review as of the first quarter of 2013. As of the date of the annual report, we do not have any approved patents.
           
We also rely on a combination of trade secrets and employee and third-party confidentiality agreements to safeguard our intellectual property. Our research and development employees are required to enter into agreements that require them to assign to us all inventions, designs and technologies that they develop during the terms of their employment with us. We have not been a party to any intellectual property claims since our inception.
 
Competition
 
We operate in a highly competitive and rapidly evolving market. As we enhance the quality of our products and increasingly penetrate the major export markets, we will compete with major international integrated manufacturers of clean-room consumables, such as KM Corporation, Contec, Inc. and ITW Texwipe, as well as companies located in China such as Dongguan Suorec Electronic Material Co., Ltd., Suzhou Selen Clean-room Technology Co., Ltd., Suzhou TA&A Ultra Clean Technology Co. Ltd. and Shenzhen X & Y International Industrial Co., Ltd. We expect to face increased competition as other manufacturers of clean-room consumables continue to expand their operations. Many of our current and potential competitors may have a longer operating history, greater financial and other resources, stronger brand recognition, better access to raw materials, stronger relationships with customers and greater economies of scale than we do. Moreover, certain of our competitors are highly-integrated producers whose business models provide them with competitive advantages as these companies are less dependent on upstream suppliers and/or downstream customers in the value chain.
 
We compete primarily in terms of product quality and consistency, pricing, timely delivery, ability to fill large orders and reputation for reliable customer support services. We believe that our high quality products, our low labor costs and easy access to key resources from our strategically located production bases in China and our proprietary process technologies enhance our overall competitiveness.
 
Production Safety
 
We are subject to extensive PRC laws and regulations in relation to labor and safety. We have adopted stringent safety procedures at our facilities to limit potential damage and personal injury in the event of an accident or natural disaster, and have devised a number of internal guidelines as well as instructions for our manufacturing processes. We distribute safety-related manuals to employees and post bulletins setting forth safety instructions, guidelines and policies throughout our facilities. Failure by employees to follow these guidelines and instructions result in fines, disciplinary actions or even dismissals. All of our new employees undergo extensive safety training and education. We require our technical staff to attend periodic training programs taught by instructors to enhance their work safety awareness and ensure safe equipment operation. We conduct regular inspections and our experienced equipment maintenance team oversees the operation of our manufacturing lines to maintain proper and safe working conditions. Although work injuries do occur periodically, we have not experienced any major work-related injuries and our operations have been in compliance with the applicable labor and safety laws and regulations in all material respects.
 
Environment Matters
 
We generate and discharge waste water at various stages of our manufacturing process. The contamination level of the waste water we discharge is very low, and we are not required under PRC laws and regulations to equip our manufacturing facilities with pollution abatement equipment to treat the waste water before discharging. Nevertheless, we are required to comply with all PRC national and local environmental protection laws and regulations and our operations are subject to periodic inspection by national and local environmental protection authorities. PRC national and local environmental laws and regulations impose fees for the discharge of waste materials above prescribed levels. The Environmental Protection Bureau of Wuxi city periodically inspects the waste water we discharge and imposes water processing fees based on the water contamination level. As of the date of this annual report, no outstanding waste water processing fees are outstanding. PRC national and local environmental laws and regulations also require the payment of fines for serious violations and provide that the relevant authorities may at their own discretion close or suspend the operation of any facility that fails to comply with orders requiring it to cease or remedy operations causing environmental damage. As of the date of this annual report, no such penalties had been imposed on us.
  
Employees
 
As of December 31, 2012, 2011 and 2010, we had a total of 241, 233 and 267 employees, respectively. The following table sets forth the number of our employees categorized by function as of dates indicated:
 

As of
December 31,
 
Management
 
Manufacturing
 
R&D
 
Quality Control
 
Administration
 
Total
                         
2012
 
13
 
125
 
19
 
18
 
66
 
241
2011
 
13
 
144
 
12
 
17
 
47
 
233
2010
 
12
 
173
 
5
 
35
 
42
 
267
 
 
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For the years ended December 31, 2012, 2011 and 2010, our total staff costs, including pension scheme contributions but excluding share based compensation, were RMB15,040.3 thousand, RMB12,645.8 thousand, RMB8,899.1 thousand, respectively.
 
