DRS 1 filename1.htm tv500812_drs - none - 16.9645186s
As confidentially submitted to the Securities and Exchange Commission on October 11, 2018
Registration No. 333-         ​
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form F-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
YX Asset Recovery Limited
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Cayman Islands
7320
Not Applicable
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
Xincheng Science and Technology Park Building 7
West Yuelu Road No. 588
Changsha 410205, Hunan Province
People’s Republic of China
+86 731-81829999
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
C T Corporation System
111 Eighth Avenue
New York, NY 10011
+1-212-894-8940
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Jia Yan, Esq.
Jason T. Kuo, Esq.
Paul Hastings LLP
43/F, Jing An Kerry Center Tower II
1539 Nanjing West Road
Shanghai 200040, China
+86 21-61032900
Stephanie Tang, Esq.
Shearman & Sterling LLP
12/F, Gloucester Tower
The Landmark
15 Queen’s Road, Central, Hong Kong
+852 2978-8000
Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging growth company ☒​
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be Registered
Proposed Maximum
Aggregate Offering Price(3)
Amount of
Registration Fee
Class A ordinary shares, par value US$0.01 per share(1)(2)
US$          
US$         
(1)
Includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes Class A ordinary shares that may be purchased by the underwriter pursuant to an over-allotment option. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.
(2)
American depositary shares evidenced by American depositary receipts issuable upon deposit of the ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 (Registration No. 333-         ). Each American depositary share represents           Class A ordinary shares.
(3)
Estimated solely for the purpose of computing the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion) Issued            , 2018
          American Depositary Shares
[MISSING IMAGE: tv500812_img-ridero.jpg]
YX Asset Recovery Limited
Representing           Class A Ordinary Shares
This is an initial public offering of American depositary shares, or ADSs, of YX Asset Recovery Limited.
We are offering           ADSs[, and the selling shareholders are offering           ADSs]. We will not receive any proceeds from the sale of shares by the selling shareholders. Each ADS represents           of our Class A ordinary shares, par value US$0.01 per share.
Prior to this offering, there has been no public market for our ADSs or shares. Our ADSs have been approved for listing on the Nasdaq [Global] Market under the symbol “         .”
Immediately following the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. Mr.  Man Tan will beneficially own all of our issued Class B ordinary shares and will be able to exercise       % of the total voting power of our issued and outstanding share capital immediately following the completion of this offering, assuming the underwriter does not exercise its option to purchase additional ADSs. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 10 votes and is convertible into one Class A ordinary share. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstance.
PRICE US$          PER ADS
Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Price to Public
Underwriting
Discounts
and Commission(1)
Proceeds to us(1)
[Proceeds to
Selling
Shareholders]
Per ADS
US$         
US$         
US$         
US$         
Total
US$         
US$         
US$         
US$         
(1)
See “Underwriting” for additional disclosure regarding reimbursement arrangement between us and the underwriter.
We [and the selling shareholders] have granted the underwriter the right to purchase up to an additional           ADSs to cover over-allotments at the initial public offering price less the underwriting discount.
The underwriter expects to deliver the ADSs against payment in U.S. dollars in New York, New York on          , 2018.
Jefferies
Prospectus dated            , 2018

TABLE OF CONTENTS
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You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free-writing prospectus. We are offering to sell, and seeking offers to buy, the ADSs only under circumstances and in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.
Neither we nor the underwriter has taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus or any filed free writing prospectus outside the United States.
Until            , 2018 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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Prospectus Summary
The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by iResearch, a third-party research firm, in October 2018 to provide information regarding our industry and our market position in China. We refer to this report as the “iResearch Report.” This prospectus also contains information available from iResearch that was not commissioned by us, which we cite and identify in this prospectus with the language “according to iResearch.”
Our Mission
We aspire to become a market leading full-service provider of consumer debt collection and asset management based on our technical know-how, scale, innovation and quality services.
Business Overview
We are a leading business service provider of delinquent consumer debt collection in China. According to iResearch, we are the largest provider of delinquent credit card receivables recovery service in terms of total value of receivables under collection, total commission, and number of collection specialists employed in 2017 and for the six months ended June 30, 2018. We offer nation-wide consumer debt collection services in China. We collect delinquent consumer receivables such as credit card receivables originated by commercial banks, and online receivables originated by online lenders. Our clients, which include six of the top 10 commercial banks by the number of credit cards issued in China and reputable online lenders in China in 2017, engage our services to collect delinquent consumer receivables and we generate commission-based fees based on our collection success. Our industry expertise, operation scale, innovative approach and IT infrastructure allow us to offer our clients a cost-effective and trustworthy solution to recover delinquent consumer receivables. We intend to continue to leverage our strengths and grow our business through our disciplined and responsible strategy, which has contributed to our growth and success to-date.
We focus on the collection of tertiary receivables. According to iResearch, for the six months ended June 30, 2018, we outperformed the second largest service provider in the tertiary receivables recovery market in terms of total value of receivables under collection, total amount collected, total commission, and number of collection specialists employed by a large margin. The commission rate for the collection of tertiary receivables is typically higher than that of fresher receivables, such as primary and secondary receivables, because tertiary receivables are past due for a longer period of time or may be charged-off, and thus more difficult to collect compared to fresher receivables. In most cases, prior to engaging us, our clients had unsuccessfully attempted to collect these delinquent consumer receivables through their in-house collection teams and other service providers before the receivables became tertiary. In 2017, we derived 96.6% of our revenues from the collection of credit card receivables and 3.1% from the collection of other receivables, substantially all of which consist of online receivables.
Our centralized management and remote collection ability contribute to our overall success. According to iResearch, we are one of the pioneers in the industry to provide collection services solely by remote means, such as telephone and text messages, or remote collection, without on-site visit or face-to-face negotiation with debtors. We purposefully do not engage in face-to-face interaction to avoid potential physical confrontation with debtors, control compliance-related risks, streamline and standardize the collection process, and increase collection efficiency. Our quality assurance team leverages our technology and IT system to monitor the conduct of collection specialists more efficiently through remote collection. For example, our operating portal records all telephone conversations with debtors, and our quality assurance team reviews these recordings internally for quality assurance purposes in accordance with our quality assurance protocol. For the six months ended June 30, 2018, 28.9% of all cases assigned were inspected. In addition, we coordinate and manage all client engagements and collection assignment allocations centrally through our Changsha headquarters as part of an integrated and centralized operation management system, or centralized management, while we have offices located in all provinces of China primarily to carry out our collection activities. Our proprietary operating portal automatically and centrally assigns collection tasks to collection specialists at headquarters and other call centers monthly following its pre-set distribution rules
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considering factors such as the current workload of a particular collection specialist and the value and difficulty of the collection tasks. We believe our centralized management allows us to consolidate marketing efforts, standardize collection process and monitor quality compliance of thousands of collection specialists. We believe our centralized management enables us to expand rapidly and efficiently while maintaining our work quality.
We believe the expertise of our collection team is critical to the success of our business. Our experience is that the tenure and the productivity of our collection specialists are positively correlated in performance measures, especially in the first two years of the collection specialists’ employment. Experienced collection specialists are critical in conducting skip tracing and negotiation with debtors. As a result, we place considerable focus on the hiring, training, retention and motivation of our collection team by providing mentorship, continued education and promotion track based on performance. Our senior collection specialists in each work group, including the department leader, deputy manager and manager-in-charge, have more than two years of experience working with us on average. In addition, we employ a performance monitoring system to monitor our collection specialists’ activities and set daily minimum performance standards, which is linked to our compensation structure based on performance. We expect continued improvement in productivity and profitability as our collection specialists accumulate experience over time. As of June 30, 2018, we had approximately 7,734 full time collection specialists in our offices located in 32 cities in China, which constituted 94.9% of our employees. Monthly average amount collected per collection specialist reached RMB22,827 (US$3,508) for the six months ended June 30, 2018, which was 14.7% higher than that for the year ended December 31, 2017.
We are committed to maintaining and upgrading our technological advances. We focus on building our technology platform, which is supported by our proprietary customer database. Our integrated platform and information technology ensure efficient data mapping and robust reporting capabilities to generate continuously improving collection results. For example, our self-developed proprietary information technology system, or operating portal, supports the core processing functions of our business under a set of integrated databases and are designed to be both replicable and scalable to accommodate our organic growth. Our system is also configured with multiple layers of security modules, as part of our overall data privacy and security program, to protect our database from unauthorized access.
We and Mr. Tan, our founder, have more than 15 years of experience in collecting delinquent consumer receivables. Mr. Tan has utilized his backgrounds in law and entrepreneurship to lead our business operation. Mr. Tan also devoted his expertise and resources to the development of legislation, industry standards, as well as education in the area of delinquent consumer receivables recovery. In addition, our senior management is comprised of executives with over 10 years of industry experience on average. Our senior management team’s experiences paired with its understanding of the Chinese delinquent consumer receivables recovery industry have helped and, we believe, will continue to help us become a strong industry leader.
Our Industry
China’s credit market experienced substantial growth in recent years due to a fast growing economy and an evolving consumer base. The government’s effort to implement policies promoting consumption and spending led to consumption upgrades in terms of quantity and quality and in turn triggered the growth of consumer lending in terms of volume and popularity.
China’s delinquent consumer receivables recovery market is in its early stage of development and has experienced a high rate of growth since 2013, compared to more mature markets such as that of the United States. According to iResearch, total revenue generated by China’s delinquent consumer receivables recovery market grew at a CAGR of 53.0% from 2013 to 2017, compared with a CAGR of 2.9% in the U.S. market during the same period. At the same time, market share of the top three service providers measured by total revenue, or market concentration, was 3.8% for China’s market, compared with 26.8% for the U.S. market in 2017. iResearch believes that major market participants in China have growth opportunities through consolidation of the fragmented market shares with reputable brand, strong relationship with financial institutions and sufficient human and capital resources.
The key characteristics of the tertiary receivable segment of the market are its availability in larger monetary value, higher commission rates, high entry barriers and potential for operations expansion.
The delinquent consumer receivables recovery industry in China is highly fragmented. There were over 3,000 collection agencies in the market, with over 1,000 collection agencies in the tertiary credit card receivables segment as of June 30, 2018. Key competitive factors of these service providers included (i) reputable brand names in order
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to maintain long-term cooperation with commercial banks and online lenders; (ii) sizable volumes enabled by centrally-managed and large teams; (iii) professional and standardized operations in compliance with relevant rules and regulations; (iv) use of technology such as big data information recovery, electronic claims, electronic judgments and smart training in order to reduce human capital costs; and (v) cultivation of professional employees.
Our Competitive Strengths
We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:

our leading position in the delinquent consumer receivables recovery industry and strong relationships with major credit originators;

our advanced know-how and proven track record in an emerging industry;

our innovative collection process supported by advanced proprietary IT systems and infrastructure;

our proven ability to hire, develop and retain a strong team of collection specialists; and

our visionary and experienced leadership.
Our Strategies
We believe the following strategies may contribute to our goal of becoming a market leading full service consumer debt collection and asset management company:

continue to invest in and upgrade our data mining and artificial intelligence;

broaden our industry and market participation;

continue to expand our regional presence; and

strengthen cooperation with major credit originators and diversify our business.
Our Challenges
We face risks and uncertainties in realizing our business objectives and executing our strategies, including those relating to:

increased regulatory risk resulting from public complaints against our industry;

unexpected reactions from debtors to our request for payment;

deterioration of business relationship with major clients;

obtaining sufficient delinquent consumer receivables for collection;

retaining efficiency in collecting delinquent consumer receivables;

changes in fee arrangements with clients;

violation of compliance policies, collection standards and government rules and regulations;

retaining existing and attracting new clients;

retaining experienced employees and attracting talents; and

our limited operating history.
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Corporate History and Structure
In April 2014, Ms. Xiaofang Zhou, or Ms. Zhou, established Hunan Yong Xiong Investment Management Co., Ltd., or Yong Xiong Investment with other shareholders. In July 2015, Mr. Man Tan, Ms. Zhou’s spouse, or Mr. Tan, purchased 94% and 3% equity interests of Yong Xiong Investment from Ms. Zhou and another shareholder, respectively. Upon the completion of such share purchase, Mr. Tan and Ms. Zhou held 97% and 3% equity interest of Yong Xiong Investment, respectively. Yong Xiong Investment was renamed the Yong Xiong Group in 2015.
Beginning in August 2018, we began our restructuring in contemplation of this offering. Under the restructuring:

Incorporation of the listing entity. In August 2018, we incorporated YX Asset Recovery Limited under the laws of the Cayman Islands as our offshore holding company to facilitate financing and an offshore listing.

Incorporation of British Virgin Islands holding company, Hong Kong holding company and WFOE. In August 2018, YX Asset Recovery Limited established a wholly-owned subsidiary in the British Virgin Islands named YX International Holding Ltd. In September 2018, YX International Holding Ltd established a wholly-owned subsidiary in Hong Kong named YX Services Limited. YX Services Limited will establish a wholly-owned subsidiary in China named          .

Contractual arrangements. Our WFOE will enter into a series of contractual arrangements with the Yong Xiong Group, which we refer to as our VIE in this prospectus, and its respective shareholders. These contractual arrangements will enable us to exercise effective control over our VIE; receive substantially all of the economic benefits of our VIE; and have an exclusive option to purchase all or part of the equity interests in and assets of them when and to the extent permitted by PRC law. For more details, please see “—Contractual Arrangements with the VIE and Its Shareholders.
Upon the completion of our restructuring and as a result of our direct ownership in our WFOE and the VIE contractual arrangements, we will be regarded as the primary beneficiary of our VIE. Upon the completion of our restructuring, we will consolidate the financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.
In August 2018, Mr. Tan, Ms. Zhou, the Yong Xiong Group and Shanghai China Ping An Guo Jing Equity Investment Fund Partnership (Limited Partnership), or Zhong Ping Capital, entered into a framework agreement, pursuant to which Zhong Ping Capital agreed to purchase 20% equity interest of YX Asset Recovery Limited from Mr. Tan, and a nominal 0.0001% equity interest of the Yong Xiong Group from Mr. Tan or, collectively, the Zhong Ping Transaction. At the closing of the Zhong Ping Transaction, Zhong Ping Capital will directly or indirectly acquire           ordinary shares of YX Asset Recovery Limited from Mr. Tan and such ordinary shares will be re-designated as Series A redeemable convertible preferred shares of YX Asset Recovery Limited, or preferred shares, at the closing of the Zhong Ping Transaction. The closing of such transaction is subject to customary closing conditions, including government approval in China.
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The following diagram illustrates our corporate structure, including our principal subsidiaries and the VIE, upon the completion of our restructuring and the closing of the Zhong Ping Transaction:
[MISSING IMAGE: tv500812_chrt23-r1.jpg]
Notes:
(1)
The shareholders of Hunan Yong Xiong Asset Management Group Co., Ltd. are Mr. Man Tan, who holds [96.9999]% of its equity interest, Ms. Xiaofang Zhou, who holds [3]% of its equity interest, and Zhong Ping Capital, which holds [0.0001]% of its equity interest.
(2)
In the process of de-registration in the local administrative bureau of industry and commerce.
Corporate Information
Our principal executive offices are located at Xincheng Science and Technology Park Building 7, West Yuelu Road No. 588, Changsha 410205, Hunan Province, People’s Republic of China. Our telephone number at this address is +86 731 81829999. Our registered office in the Cayman Islands is located at Office of Sertus Incorporations
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(Cayman) Limited, Sertus Chambers, Governors Square, Suite #5-204, 23 Lime Tree Bay Avenue, P.O. Box 2547, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is C T Corporation System, located at 111 Eighth Avenue, New York, NY 10011.
Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is http://www.hnyongxiong.com/. The information contained on our website is not a part of this prospectus.
Implications of Being an Emerging Growth Company
As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012 (as amended by the Fixing America’s Surface Transportation Act of 2015), or the JOBS Act. As such, we may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of our internal control over financial reporting. Under the JOBS Act, we also do not need to comply with any new or revised financial accounting standards until the date that private companies are required to do so.
We will remain an emerging growth company until the earliest of  (i) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of completion of this offering; (iii) the date on which we have, during the previous three-year period, issued more than US$1.07 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.
Conventions Which Apply to this Prospectus
Unless we indicate otherwise, all information in this prospectus assumes the underwriter does not exercise its option to purchase up to           additional ADSs representing           Class A ordinary shares from us.
Except where the context otherwise requires and for purposes of this prospectus only:

“ADSs” refers to our American depositary shares, each of which represents           Class A ordinary shares;

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

“delinquent consumer receivables” refer to unpaid and past due financial obligations of consumers owed to credit originators, including commercial banks, online lenders and other financial service providers;

“IP” refers to intellectual property;

“IT” refers to information technology;

“online loan” refers to any consumer credit loan originated by online lenders, typically the consumer finance departments of the largest internet companies in China with principal value of less than RMB10,000 (US$1,537);

“online receivables” refer to receivables of online loans;

“our WFOE” or “our PRC subsidiary” refers to          , a wholly-owned subsidiary of YX Services Limited in China;

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

“shares” or “ordinary shares” prior to this offering refers to our Class A ordinary shares and Class B ordinary shares, par value $0.01 per share;

“tertiary receivables” refer to credit card receivables that are typically more than 12 months past due or are charged-off and online receivables that are typically more than six months past due or are charged-off;

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

“we,” “us,” “our company” and “our” refer to YX Asset Recovery Limited, a Cayman Islands company, and its subsidiaries, and, in the context of describing our operations and consolidated financial information, also include its VIE in the PRC; and
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“Yong Xiong Group” refers to Hunan Yong Xiong Asset Management Group Co., Ltd.
This prospectus contains information and statistics relating to China’s economy and the industries in which we operate derived from various publications issued by market research companies and PRC governmental entities, which have not been independently verified by us, the underwriter or any of its respective affiliates or advisers. The information in such sources may not be consistent with our internal operating data and other information compiled in or outside of China.
All of our operations are conducted in China and all of our revenues are denominated in RMB. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB6.5063 to US$1.00, the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on December 29, 2017. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On October 5, 2018, the noon buying rate was RMB6.8680 to US$1.00.
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The Offering
Offering price
$          per ADS.
ADSs offered by us
          ADSs (or           ADSs if the underwriter exercises its option to purchase additional ADSs in full).
ADSs offered by the selling shareholders
          ADSs if the underwriter exercises its option to purchase additional ADSs in full.
ADSs to Class A ordinary share ratio
Each ADS represents the right to receive           Class A ordinary shares, par value $0.01 per share.
ADSs outstanding immediately after
this offering
          ADSs (or           ADSs if the underwriter exercises its option to purchase additional ADSs representing Class A ordinary shares in full).
Ordinary shares outstanding immediately after this offering
          Class A ordinary shares (or           Class A ordinary shares if the underwriter exercises its option to purchase additional ADSs representing Class A ordinary shares in full) and           Class B ordinary shares.
The ADSs
Each ADS represents           Class A ordinary shares. The depositary will hold the Class A ordinary shares underlying your ADSs and you will have rights as provided in the deposit agreement.
You may turn in your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.
We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.
To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.
Option to purchase additional ADSs
We [and the selling shareholders] have granted to the underwriter an option, exercisable within 30 days from the date of this prospectus, to purchase up to an additional           ADSs.
Use of proceeds
We expect that we will receive net proceeds of approximately $          million from this offering, or approximately $          million if the underwriter exercises its option to purchase additional ADSs from us in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us of  $          million.
We plan to use 60% of the net proceeds we receive from this offering to expand and enhance our delinquent consumer receivable collection operations, 30% to upgrade our technology and IT infrastructure, and the balance for working capital and other general corporate purposes. See “Use of Proceeds” for more information.
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We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
Nasdaq symbol
         
Depositary
         
Lock-up
[We, our directors, executive officers and our existing shareholders] have agreed with the underwriter not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of  [180] days after the date of this prospectus, subject to certain exceptions.] See “Shares Eligible for Future Sale” and “Underwriting.”
Risk factors
See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in the ADSs.
The number of ordinary shares that will be outstanding immediately after this offering:

assumes (i) re-designation or conversion of all outstanding ordinary shares and preferred shares (other than ordinary shares held by YX Major Limited) into           Class A ordinary shares and (ii) re-designation or conversion of all outstanding ordinary shares held by YX Major Limited into           Class B ordinary shares, in each case immediately upon the completion of this offering;

assumes no exercise of the underwriter’s option to purchase additional ADSs representing Class A ordinary shares;

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

excludes           Class A ordinary shares reserved for future issuances under our equity incentive plans.
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Summary Consolidated Financial and Operating Data
The following summary consolidated statements of income data (other than US$ data) for the years ended December 31, 2016 and 2017, summary consolidated balance sheets data (other than US$ data) as of December 31, 2016 and 2017 and summary consolidated cash flow data (other than US$ data) for the years ended December 31, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with the generally accepted accounting principles in the United States, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
Year ended December 31,
2016
2017
RMB
RMB
US$
(in thousands)
Summary Consolidated Statements of Income Data
Revenues
435,636 595,279 91,493
Cost of revenues
(244,109) (388,106) (59,651)
Gross Profit
191,527 207,173 31,842
Net income
97,649 109,569 16,840
As of December 31,
2016
2017
RMB
RMB
US$
(in thousands)
Summary Consolidated Balance Sheets Data:
Cash 45,003 44,830 6,890
Accounts receivable
91,819 105,110 16,155
Amounts due from related parties
45,695 117,594 18,074
Total assets
361,458 530,167 81,485
Short-term bank loans, including current portion of long-term bank loan
111,466 8,833 1,358
Amounts due to related parties
22,052 77,605 11,928
Long-term bank loan, excluding current portion
34,908 30,275 4,653
Total liabilities
291,315 320,485 49,258
Total equity
70,143 209,682 32,227
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Year ended December 31,
2016
2017
RMB
RMB
US$
(in thousands)
Summary Consolidated Cash Flow Data:
Net cash provided by operating activities
88,801 137,165 21,082
Net cash used in investing activities
(132,081) (105,797) (16,261)
Net cash provided by (used in) financing activities
80,303 (31,541) (4,848)
Net increase (decrease) in cash
37,023 (173) (27)
Cash at the beginning of the year
7,980 45,003 6,917
Cash at the end of the year
45,003 44,830 6,890
Year ended December 31,
2016
2017
RMB
RMB
US$
(in thousands)
Operating Data
Monthly average delinquent consumer receivables under collection (MARC)
7,249,989 14,951,372 2,297,984
Total amount collected
920,547 1,435,991 220,708
Monthly average amount collected per collection specialist
19 20 3
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Risk Factors
You should carefully consider the risks described below in connection with reviewing this prospectus. If any of the events referred to below actually occurs, our business, financial condition, liquidity and results of operation could suffer. In that case, the trading price of our ADS could decline and you may lose all or part of your investment. You should also refer to the other information in this prospectus, including our consolidated financial statements and the related notes.
Risks Related to Our Business
We may not be able to collect delinquent consumer receivables efficiently and a decline in our ability to collect delinquent consumer receivables could adversely affect our ability to generate revenues.
The success of our business depends on our ability to collect delinquent consumer receivables efficiently. Our clients pay us a certain percentage of the total amount of delinquent consumer receivables collected as commission; the commission rates correlate strongly to our collection rates. Our operations have been profitable largely due to the fact that we have been able to collect these delinquent consumer receivables efficiently, and thus receive a relatively high commission rate. Our ability to collect delinquent consumer receivables and generate revenues may be adversely affected by the debtors’ inability to repay in a bad economy, the quality of the receivables, or any problem with our operating portal. If we are unable to collect these delinquent consumer receivables efficiently in the future, our business, financial condition and results of operations could be significantly and adversely impacted.
Our operating margin will suffer if we are not able to maintain our commission, utilize our collection specialists and assets efficiently or maintain and improve the current mix of services that we deliver.
Our operating margin is largely a function of the commission that we receive for our services, the efficient use of our technology, and the utilization of our collection specialists. Our business model is predicated on our ability to objectively quantify the value that we provide to our clients. If we fail to succeed on any of these objectives, we may experience a decline in our current operating margin.
The commission we receive for our services, and our ability to manage our technology and collection specialists efficiently, are affected by a number of factors, including:

our clients’ perceptions of our ability to add value through our services;

our ability to negotiate on commercial terms with our clients;

our ability to objectively differentiate and verify the value we offer to our clients;

competition;

introduction of new services by us or our competitors;

cost of communication services;

our ability to estimate demand for our services;

our ability to control costs and improve the efficiency of our collection specialists; and

general economic and political conditions.
If we are not able to maintain our commission rates or utilize our collection specialists and assets efficiently, our results of operations may be adversely affected.
Changes in fee arrangements with clients could adversely affect our ability to generate revenues.
Our clients may choose to suspend or terminate our services, or revise the terms of our future services, at any time and any such suspension, termination or revision could adversely affect our ability to generate revenues. For example, certain clients set annual caps on the total amount of commission that can be paid to a collection service provider. If an annual cap for our services is reached during the year, such client may suspend our collection services for the remainder of the year. Since our service contracts are typically renewed periodically, or at the very least annually, and clients usually have the stronger bargaining power in negotiating the commission rates, our clients may also reduce commission rates or revise other commercial terms such as payment schedule and requirements for deposit payments in new contracts. Such new commercial terms may not be as favorable as existing terms. As a result, our ability to generate revenues and our profitability may be adversely affected by our clients’ actions, which are beyond our control.
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We may not be able to obtain sufficient delinquent consumer receivables for collection from our clients to sustain our business operations.
We provide services to commercial banks and online lenders to collect the delinquent consumer receivables that our clients are not able to collect on their own. The fees that we receive for collecting these delinquent consumer receivables currently represent almost all of our revenues, and we expect this trend to continue in the future. To operate profitably, we must continuously receive a sufficient supply of delinquent consumer receivables for collection from our clients.
The availability of delinquent consumer receivables for collection depends on a number of factors outside of our control, including the continued growth of consumer debts in China. The growth in consumer debts may be affected by commercial banks and online lenders’ underwriting criteria and government regulations with respect to consumer loans. Any slowing of the consumer debt growth could result in less credit being extended. Therefore, there can be no assurance that our existing or potential clients will continue to outsource their delinquent consumer receivables at recent levels or at all, or that we may be able to continue to offer competitive bids or services for delinquent consumer receivable collection.
If we are unable to maintain, develop and expand our business or adapt to changing market needs as well as our current or future competitors are able to do, or if the amount of outsourced delinquent consumer receivables available in the market for collection decreases, we may not be able to obtain the same amount of delinquent consumer receivables for collection from our clients as we have in the past. As a result, we may not be able to generate the same level of revenues or profits to sustain our operations.
We are highly dependent on our telecommunications and computer systems, and an interruption or error in those systems could have an adverse effect on our business and results of operations.
Our business is materially dependent on our proprietary operating portal and services provided by various telecommunications companies. Development and maintenance of our proprietary operating portal is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our operating portal from functioning properly and consequently adversely affect our information infrastructure and our business. If our equipment or systems cease to work or become unavailable, or if there is any significant interruption in telephone services, we may be prevented from providing services and collecting on delinquent consumer receivables. Our business also depends on the efficient and uninterrupted operation of our computer and communications systems. All of our computer hardware and our computing services are currently located in China. Although we have prepared for contingencies through redundancy measures and disaster recovery plans, such preparation may not be sufficient, and we currently do not carry business interruption insurance. Despite any precautions we may take, the occurrence of a natural disaster, such as an earthquake, flood or fire, or other unanticipated problems at our offices in China, including power outages, telecommunications delays or failures, break-ins to our systems or computer viruses, could result in delays or interruptions to our marketplaces and platforms, loss of our and debtors’ data and business interruption for us. Any of these events could damage our reputation, significantly disrupt our operations and subject us to liability, which could materially and adversely affect our business, financial condition and results of operations.
Our employees may violate our compliance policies, our clients’ collection standards and government rules and regulations during the collection process.
We have compliance policies to instruct and guide our employees’ actions during the course of the collection process to comply with our clients’ collection standards and government rules and regulations. However, our employees may not comply with our compliance policies and observe our clients’ collection standards, and our employees may make verbal or written threats of physical harm, use vulgar or inappropriate language, agree to unauthorized repayment arrangements with debtors or contact their friends or relatives, among other actions, in order to increase the likelihood of collection.
Furthermore, our employees may violate laws and regulations in the collection process. Our employees may use illegal tactics such as impersonation of government officials or fabricated documents to exert influence over debtors, and they may sell debtor information to third parties for their personal financial gains.
Although these are individual acts, violation of our compliance policies or our clients’ standards may adversely affect our business, cause reputational damage, or result in monetary penalties or loss of business. If the violations are severe, our clients may terminate our services and cease cooperation with us in the future. For example, in June 2018, one of our major clients suspended our collection services in Anhui province due to alleged improper conduct by our employees. See “Business—Compliance and Quality Control—Complaints Against Our Service.” In addition, the government may investigate our operations for potential violations of government rules and regulations, which may interrupt our normal operations, and we may be subject to administrative penalties such as monetary penalties or, in the most severe circumstances, suspension of our business.
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We have a limited operating history and our historical financial and operating performance may not be indicative of our future results of operations.
Our company only commenced our tertiary delinquent unsecured consumer receivables, or tertiary receivables, recovery business in 2015, although our founder and senior management have accumulated over 15 years of experience in the delinquent consumer receivables recovery industry. As such, we have a limited operating history for you to evaluate our business, financial performance and prospects. We derive substantially all of our revenues from our tertiary receivable collection service, which is a business model that has undergone, and continues to experience, rapid and dramatic changes. For the fiscal years ended December 31, 2016 and 2017, we generated revenues of RMB435.6 million and RMB595.3 million (US$91.5 million), respectively. As a result, we have very little operating history for you to evaluate in assessing our future prospects. We may not be able to achieve similar results or growth in future periods. Our business model may become obsolete due to development of other business models or technologies.
We have primarily focused on the collection of credit card receivables for commercial banks but recently started the collection of other receivables, substantially all of which consist of online receivables. Although we currently focus our development on the consumer finance departments of the largest internet companies in China that provide online loans and expect significant growth, this aspect of our business remains in the early stages of its development. Accordingly, we have a limited operating history in the collection of online receivables and we may not have the experience and resources to analyze and collect online receivables as we do with credit card receivables.
The prospects of our online receivables collection operation must be considered in light of the risks and uncertainties accompanied with early business development. From 2016 to 2017, we received RMB10.0 billion in total online receivables from our clients for collection and have successfully collected RMB95.5 million. Our limited operating history makes prediction of future performance difficult.
You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving market. Our ability to maintain profitability primarily depends on many factors, including our ability to compete effectively in this market, our expertise in the collection of tertiary receivables, volume of receivables under collection, our clients’ willingness to waive deposits, our reputation to collect receivables in a timely fashion, our relationships with clients, our technology and IT infrastructure, our ability to bid on charged-off debt portfolios at appropriate terms, our ability to manage debtor complaints, our successful development of collection business with online lenders, and our team of collection specialists who provide quality customer service and compliance with applicable laws and regulations. We may not be able to maintain such qualities or sustain profitability on an annual basis. Accordingly, you should not rely on our results of operations for any prior period as an indication of our future performance. We may not be able to effectively assess or address the evolving risks and difficulties present in the market, which could threaten our capacity to continue to operate successfully in the future. We have a very limited operating history and our prospects must be considered in light of the risks and uncertainties that face early-stage companies.
Our business volume may decrease if our business relationships with major clients deteriorate.
We received delinquent consumer receivables for collection from 18 commercial banks and online lenders, and we identified five commercial banks as our major clients, which individually provided over 10% and, in the aggregate, 89% of our revenues in 2017. If our business relationships with any of these major clients deteriorate or terminate, the total amount of delinquent consumer receivables that we receive for collection may decrease. As new client relationships are challenging and time-consuming to develop, any termination could significantly and adversely affect our business, financial condition and results of operations.
As required by our business, we assign or delegate collection assignments to our branch companies, subsidiaries and affiliates from time to time. Such assignment and delegation may not be permissible under our contracts. In addition, we may be required to destroy certain debtor information or return it to our clients within the agreed time period. Our relationships with major clients may deteriorate if we breach contractual terms, such as any unauthorized assignment or delegation to our branch companies, subsidiaries and affiliates, or failure to fully comply with our contractual commitments to timely destroy or return debtor information.
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Our revenues would be adversely affected if our clients develop, use or adopt an alternative to our services.
If our clients decide to develop their own receivables collection solution or platform internally, engage other service providers, or develop their in-house collection team, our business could be adversely affected. For example, our clients may require our collection specialists to sign into our clients’ proprietary receivable collection system to access debtor information, instead of allowing us to use such information in our system. Since our success largely depends on our ability to use our advanced technology system to process successful collections, clients resorting to such alternate systems may eliminate our advantage. In addition, our clients may decide against the use of third party service providers altogether by relying on internal and proprietary resources, which could result in the reduction or loss of substantially all of our revenues.
We may not be able to manage our growth effectively.
We expanded rapidly since our formation and intend to continue to expand our business in terms of market segment participation, regional presence and strategic partnerships. However, our growth will place significant demands on our resources, and we may not manage our growth effectively in the future. In order to successfully manage our growth, we need to:

upgrade our administrative infrastructure to effectively oversee and manage the new business operations and regional offices;

continue to improve our management, financial and information systems and controls to enable nation-wide support to all regional offices;

provide comparable training and management to our current and new employees to meet the challenges entailed by the growth; and

provide competitive compensation package, and adjust our operations to be compatible with local culture to support our geographical expansion.
Continued growth could place a strain on our management, operations and resources. We cannot assure you that our infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth. If we cannot manage our growth effectively, our results of operations may be adversely affected.
We may not be able to diversify our operations.
Our current operations focus on the collection of tertiary receivables. While our business has been profitable, the lack of business diversification makes us vulnerable to market volatility within this particular market segment. We may enter into the collection of fresh, primary and secondary delinquent consumer receivables as well as acquire delinquent consumer receivables for our own collection to diversify our operations.
However, the primary and secondary delinquent consumer receivable market segments are highly competitive. As a new market participant, we may not compete successfully with the current market participants who have substantially longer operating histories and greater financial resources. There is no assurance that the strategy and methods we developed in the collection of tertiary receivables will be effective in the collection of fresh, primary and secondary delinquent consumer receivables. If we are not be able to offer competitive services, we may not be able obtain fresh, primary and secondary delinquent consumer receivables from potential clients.
We have limited experience in the acquisition of delinquent consumer receivables for our own collection. The PRC government has not allowed the trading of credit card receivables. Even if the law changes and allows our entry into such business, there is no assurance that we will receive the required government licenses to purchase credit card receivables. The success of any receivable acquisition business largely depends on the ability to price credit card receivables portfolios, and we may not have the appropriate expertise to price such portfolios. Although delinquent consumer receivables are generally purchased at a significant discount, the actual amount collected will vary. The actual amount collected may be less than the amount expected or may even be less than the purchase price paid for such consumer receivables. In addition, the timing or amounts to be collected on those consumer receivables cannot be assured. If cash flows from operations are less than anticipated as a result of our inability to collect these consumer receivables, we may have difficulties servicing our debt obligations and may not be able to purchase new delinquent consumer receivables for collection.
Therefore, our efforts to diversify our business and venture into new market segments may prove unsuccessful, which could adversely affect our business, financial condition and results of operations.
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Returns from our geographical expansion may not justify our investment.
We have 40 offices in China and intend on establishing several more offices by the end of 2018 or early 2019 as a part of our nationwide expansion. The goal of our geographical expansion is:

to acquire local employees; and

to engage potential clients who only engage or prefer to engage service providers that have a local presence.
However, prior to our current expansion efforts, we had limited experience operating in cities and counties outside of Hunan province. We may face significant challenges to maintain our established standards, controls and policies in these regional offices, and we may not be able to integrate these regional offices into our established operations. In addition, there is no assurance that we will successfully hire local talent or obtain receivable collection service contracts that are only available to regional collection agencies even with the establishment of our regional offices. We also cannot predict the financial performance of these regional offices. Our management efficiency, business, financial condition and results of operations may be adversely impacted if our geographical expansion is unsuccessful, because of the upfront investments for our regional offices.
Our senior management team is important to our continued success and the loss of one or more members of senior management could negatively affect our operations.
Our success depends substantially on the expertise and experience of our executive officers, who have extensive skills in and knowledge about the consumer receivables management industry in China. They also have established relationships with our major clients and government regulators. We do not maintain key-man life insurance for any of our executive officers. The loss of services of any or all of our executive officers in the absence of suitable replacements could have a material adverse effect on our operations and future profitability.
In addition, if any of our executive officers joins a competitor or forms a competing company, we may lose clients, research and development expertise and employees. We have employment agreements with Mr. Man Tan, our founder, chief executive officer and chairman of the board; Mr. Xiong Zhou, our executive vice president and Mr. Lei Li, our executive vice president, and most of our other senior executives. The current agreements contain covenants against competition that survive termination of employment. However, these agreements do not and will not assure the continued services of these senior executives, and we cannot assure you that covenants against competition will be enforceable. Our success depends on the continued service and performance of our executive officers, and we cannot guarantee that we will be able to retain those individuals. The loss of the services of Mr. Man Tan, Mr. Xiong Zhou, Mr. Lei Li or one or more of our other executive officers could seriously impair our ability to continue to collect on delinquent consumer receivables and to manage and expand our business.
We may require additional financing in the future, and our operations could be curtailed if we are unable to obtain required additional financing when needed.
We may need to obtain additional debt or equity financing to fund future business expansion and capital expenditures. While we do not anticipate seeking additional financing in the immediate future, any additional equity financing may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may restrict our business operations, including the following:

limiting our ability to pay dividends or requiring us to seek consent for the payment of dividends;

increasing our vulnerability to general adverse economic and industry conditions;