We typically enter into a standard confidentiality and non-competition agreement with each of our management and research and development personnel. Each of these contracts includes a covenant that prohibits the relevant personnel from engaging in any activities that compete with our business during his or her employment with us and for one year after their employment with us.
 
Our employees are part of a union and are subject to a collective bargaining agreement. As of the date of this annual report we have not experienced any labor disputes or any difficulty in recruiting staff for our operations.
 
Insurance
 
We have insurance policies including general property insurance, fire insurance, vehicle insurance and mandatory traffic insurance. We do not have business interruption insurance or natural disaster insurance.  We believe that our overall insurance coverage is consistent with the market practice in China. However, significant damage to any of our manufacturing facilities and buildings could have a material adverse effect on our results of operations. In accordance with customary practice in China, we do not carry any business interruption insurance. Moreover, we may incur losses beyond the limits, or outside the coverage, of our insurance policies. See “Item 3. Key Information—D. Risk Factors — Risks Related to Our Business and Industry — We have limited insurance coverage which may not completely cover the risks related to our business and operations, including losses resulting from product liability claims, business interruptions or natural disasters.” As of the date of this annual report, we have insurance covering our assets in a value of approximately RMB50 million.
 
Legal and Administrative Proceedings
 
We are currently not a party to any other material legal or administrative proceedings, and we are not aware of any other material legal or administrative proceedings threatened against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

Regulations

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ right to receive dividends and other distributions from us.
 
Environmental Regulations
 
Our product manufacturing processes generate certain levels of noise, waste water and other industrial wastes in the course of our business operations. Our PRC legal counsel has advised us that we are subject to a variety of government regulations related to the storage, use and disposal of hazardous materials. The major environmental regulations applicable to us include the Environmental Protection Law of the PRC, the PRC Law on the Prevention and Control of Noise Pollution, the PRC Law on the Prevention and Control of Air Pollution, the PRC Law on the Prevention and Control of Water Pollution, the PRC Law on the Prevention and Control of Solid Waste Pollution, the PRC Law on Evaluation of Environmental Affects and the Regulations on the Administration of Construction Project Environmental Protection. The PRC Environment Protect Bureau (“EPB”) and its subordinate local authorities may give an entity a warning or an order of correction, levy a fine or request suspension of operation in the case of violation of the applicable laws and regulations. We have not been subject to any warnings or fines or any other penalty by the EPB and we do not believe that we are in material non-compliance of the regulations.
 
Restriction on Foreign Businesses
 
The principal regulation governing foreign ownership in conducting business in the PRC is the Foreign Investment Industrial Guidance Catalogue, as amended in 2011. The catalogue classifies three categories where foreign investment is encouraged, restricted or prohibited. Foreign investors shall follow the catalogue as a guideline to ascertain which industries they can engage in. In general, foreign investment is (1) subject to no entry barrier in encouraged industries, (2) subject to certain limitations in entering into restricted industries, and (3) prohibited from entering into prohibited industries. The PRC Ministry of Commerce (MOC) and/or the State Reform and Development Commission (SRDC) and their subordinate authorities review and decide the foreign investment applications. Our PRC legal counsel has advised us that, the manufacturing and sales of clean-room consumables products we are engaged in is not a restricted or prohibited business area. The catalogue is amended regularly and it is uncertain whether any future amendment of the catalogue may affect our business in China. However, our PRC legal counsel has advised us that, manufacturing and sales of clean-room consumables products is not a sensitive business area for foreign investment and the chance of it being classified as a restricted or prohibited industry in future amendments of the catalogue is low.
 
 
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Tax
 
PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles and adjustments in line with the tax laws and regulations. In accordance with the PRC Income Tax Law on Foreign Invested Enterprise and Foreign Enterprise, or the former Income Tax Law, and the related implementing rules, foreign-invested enterprises incorporated in the PRC were generally subject to an enterprise income tax of 30% on taxable income and a local income tax of 3% on taxable income. The former Income Tax Law and the related implementing rules provided certain favorable tax treatments to foreign invested enterprises.
 
For instance, beginning with its first year of profitability, a foreign invested manufacturing enterprise with an operating period of no less than ten years would be eligible for an enterprise income tax exemption for two years followed by a three-year 50% reduction on its applicable enterprise income tax rate.
 