requiring us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and

limiting our flexibility in planning for, or reacting to, changes in our business and our industry.
We cannot guarantee that we will be able to obtain additional financing on terms that are acceptable to us, or any financing at all.
Our failure to comply with government regulations could result in the suspension or termination of our business operations.
The business scope indicated in the business license of our VIE includes, among others, activities in relation to the receivable collection business, such as services in relation to receivables management, and the collection business engaged by commercial banks in connection with delinquent consumer receivables. We are required to operate within our registered business scope. The competent departments of the administration for industry and commerce may have the authority to recommend enforcement actions and seek monetary penalties on our VIE if our operations exceed such business scope. The PRC government’s administration for industry and commerce has the authority to investigate consumer complaints against
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debt collection companies like us and to recommend enforcement actions and seek monetary penalties. We are routinely subjected to legal proceedings and regulatory investigations incidental to our business. Failure to comply with applicable laws and regulations could result in warnings, fines, confiscation of earnings, as well as the suspension or termination of our ability to conduct collections, which would materially adversely affect our business, financial condition and results of operations.
We experience high employee turnover rates and we may not be able to hire and retain enough well-trained employees to support our operations.
The delinquent consumer receivables recovery industry is very labor intensive, and we typically experience a high rate of employee turnover. Competition for talent in the recovery industry is intense, and the availability of suitable and qualified candidates in China is limited. We will need to continue to attract and retain experienced and capable personnel at all levels as we expand our business and operations. We compete for qualified personnel with companies in our industry and in other industries. Competition for these individuals could cause us to offer higher compensation and other benefits to attract and retain them. Even if we were to offer higher compensation and other benefits, there is no assurance that these individuals will choose to join or continue to work for us. Our growth requires that we continually hire and train new collection specialists. A higher turnover rate among our collection specialists will increase our recruiting and training costs and limit the number of experienced collection specialists available to service our delinquent consumer receivables. If this occurs, we would not be able to service our delinquent consumer receivables effectively, which could reduce our ability to continue our growth and maintain or improve profitability.
If we are not able to respond to technological advances in a timely manner, we may not remain competitive.
Our success depends in a large part on our technology and IT infrastructure. We use these systems to identify, locate and contact large numbers of debtors and record the results of our collection efforts, as well as to provide customer service to our clients. If we are not able to respond to advances in telecommunications and computer technologies in a timely manner, we may not be able to remain competitive. We have made significant investments in technology to remain competitive and we anticipate that it will be necessary to continue to do so in the future. Telecommunications and computer technologies are changing rapidly and are characterized by short product life cycles, so we must anticipate technological developments. If we are not successful in anticipating, managing, or adopting technological changes on a timely basis or if we do not have the capital resources available to invest in new technologies, our business could be materially adversely affected.
Security and privacy breaches, and failure to comply with personal information protection laws and regulations could adversely affect our business, results of operations and financial condition.
We generate and process a large amount of personal data. Our databases contain our clients’ customers data, including credit card information and other personal information. Any security or privacy breach of these databases could expose us to liability, increase our expenses relating to the resolution of these breaches and deter our clients from selecting our service. We face risks inherent in handling large volumes of data and in securing and protecting such data. For example, we face challenges protecting the data in our systems, including attacks on our system by external parties or fraudulent behavior by our employees.
In addition, we are subject to various personal information protection laws and regulations in China, which regulate the data collection, storage, use, processing, disclosure and transfer of personal information. While we take measures to comply with all applicable personal information protection laws and regulations, we cannot guarantee the effectiveness of these measures. Any failure or perceived failure to comply with any applicable personal information protection laws and regulations, or any failure or perceived failure of our employees to comply with our internal control measures may result in negative publicity, legal proceedings or regulatory actions against us. These results could damage our reputation, discourage current and potential clients from engaging our services and subject us to fines and government investigations, which could have a material adverse effect on our business, results of operations and financial condition. See “RegulationsRegulations on Personal Information Protection.”
Furthermore, the interpretation and application of personal information protection laws and regulations are uncertain and evolving. We cannot assure you that relevant governmental authorities will not interpret or implement the laws or regulations in ways that negatively affect us. In addition, we may become subject to additional laws and regulations that come into effect regarding the protection of personal information in connection with debtor information to which we have access. Compliance with these additional regulatory requirements could force us to incur substantial costs or require us to change our business practices. Any occurrence of the foregoing circumstances may negatively affect our business, results of operations and financial condition.
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If we fail to maintain the requisite licenses or comply with the regulatory requirements under the complex regulatory environment applicable to our businesses in China, our business, financial condition and results of operations may be materially and adversely affected.
We have obtained value-added telecommunications service licenses, or VATS licenses, for the provision of value-added telecommunication services. These licenses are generally subject to regular government review or renewal. We are currently applying for renewal of the VATS licenses held by Changsha Yubang Software Development Co., Ltd., one of the wholly-owned subsidiaries of Yong Xiong Group. However, we cannot assure you that we can successfully renew these licenses in a timely manner or that these licenses are sufficient to conduct all of our present or future business.
In addition, the outsourced delinquent consumer receivables recovery industry is still at an early stage of development in China, comparing to more mature markets such as that of the United States. The regulatory framework of our industry is unclear. Our failure to comply with any new rules or regulations introduced may materially and adversely affect our business, financial condition, and results of operations.
We may be unable to protect our proprietary intellectual property rights from unauthorized use, such that our brand, reputation and business may be negatively impacted.
Our protection of our intellectual property is crucial to our success and future growth, as we rely on a combination of patents, copyrights, trademarks and other rights to protect our know-how, proprietary technology, processes and other intellectual property. The protective measures we take may not be sufficient to prevent theft and unauthorized use. We may have to bring lengthy and costly litigation and take time-consuming measures in order to protect our intellectual property rights, diverting our management’s attention from our business operation. Our brand, reputation and business may be negatively impacted by such measures and risks.
Our senior management lacks experience in managing a public company and complying with laws applicable to operating as a U.S. public company domiciled in the Cayman Islands and failure to comply with such obligations could have a material adverse effect on our business.
Prior to the completion of this offering, we operated as a private company located in the PRC. In the process of taking steps to prepare us for this offering, the Yong Xiong Group’s senior management became the senior management of YX Asset Recovery Limited. Most of the senior management of YX Asset Recovery Limited does not have experience managing a publicly listed company or managing a Cayman Islands company.
As a result of this offering, we will become subject to laws, regulations and obligations that do not currently apply to us, and most of our senior management currently do not have experience in complying with such laws, regulations and obligations. The senior management is only experienced in operating the business of the Yong Xiong Group in compliance with Chinese laws. Similarly, by virtue of this offering, YX Asset Recovery Limited will be required to file reports in compliance with U.S. securities and other laws. These obligations can be burdensome and complicated, and failure to comply with such obligations could have a material adverse effect on us. In addition, we expect that the process of learning about such new obligations as a public company in the United States will require our senior management to devote time and resources to such efforts that might otherwise be spent on the operation of our business.
We have limited business insurance coverage. Any future business liability, disruption or litigation we experience might divert management focus from our business and could significantly impact our financial results.
Availability of business insurance products and coverage in the PRC is limited, and most business insurance products are expensive in relation to the coverage offered. We have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurances on commercially reasonable terms make it impractical for us to maintain such insurance policies. As a result, we do not have any business liability, disruption or litigation insurance coverage for our operations in the PRC, and we have not made any reserve for these purposes. Accordingly, a business disruption, litigation or natural disaster may result in substantial costs and divert management’s attention from our business, which would have an adverse effect on our results of operations and financial condition.
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Certain data and information in this prospectus was obtained from external third parties and we have not independently verified such data and information.
In this prospectus we have utilized data and information from external sources including various third parties comprising government sources and private entities such as industry consultant iResearch. Such external sources of statistical data include projections based on numerous assumptions. The performance of the overall industry and segment affects our business and the market price of our ADSs, especially if they fail to grow at the projected rate. Further, the new and constantly evolving environment of the industry and market results in significant uncertainties, and the projections or estimates about the growth of the market in which we operate in should be considered in this context. If any of the assumptions underlying the market data prove to be incorrect, discrepancies between the projections and actual results may emerge.
We have not independently verified data and information obtained from third party external sources, and the method of collection and methodologies employed by such third parties may differ from ours. In addition, these industry reports and publications generally include a disclaimer that the information therein is believed to be reliable but which accuracy and completeness cannot be guaranteed.
We rely on assumptions and estimates to calculate certain key operating metrics and inaccuracies in such metrics may harm our reputation and adversely affect our business.
Certain key operating metrics in this prospectus are calculated using our internal data that have not been independently verified by third parties. While these numbers are based on what we believe to be reasonable calculations for the applicable periods of measurement, there are some challenges in measuring those metrics. In addition, our key operating metrics are derived and calculated based on different assumptions and estimates, and you should be cautious of such assumptions and estimates when assessing our operating performance.
Our operating metrics may differ from estimates published by third parties or from similarly titled metrics used by our competitors due to differences in data availability, sources and methodology. If we discover material inaccuracies in our operating metrics, our reputation may be harmed and third parties may be less willing to allocate their resources or spending to us, which could adversely affect our business and operating results.
We may from time to time become party to litigation, other legal or administrative disputes, proceedings and investigations that may materially and adversely affect us.
In the course of our ordinary business operations, we may become a party to litigation, legal proceedings, claims, disputes or arbitration proceedings from time to time. Any ongoing litigation, legal proceedings, claims, disputes or arbitration proceedings may distract our senior management's attention and consume our time and other resources. In addition, even if we ultimately succeed in such litigation, legal proceedings, claims, disputes or arbitration proceedings, there may be negative publicity attached to such litigation, legal proceedings, claims, disputes or arbitration proceedings, which may materially and adversely affect our reputation and brand names. In the case of an adverse verdict, we may be required to pay significant monetary damages, assume significant liabilities or suspend or terminate parts of our operations. As a result, our business, financial condition, results of operations and prospects may be materially and adversely affected.
We are unable to predict all the risks and uncertainties that we face as a result of current economic, political, social and regulatory developments and many of these risks are beyond our control. All such factors may adversely affect our business and operations as well as our financial performance. For example, while China has a comprehensive set of laws, rules and regulations, the administration of economic affairs is also highly dependent on changes in national and regional policy, including the implementation of laws, rules and regulations. From time to time, particularly when certain activities are the target of greater policy scrutiny, key personnel of affected enterprises have had to respond to inquiries from Chinese regulatory authorities. The time and energy needed to respond to such inquiries may affect such persons’ ability to devote full attention to their enterprises or, in extreme cases, step down from their roles. Resulting negative publicity from such inquiries, whether or not justified, may also have a negative effect on the results of operations of such enterprises.
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RISKS RELATED TO OUR INDUSTRY
We operate a socially sensitive business. Public complaints against the delinquent consumer receivables recovery industry generally or against us in particular may result in increased regulatory risk, which may materially and adversely affect our business, financial condition and results of operations.
The general public may have certain misconceptions about the receivables recovery industry, such as the perceived use of unlawful means to collect debts. Given the growth of collection service providers in China, the contentious nature associated with debt collection, the unpredictability of debtor behavior, and the inflow of small-scale market participants with weak compliance protocols, the delinquent consumer receivables recovery industry is subject to potentially higher and unpredictable government scrutiny. Such development could subject our operations to regulatory restrictions, government investigations, administrative fines and increased compliance requirements. As a result, our business and our ability to generate revenues could be materially and adversely affected.
Furthermore, negative publicity about our industry and business creates the possibility of heightened attention from the public, the media and government regulators. From time to time, complaints or allegations against us, regardless of their veracity, may result in public protests or negative publicity, which could result in government inquiry or harm our reputation. There is no assurance that we would not become a target for public scrutiny in the future or such scrutiny and public exposure would not severely damage our reputation as well as our business and prospects. Furthermore, we rely heavily on our reputation to develop and maintain client relationships. Commercial banks and online lenders may refuse to work with us if we suffer from a tarnished reputation, since any perceived or actual violation of laws and regulations by service providers could increase our clients’ regulatory risks. As such, our business is particularly vulnerable to negative media coverage and negative publicity.
In addition, our directors and management may become subject to scrutiny by the media and the public regarding our business, which may result in unverified, inaccurate or misleading information about our directors and management being reported by the press. Negative publicity about our directors or management, even if untrue or inaccurate, may harm our reputation.
Debtors may respond to our request for payment with unexpected reactions.
Our primary method of collecting delinquent consumer receivables is to contact debtors by telephone, inform debtors about the disadvantages and consequences of having delinquent debts, and formulate a payment plan with these debtors. However, debtors may not react to our requests for payments rationally. In certain extreme cases, debtors have threatened us with self-inflicted harm in an attempt to dissuade us from collection.
In addition, debtors have formed self-help groups to strategize against collection service providers, including entrapment arrangements to induce collection specialists to violate compliance policies and laws and regulations. We are aware of the existence of certain online social media groups organized by debtors to strategize against collection activities, such as inducing collection specialists to use inappropriate language during the collection process and then recording such conversations as evidence against collection service providers in order to claim monetary damages or request reduction or cancellation of their debts.
Debtors’ actions are beyond our control. If any of their threats materializes, such threats may cause significant reputational damage to our operations and/or instigate a government investigation. Our clients may be discouraged from working with us due to the negative publicity caused by debtors’ actions, which could result in an increase in staff turnover rates, a decrease in revenues and an adverse impact on our business, financial condition and results of operations. Government agencies may also initiate formal investigations as result of any materialized threats. Government agencies may detain our executives and employees and/or temporarily suspend or permanently shut down our business as part of the investigation. As of the date of this prospectus, government agencies have not initiated any investigation against us for violations during collection.
We operate in a highly competitive and fragmented market, and market competition could materially and adversely affect our business, financial condition and results of operations, and limit our ability to increase market share.
We operate in a highly competitive and fragmented market and expect competition to persist or intensify in the future. We compete with other collection service providers primarily on industry reputation and expertise in the collection of tertiary receivables, technology and IT infrastructure, relationships with clients, the services of well-trained collection specialists and compliance with applicable collections laws. Some of our competitors may have greater financial, human and other resources, longer operating histories, greater technological expertise, more recognizable brand names and more established relationships than we do in the industries that we currently serve or may serve in the future. Some of our competitors may enter into strategic or commercial relationships among themselves or with larger, more established companies through
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cooperation, mergers or acquisitions, in order to increase their ability to address client needs. Increased competition, pricing pressure or loss of market share could reduce our operating margin, which could harm our business, results of operations and financial condition. Furthermore, our competitors may be able to develop or adopt new technologies faster than we can, or offer a broader range of services than we are presently able to offer.
In addition, due to intense competition in our industry, we have been and may be the target of incomplete, inaccurate and false statements about our company that could damage our and our management’s reputation and materially deter clients from working with us. Our ability to respond to our competitors’ misleading marketing efforts may be limited by legal prohibitions on permissible public communications by us during our initial public offering process or during future periods.
Risks Related to Our Corporate Structure
If the agreements that establish the structure for certain of our operations in China do not comply with PRC regulations, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Our WFOE will enter into a series of contractual arrangements with our VIE and its shareholders, which enable us to (i) exercise effective control over our VIE, (ii) receive substantially all of the economic benefits of our VIE, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIE and hence consolidate its financial results into our consolidated financial statements under U.S. GAAP. See “Corporate History and Structure” for further details.
In the opinion of Zhong Lun Law Firm, our PRC legal counsel, (i) the ownership structure of our VIE in China and our WFOE, both currently and immediately after giving effect to this offering, complies with all existing PRC laws and regulations; and (ii) the contractual arrangements between our WFOE, our VIE and its shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or, if adopted, what they would provide. If we or our VIE are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

discontinuing or placing restrictions or onerous conditions on our operations through any transactions between our WFOE and our VIE;

imposing fines, confiscating the income from our WFOE or our VIE, or imposing other requirements with which we or our VIE may not be able to comply;

requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIE and deregistering the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIE; or

restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.
The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our VIE in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIE or our right to receive substantially all the economic benefits and residual returns from our VIE and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIE in our consolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.
We rely on contractual arrangements with our VIE and its shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control and otherwise have a material adverse effect on our business and results of operations.
We will rely on contractual arrangements with our VIE and its shareholders to conduct our businesses. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. For example, our VIE and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct its operations in an acceptable manner or taking other actions that are detrimental to our interests.
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If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIE, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we will rely on the performance by our VIE and its shareholders of their obligations under the contracts to exercise control over our VIE. However, the shareholders of our consolidated VIE may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual arrangements with our VIE. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.” Therefore, our contractual arrangements with our VIE may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
Any failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.
We refer to the shareholders of our VIE as its nominee shareholders because although they remain the holders of equity interests on record in our VIE, pursuant to the terms of the relevant power of attorney to be executed by them, each such shareholder will irrevocably authorize our WFOE to exercise his, her or its rights as a shareholder of the VIE. However, if our VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For example, if the shareholders of our VIE refuse to transfer their equity interest in our VIE to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
All of the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law, and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.” Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIE, and our ability to conduct our business may be negatively affected.
The shareholders of our VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The shareholders of our VIE may have potential conflicts of interest with us. These shareholders may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE, which would have a material and adverse effect on our ability to effectively control our VIE and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
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Contractual arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC VIE owe additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our WFOE’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIE’s tax liabilities increase or if it is required to pay late payment fees and other penalties.
We may lose the ability to use and enjoy assets held by our VIE that are material to the operation of a certain portion of our business if our VIE enters bankruptcy or becomes subject to a dissolution or liquidation proceeding.
As part of our contractual arrangements with our VIE, our VIE and its subsidiaries hold certain assets that are material to the operation of certain portion of our business, including intellectual property and premise. If our VIE enters bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIE may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.
The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. Substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.
Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of  “actual control” in determining whether a company is considered an foreign invested enterprise, or FIE. The draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry approval by the MOFCOM, treated as a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens. According to the draft Foreign Investment Law, once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “catalog of special administrative measures,” which is classified into the “catalog of prohibitions” and the “catalog of restrictions,” to be separately issued by the State Council later. Foreign investors are not allowed to invest in any sector set forth in the catalog of prohibitions.
The draft Foreign Investment Law does not indicate what actions shall be taken with respect to companies with an existing contractual arrangement structure, whether or not these companies are controlled by Chinese parties. Moreover, it is uncertain whether the “catalog of special administrative measures” to be issued will differ from the Catalog for the Guidance of Foreign Investment Industries (Revised in 2017), or the 2017 Catalog. If the enacted version of the Foreign Investment Law and the final “catalog of special administrative measures” mandate further actions, such as the MOFCOM market entry approval, to be completed by companies with an existing contractual arrangement structure like us, we will face uncertainties as to whether such approval can be timely obtained, or at all. If we are not able to obtain such approval when required, our contractual arrangement structure may be regarded as invalid and illegal. As a result, we would not be
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able to (i) continue our business in China through our contractual arrangements with our VIE, (ii) exert control over our VIE, (iii) receive the economic benefits of our VIE under such contractual arrangements, or (iv) consolidate the financial results of our VIE. Were this to occur, our results of operations and financial condition would be materially and adversely affected.
The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs.
Aside from an investment information report required at each investment, and investment amendment reports, which shall be submitted upon alteration of investment specifics, it is mandatory for entities established by foreign investors to submit an annual report, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.
Risks Related to Doing Business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
All of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results.
Our revenues may be materially and adversely affected by any economic slowdown in China as well as globally.
The success of our business ultimately depends on consumer spending. We derive all of our revenues from China. As a result, our revenues and net income are impacted to a significant extent by economic conditions in China and globally. The global economy, markets and levels of consumer spending are influenced by many factors beyond our control, including consumer perception of current and future economic conditions, political uncertainty, levels of employment, inflation or deflation, real disposable income, interest rates, taxation and currency exchange rates.
The PRC government has in recent years implemented a number of measures to control the rate of economic growth, including by raising interest rates and adjusting deposit reserve ratios for commercial banks as well as by implementing other measures designed to tighten credit and liquidity. These measures have contributed to a slowdown of the PRC economy. According to the National Bureau of Statistics of China, in the second quarter of 2018, China’s GDP growth rate was 6.7%. Any continuing or worsening slowdown could significantly reduce domestic commerce in China. An economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in China or any other market in which we may operate could have a material adverse effect on our business, financial condition and results of operations.
Recently, the United States imposed significant tariffs on certain Chinese-made products. The PRC has in turn imposed tariffs against certain U.S. products in response to U.S. tariffs. Continued trade tensions between the U.S. and China may ultimately have an adverse effect on the global economy, which in turn may affect our business.
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Uncertainties with respect to the PRC legal system could adversely affect us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and the enforcement of these laws, regulations and rules involves uncertainties.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in this annual report based on foreign laws.
We are a company incorporated under the laws of the Cayman Islands, and we conduct all of our operations in China and all of our assets are located in China. In addition, most of our senior executive officers reside within China for a significant portion of the time, and most are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who reside and whose assets are located outside the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.
We may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us and any tax we are required to pay could have a material and adverse effect on our ability to conduct our business.
We are a Cayman Islands holding company, and we may rely on dividends and other distributions on equity from our PRC subsidiary for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and for services of any debt we may incur. Our subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiary to pay dividends to its shareholders only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, both of our PRC subsidiary and our VIE are required to set aside at least 10% of their after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entities in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. These reserves are not distributable as cash dividends. If our PRC subsidiary incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiary to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
In response to the persistent capital outflow and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures, including stricter vetting procedures for China-based companies to remit foreign currency for overseas
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acquisitions, dividend payments and shareholder loan repayments. For instance, the People’s Bank of China issued the Circular on Further Clarification of Relevant Matters Relating to Offshore RMB Loans Provided by Domestic Enterprises, or the PBOC Circular 306, on November 29, 2016, which provides that offshore RMB loans provided by a domestic enterprise to offshore enterprises that it holds equity interests in shall not exceed 30% of the domestic enterprise’s ownership interest in the offshore enterprise. The PBOC Circular 306 may constrain our PRC subsidiary’s ability to provide offshore loans to us. The PRC government may continue to strengthen its capital controls and our PRC subsidiary’s dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.
Under the Enterprise Income Tax Law of the PRC and related regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise, such as our PRC subsidiary, to any of its foreign non-resident enterprise investors, and proceeds from any such foreign enterprise investor’s disposition of assets (after deducting the net value of such assets) are subject to a 10% withholding tax, unless the foreign enterprise investor’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. Undistributed profits earned by foreign-invested enterprises prior to January 1, 2008 are exempted from any withholding tax. Hong Kong has a tax arrangement with China that provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirement that the Hong Kong resident enterprise own at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and be a “beneficial owner” of the dividends. For example, YX Services Limited, which directly owns our PRC subsidiary is incorporated in Hong Kong. However, if YX Services Limited is not considered to be the beneficial owner of dividends paid to it by our PRC subsidiary under the tax circulars promulgated in April, 2018, such dividends would be subject to withholding tax at a rate of 10%. If our PRC subsidiary declares and distributes profits to us, such payments will be subject to withholding tax, which will increase our tax liability and reduce the amount of cash available to our company.
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary and VIE, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any funds we transfer to our PRC subsidiary, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration or filing with relevant governmental authorities in China. According to the relevant PRC regulations on FIEs, in China, capital contributions to our PRC subsidiary are subject to filing with the MOFCOM in its foreign investment comprehensive management information system and registration with other governmental authorities in China. In addition, (a) any foreign loan procured by our PRC subsidiary and VIE is required to be registered with the SAFE or its local branches or filed with SAFE in its information system, and (b) each of our PRC subsidiary and VIE may not procure loans which exceed the difference between its registered capital and its total investment amount as recorded in the foreign investment comprehensive management information system or, as an alternative, only procure loans subject to the Risk-Weighted Approach and the Net Asset Limits. See “Regulation—Regulations on Foreign Exchange.” Any medium or long term loan to be provided by us to our VIE must also be approved by the NDRC. We may not obtain these government approvals or complete such registrations or filings on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiary and VIE. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of this offering 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. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there is no statutory limit on the amount of registered capital for our PRC subsidiary, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for their initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant filing and registration procedures. With respect to loans to the PRC subsidiary by us, (i) if the relevant PRC subsidiary adopt the traditional foreign exchange administration mechanism, or the Current Foreign Debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiary and there is, in effect, no statutory limit on the amount of loans that we can make to our PRC subsidiary under this circumstance because we can increase the registered capital of our PRC subsidiary by making capital contributions to them, subject to the completion of the required registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant PRC subsidiary adopt the foreign exchange administration mechanism as provided in the PBOC Notice No. 9, or the Notice No. 9 Foreign Debt mechanism, the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in
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the PBOC Notice No. 9, shall not exceed 200% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiary. Currently, our PRC subsidiary has the flexibility to choose between the Current Foreign Debt mechanism and the Notice No. 9 Foreign Debt mechanism before it submits information on the conclusion of the cross-border financing contract for record-filing for the first time. However, if the Notice No. 9 Foreign Debt Mechanism, or a more stringent foreign debt mechanism becomes mandatory and our PRC subsidiary is no longer able to choose the Current Foreign Debt mechanism, our ability to provide loans to our PRC subsidiary or our VIE may be significantly limited, which may adversely affect our business, financial condition and results of operations.
In 2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142. SAFE Circular 142 regulates the conversion by FIEs of foreign currency into Renminbi by restricting the usage of converted Renminbi. SAFE Circular 142 provides that any Renminbi capital converted from registered capitals in foreign currency of FIEs may only be used for purposes within the business scopes approved by PRC governmental authority and such Renminbi capital may not be used for equity investments within China unless otherwise permitted by the PRC law. In addition, the SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from registered capital in foreign currency of FIEs. The use of such Renminbi capital may not be changed without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been utilized. On April 8, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 142 on the same date. SAFE further promulgated Circular 16, effective on June 9, 2016, which, among other things, amended certain provisions of Circular 19. SAFE Circulars 19 and 16 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise permitted under its business scope. As a result, we are required to apply Renminbi funds converted from the net proceeds we received from this offering within the business scopes of our PRC subsidiary. SAFE Circular 19 and 16 may significantly limit our ability to transfer to and use in China the net proceeds from this offering, which may adversely affect our business, financial condition and results of operations.
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund, or IMF, completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the
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conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any material hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
Our use of some leased properties could be challenged by third parties or governmental authorities, which may cause interruptions to our business operations.
As of the date of this prospectus, some of the lessors of our properties leased by us in China have not provided us with their property ownership certificates or any other documentation proving their right to lease those properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their lessors or permits from the relevant governmental authorities, our leases could be invalidated. If this occurs, we may have to renegotiate the leases with the owners or other parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. Although we may seek damages from such lessors, such leases may be void and we may be forced to relocate. We can provide no assurance that we will be able to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties’ challenges on our use of such properties. As a result, our business, financial condition and results of operations may be materially and adversely affected.
In addition, a substantial portion of our leasehold interests in leased properties have not been registered with the relevant PRC governmental authorities as required by relevant PRC laws. The failure to register leasehold interests may expose us to potential warnings and penalties up to RMB10,000 per unregistered leased property.
The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and results of operations.
Under the PRC Social Insurance Law and the Administrative Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing funds and employers are required, together with their employees or separately, to pay the social insurance premiums and housing funds for their employees. If we fail to make adequate social insurance and housing fund contributions, we may be subject to fines and legal sanctions, and our business, financial condition and results of operations may be adversely affected.
These laws designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.
Our failure to make sufficient statutory social welfare payments for our employees could materially and adversely affect our business, financial condition, results of operations and prospects.
PRC laws and regulations require us to pay several statutory social welfare benefits for our employees, including medical care insurance, occupational injury insurance, unemployment insurance, maternity insurance, pension benefits and housing fund contributions. While we believe we have made adequate provision in our audited consolidated financial statements for any outstanding amounts that are not paid or withheld, our failure to make payments may be in violation of the applicable PRC laws and regulations and we may be subject to fines and penalties. According to the applicable PRC laws and regulations, employers failing to make any of these social welfare benefit payments may be ordered by the government to rectify the noncompliance and make the required payments. Failure to make social insurance premium payments may also subject employers to a late fee of up to 0.2% or 0.05%, as the case may be, of the amount overdue per day from the original due date, by a stipulated deadline after they receive written notice from the authorities. If the payment is not made by the stipulated deadline after the employer receives written notice from the authorities in the case of any of the insurance and pension benefit premium described above, the employer may be assessed by the relevant government authority for fines of up to three times the amount of any under-reported obligation of the employer. An application may be made to the relevant government authority for deduction of the overdue amount from the employer’s bank account or to a local court for compulsory enforcement of any of these payment obligations and an employee is entitled to compensation if the employer fails to make payments due for social welfare benefits. Late charges, penalties or legal or administrative proceedings to which we may be subject could materially and adversely affect our reputation, financial condition, results of operations and prospects.
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The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and certain other regulations and rules concerning mergers and acquisitions 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 the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Round-trip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents or entities’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. In February 2015, the SAFE promulgated the Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound direct investments, including those required under SAFE Circular 37, must be filed with qualified banks instead of the SAFE. Qualified banks should examine the applications and accept registrations under the supervision of the SAFE.
If our shareholders who are PRC residents or entities do not complete their registration procedures set forth in the foregoing regulations, our PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
We have notified all PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents to complete the foreign exchange registrations. We are aware that as of October 11, 2018, Mr. Man Tan, our chief executive officer and chairman of the board, and Ms. Xiaofang Zhou, our shareholder, both PRC residents, are applying for the foreign exchange registrations under the relevant PRC laws.
However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’s ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
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Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors, executive officers and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who will be granted share-based awards by us, may follow the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company or the 2012 SAFE Notices, promulgated by the SAFE in 2012. Pursuant to the 2012 SAFE Notices, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We, our directors, our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who will be granted share-based awards will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation—Regulations on Employee Share Options.”
The State Administration of Taxation, or SAT, has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities. See “Regulation—Regulations on Employee Share Options.”
If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to PRC enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the SAT issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that YX Asset Recovery Limited is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax on gains realized on
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the sale or other disposition of ADSs or ordinary shares at a rate of 10%, if such income is treated as sourced from within the PRC. Furthermore, if PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us), if such gains are deemed to be from PRC sources. These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of YX Asset Recovery Limited would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that YX Asset Recovery Limited is treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On December 10, 2009, the SAT issued the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, with retroactive effect from January 1, 2008, to December 1, 2017. Pursuant to SAT Circular 698, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.
On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
On October 17, 2017, the SAT released Public Notice Regarding Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, with effect from December 1, 2017. SAT Public Notice 37 replaced a series of important circulars, including but not limited to SAT Circular 698, and revised the rules governing the administration of withholding tax on China-source income derived by the non-resident enterprise. SAT Public Notice 37 provided certain key changes to the current withholding regime, such as (i) the withholding obligation for non-resident enterprise deriving dividend arises on the day the payment is actually made rather than on the day of the resolution to declare the dividends; (ii) the provision that non-resident enterprise shall self-report tax within seven days if their withholding agents fail to withhold any or sufficient tax is removed.
We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring and sale of the shares in our offshore subsidiaries and investments. Our company may be subject to withholding obligations if our company is a transferee in such transactions under SAT Public Notice 37 and SAT Public Notice 7. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be required to expend valuable resources to comply with SAT Public Notice 37 and SAT Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars. Our expending of such resources may affect our ability to deploy adequate resources to the operation of our business, which may have an adverse effect on our financial condition and results of operations.
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The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit report included in our prospectus filed with the U.S. Securities and Exchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or 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. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.
Starting in 2011 the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or CSRC.
In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against five Chinese-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work papers related to their audits of certain China-based companies that are publicly traded in the U.S. Rule 102(e)(1)(iii) grants the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. Four of these China-based accounting firms appealed to the SEC against this decision and, on February 6, 2015, each of the four China-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The firms’ ability to continue to serve all their respective customers is not affected by the settlement. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. The settlement did not require the firms to admit to any violation of law and preserves the firms’ legal defenses in the event the administrative proceeding is restarted.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ordinary shares may be adversely affected.
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If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
Our failure to comply with the U.S. Foreign Corrupt Practices Act, or the FCPA, and other anticorruption laws could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects.
After the completion of this offering, we will be subject to the FCPA, which prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anticorruption laws. We are in the process of implementing policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject. Such policies or procedures may not work effectively or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. As we market and offer our services to increasing numbers of state-owned enterprises, we will have frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. Any investigation of a potential violation of the FCPA or other anticorruption laws by the United States or foreign authorities could have an adverse impact on our reputation, and if we are not in compliance with the FCPA and other laws governing the conduct of business with government entities, we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our reputation, business, financial condition, results of operations and prospects.
Our extensive and growing operations in the PRC may give rise to elevated compliance risks on anti-bribery. In recent years, commercial bribery has increasingly been identified as a key risk in doing business in the PRC. If PRC regulatory authorities determine that our marketing or other activity violates the anti-bribery or anti-corruption laws, we may be penalized or ordered to cease such activity, which could have an adverse impact on our business.
Risks Related to Our ADSs and this Offering
An active trading market for our ordinary shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.
Our ADSs have been approved for listing on the [Nasdaq Global Market]. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for our ADSs or our ordinary shares, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.
The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.
The trading price of our ADSs is likely to be volatile and could fluctuate widely due to multiple factors, some of which are beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

regulatory developments affecting us or our industry;

variations in our revenues, operating costs and expenses, earnings and cash flow;

announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

announcements of new offerings, solutions and expansions by us or our competitors;

changes in financial estimates by securities analysts;

detrimental adverse publicity about us, our services, our employees, our content offerings, our business model or our industry;

additions or departures of key personnel;
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release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

potential litigation or regulatory investigations.
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be           ADSs (equivalent to           Class A ordinary shares) outstanding immediately after this offering, or           ADSs (equivalent to           Class A to ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we, our directors, executive officers and our existing shareholders as well as our option holders have agreed not to sell any ordinary shares, ADSs or similar securities for 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.
Our proposed dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
Our authorized and issued ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering (with a third class of undesignated shares authorized but not issued). Holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to 10 votes per share. We will issue Class A ordinary shares represented by our ADSs in this offering. All of the outstanding ordinary and preferred shares, either directly or indirectly, held by YX Major Limited or its affiliates as of the date of this prospectus will be automatically re-designated or converted into Class B ordinary shares immediately prior to the completion of this offering. All other ordinary shares or preferred shares that are outstanding as of the date of this prospectus will be automatically re-designated or converted into Class A ordinary shares immediately prior to the completion of this offering. We intend to maintain the dual-class voting structure after the completion of this offering.
Due to the disparate voting powers attached to these two classes of ordinary shares, Mr. Tan will beneficially own approximately       % of our total issued and outstanding ordinary shares on an as-converted basis and       % of the voting power of our outstanding shares immediately after this offering, assuming no exercise of the underwriters’ option to purchase additional ADSs. Therefore, Mr. Tan will have decisive influence over matters requiring shareholders’ approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
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Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.
The approval of the CSRC may be required in connection with this offering under PRC law.
The M&A Rules, which were adopted in 2006 by six PRC regulatory agencies, including the CSRC, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this offering may ultimately require approval from the CSRC. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.
Our PRC counsel, Zhong Lun Law Firm, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our ADSs on [Nasdaq Global Market] because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation, (ii) our wholly owned PRC subsidiary were established by foreign direct investment, rather than through a merger or acquisition of a domestic company as defined under the M&A Rules and (iii) no explicit provision in the M&A Rules classifies the respective contractual arrangements among our PRC subsidiary, the VIE and their shareholders as a type of acquisition transaction falling under the M&A Rules.
However, we cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.
We have adopted the [second] amended and restated memorandum and articles of association that will become effective upon the completion of this offering. Our new memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or
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special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2016 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. Currently, we do not plan to rely on home country practice with respect to any corporate governance matter. To the extent we choose to follow home country practice with respect to corporate governance matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands company and all of our assets are located outside of the United States. All of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A ordinary shares.
As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is
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not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least [30] days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
You may experience dilution of your holdings due to inability to participate in rights offerings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.
Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) 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 (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of [Nasdaq Global Market]. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.
In addition, as a foreign private issuer whose securities are listed on the [Nasdaq Global Market], we are permitted to follow certain home country corporate governance practices in lieu of the requirements of the Nasdaq Rules pursuant to Nasdaq Rule 5615(a)(3), which provides for such exemption to compliance with the Nasdaq Rule 5600 Series. We intend to rely on the exemption available to foreign private issuers for the requirement that an audit committee be comprised of at least three members under Nasdaq Rule 5605(c)(2)(A). We are not required to and will not voluntarily meet this requirement. As a result of our use of the “controlled company” and “foreign private issuer” exemptions, our investors will not have the same protection afforded to shareholders of companies that are subject to all of Nasdaq’s corporate governance requirements.
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We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.
If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
Before this offering, we were a private company of limited resources. Our internal controls and procedures, especially over financial reporting, may not be able to sufficiently identify any material weaknesses and control deficiencies that could lead to inaccuracies in our financial statements. Our ability to comply with applicable financial reporting requirements and regulatory filings in a timely manner may be impaired. Our independent registered public accounting firm has not conducted an attestation of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements as of and for the fiscal years ended December 31, 2016 and 2017, we and our independent registered public accounting firm identified one material weakness. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness identified relates to the lack of sufficient financial reporting and accounting personnel to formalize and implement key controls over financial reporting process and to prepare, review and report financial information in accordance with U.S. GAAP and SEC reporting requirements. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act of 2002 for purposes of identifying and reporting any weakness in our internal control over financial reporting. We and they are required to do so only after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control weaknesses may have been identified.
Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act. Section 404 of this Act will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2019. However, as an emerging growth company as defined in the JOBS Act, we may choose to not comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act as to the effectiveness of our internal controls over financial reporting until such time that we cease to be an emerging growth company, although we will still be required to implement and maintain internal control over financial reporting and include the management assessment in our annual reports under Section 404. To comply with Section 404, we may incur substantial costs, expend significant management time on compliance-related issues and hire additional accounting, financial and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results, and cause a decline in the price of our ADSs.
During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
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We will incur additional costs as a result of being a public company.
Upon completion of this offering, we will become a public company and expect to incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and Nasdaq, have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. We expect these rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Our reporting and other compliance obligations as a public company may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.
We may be a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors owning our ADSs or ordinary shares.
A non-U.S. corporation, such as our company, will be considered a passive foreign investment company, or “PFIC,” for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. The value of our assets may be determined by reference to the market price of the ADSs and ordinary shares, which may fluctuate considerably. In addition, because there are uncertainties in the application of the relevant rules and because PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given with respect to our PFIC status for the current or any future taxable year.
Based on our current and expected income and assets (taking into account the expected cash proceeds and our anticipated market capitalization following this offering), we do not presently expect to be a PFIC for the current taxable year or the foreseeable future. However, given the lack of authority and the highly factual nature of the analyses, no assurance can be given in this regard. Fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test may be determined by reference to the market price of our ADSs. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. In addition, because there are uncertainties in the application of the relevant rules, it is possible that the Internal Revenue Service, or IRS, may challenge our classification of certain income and assets as non-passive or our valuation of our tangible and intangible assets, each of which may result in our becoming a PFIC for the current or subsequent taxable years. Furthermore, we may also be a PFIC if we were not treated as the owner of our VIE for U.S. tax purposes.
If we were treated as a PFIC for any taxable year during which a U.S. investor held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply to the U.S. Holder. See “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”
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Special Note Regarding Forward-Looking Statements and Industry Data
This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

our goals and strategies;

relevant government policies and regulations relating to our industry;

our ability to retain and increase the amount of receivables for collection and our clients, and expand our service offerings;