The effective income tax rate applicable to us in China depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred.
 
On March 16, 2007, the National People’s Congress, the Chinese legislature passed the new Enterprise Income Tax Law, which became effective on January 1, 2008. On December 6, 2007, the State Council approved and promulgated the Implementation Rules of PRC Enterprise Income Tax Law, which took effect simultaneously with the new Enterprise Income Tax Law. However, a number of detailed implementation regulations are still in the process of promulgation.
 
The new Enterprise Income Tax Law applies a uniform 25% enterprise income tax rate to both foreign invested enterprises and domestic enterprises and eliminates many of the preferential tax policies afforded to foreign investors. Furthermore, dividends paid by a foreign invested enterprise to a non-resident shareholder are now subject to a withholding tax of 10%, which may be reduced under any applicable bilateral tax treaty between China and the jurisdiction where the non-resident shareholder resides.
  
According to the Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation), which was issued by the State Administration of Taxation (“SAT”) on August 24, 2009 and became effective on October 1, 2009, the application of the preferential withholding tax rate under bilateral tax treaty is subject to the approval of competent PRC tax authority. According to the Circular of the State Administration of Taxation on How to Understand and Identify “Beneficial Owner” under Tax Treaties, which became effective on October 27, 2009, the PRC tax authorities must evaluate whether an applicant for treaty benefits in respect of dividends, interest and royalties qualifies as a “beneficial owner” on a case-by-case basis and following the “substance over form” principle. This circular sets forth the criteria to identify a “beneficial owner” and provides that an applicant that does not carry out substantial business activities, or is an agent or a conduit company may not be deemed as a “beneficial owner” of the PRC subsidiary and therefore may not enjoy tax treaty benefits.
 
An enterprise registered under the laws of a jurisdiction outside China may be deemed a Chinese tax resident if its place of effective management is in China. If an enterprise is deemed to be a Chinese tax resident, its worldwide income will be subject to the enterprise income tax. According to the implementation rules of the new Enterprise Income Tax Law, the term “de facto management bodies” is defined as bodies that have, in substance, and overall management and control over such aspects as the production and the business, personnel, accounts and properties of the enterprise. In addition, under the new Enterprise Income Tax Law, foreign shareholders could become subject to a 10% income tax on any gains they realized from the transfer of their shares, if such gains are regarded as income derived from sources within China, and the enterprise in which their shares invested is considered a “tax resident enterprise” in China. Once a non-Chinese company is deemed to be a Chinese tax resident by following the “place of effective management” concept and any dividend distributions from such company are regarded as income derived from sources within China, Chinese income tax withholding may be imposed and applied to dividend distributions from the deemed Chinese tax resident to its foreign shareholders.
 
The Enterprise Income Tax Law provides a five-year grandfathering period, starting from its effective date, for enterprises established before the promulgation date of the Enterprise Income Tax Law that were entitled to enjoy preferential tax policies under former Income Tax Law or regulations. However, subject to the Circular by the PRC State Council on the Implementation of the Grandfathering Preferential Policies under the PRC Enterprise Income Tax Law (Decree No. 2007 39), or the Implementation Circular, promulgated on December 26, 2007, only a certain number of the preferential policies provided under the former Income Tax Law, regulations, and documents promulgated under the legal authority of the State Council are eligible to be grandfathered in accordance with Implementation Circular.
 
With respect to our PRC operations, Maxclean (Wuxi) has already enjoyed the “two-year exemption” and “three-year half deduction” tax preferential policy and is now subject to a uniform 25% enterprise income tax rate as stipulated by the new Enterprise Income Tax Law.
 
Pursuant to the Provisional Regulation and its Implementing Rules, all entities and individuals that were engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are required to pay value-added tax (“VAT”). According to the Provisional Regulation, gross proceeds from sales and importation of goods and provision of services are generally subject to a VAT rate of 17% with exceptions for certain categories of goods that are taxed at a VAT rate of 13%. When exporting goods, exporters are entitled to a refund of a portion of or all of the VAT that they have already paid or borne. In addition, under the current Provisional Regulation, the input VAT for fixed assets is generally deductible from the output VAT, except for fixed assets that are non-VAT taxable items or VAT exempted items or fixed assets used in welfare activities or for personal consumption. According to former VAT levy rules, equipment imported for qualified projects was entitled to import VAT exemption and domestic equipment purchased for qualified projects was entitled to a VAT refund. However, such import VAT exemption and VAT refunds were both eliminated as of January 1, 2009. We have been in compliance with the applicable PRC tax regulations.
 
 
26

 
 
The governing law of our share swap agreement is Hong Kong law. Please see “Item 7. Major Shareholders and Related Party Transactions -- B. Related Party Transactions” section regarding the share swap agreement. The PRC laws may have certain effect on the arrangement in our share swap agreement from a taxation perspective. If the share swap agreement is deemed as an intentional arrangement to avoid enterprise income taxes arising from the transfer of shares, the PRC tax authorities may request us to pay off the transfer’s enterprise income taxes. However, the purpose of our share swap agreement was to reorganize our group structure instead of avoiding PRC enterprise income taxes. As such, the Board of Directors do not believe that the share swap is subject to the PRC taxation.
 
Foreign Currency Exchange
 
Historically, our operations have not been impacted by foreign currency exchange regulations in the PRC. Foreign currency exchange regulation in the PRC is primarily governed by the following rules:
 
 
l
Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and
 
 
l
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
 
Currently, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for most capital account items, such as direct investment, security investment and repatriation of investment, however, is still subject to registration with the PRC State Administration of Foreign Exchange (“SAFE”).
 
Under the Exchange Rules, foreign invested enterprises may buy, sell and remit foreign currencies at financial institutions engaged in foreign currency settlement and sale after providing valid commercial documents and, in the case of most capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign enterprises are also subject to limitations, which include approvals by the Ministry of Commerce, the State Reform and Development Commission and registration with SAFE.
 
Dividend Distribution
 
The principal regulations governing distribution of dividends paid by wholly foreign owned enterprises include:
 
 
l
Wholly Foreign Owned Enterprise Law (1986), as amended in 2000; and
 
 
l
Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended in 2001.
 
Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign owned enterprise in China is required to set aside at least 10.0% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. A foreign invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds and expansion funds, which may not be distributed to equity owners except in the event of liquidation. The local SAFE authority may not approve a company’s application of remitting dividends to overseas shareholders if the company is not in compliance with the above laws and regulations. Since our ability to pay dividends is subject to dividends received from our subsidiaries, our ability to distribute dividends for our shareholders may be affected if we are not in compliance with the above regulations. However, we believe that we have been in material compliance with the necessary regulations governing dividend distributions in the PRC.
 
Regulation of Foreign Exchange in Certain Return Investment Activities
 
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective on November 1, 2005, and was further supplemented by an implementing notice issued by the SAFE on November 24, 2005. SAFE Notice 75 suspends the implementation of two prior regulations promulgated in January and April of 2005 by SAFE. SAFE Notice 75 states that Chinese residents, whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them. The term “Chinese legal person residents” as used in the SAFE Notice 75 refers to those entities with legal person status or other economic organizations established within the territory of China. The term “Chinese natural person residents” as used in the SAFE Notice 75 includes all Chinese citizens and all other natural persons, including foreigners, who habitually reside in China for economic benefit. The SAFE implementing notice of November 24, 2005 further clarifies that the term Chinese natural person residents as used under SAFE Notice 75 refers to those “Chinese natural person residents” defined under the relevant PRC tax laws and those natural persons who hold any interests in domestic entities which are classified as “domestic-funding” interests.
 
 
27

 
 
Chinese residents are required to complete amended registrations with the local SAFE branch upon (i) injection of equity interests or assets of an onshore enterprise into an offshore entity, or (ii) subsequent overseas equity financing or equity investment by such offshore entity. Chinese residents are also required to complete amended registrations or filing with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers and long-term equity or debt investments, and providing security. Chinese residents who have already incorporated or gained control of offshore entities that have made onshore investment in China before SAFE Notice 75 was promulgated must register their shareholding in the offshore entities with the local SAFE branch on or before March 31, 2006.
 
Under SAFE Notice 75, Chinese residents are further required to repatriate into China all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. According to the Exchange Rules further amended in August 2008, Chinese residents are allowed to reserve foreign exchange income outside China. However, the terms and conditions for such reservation are still subject to further interpretations by SAFE. The registration and filing procedures under SAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction.
 