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

expected changes in our revenues, costs or expenditures;

our expectation regarding the use of proceeds from this offering;

competition in our industry;

general economic and business conditions globally and in China; and

assumptions underlying or related to any of the foregoing.
You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
This prospectus also contains statistical data and estimates that we obtained from industry publications and reports generated by third-party providers of market intelligence. These industry publications and reports generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, we have not independently verified the data.
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Use of Proceeds
We estimate that we will receive net proceeds from this offering of approximately US$          million, or approximately US$          million if the underwriter exercises its option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us of US$          million.
The primary purposes of this offering are to expand our operations, attract and retain talented employees by providing them with equity incentives, and obtain additional capital. We intend to use the proceeds we receive from this offering as follows:

approximately US$          million, or 60% of the net proceeds to expand and enhance our operations;

approximately US$          million, or 30% of the net proceeds to upgrade our technology and IT infrastructure; and

the balance, approximately US$          million, or 10% of the net proceeds, for working capital and other general corporate purposes.
The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. The amounts and timing of any expenditure will vary depending on the amount of cash generated by our operations, and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds differently than as described in this prospectus.
In utilizing the proceeds of this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiary only through loans or capital contributions. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiary or make additional capital contributions to our PRC subsidiary to fund its capital expenditures or working capital. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there is no statutory limit on the amount of registered capital for our PRC subsidiary, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for its initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant filing and registration procedures. With respect to loans to the PRC subsidiary by us, (i) if the relevant PRC subsidiary determine to adopt the traditional foreign exchange administration mechanism, or the current foreign debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiary and there is, in effect, no statutory limit on the amount of loans that we can make to our PRC subsidiary under this circumstance since we can increase the registered capital of our PRC subsidiary by making capital contributions to them, subject to the completion of relevant registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant PRC subsidiary determine to adopt the foreign exchange administration mechanism as provided in the PBOC Notice No. 9, or the Notice No. 9 foreign debt mechanism, the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in the PBOC Notice No. 9, shall not exceed 200% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions and loans to our PRC subsidiary, we cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary and VIE, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” It is likely that we will need to convert some of our net proceeds in U.S. dollars into Renminbi in order to use as proceeds as contemplated in this section. For details of PRC regulations governing foreign currency conversion, see “Regulation—Regulations on Foreign Exchange.”
Pending use of the net proceeds, we intend to hold our net proceeds in demand deposits or invest them in interest-bearing government securities.
We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
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Dividend Policy
Our board of directors has complete discretion on whether to distribute dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiary in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See “Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us and any tax we are required to pay could have a material and adverse effect on our ability to conduct our business.”
If we pay any dividends, we will pay our ADS holders to the same extent as holders of our Class A ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
42

Capitalization
The following table sets forth our capitalization, defined as our long-term bank loan, excluding current portion and total equity, as of [December 31, 2017]:

on an actual basis;

on a pro forma basis to reflect (i)  the issuance of           ordinary shares upon the completion of our restructuring; (ii) the closing of the Zhong Ping Transaction, the designation of           ordinary shares as           preferred shares, and the automatic conversion of preferred shares into           Class A ordinary shares; (iii) the re-designation of ordinary shares held by holders other than YX Major Limited into           Class A ordinary shares; and (iv) the re-designation of ordinary shares held by YX Major Limited into           Class B ordinary shares, in each case immediately prior to the completion of this offering; and

a pro forma as adjusted basis to reflect (i) the issuance of           ordinary shares upon the completion of our restructuring; (ii) the closing of the Zhong Ping Transaction, the designation of           ordinary shares as           preferred shares, and the automatic conversion of preferred shares into           Class A ordinary shares; (iii) the re-designation of ordinary shares held by holders other than YX Major Limited into           Class A ordinary shares; (iv) the re-designation of ordinary shares held by YX Major Limited into           Class B ordinary shares, in each case immediately prior to the completion of this offering; and (v) the issuance and sale of           Class A ordinary shares in the form of ADSs by us in this offering at the initial public offering price of US$          per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses of RMB          (US$         ) payable by us, assuming the underwriter does not exercise the option to purchase additional ADSs.
You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
As of December 31, 2017
Actual
Pro forma
Pro forma
as adjusted
(RMB in thousands)
Non-Current Liabilities
Long-term bank loan, excluding current portion
30,275
         ​
         ​
Equity:
[Class A ordinary shares]
         ​
         ​
[Class B ordinary shares]
         ​
         ​
Paid-in capital
60,000
         ​
         ​
Additional paid-in capital
17,926
         ​
         ​
Statutory reserve
16,358
         ​
         ​
Retained earnings
115,398                    
Total equity/shareholders’ equity
209,682                    
Total capitalization
239,957                    
43

Dilution
If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.
Our net tangible book value as of           was US$          million, or US$          per ordinary share and US$          per ADS. We did not have intangible assets as of          , therefore, our net tangible book value represents the amount of our total assets, less the amount of our total liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the initial public offering price of US$          per ordinary share, which is set forth on the cover page of this prospectus adjusted to reflect the ADS-to-ordinary share ratio, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all ordinary shares.
Without taking into account any other changes in net tangible book value after          , other than to give effect to (i) the issuance of           ordinary shares upon the completion of our restructuring; (ii) the closing of the Zhong Ping Transaction, the designation of           ordinary shares as           preferred shares, and the automatic conversion of preferred shares into           Class A ordinary shares; (iii) the re-designation of ordinary shares held by holders other than YX Major Limited into           Class A ordinary shares; (iv) the re-designation of ordinary shares held by YX Major Limited into           Class B ordinary shares, in each case immediately prior to the completion of this offering, and (v) our issuance and sale of           ADSs, representing           Class A ordinary shares, offered in this offering at the initial public offering price of US$          per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of           would have been US$          million, or US$          per ordinary share and US$          per ADS. This represents an immediate increase in net tangible book value of US$          per ordinary share and US$          per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$          per ordinary share and US$          per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:
Per Ordinary
Share
Per ADS
Initial public offering price
US$         
US$         
Net tangible book value as of          
US$         
US$         
Pro forma net tangible book value after giving effect to the conversion of our preferred shares
US$         
US$         
Pro forma as adjusted net tangible book value after giving effect to the conversion of our preferred shares and this offering
US$         
US$         
Amount of dilution in net tangible book value to new investors in this offering
US$         
US$         
44

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2017, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us in this offering, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include Class A ordinary shares underlying the ADSs issuable upon the exercise of the option granted to the underwriter to purchase additional ADSs.
Ordinary Shares Purchased
Total Consideration
Average
Price Per
Ordinary
Share
Average
Price Per
ADS
Number
%
Amount
%
(in millions of US$, except number of shares and percentages)
Existing shareholders
         ​
             
         
             
US$         
US$         
New investors
         
             
         
             
US$         
US$         
Total
         
100.0
         
100.0
The pro forma as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.
45

Exchange Rate Information
All of our operations are conducted in China and all of our revenues are denominated in RMB. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB6.5063 to US$1.00, the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on December 29, 2017. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On October 5, 2018, the noon buying rate was RMB6.8680 to US$1.00.
The following table sets forth, for the periods indicated, information concerning exchange rates between the Renminbi and the U.S. dollar based on the noon buying rate in New York City as certified for customs purposes by the Federal Reserve Bank of New York. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.
Noon Buying Rate
Period End
Average(1)
High
Low
(RMB per US$1.00)
Period
2013
6.0537 6.1412 6.2438 6.0537
2014
6.2046 6.1704 6.2591 6.0402
2015
6.4778 6.2869 6.4896 6.1870
2016
6.9430 6.6549 6.9580 6.4480
2017
6.5063 6.7350 6.9575 6.4773
2018
April
6.3325 6.2967 6.3340 6.2655
May
6.4096 6.3701 6.4175 6.3325
June
6.6171 6.4651 6.6235 6.3850
July
6.8038 6.7164 6.8097 6.6123
August
6.8300 6.8453 6.9330 6.8018
September
6.8680 6.8551 6.8763 6.8270
October (through October 5, 2018)
6.8680 6.8680 6.8680 6.8680
Note:
(1)
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
46

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

political and economic stability;

an effective judicial system;

a favorable tax system;

the absence of exchange control or currency restrictions; and

the availability of professional and support services.
However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:

the Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors; and

Cayman Islands companies may not have standing to sue before the federal courts of the United States.
Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.
All of our operations are conducted in China, and all of our assets are located in China. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
We have appointed C T Corporation System, located at 111 Eighth Avenue, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.
We have been advised by Walkers, our counsel as to Cayman Islands law, that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters and that there is uncertainty as to whether a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability provisions, whether or not predicated solely upon the U.S. federal securities laws, would be enforceable in the Cayman Islands. This uncertainty relates to whether such a judgment would be determined by the courts of the Cayman Islands to be penal or punitive in nature. We have also been advised by Walkers that, notwithstanding the above, a final and conclusive judgment obtained in U.S. federal or state courts under which a definite sum of money is payable as compensatory damages and not in respect of laws that are penal in nature (i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in respect of a fine or penalty or multiple or punitive damages) will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided that:

the court that gave the judgment was competent to hear the action in accordance with private international law principles as applied by the courts in the Cayman Islands and the parties subject to such judgment either submitted to such jurisdiction or were resident or carrying on business within such jurisdiction and were duly served with process;

the judgment given by the foreign court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations;

the judgment was final and conclusive and for a liquidated sum;

the judgment was not obtained by fraud; and

the judgment was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or public policy in the Cayman Islands.
A Cayman Islands court may impose civil liability on us or our directors or officers in a suit brought in the Grand Court of the Cayman Islands against us or these persons with respect to a violation of U.S. federal securities laws, provided that the facts surrounding any violation constitute or give rise to a cause of action under Cayman Islands law.
47

PRC
Zhong Lun Law Firm, our counsel as to PRC law, has advised us that there is uncertainty as to whether the courts of China would:

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

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
Zhong Lun Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law and relevant civil procedure requirements in China. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the jurisdiction where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in the PRC for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit.
It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding our ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.
48

Corporate History and Structure
Corporate History
In April 2014, Ms. Zhou established Yong Xiong Investment with other shareholders. In July 2015, Mr. Tan purchased 94% and 3% equity interests of Yong Xiong Investment from Ms. Zhou and another shareholder, respectively. Upon the completion of such share purchase, Mr. Tan and Ms. Zhou held 97% and 3% equity interest in Yong Xiong Investment, respectively. Yong Xiong Investment was renamed the Yong Xiong Group in 2015.
Beginning in August 2018, we began our restructuring in contemplation of this offering. Under the restructuring:

Incorporation of the listing entity. In August 2018, we incorporated YX Asset Recovery Limited under the laws of the Cayman Islands as our offshore holding company to facilitate financing and an offshore listing.

Incorporation of British Virgin Islands holding company, Hong Kong holding company and WFOE. In August 2018, YX Asset Recovery Limited established a wholly-owned subsidiary in the British Virgin Islands named YX International Holding Ltd. In September 2018, YX International Holding Ltd established a wholly-owned subsidiary in Hong Kong named YX Services Limited. YX Services Limited will establish a wholly-owned subsidiary in China named          .

Contractual arrangements. Our WFOE will enter into a series of contractual arrangements with the Yong Xiong Group, which we refer to as our VIE in this prospectus, and its respective shareholders. These contractual arrangements will enable us to exercise effective control over our VIE; receive substantially all of the economic benefits of our VIE; and have an exclusive option to purchase all or part of the equity interests in and assets of them when and to the extent permitted by PRC law. For more details, please see “—Contractual Arrangements with the VIE and Its Shareholders.
Upon the completion of our restructuring and as a result of our direct ownership in our WFOE and the VIE contractual arrangements, we will be regarded as the primary beneficiary of our VIE. Upon the completion of our restructuring, we will consolidate the financial results of our VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.
In August 2018, Mr. Tan, Ms. Zhou, the Yong Xiong Group and Shanghai China Ping An Guo Jing Equity Investment Fund Partnership (Limited Partnership), or Zhong Ping Capital, entered into a framework agreement, pursuant to which Zhong Ping Capital agreed to purchase 20% equity interest of YX Asset Recovery Limited from Mr. Tan, and a nominal 0.0001% equity interest of the Yong Xiong Group from Mr. Tan or, collectively, the Zhong Ping Transaction. At the closing of the Zhong Ping Transaction, Zhong Ping Capital will directly or indirectly acquire           ordinary shares of YX Asset Recovery Limited from Mr. Tan and such ordinary shares will be re-designated as Series A redeemable convertible preferred shares of YX Asset Recovery Limited, or preferred shares, at the closing of the Zhong Ping Transaction. The closing of such transaction is subject to customary closing conditions including government approval in China.
49

Corporate Structure
The following diagram illustrates our corporate structure, including our principal subsidiaries and the VIE, upon the completion of our restructuring and the closing of the Zhong Ping Transaction:
[MISSING IMAGE: tv500812_chrt23-r1.jpg]
Notes:
(1)
The shareholders of Hunan Yong Xiong Asset Management Group Co., Ltd. are Mr. Man Tan, who holds [96.9999]% of its equity interest, Ms. Xiaofang Zhou, who holds [3]% of its equity interest, and Zhong Ping Capital, which holds [0.0001]% of its equity interest.
(2)
In the process of de-registration in the local administrative bureau of industry and commerce.
50

Contractual Arrangements with the VIE and Its Shareholders
Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications businesses, we currently conduct our business operations through the Yong Xiong Group, which we expect to effectively control through a series of contractual arrangements. These contractual arrangements will allow us to:

exercise effective control over the Yong Xiong Group;

receive substantially all of the economic benefits of the Yong Xiong Group; and

have an exclusive option to purchase all or part of the equity interests in the Yong Xiong Group when and to the extent permitted by PRC law.
As a result of these contractual arrangements, we will become the primary beneficiary of the Yong Xiong Group. Upon the completion of our restructuring, we will consolidate the financial results of the Yong Xiong Group in our consolidated financial statements in accordance with U.S. GAAP.
The following is a summary of the expected effective contractual arrangements by and among our WFOE, the Yong Xiong Group and each of the shareholders of the Yong Xiong Group.
Agreements that provide us with effective control over the VIE
Shareholder Voting Proxy Agreement and Powers of Attorney. Our WFOE, the Yong Xiong Group and each of the shareholders of the Yong Xiong Group will enter into a Shareholder Voting Proxy Agreement, pursuant to which each of the shareholders of the Yong Xiong Group will execute a power of attorney to irrevocably authorize our WFOE or any person designated by our WFOE to act as their attorney-in-fact to exercise all of their rights as a shareholder of the Yong Xiong Group, including, but not limited to, the right to convene and attend shareholders’ meetings, vote on any resolution that requires a shareholder vote, such as the appointment and removal of directors, supervisors and officers, as well as the sale, transfer, pledge and disposal of all or part of the equity interests owned by such shareholder. The power of attorney will remain effective until the termination of the Shareholder Voting Proxy Agreement unless otherwise instructed by our WFOE.
Equity Pledge Agreement. Our WFOE, the Yong Xiong Group and each of the shareholders of the Yong Xiong Group will enter into an Equity Pledge Agreement, pursuant to which the shareholders of the Yong Xiong Group will pledge 100% equity interests of the Yong Xiong Group to our WFOE to guarantee the performance by the shareholders of their obligations under the contractual arrangements including the Exclusive Option Agreement, the Shareholder Voting Proxy Agreement and the Equity Pledge Agreement, as well as the performance by the Yong Xiong Group of its obligations under the Exclusive Option Agreement, the Shareholder Voting Proxy Agreement, the Exclusive Consultation and Service Agreement and the Equity Pledge Agreement. In the event of a breach by the Yong Xiong Group or any shareholder of contractual obligations under the Equity Pledge Agreement, our WFOE, as pledgee, will have the right to dispose of the pledged equity interests in the Yong Xiong Group and will have priority in receiving the proceeds from such disposal. The shareholders of the Yong Xiong Group will also undertake that, without the prior written consent of our WFOE, they will not dispose of, create or allow any encumbrance on the pledged equity interests. The Yong Xiong Group will undertake that, without the prior written consent of our WFOE, they will not assist or allow any encumbrance to be created on the pledged equity interests. Each shareholder will also execute a power of attorney to irrevocably authorize Mr. Tan as their attorney-in-fact to sign any legal documents that are required or useful in exercising our WFOE’s rights under the Equity Pledge Agreement.
Agreement that allow us to receive economic benefits from the VIE
Exclusive Consultation and Service Agreement. Our WFOE and the Yong Xiong Group will enter into an Exclusive Consultation and Service Agreement, pursuant to which our WFOE will have the exclusive right to provide the Yong Xiong Group with the consulting and technical services required by the Yong Xiong Group’s business. Under the Exclusive Consultation and Service Agreement, the Yong Xiong Group will agree that it may not accept any services subject to this agreement from any third party without our WFOE’s prior written consent. The Yong Xiong Group will agree to pay our WFOE an annual service fee at an amount that is equal to 100% of its net income or the amount which is adjusted in accordance with our WFOE’s sole discretion for the relevant year as well as the mutually agreed amount for certain other technical services, both of which should be paid within three months after the end of the relevant calendar year. Our WFOE will have the exclusive ownership of all the intellectual property rights created as a result of the performance of the Exclusive Consultation and Service Agreement, to the extent permitted by applicable PRC laws. To guarantee the Yong Xiong Group’s performance of its obligations thereunder, the shareholders will pledge their equity interests of the Yong Xiong Group to our WFOE pursuant to the Equity Pledge Agreement. The Exclusive Consultation and Service Agreement will remain effective for an indefinite term, unless otherwise terminated pursuant to mutual agreement in writing or applicable PRC laws.
51