Under relevant guidelines issued by SAFE, a PRC subsidiary of an offshore special purpose company is required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner. If these shareholders fail to comply, the PRC subsidiary is required to report to the local SAFE authorities. If the PRC subsidiary of the offshore parent company does not report to the local SAFE authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions.
 
We believe we are in compliance with the aforementioned regulations.

C. Organizational Structure
 
The following chart summarizes our corporate structure as of December 31, 2012.

 
 
*
branch company
**
representative office
 
For more details of the Company and its subsidiaries, please see “Item 4. Information on the Company - A. History and Development of the Company” as discussed above.

 
28

 
 
D. Property, Plant and Equipment

Our principal executive offices are located in the People’s Republic of China.

The facilities used in our principal operations are located in Hong Kong, Wuxi, Shenzhen and Chengdu. Our manufacturing facilities are located in Wuxi, China, covering approximately 54,783 square meters. See “Item 4. Information on the Company – B. Business Overview – Property, Plant and Equipment” in this annual report.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report. This report contains forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
 
A. Operating Results

Overview

We manufacture clean-room consumable products. Our comprehensive range of disposable clean-room consumable products includes wipes, PE bags, sticky mats, face masks and other clean-room consumables, including swabs and caps, which we supply to our customers in the Chinese domestic and overseas markets. Our products are marketed under our trade name “Maxclean” and are employed in high-technology manufacturing industries, which require certain manufacturing and assembly processes to be carried out in highly controlled, dust-free and electrostatic-free critical environments. In particular, we seek to maximize purity levels for clean-room environments for customers in the hard disk drive, optics, semi-conductor, TFT-LCD (a type of liquid crystal display which employs TFT technology and is often used in television sets, computer monitors and mobile phones), electronics, biotechnology, pharmaceutics and food processing industries.
 
All of our products are manufactured at our modern facilities located in Wuxi. Our production lines have been certified to international ISO9001 and ISO14001 standards. Our products are sold through our four sales and marketing offices located in Hong Kong, Wuxi, Shenzhen and Chengdu.

Basis of Presentation
 
The consolidated financial statements of the Company have been prepared in accordance with IFRS issued by the International Accounting Standards Board (“IASB”). They have been prepared under the historical cost convention.
 
All income, expenses and unrealized gains and losses resulting from intercompany transactions and balances within the group are eliminated in full up on consolidation.
   
Critical Accounting Policies and Estimates

Critical accounting policies are policies important to the portrayal of a company’s financial condition and operating results, requiring management to make difficult and subjective judgments that are inherently uncertain. Based on this definition, we have identified the following significant accounting policies as critical to the understanding of our Consolidated Financial Statements. The preparation of our Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. These estimates and judgments are subject to an inherent degree of uncertainty. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. We continually evaluate our judgments, estimates and assumptions. To the extent there are material differences between these estimates and actual results, our Consolidated Financial Statements will be affected. We believe the following to be our more significant critical accounting policies and estimates used in the preparation of the consolidated financial statements. For further details on our principal accounting policies and accounting estimates and judgments, please refer to our Consolidated Financial Statements included elsewhere in this annual report.

 
29

 
 
Revenue recognition
 
We recognize revenue based on the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Company and the revenue and costs, if applicable, can be measured reliably, we recognize revenue from the sale of goods upon the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed. We retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold. Revenue excludes value added tax or other sales tax and is after deduction of any trade discounts.
 
Although it is our policy is to recognize product returns as a reduction of revenue, we have not deemed it necessary to accrue for returns at the time when sales are recorded, as we have not experienced any product returns or similar claims. Our management periodically reviews this matter and will consider making such accruals, when there are indications of significant sales returns or similar claims in future periods.
 
Useful lives of property, plant and equipment
 
Our management reviews the estimated useful lives of our assets regularly in order to determine the amount of depreciation and amortization expenses for the periods. Management determines the useful lives of its property, plant and equipment based on their historical experience with assets of a similar nature and functions and taking into account anticipated technological changes. Management will revise the depreciation period where actual useful lives are different from those previously estimated, and write off or write down the value of obsolete or non-strategic assets that have been abandoned. Currently, the useful lives of the Company’s property, plant and equipment estimated by our management are as follows:


Buildings
Over the shorter of lease terms or 20 years
Leasehold improvements
Over the shorter of lease terms or 5-20 years
Plant and machinery
5-10 years
Motor vehicles
5 years
Furniture, fixtures and office equipment
5 years
 
Net realizable value of inventories
 
Net realizable value of inventories is the estimated selling price in the ordinary course of business, less estimated costs to completion and selling expenses. The net realizable value is estimated based on the current market conditions and historical experience of manufacturing and selling products of similar nature. The estimates can change significantly as a result of changes in customer preferences or competitor actions in response to severe industry cycles. Management reassesses these estimates at the end of each reporting period.
 
Impairment of property, plant and equipment and land lease prepayments
 
The recoverable amount of an asset is the higher of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset, which requires significant judgement relating to level of revenue and amount of operating costs. We use all readily available information in determining an amount that is a reasonable approximation of the recoverable amount, including estimates based on reasonable and supportable assumptions and projections of revenue and operating costs. Changes in these estimates could have a significant impact on the carrying value of the assets and could result in an additional impairment charge or reversal of impairment in future periods.
 
Impairment of receivables
 
We maintain an impairment allowance for doubtful accounts based upon evaluation of the recoverability of the accounts receivable and other receivables, where applicable, at the end of each reporting period. The estimates are based on the ageing of the accounts receivable and other receivable balances and the historical write-off experience, net of recoveries. If the financial condition of the debtors were to deteriorate, an additional impairment allowance may be required.

 
Trends and Factors Affecting Our Results of Operations
 
We believe that the following factors have had, and we expect that they will continue to have, a significant effect on the development of our business, financial condition and results of operations:
 
Demand for our clean-room consumable products
 
Our business and revenue growth depends on demand for clean-room consumable products. The clean-room consumable products market has grown significantly since the 1980’s. Global demand for clean-room consumable products is dependent on a diverse number of industries, namely the electronics, medical device technology, biotechnology, pharmaceutical, and aerospace industries and their respective supporting industries.
 
 
30

 
 
Demand for our clean-room consumable products also depends on the general economic conditions in our target markets. In 2009, demand for our products decreased significantly due to the global economic downturn starting in 2008. Since the second quarter of 2010, however, we believe that demand for clean-room consumable products has recovered significantly as the effects of the global economic crisis that started in 2008 have subsided. Nonetheless, there have been recent concerns over the sustainability of growth in the world’s economy due in part to the solvency of certain European Union member states and it is unclear how a slowdown will impact our business.
 
Pricing and other competitive pressures
 
The prices of our products are based on a variety of factors, including our raw material costs, supply and demand conditions for clean-room consumable products in the market, product mix, product quality and the terms of our customer contracts, including sales volumes.
 
From 2011 to 2012, the pricing of our products, except for wipes and PE bags, underwent a significant fluctuation and downward adjustment further adversely impacting our operating margins. For example, the average selling price of face masks decreased from RMB0.13 per piece in 2011 to RMB0.12 per piece in 2012. The overall decrease in unit selling price can generally be attributable to increased competition combined with the increased supply of clean-room consumable products.

From 2011 to 2012, the average selling price of wipes increased from RMB0.17 per piece to RMB0.24 per piece as the sales of our high-end wipe products increased for the same period. The average selling price of PE bags increased from RMB0.11 per pieces in 2011 to RMB0.12 per piece in 2012.
 
Product mix
 
Our key products include clean-room wipes, PE bags, face masks and sticky mats. For the years ended December 31, 2012, 2011 and 2010, we derived approximately 64.1%, 77.7% and 80.6%, respectively, of our revenues from the sale of these key products. As our product mix continues to evolve, we have expanded our production capabilities to manufacture a greater mix of products, while continuing to consolidate our presence as a market leader in the sale of clean-room wipes and PE bags. For the years ended December 31, 2012, 2011and 2010, we derived approximately 41.0%, 55.7% and 55.3%, respectively, of our revenues from the sale of clean-room wipes and PE bags. Each clean-room consumable product we produce involves different raw materials, production process, average selling prices and profit margins. Accordingly, our historical results of operations from period to period have been significantly influenced by our changing product mix, and we expect that our operating results for future periods will continue to be influenced by our product mix. The following table presents the average selling price, average unit cost and average margin of our key products for the periods indicated:


   
Year ended December 31,
 
   
2012
   
2011
 
   
Average
unit
selling
price