Agreement that provides us with the option to purchase the equity interests and assets of the VIE
Exclusive Option Agreement. Our WFOE, the Yong Xiong Group and each of the shareholders of the Yong Xiong Group will enter into an Exclusive Option Agreement, pursuant to which the shareholders of the Yong Xiong Group will irrevocably grant our WFOE an exclusive option to purchase all or part of their equity interests of the Yong Xiong Group, and the Yong Xiong Group will irrevocably grant our WFOE an exclusive option to purchase all or part of its assets. Under the Exclusive Option Agreement, our WFOE will have the right to exercise, or designate a person or entity to exercise, such options at the lowest price permitted under applicable PRC laws. The shareholders of the Yong Xiong Group will undertake that, without our WFOE’s prior written consent, they will not, among other things, (i) create any pledge or encumbrance on their equity interests of the Yong Xiong Group, (ii) transfer or otherwise dispose of their equity interests of the Yong Xiong Group, (iii) change the Yong Xiong Group’s registered capital, (iv) amend the Yong Xiong Group’s articles of association, (v) dispose of the Yong Xiong Group’s material assets (except in the ordinary course of business), or (vi) merge the Yong Xiong Group with any other entity. In addition, the Yong Xiong Group will undertake that, without our WFOE’s prior written consent, it will not, among other things, create any pledge or encumbrance on any of its assets, or transfer or otherwise dispose of its material assets (except in the ordinary course of business). The Exclusive Option Agreement will remain effective until the entire equity interests and all the assets of the Yong Xiong Group have been transferred to our WFOE or its designated person or entity.
In the opinion of Zhong Lun Law Firm, our PRC legal counsel:

the ownership structures of our VIE in China and our WFOE immediately after giving effect to this offering, comply with all existing PRC laws and regulations; and

upon the execution of the contractual agreements with the VIE and its shareholders, the contractual arrangements between our WFOE, our VIE and their respective shareholders governed by PRC law will be valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.
However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or, if adopted, what they would provide. If we or our VIE are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Risk Factors—Risks Related to Our Corporate Structure—If the agreements that establish the structure for certain of our operations in China do not comply with PRC regulations, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”
52

Selected Consolidated Financial Data
The following selected consolidated statements of income data (other than US$ data) for the years ended December 31, 2016 and 2017, selected consolidated balance sheets data (other than US$ data) as of December 31, 2016 and 2017, selected consolidated statements of cash flows data (other than US$ data) for the years ended December 31, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods.
Year Ended December 31,
2016
2017
RMB
%
RMB
US$
%
(in thousands, except percentages)
Selected Consolidated Statements of Income Data
Revenues
435,636 100.0 595,279 91,493 100.0
Cost of revenues
(244,109) (56.0) (388,106) (59,651) (65.2)
Gross Profit
191,527 44.0 207,173 31,842 34.8
Selling and marketing expenses
(1,145) (0.3) (981) (151) (0.2)
General and administrative expenses
(55,505) (12.7) (56,497) (8,683) (9.4)
Income from operations
134,877 31.0 149,695 23,008 25.2
Interest income
32 0.0 85 13 0.0
Interest expense
(8,439) (1.9) (12,609) (1,938) (2.1)
Government grants
302 0.1 1,959 301 0.3
Income before income taxes
126,772 29.2 139,130 21,384 23.4
Income tax expense
(29,123) (6.8) (29,561) (4,543) (5.0)
Net income
97,649 22.4 109,569 16,840 18.4
Net income attributable to Hunan Yong Xiong Asset Management
Group Co., Ltd.
85,222 19.6 104,661 16,086 17.6
As of December 31,
2016
2017
RMB
RMB
US$
(in thousands)
Selected Consolidated Balance Sheets Data:
Cash
45,003 44,830 6,890
Accounts receivable
91,819 105,110 16,155
Amounts due from related parties
45,695 117,594 18,074
Prepaid expenses and other current assets
47,143 73,717 11,330
Total current assets
230,904 364,310 55,993
Total assets
361,458 530,167 81,485
Short-term bank loans, including current portion of long-term bank loan
111,466 8,833 1,358
Amounts due to related parties
22,052 77,605 11,928
Accrued expenses and other payables
80,773 143,330 22,029
Total current liabilities
251,022 270,034 41,503
Long-term bank loan, excluding current portion
34,908 30,275 4,653
Total liabilities
291,315 320,485 49,258
Total equity
70,143 209,682 32,227
53

Year ended December 31,
2016
2017
RMB
RMB
US$
(in thousands)
Selected Consolidated Statements of Cash Flows Data:
Net cash provided by operating activities
88,801 137,165 21,082
Net cash used in investing activities
(132,081) (105,797) (16,261)
Net cash provided by (used in) financing activities
80,303 (31,541) (4,848)
Net increase (decrease) in cash
37,023 (173) (27)
Cash at the beginning of the year
7,980 45,003 6,917
Cash at the end of the year
45,003 44,830 6,890
54

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Overview
We are a leading business services company that specializes in the collection of tertiary delinquent unsecured consumer receivables, or tertiary receivables, in China. We collect tertiary receivables such as credit card receivables originated by commercial banks, and consumer credit receivables originated by non-bank online financial institutions, or online lenders, typically with principal amount of less than RMB10,000, or online receivables. Delinquent consumer receivables are unpaid and past due financial obligations of individuals owed to credit originators, including banks, online lenders and other financial institutions. Tertiary credit card receivables are typically more than 12 months past due or are charged-off and tertiary online receivables are typically more than six months past due or are charged-off.
We generate substantially all of our revenue from the commission we receive from the successful collection of delinquent consumer receivables. In 2017, we derived 96.6% of our revenues from the collection of delinquent credit card receivables, 3.1% from the collection of other receivables, substantially all of which consist of online receivables, and the remaining revenue from other activities. In most cases, our clients have unsuccessfully attempted to collect these delinquent consumer receivables through their in-house collection teams and other service providers prior to engaging us. Tertiary receivables are past due for a longer period of time and more difficult to collect compared to fresher receivables such as primary and secondary receivables, and thus the market compensation for successful collection of tertiary receivables is generally higher than the market compensation for successful collection of primary and secondary receivables. We believe our focus on the tertiary receivables segment of the general market enables us to generate higher profit margins relative to other collection service providers in China.
The total amount of debt we collected on behalf of our clients in 2016 and 2017 were RMB920.5 million and RMB1.4 billion (US$220.7 million), respectively. Our commissions from debt collection increased by 38.0% from RMB430.0 million in 2016 to RMB593.5 million (US$91.5 million) in 2017. Our gross profit increased by 8.2% from RMB191.5 million in 2016 to RMB207.2 million (US$31.8 million) in 2017. Our net income increased by 12.2% from RMB97.6 million in 2016 to RMB109.6 million (US$16.8 million) in 2017.
General Factors Affecting Our Results of Operations
Our business and operating results are affected by, among others, general factors that affect China’s consumer receivable recovery industry, which include:

China’s overall economic growth and level of per capita disposable income;

the availability of consumer credit and the continued growth of consumer debt in China;

banks, online lenders and other non-bank financial institutions’ willingness to outsource delinquent consumer receivables for collection;

banks, online lenders and other non-bank financial institutions’ pricing strategy for outsourced collections;

the overall competitive landscape of the recovery industry;

the general collectability of the tertiary receivables outsourced; and

governmental policies and initiatives that affect China’s consumer receivable recovery industry.
Unfavorable changes in any of these general industry conditions could negatively affect demand for our services and materially and adversely affect our results of operations.
Specific Factors Affecting Our Results of Operations
While our business is influenced by general factors affecting the consumer receivable recovery industry in China, we believe our results of operations are more directly affected by company-specific factors, including the following major factors.
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Our ability to obtain sufficient quality delinquent consumer receivables for collection
We derive our revenue from providing collection services to commercial banks and online lenders. The commissions that we receive from such services represent the predominant source of our revenues. To operate profitably, we must continuously receive delinquent consumer receivables for collection from our clients. Therefore, our ability to maintain, develop and expand our business to obtain the same or greater value and number of quality delinquent consumer receivables for collection is essential to our operation. Any material change in consumer receivables for collection could have a significant impact on our results of operations. We currently maintain strong business relationships with top national commercial banks and reputable online lenders in China and have a consistent stream of receivables for collection. To this end, we need to continue to maintain our relationships with existing clients and develop business relationships with new clients to ensure that we have sufficient consumer receivables for collection.
Our ability to allocate company resources and select profitable consumer receivables for collection
The efficient use of limited resources, which include human resources and capital commitments, to conduct our collection operation is fundamental to our success. Therefore, our ability to select profitable consumer receivables based on the receivables’ overall collectability and projected commission revenue is essential to our operation. Based on our market experience and the industry data we accumulated over the years, we have the ability to assess and evaluate receivable portfolio bids under portfolio collection and the ability to target banks as ideal clients under general collection. We believe as we implement and incorporate greater technology into our collection platform, our ability to select profitable consumer receivables for collection and ability to allocate company resources will improve.
Our ability to collect delinquent consumer receivables efficiently
Our business, financial condition and results of operations depend on our ability to collect delinquent consumer receivables efficiently. Our clients pay us a certain percentage of the total value of delinquent consumer receivables collected as commission and the commission rates are correlated to an agreed-upon collection rate schedule with our clients. Our operations have been profitable largely due to the fact that we have been able to collect these delinquent consumer receivables at rates that are generally above the industry average collection rates, and thus receive relatively higher commissions. The key measures of our collection efficiency are the average value and number of receivables assigned to each collection specialist and the average amount collected. As a result of our experienced collection specialists and advances in technology, we believe we can maintain and continue to improve our overall productivity and efficiency in our future operation.
Our ability to manage our growth effectively
We expanded rapidly since our formation and intend to continue to expand our business in terms of market segment participation, geographic presence and strategic partnerships. As a part of our overall expansion plan, we will leverage our experience in tertiary receivable recovery into earlier stage consumer receivable segments and other non-consumer receivable markets, increase our geographic coverage in China by establishing additional offices and synergize our big data resources into our current operations.

Market Segment Expansion. We will expand into other segments of the collection industry and believe our success in the tertiary receivable segment affords us the ability to expand.

Geographic Expansion. We will continue to use our centralized operations and proprietary management system to manage our ongoing geographic expansion. Many of our competitors allow their regional offices to operate relatively more independent from central management by allowing their branch offices to engage clients directly and only collect delinquent consumer receivables from credit originators in that local area. Unlike our competitors, our company headquarters in Changsha centrally manages our regional offices by centralizing nationwide client engagement efforts and allocating consumer receivables to the regional offices and call centers for collection based on our efficiency analysis. Therefore, we believe we can maintain the same quality of service throughout all of our regional offices.

Partnerships. Our strategic partnership with China Unicom aims to utilize the database of one of the largest telecommunication service providers in China to strengthen our skip tracing system. We believe we can leverage and utilize China Unicom’s large database resources into our current platform to improve our collection efficiency.
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We believe we can manage our expansion initiatives effectively to develop and grow our company. Failure to do so could adversely affect our business and results of operation.
Our ability to effectively invest in technology infrastructure
Our technology infrastructure and innovation are critical to our collection service. We must continue to upgrade and expand our technology infrastructure to keep pace with the growth of our operations and accommodate changes in the market. We devote significant resources to develop and advance our technology. In addition, we aim to incorporate the use of artificial intelligence, or AI, and big data analytical capabilities platform into our current technology infrastructure. We believe our ability to effectively invest in technology infrastructure solidifies our status as an innovative industry leader. Failure to continue to successfully adopt technology infrastructure could adversely affect our results of operation.
Our ability to attract, train and retain collection specialists and our ability to manage staff costs
Our ability to collect delinquent consumer receivables depends on our collection specialists’ capability and experience. Therefore, the ability to attract, train and retain capable collection specialists is critical to our business. We believe our reputation as an industry leader and a preferred employer as well as the training and compensation we offer to our employees afford us the ability to maintain a sufficient level of employees to ensure our business operation, overall productivity and expansion initiative to develop and grow our company.
Our efforts to maintain a capable collection team must be balanced with the effective management of staff costs. Staff costs constitute our largest operating cost by far. The inability to manage staff costs diminishes our profitability. We continue to implement and incorporate technologies to increase per specialist output and reduce reliance on human resources in expanding our business.
Key Components of Results of Operations
Revenues
We derive our revenues from commissions generated from our collection of delinquent credit card receivables and other receivables, substantially all of which consist of online receivables, as well as other revenues from Hunan Yong Xin Catering Management Co., Ltd., or Yong Xin Catering, and from Changsha Yubang Software Development Co., Ltd., or Yubang Software. The following table presents our revenue lines and as percentages of our total revenues for the periods presented.
Year Ended December 31,
2016
2017
RMB
%
RMB
US$
%
(in thousands, except percentages)
Collection of credit card debts
420,033 96.4 574,924 88,364 96.6
Collection of other debts
10,012 2.3 18,622 2,862 3.1
Others
5,591 1.3 1,733 267 0.3
Total
435,636 100.0 595,279 91,493 100.0
Collection Service
We collect tertiary receivables such as delinquent credit card receivables and other receivables, substantially all of which consist of online receivables. We generate substantially all of our revenues from commissions received for the successful collection of delinquent credit card receivables. With the emergence of the online consumer lending industry and the growth of online delinquent receivable market in China, we expect our revenue generated from online receivable collections to increase in the next few years.
Others
Revenue from other services primarily consists of revenues generated from Yong Xin Catering for meal services provided to our employees and services provided by Yubang Software. In March 2017, Yong Xin Catering was sold to Changsha Yong Xiong Equity Investment Management Co., Ltd., or Yong Xiong Equity Investment, a company controlled by our founder. Yubang Software primarily provided software and technology support services to our collection operation and only generated minimum revenue through provision of services to other third party entities in 2016.
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Operating Costs and Expenses
Our operating costs and expenses consist of  (i) cost of revenues, (ii) selling and marketing expenses, and (iii) general and administrative expenses.
Cost of revenues. Our cost of revenues mainly consists of staff costs, operating lease charges, depreciation and amortization, and communication charges incurred from our provision of collection services. Staff costs under cost of revenues consist of the salary, bonus, social benefit contributions and other compensation that we pay to our collection specialists. Operating lease charges are expenses related to the lease of our call centers in Changsha. Depreciation and amortization expenses consist of the depreciated value of our property and equipment such as buildings, leasehold improvements, machinery and electronic equipment, office equipment and motor vehicles used for our collection service. Communication charges are expenses related to our collection service in which we attempt to contact debtors mainly by telephone calls and text messages.
Selling and marketing expenses. Our sales expenses consist of business entertainment expenses, conference fees, and other related expenses. Business entertainment expenses are expenses incurred by our marketing department for providing meals, hotel accommodations and transportation for business development activities. Other related expenses primarily consist of marketing and advertising expenses.
General and administrative expenses. Our general and administrative expenses mainly consist of staff costs, depreciation and amortization, business entertainment expenses, conference fees, audit and consultancy fees and other related expenses. Similar to our cost of revenues, staff costs and depreciation and amortization of assets comprise a large portion of our general and administrative expenses. Under general and administrative expenses, staff costs are salary, bonus, social benefit contributions and other compensation to company management and administrative staff. Depreciation and amortization expenses consist of depreciated value of our property and equipment such as buildings, leasehold improvements, machinery and electronic equipment, office equipment and motor vehicles used by our company management administrative staff. Hospitality costs are expenses incurred by our administrative and management departments for providing meals, hotel accommodations and transportation for business development activities. Audit and consultancy expenses consist of fees the company paid to law firms, accounting and auditing firms and consulting firms for legal, accounting, tax and other professional services. We expect our expenses for such professional services to increase in the near future as we become a publicly listed company and need to comply with U.S. securities laws and other U.S. regulations. Other expenses include miscellaneous administrative and office expenses.
Interest expenses
In the course of engaging our clients to obtain portfolio collection contracts, we may need to provide security deposits to these clients as guarantees for the minimum value of consumer receivables collected. We may, from time to time, finance these security deposits by obtaining loans from various banks. Therefore, we incur interest expenses for the provision of security deposits. We also obtained a mortgage for the purchase of our headquarters building in Changsha which contributed to our interest expenses.
Taxation
We had income tax expenses of RMB29.1 million and RMB29.6 million (US$4.5 million) in 2016 and 2017, respectively. We are subject to various rates of income tax under different jurisdictions. The following summarizes the major factors affecting our applicable tax rates in the Cayman Islands, Hong Kong and the PRC.
Cayman Islands
We are an exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income, corporation or capital gains tax in the Cayman Islands. In addition, our payment of dividends to our shareholders, if any, is not subject to withholding tax in the Cayman Islands.
Hong Kong
Our subsidiaries in Hong Kong are subject to the uniform tax rate of 16.5%. Under Hong Kong tax law, our subsidiaries in Hong Kong are exempted from income tax on their foreign-derived income and there is no withholding tax in Hong Kong on remittance of dividends. No provision for Hong Kong profits tax was made as we had no estimated assessable profit that was subject to Hong Kong profits tax during 2016 and 2017.
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PRC
Generally, our PRC subsidiary, our VIE and its subsidiaries are subject to enterprise income tax, or EIT, on their taxable income in the PRC at a rate of 25.0%. The EIT is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.
Yubang Software currently qualifies as a newly established and qualified software enterprise and enjoys two year tax exemptions and three year 50.0% tax reductions under the preferential tax treatment from 2016 to 2020.
Our PRC subsidiary, our VIE and its subsidiaries were subjected to general business tax at a rate of 5.0% from January 2016 to April 2016 and are currently subject to VAT at a rate of 6.0% on the services we provide.
If our holding company in the Cayman Islands or our subsidiary outside of the PRC were deemed to be a “resident enterprise” under the EIT law, it would be subject to EIT on its worldwide income at a rate of 25.0%. See “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”
Results of Operations
The following table summarizes our consolidated results of operations and as percentages of our total revenues for the years presented.
Year Ended December 31,
2016
2017
RMB
%
RMB
US$
%
(in thousands, except percentages)
Revenues
Collection of credit card debts
420,033 96.4 574,924 88,364 96.6
Collection of other debts
10,012 2.3 18,622 2,862 3.1
Others
5,591 1.3 1,733 267 0.3
Revenues
435,636 100.0 595,279 91,493 100.0
Cost of revenues
(244,109) (56.0) (388,106) (59,651) (65.2)
Gross Profit
191,527 44.0 207,173 31,842 34.8
Operating Expenses
Selling and marketing expenses
(1,145) (0.3) (981) (151) (0.2)
General and administrative expenses
(55,505) (12.7) (56,497) (8,683) (9.4)
Income from operations
134,877 31.0 149,695 23,008 25.2
Interest income
32 0.0 85 13 0.0
Interest expense
(8,439) (1.9) (12,609) (1,938) (2.1)
Government grants
302 0.1 1,959 301 0.3
Income before income taxes
126,772 29.2 139,130 21,384 23.4
Income tax expense
(29,123) (6.8) (29,561) (4,543) (5.0)
Net income
97,649 22.4 109,569 16,840 18.4
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Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Revenues
Our revenues increased by 36.6% from RMB435.6 million in 2016 to RMB595.3 million (US$91.5 million) in 2017.
Collection Service. Our revenue from debt collection increased by 38.0% from RMB430.0 million in 2016 to RMB593.5 million (US$91.5 million) in 2017, primarily driven by the increase in total amount of debt we collected on behalf of our clients, which increased by 56.0% from RMB920.5 million in 2016 to RMB1.4 billion (US$220.7 million) in 2017. Our revenue from the collection of delinquent credit card receivables increased by 36.9% from RMB420.0 million in 2016 to RMB574.9 million (US$88.4 million) in 2017. Our revenue from the collection of other receivables, substantially all of which consist of online receivables from online lenders, increased by 86.0% from RMB10.0 million in 2016 to RMB18.6 million (US$2.9 million) in 2017. Collection of delinquent credit card receivables continued to generate a substantial portion of our revenues and growth while collection of online receivables experienced significant growth in 2017. The increase in delinquent credit card receivable collection was attributable to our engagement of higher quality clients and receivables under portfolio and general collections, our overall increase in capacity to service more delinquent credit card receivables, our technological advances and improvement in operation efficiency. The significant increase in online lending collection was attributable to the growth of the online lending industry and our conscious effort to obtain more receivables for collection from online lenders by allocating additional resources in order to establish ourselves in this market segment. In addition to collecting a greater number and value of online receivables for our existing clients, we obtained receivables for collection from new clients.
Others. Revenue from other services decreased by 69.0% from RMB5.6 million in 2016 to RMB1.7 million (US$267,000) in 2017 mainly because we ceased operation of Yong Xin Catering in March 2017.
Cost of Revenues
Our cost of revenues increased by 59.0% from RMB244.1 million in 2016 to RMB388.1 million (US$59.7 million) in 2017 as a result of increases in staff costs, operating lease charges, depreciation and amortization and communication charges.
Staff costs. Staff costs increased by 57.7% from RMB216.8 million in 2016 to RMB342.0 million (US$52.6 million) in 2017 as a result of hiring additional collection specialists, which increased by 49.2%, and an increase in average employee compensation, which increased by 5.8% from RMB4,482 per month in 2016 to RMB4,740 (US$729) per month in 2017. In addition to a growing workforce and an increase in employee salary, our contribution to the employees’ social security benefits also increased, which contributed to the overall increase in staff costs in 2017.
Operating lease charges. Operating lease charges increased by 69.7% from RMB14.5 million in 2016 to RMB24.6 million in 2017 as a result of the additional call centers in Changsha and various other facilities.
Depreciation and amortization. Depreciation and amortization increased by 118.6% from RMB4.3 million in 2016 to RMB9.4 million (US$1.4 million) in 2017 as a result of the increased leasehold improvement for renovation as well as the purchase of computer equipment and furniture for the Xinyuan and Riye call centers.
Communication charges. Expenses for the use of telephone and text message in rendering collection services increased by 52.5% from RMB4.0 million in 2016 to RMB6.1 million (US$938,000) in 2017 as a result of the increase in our overall business activity and, in particular, an increase in the number of receivables under collection in 2017.
Gross Profit
As a result of the foregoing, we had gross profit of RMB191.5 million and RMB207.2 million (US$31.8 million) in 2016 and 2017, respectively. Our gross profit as a percentage of revenues, or gross margin, decreased from 44.0% in 2016 to 34.8% in 2017. We maintained a relatively stable gross margin since the commencement of our operation in 2015. The exceptional increase in gross margin in 2016 was due to our first business engagement with one of the largest commercial banks in China for its portfolio collection. This particular client overestimated the collection difficulty and anticipated a longer collection period in order for us to meet the collection requirement. As our commission rate was correlated to the difficulty of collection we met the collection requirement very quickly and generated RMB111.8 million in commission fee, which represented a substantial portion of our revenue in 2016. Such efficient collection service also afforded us resources to engage more collection portfolios in 2016. This particular engagement generated exceptionally high commission rate, and as a result, our gross margin in 2016 was substantially higher than our gross margin of prior years. This particular client adjusted its pricing strategy in its subsequent business engagements with us, and our gross margin stabilized in 2017.
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Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses decreased by 14.3% from RMB1.1 million in 2016 to RMB981,000 (US$151,000) in 2017, primarily due to a decrease in marketing and advertising activities. As a result of the decrease in advertising activities, advertising expenses decreased from RMB1.1 million in 2016 to RMB728,000 (US$112,000) in 2017.
General and Administrative Expenses
General and administrative expenses increased by 1.8% from RMB55.5 million in 2016 to RMB56.5 million (US$8.7 million) in 2017, primarily due to the increase in staff costs, depreciation and amortization, business entertainment expenses and conference fees. Our staff costs increased by 5.7% from RMB33.1 million in 2016 to RMB35.0 million (US$5.4 million) in 2017 mainly due to an increased headcount. Our depreciation and amortization increased by 23.9% from RMB4.6 million in 2016 to RMB5.7 million (US$875,000) in 2017 primarily due to leasehold improvements for the renovation of our new headquarters office building in 2016. Our business entertainment expenses and conference fees increased by 114.6% from RMB966,000 in 2016 to RMB2.1 million (US$323,000) in 2017 as a result of an increase in business development activities. These increases were offset by decreases in other general and administrative expenses such as company donations which decreased from RMB2.9 million in 2016 to RMB100,000 (US$15,000) in 2017.
Interest Expense
We had interest expense of RMB8.4 million in 2016 and RMB12.6 million (US$1.9 million) in 2017. The 49.4% increase in interest expense in 2017 was mainly due to our increased use of revolving credit for the provision of security deposits required for some of the portfolio collections as we obtained additional portfolio collections from our clients in 2017.
Income Tax Expense
We had income tax expense of RMB29.1 million in 2016 and RMB29.6 million (US$4.5 million) in 2017. Our effective tax rate decreased from 23.0% in 2016 to 21.2% in 2017. The difference in effective income tax rate and the PRC statutory tax rate of 25% applicable to our major operating subsidiaries was primarily due to the income tax exemption enjoyed by Yubang Software, which was partially offset by non-deductible expenses.
Yubang Software obtained a software enterprise certificate in 2016. Pursuant to the respective tax laws, Yubang Software qualifies as a “Newly Established and Qualified Software Enterprises,” and was entitled to a preferred income tax rate of 0% from 2016 to 2017. The effect of Yubang Software's tax holiday was RMB4.1 million and RMB11.3 million for the years ended December 31, 2016 and 2017, respectively.
Net Income
As a result of the foregoing, we had net income of RMB97.6 million and RMB109.6 million (US$16.8 million) in 2016 and 2017, respectively, which represented a 12.2% increase.
Liquidity and Capital Resources
Prior to this offering, our principal source of liquidity has been the commissions that we receive for our successful collection of consumer receivables.
As of December 31, 2017, our total current assets were RMB364.3 million (US$56.0 million) and consisted of amounts due from related parties, accounts receivable, cash, prepaid expenses and other current assets, and contract assets. We had RMB117.6 million (US$18.1 million) in amounts due from related parties mainly consisted of cash advances to our founder, shareholders, executives or entities under our founder’s control. We had RMB105.1 million (US$16.2 million) in accounts receivable which consisted of commission receivables from third party trade debtors, and we expect to recover these receivables within one year. We had RMB44.8 million (US$6.9 million) in cash. Our cash consisted of cash at bank and on hand, which are unrestricted from withdrawal or use. We had RMB23.1 million (US$3.5 million) in contract assets which are recognized when we recognize revenue before being unconditionally entitled to the consideration under the payment terms set out in the contract.
As of December 31, 2017, our total current liabilities were RMB270.0 million (US$41.5 million), which primarily consisted of RMB143.3 million (US$22.0 million) in accrued expenses and other payables, RMB77.6 million (US$11.9 million) in amounts due to related parties and RMB40.3 million (US$6.2 million) in income tax payables. RMB143.3 million (US$22.0 million) in accrued expenses and other payables were payables to third parties which mainly include RMB70.8 million (US$10.9 million) in accrued payroll and benefits, RMB43.5 million (US$6.7 million) in security
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deposits payable to banks for portfolio collection, and RMB17.4 million (US$2.7 million) in value-added tax and other tax payables. RMB77.6 million (US$11.9 million) in amounts due to related parties were mainly cash advances to the company from our founder, shareholders and executives. Our current bank loan payables as of December 31, 2017 were RMB8.8 million (US$1.4 million).
We had a working capital (defined as total current assets deducted by total current liabilities) surplus in 2017. Historically, we have been profitable and are able to generate positive net cash flows. We had a working capital deficit in 2016 as a result of significant bank loans incurred in 2016 to support our business expansion. In 2017, we were able to generate a working capital surplus due to our effort to deleverage through loan repayment, which reduced current liabilities, and an increase in current trade receivables as a result of our business growth.
We believe that our current cash and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for the 12 months following this offering. We may, however, need additional capital in the future to fund our continued operations. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. In the future, should we require additional liquidity and capital resources to fund our business and operations, we may need to obtain additional financing, including financing from new and/or existing shareholders, and financing generated through capital markets and commercial banks. See “Risk Factors—Risks Related to Our Business.”
As of December 31, 2017, 100.0% of our cash were held in the PRC by the Yong Xiong Group and its subsidiaries.
Although we will consolidate the results of our VIE and its subsidiaries, we will only have access to the assets or earnings of our VIE and its subsidiaries through our contractual arrangements with our VIE and its shareholders. See “Corporate History and Structure—Contractual Arrangements with the VIE and Its Shareholders.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “—Holding company structure.”
In utilizing the proceeds that we expect to receive from this offering, we may make additional capital contributions to our PRC subsidiary, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to these PRC subsidiaries, or acquire offshore entities with business operations in China in offshore transactions. However, most of these uses are subject to PRC regulations and approvals. For example:

capital contributions to our existing PRC subsidiary or any new subsidiaries in the PRC that we may establish must be filed with MOFCOM in its foreign investment comprehensive management information system; and

loans by us to our PRC subsidiary to finance its activities cannot exceed the difference between its registered capital and its total investment amount as recorded in the foreign investment comprehensive management information system or, as an alternative, we may procure loans subject to the Risk-Weighted Approach and the Net Asset Limits and must be registered with SAFE or its local branches or filed with SAFE in its information system.
See “Regulation—Regulations on Foreign Exchange.” There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there is no statutory limit on the amount of registered capital for companies under PRC laws, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for its initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant filing and registration procedures. With respect to loans to the PRC subsidiaries by us, (i) if the relevant PRC subsidiary determine to adopt the traditional foreign exchange administration mechanism, or the Current Foreign Debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiaries and there is, in effect, no statutory limit on the amount of loans that we can make to our PRC subsidiary under this circumstance since we can increase the registered capital of our PRC subsidiary by making capital contributions to it, subject to the completion of relevant registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant PRC subsidiary determines to adopt the foreign exchange administration mechanism as provided in the Notice No. 9 Foreign Debt mechanism, the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in the PBOC Notice No. 9, shall not exceed 200.0% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year beginning from the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiary.
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A majority of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, Renminbi may be converted into foreign exchange for current account items, including profit distributions, interest payments and trade-and service related foreign exchange transactions.
Our PRC subsidiary may convert Renminbi amounts that it generates in its own business activities, including technical consulting and related service fees pursuant to its contracts with the VIE, as well as dividends they receive from their own subsidiaries, into foreign exchange and pay them to their non-PRC parent companies in the form of dividends. However, current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary is required to set aside at least 10.0% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50.0% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE and its local branches. The total amount of loans we can make to our PRC subsidiary cannot exceed statutory limits and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the MOFCOM and the amount of registered capital of such foreign-invested company.
The following table sets forth a summary of our cash flows for the years indicated.
Year Ended December 31,
2016
2017
RMB
RMB
US$
(in thousands)
Summary Consolidated Cash Flow Data:
Net cash provided by operating activities
88,801 137,165 21,082
Net cash used in investing activities
(132,081) (105,797) (16,261)
Net cash provided by (used in) financing activities
80,303 (31,541) (4,848)
Net increase (decrease) in cash
37,023 (173) (27)
Cash at the beginning of the year
7,980 45,003 6,917
Cash at the end of the year
45,003 44,830 6,890
Net Cash Provided By Operating Activities
Net cash provided by operating activities increased from RMB88.8 million in 2016 to RMB137.2 million (US$21.1 million) in 2017 primarily due to the combined effect of increase in net income, and changes in operating assets and liabilities. Net income increased by RMB12.0 million from RMB97.6 million in 2016 to RMB109.6 million (US$16.8 million) in 2017. Key changes in operating assets and liabilities that caused operating cash inflow include that the increase of accounts receivable decreased from RMB49.8 million in 2016 to RMB13.3 million (US$2.0 million) in 2017, and that the increase of accrued expenses and other liabilities increased from RMB16.5 million in 2016 to RMB60.8 million (US$9.3 million) in 2017.
Net Cash Used In Investing Activities
Net cash used in investing activities decreased from RMB132.1 million in 2016 to RMB105.8 million (US$16.3 million) in 2017 primarily due to a decrease in purchases of property and equipment from RMB81.2 million in 2016 to RMB20.6 million (US$3.2 million) in 2017 as result of a decrease in property acquisition activities. The government also provided RMB11.2 million (US$1.7 million) in subsidy related to the acquisition of our headquarters building in Changsha. The decrease in net cash used in investing activities was partially offset by an increase in purchase of land use right in the amount of RMB25.0 million (US$3.8 million) in 2017, and the increase in advanced funds to related parties from RMB45.7 million in 2016 to RMB80.3 million (US$12.3 million) in 2017.
Net Cash Provided By (Used In) Financing Activities
Net cash from financing activities changed from RMB80.3 million provided in 2016 to RMB31.5 million (US$4.8 million) used in 2017 primarily due to the combined effect of the RMB32.9 million (US$5.1 million) payment we collected on behalf of a related party in 2017, the RMB97.5 million repayment of advanced funds from related parties in 2016, the decrease in proceeds from bank loans and increase in repayments of bank loans. Proceeds from bank loans decreased from RMB230.7 million in 2016 to RMB68.2 million (US$10.5 million) in 2017. Repayment of bank loans increased from RMB87.4 million in 2016 to RMB179.0 million (US$27.5 million) in 2017.
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Contractual Obligations
The following table sets forth our contractual obligations by specified categories as of December 31, 2017.
Payment due by December 31,
Total
2018
2019
2020
2021
2022 and after
(in RMB thousands)
Operating lease obligations(1)
107,391 25,983 24,970 24,384 19,487 12,567
Capital commitments(2)
18,309 18,309
Long-term bank loan obligations, including current portion(3)
43,023 6,884 6,884 6,884 6,884 15,487
Long-term payables obligations, including current portion(4)
4,416 1,270 394 160 160 2,432
Total
173,139 52,446 32,248 31,428 26,531 30,486
Notes:
(1)
Operating lease obligations represent our obligations for office premise and staff apartment leases.
(2)
Capital commitments represent our obligations in respect of construction of buildings.
(3)
Long-term bank loan obligations represent our secured loan obligations. The balances include interest of RMB8.1 million, which is accrued at the interest rate as of December 31, 2017.
(4)
Long-term payables obligations represent our obligations under installment plans related to the purchase of motor vehicles and property for employee benefits. The balances include interest of RMB1.5 million.
Our contractual obligations as of December 31, 2017 also included additional income taxes payable of RMB7.0 million in the event that a tax position is ultimately disallowed by the relevant tax authority.
Holding Company Structure
YX Asset Recovery Limited is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiary, our VIE and its subsidiaries in China. As a result, YX Asset Recovery Limited’s ability to pay dividends depends upon dividends paid by our PRC subsidiary. If our existing PRC subsidiary or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws, each of our subsidiary and our VIE in China is required to set aside at least 10.0% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50.0% of its registered capital. In addition, each of our wholly foreign-owned subsidiaries in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our VIE may allocate a portion of their after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiary has not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.
Off-Balance Sheet Commitments and Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
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Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Risk
Our revenues and expenses are denominated in Renminbi. Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20.0% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation subsided and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
To date, we have not entered into any material hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. To the extent that we need to convert U.S. dollars we received from this offering into Renminbi for our operations or capital expenditures, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
We estimate that we will receive net proceeds of approximately US$          million from this offering if the underwriter does not exercise its option to purchase additional ADSs, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. Assuming that we convert the full amount of the net proceeds from this offering into Renminbi, a 10.0% appreciation of the U.S. dollar against Renminbi, from a rate of RMB          to US$1.00 as of          , 2017 to a rate of RMB          to US$1.00, will result in an increase of RMB          million in our net proceeds from this offering. Conversely, a 10.0% depreciation of the U.S. dollar against the Renminbi, from a rate of RMB          to US$1.00 as of          , 2017 to a rate of RMB          to US$1.00, will result in a decrease of RMB          million in our net proceeds from this offering.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to interest expenses under our loan agreements, which may bear a floating interest rate, and interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. Interest expenses and interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, our future interest expenses may increase or interest income may fall short of expectations due to changes in market interest rates.
Inflation
To date, inflation in the PRC has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2015, 2016 and 2017 were increases of 1.60%, 2.10% and 1.80%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation in the PRC. For example, certain operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.
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Critical Accounting Policies, Judgments and Estimates
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.
We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.
The following describes our critical accounting policy, judgments and estimates, which should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus. When reviewing our consolidated financial statements, you should consider our selection of critical accounting policy, the judgments and other uncertainties affecting the application of such policy and the sensitivity of reported results to changes in conditions and assumptions.
Revenue Recognition
We have adopted ASC 606, Revenue from Contracts with Customers, since our establishment. Revenue is recognized when control over the service is transferred to the customer at the amount of promised consideration to which we are expected to be entitled.
The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring debt collection service to a customer, excluding amounts collected on behalf of governmental authorities, such as value-added tax and other sales related taxes. The transaction price includes variable consideration where our performance may result in increased commission rates and/or full or partial return of the deposits originally placed with certain customers based on the achievement of agreed contractual milestones and performance targets. We estimate the transaction price at contract inception based on either the expected value method or the most likely outcome method, depending on which method we expect to better predict the amount of consideration to which we will be entitled in each contract. In making the estimate of variable consideration, we apply judgments which are inherently subjective. This includes the assessment of the estimated amount of successful debt collections based upon a number of factors such as the quality of debt of similar nature, workforce and their historical experience and performance. The amount of estimated variable consideration included in the transaction price is limited only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable condition is subsequently resolved. We review these estimates on a regular basis. Any changes in these factors could materially affect the estimated variable consideration and revenue recognized.
Internal Control Over Financial Reporting
Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures and we were never required to evaluate our internal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2016 and 2017, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2017. In accordance with reporting requirements set forth by the SEC, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
The material weakness identified relates to the lack of sufficient financial reporting and accounting personnel to formalize and implement key controls over financial reporting process and to prepare, review and report financial information in accordance with U.S. GAAP and SEC reporting requirements. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness in our internal control over financial reporting. We and they are required to do so only after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our
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independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control weaknesses may have been identified.
To remedy our identified material weakness subsequent to December 31, 2017, we plan to undertake steps to strengthen our internal control over financial reporting, including: (i) hiring more qualified resources including financial controller, equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel, (iii) establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with SEC reporting requirements, and (iv) enhancing an internal audit function as well as engaging an external consulting firm to help us assess our compliance readiness under rule 13a-15 of the Exchange Act and improve overall internal control.
However, we cannot assure you that we will remediate our material weakness in a timely manner.
As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, related to the assessment of the effectiveness of the emerging growth company’s internal control over financial reporting. Under the JOBS Act, we also do not need to comply with any new or revised financial accounting standards until the date that private companies are required to do so.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), a new standard on revenue which will supersede the revenue recognition requirements in ASC 605. The new standard, as amended, sets forth a single comprehensive model for recognizing and reporting revenues. The new guidance requires us to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The new guidance requires us to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy a performance obligation. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenues and cash flows relating to customer contracts. The standard is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. We have early adopted the standard since our establishment.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods therein. For all other entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. As we are an “emerging growth company,” which elects to apply new and revised accounting standards at the effective date for a private company, we will adopt the new standard on January 1, 2021. We are in the process of evaluating the impact that the adoption of this ASU will have on our consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. The new standard requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Consistent with current GAAP (Topic 840), the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a financing or operating lease. However, unlike current U.S. GAAP (Topic 840), which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet. As a result, lessees will be required to put most leases on their balance sheets while recognizing expense on their consolidated statements of income in a manner similar to current accounting. In addition, this guidance requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02
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specifies a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements and that the new and enhanced disclosures be provided for each period presented (including comparative periods). On March 7, 2018, the FASB affirmed its proposed ASU, Leases (Topic 842): Targeted Improvements, which provides entities with an additional (and optional) transition method to adopt the new lease requirements by allowing entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The standard is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. For all other entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. As we are an “emerging growth company,” which elects to apply new and revised accounting standards at the effective date for a private company, we will adopt the new standard on January 1, 2020. We are in the process of evaluating the impact that the adoption of this ASU will have on our consolidated financial statements and disclosures, including the effect of certain optional practical expedients permitted under the transition guidance.
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Industry
China’s Credit Market
Market Overview
China’s credit market experienced substantial growth in recent years due to a fast growing economy and an evolving consumer base. The government’s effort to implement policies promoting consumption and spending led to consumption upgrades in terms of quantity and quality and in turn triggered the growth of consumer lending in terms of volume and popularity.
Government policies. In recent years, the Chinese government promoted domestic consumption and spending as the major driving forces of economic growth. In 2017, domestic consumption and spending contributed to 58.8% of China’s GDP growth and are projected to contribute up to 80.0% of China’s GDP growth in 2022.
Consumption upgrade. iResearch projects that with the growth in disposable income, consumers started to focus on improving their quality of life as demonstrated by their increasing demand for diverse consumer products and services. The growth rate of per capita spending is increasing at a faster pace than that of per capita disposable income, and is projected to surpass the latter from 2017 to 2022.
Popularity of Consumer Lending. As different spending and payment methods such as credit card financing, online loans and installments have emerged to support consumers’ increasing demand for more diverse consumer goods. iResearch observed that demand for consumer lending has been increasing.
Market Trends
Growing delinquent credit card and online receivables. Concurrent with the development of the retail industry and the emergence of financial technology, commercial banks shifted their focus from traditional mortgages and loans to consumer credit lending with more diversified payment scenarios and more convenient payment methods. According to PBOC and the China Banking and Insurance Regulatory Commission, or CBIRC, the percentage of credit card balance expressed as a percentage of total consumer loan balance grew from 15.2% to 20.0% from 2013 to 2017 and is projected to reach 35.4% in 2022. According to iResearch, the balance of online loans in China grew from RMB70.4 billion to RMB2,207.3 billion (US$339 billion) from 2013 to 2017 and is projected to reach RMB10,531.0 billion (US$1,618.6) in 2022.
2013-2022E Balance of Domestic RMB Consumer Loans Issued by Commercial Banks in China
2013-2022E Balance of Online Consumer Loans in China
[MISSING IMAGE: tv500812_chrt5-r1.jpg]
[MISSING IMAGE: tv500812_chrt6-r2.jpg]
Source: iResearch Source: iResearch
Together with the popularity of credit card loans, iResearch believes that the increasing number of credit cards issued in recent years and the introduction of credit cards to less sophisticated borrowers contributed to the increase in delinquent credit card receivables. According to CBIRC, the percentage of the balance of delinquent credit card receivables per all delinquent consumer receivables of commercial banks grew from 40.5% to 49.3% from 2013 to 2017, and is projected to reach 74.9% in 2022.
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The value of  (online) receivables also increased significantly in the last several years. In the second half of 2017, the Chinese government issued stricter policies to limit the amount of debt that may be issued by online lenders. Consequently, the growth of online loans available in the credit market slowed down from a CAGR of 184.2% from 2015 to 2017 to an expected CAGR of 57.0% from 2017 to 2022. Debtors who rely on online loans from one lender to repay the debts with another online lender were no longer able to sustain their financial balance, which caused the increase of delinquent online receivables.
2013-2022E Balance of Delinquent Consumer
Receivables of Commercial Banks
2015-2022E Balance of Delinquent Online
Receivables in China
[MISSING IMAGE: tv500812_chrt7-r1.jpg]
[MISSING IMAGE: tv500812_chrt9-r1.jpg]
Source: iResearch Source: iResearch
Evolving regulatory framework. The Chinese government introduced new measures and guidance to regulate delinquent consumer receivables originated from banks and online lenders as a result of the upsurge of the credit market and delinquent consumer receivables. Banks and online lenders are required to manage their delinquent consumer receivables more effectively, and therefore deploy methods such as increased collection, charge-off, transfer, restructuring, outsourcing and securitization in order to meet government and regulatory requirements. According to iResearch, the delinquency rate of online receivables grew from 1.1% to 2.6% from 2015 to 2017 and is projected to reach 5.2% by 2022. Under the current regulatory environment, iResearch expects the market need for delinquent consumer receivable collection services by banks and online lenders to continue to grow.
China’s Delinquent Consumer Receivables Recovery Market
Overview
China’s delinquent consumer receivables recovery market is in its early stage of development and has experienced a high rate of growth since 2013, compared to more mature markets such as that of the United States. According to iResearch, total revenue generated by China’s delinquent consumer receivables recovery market grew at a CAGR of 53.0% from 2013 to 2017, compared with a CAGR of 2.9% in the U.S. market during the same period. At the same time, market share of the top three service providers measured by total revenue, or market concentration, was 3.8% for China’s market, compared with 26.8% for the U.S. market in 2017. iResearch believes that major market participants in China have growth opportunities through consolidation of the fragmented market shares with reputable brand, strong relationship with financial institutions and sufficient resources, such as human and capital resources.
Delinquent consumer receivables are usually smaller in account value but larger in quantity compared to other types of delinquent receivables. According to iResearch, the average account value of delinquent credit card receivables is approximately RMB20,000 per case. Banks and online lenders typically conduct internal collections or engage collection agencies to collect these consumer receivables. Internal collection refers to banks and online lenders notifying debtors of delinquent consumer receivables about their repayment obligations that are within three months past due through telephone calls, text messages or by other means. Given the lower value of delinquent consumer receivables per account and their increasing quantity, banks and online lenders need substantial resources to successfully recover these receivables through internal collection.
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During periods of fast economic growth, an increase in spending power of consumers leads to an increase in the demand for consumer lending, which often results in larger delinquent consumer receivables. While the total value of consumer lending available decreases during economic downturns, the total value of delinquent consumer receivables is expected to continue to increase due to the debtors’ reduced ability to repay outstanding debt and increasing pressure on banks and online lenders to recover these receivables. Therefore, the growth of delinquent accounts is not strongly affected by the change in consumer spending and lending due to economic cycles. These circumstances together create a large market and potential opportunities for third-party delinquent receivables collection service providers.
A large percentage of delinquent consumer receivables are unsecured, limiting banks and online lenders’ recourse to collection efforts against the debtors in the event of default. With respect to delinquent consumer receivables, banks and online lenders usually impose life-time payment obligation on the debtors. At the same time, banks and online lenders have fewer resources to allocate to internal collection for cost savings purposes, while they focus on reducing delinquency in order to meet regulatory requirements and business viability. As a result, banks and online lenders are motivated to outsource these delinquent consumer receivables to third-party service providers if their internal collection efforts fail.
Types of Delinquent Consumer Receivables
Delinquent consumer receivables are divided into primary delinquent consumer receivables, or primary receivables, secondary delinquent consumer receivables, or secondary receivables, and tertiary delinquent consumer receivables, or tertiary receivables, depending on the length of time past due.
For delinquent consumer receivables that originate from traditional consumer finance instruments, such as credit card financing, primary receivables are receivables that are one to three months past due. Secondary receivables are within four to 12 months past due, and tertiary receivables are over 12 months past due or have been charged-off. For delinquent online receivables, primary receivables are within one to three months past due, secondary receivables are within four to six months past due, and tertiary receivables are over six months past due or have been charged-off.
Life Cycle of Delinquent Consumer Receivables
[MISSING IMAGE: tv500812_chrt10a-r2.jpg]
Source: iResearch
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In the receivable recovery industry, the weighted monthly average collection rate correlates strongly with the past due period. At the same time, the commission rate varies according to the length of time receivables are past due. The industry weighted monthly average collection rate and commission rate for delinquent credit card receivables are shown in the following table:
M1-M2
M3-M6
M7-M12
Over M12
M1
M2
M3
M4-M6
M13-M24
M24+
Industry weighted monthly average collection rate (credit card receivables)
90%
40%
20%
5%
1.5%
0.4%
Commission rate Fixed price at RMB10,000 (US$1,537) per month per telephone seat to be operated by collection specialist to reach the debtor 10%-25% of receivables collected 30% of receivables collected 40% of receivables collected Over 50% of receivables collected
Source: iResearch
Collection Methods
Third-party receivables collection agencies use both non-judicial collection and judicial collection methods. According to iResearch, non-judicial collection is more widely used by collection agencies compared with judicial collection, because non-judicial collection can access a larger debtor base through standardized operating procedures suitable for mass application.

Non-judicial collection. Non-judicial collection involves providing payment notification via means such as text messages and telephone calls. Telephone communication is the preferred method primarily because it avoids direct conflict that will likely arise from face-to-face communication, reduces costs and enhances efficiency. Currently, AI technology, which allows for automated calls, is transforming the traditional labor-intensive telephone collection method. In the event that these methods are not effective, in-person visits may be arranged.

Judicial collection. Judicial collection involves bringing civil or criminal lawsuits against debtors. Civil litigation targets those debtors who are capable but unwilling to pay, whereas criminal litigation targets those debtors whose actions involve fraud.
Under non-judicial collection, portfolio collection and general collection are the two main arrangements.
Portfolio Collection: There are generally three types of portfolio collection arrangements:

Non-Refundable Deposit: Service providers are required to pay a certain amount of non-refundable deposit upon engagement, which serves as a minimal value of collection of the receivables for the client.

Refundable Deposit: Service providers are required to pay a certain amount of deposit upon engagement, which is refundable if they achieve a certain minimum collection rate.

No Deposit: Service providers are required to guarantee a minimal collection rate or amount in lieu of paying deposit. If service providers do not achieve the guaranteed collection rate, they are not entitled to receive any commission, and may be required to make up the difference between the minimal amount guaranteed and the amount collected.
General Collection: There are two models under general collection, assignment model and scramble model.

Assignment Model: Clients assign a certain number of delinquent consumer receivables for collection to service providers on a monthly or quarterly basis.

Scramble Model: Clients place a large number of delinquent consumer receivables for collection in a pool and invite service providers to participate in an online real-time “scramble” process to obtain priority rights to collect on certain delinquent consumer receivables. Service providers can also return receivables that they previously selected back to the pool, which become available to be selected by other service providers.
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Fee Arrangements
Fee arrangements for outsourced receivables collection include the following two arrangements. In practice, different fee arrangements can be used simultaneously.

Service fee charged based on time spent. Used mostly for primary receivable collection, where banks and online lenders pay monthly fees for time spent on providing collection services. This fee arrangement typically generates lower fees compared to those generated by a commission-based arrangement.

Commission charged as a percentage of receivables collected. This arrangement is mostly used for secondary and tertiary receivable collection, where banks and online lenders pay recovery agencies a percentage of the receivables collected as commission. This arrangement is usually used after the banks and online lenders had already attempted but failed to collect through telephone notification. The commission rate varies proportionally with the difficulty of collection. One variation of this arrangement commonly used for tertiary receivable collection is where banks and online lenders package long-term or charged-off receivables into a portfolio with higher commission rates.
Online lenders may transfer the rights to online receivables to collection agencies for a fixed price. These collection agencies receive collection rights, so there is more flexibility in designing collection plans and conditions. The collection agencies also retain the entire amount collected. However, this arrangement has higher requirements on capability and capital for the collection agencies.
Currently, transfer of creditor’s rights to delinquent consumer receivables by banks has certain restrictions, whereas online lenders may freely transfer creditor’s rights to online receivables to collection agencies. iResearch believes that banks may use the same method as online lenders to dispose of delinquent consumer receivables if or when government policies authorize such practice.
China’s Tertiary Receivables Recovery Market
Market Overview
2013-2022E Market Scale of Delinquent Consumer Receivables by Types in China
[MISSING IMAGE: tv500812_chrt11-r1.jpg]
Source: iResearch
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2013-2022E Revenue Generated by Collection Agencies by Receivable Types in China
[MISSING IMAGE: tv500812_chrt12-r2.jpg]
Source: iResearch
The key characteristics of the tertiary receivable segment of the market are its availability in larger monetary value, higher commission rate, high entry barrier and potential for operations expansion.
Larger monetary value. Tertiary receivables accumulate uncollected receivables from previous years and their accrued interest due to their life time recourse for collection, together with receivables accrued in the current year. According to iResearch, the total value of tertiary receivables in China grew from RMB15.0 billion in 2013 to RMB319.9 billion (US$49.2 billion) in 2017, and is projected to reach RMB2,532.6 billion (US$389.3 billion) in 2022. Due to the flow-on and multiplying effect, the CAGR for tertiary receivables between 2013 and 2017 was 115.1% and is projected to be 51.3% between 2017 and 2022, which was roughly three times and twice, respectively, the growth rate of primary and secondary receivables between 2013 and 2017 and between 2017 and 2022.
Higher commission rate. Compared with primary and secondary receivables, tertiary receivables are more difficult to collect due to their longer period of delinquency and lower probability of making successful contact with the debtors. As a result, commissions for tertiary receivables are significantly higher than the commissions for primary and secondary receivables. According to iResearch, commission as a percentage of the amount collected can be over 50% for tertiary receivables, which is three to five times that of primary and secondary receivables. With the growing market scale and higher commission rate of tertiary receivables, iResearch projects revenues generated by collection agencies from tertiary receivables to grow at a faster rate than those from primary and secondary receivables.
High entry barrier. Due to difficulties associated with tertiary receivable collection such as the long delinquency period and low probability of making contact with the debtors, there are only a few competing collection agencies in the tertiary receivables recovery market. At the same time, banks and online lenders tend to have stringent technology, facility, compliance and scale requirements for service providers. These requirements are put in place to protect the integrity and authenticity of the collection process since any violation of industry standard practices and regulations can taint the banks and online lenders’ reputation and increase their regulatory risks. These factors together form a high entry barrier to the tertiary receivables recovery segment of the market. As a result, only service providers with certain scale, established track records and reputation are likely able to form stable and long-term relationship with banks and online lenders.
Potential for operations expansion. The collection methods used by tertiary receivables recovery agencies are similar to those used by primary and secondary receivables recovery agencies. At the same time, tertiary receivables recovery agencies have developed relevant and transferrable professional capabilities as a result of the greater difficulties in collecting tertiary receivables and the higher entry barrier of the market, which make it easier for tertiary receivables recovery agencies to expand their operations into the less difficult primary and secondary receivables recovery market.
Competition Landscape
The delinquent consumer receivables recovery industry in China is highly fragmented. There were over 3,000 collection agencies in the market, with over 1,000 collection agencies in the tertiary credit card receivables segment as of June 30, 2018. The Yong Xiong Group ranked first in the delinquent credit card receivables recovery market among all major players
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with RMB24.5 billion (US$3.8 billion) of receivables under collection and 7,734 collection specialists employed as of June 30, 2018. For the six months ended June 30, 2018, the Yong Xiong Group also led the delinquent credit card receivables recovery market in terms of total commission received.
The Yong Xiong Group had RMB16.6 billion (US$2.6 billion) in tertiary credit card receivables under collection as of December 31, 2017, and according to iResearch, the Yong Xiong Group had a market share, measured by the value of tertiary credit card receivables under collection, of approximately 9% with a weighted monthly average collection rate of 0.76%. For the six months ended June 30, 2018, the Yong Xiong Group’s market share of tertiary credit card receivables collection grew to 11.4%.
With regard to the amount of tertiary credit card receivables successfully recovered as of December 31, 2017, the Yong Xiong Group also led the industry with RMB1.4 billion (US$220.7 million), representing 18.9% of the total value of receivables collected by all market players in the industry. Inter-Credit, Shenjuyuan and Herahal each recovered RMB270 million (US$41.5 million), RMB170 million (US$26.1 million) and RMB10 million (US$1.5 million) in 2017, representing 3.7%, 2.4% and 0.2%, respectively of the total value of receivables collected by all the market players in the industry. As of June 30, 2018, the Yong Xiong Group continued to lead the industry and collected 20.1% of the total value of receivables collected by all market players in the industry.
Market Share of Third-party Collection Agencies for Tertiary Credit Card Receivables in China by Amount Collected
as of June 30, 2018
Market Share of Third-party Collection Agencies for Tertiary Credit Card Receivables in China by Amount Collected
for the Six Months Ended June 30, 2018
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[MISSING IMAGE: tv500812_chrt16-r3.jpg]
Source: iResearch Source: iResearch
Key competitive factors of these service providers included (i) reputable brand names in order to maintain long-term cooperation with commercial banks and online lenders; (ii) sizable volumes enabled by centrally-managed and large teams; (iii) professional and standardized operations in compliance with relevant rules and regulations; (iv) use of technology such as big data information recovery, electronic claims, electronic judgments and smart training in order to reduce human capital costs; and (v) cultivation of professional employees.
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Business
Our Mission
We aspire to become a market leading full-service provider of consumer debt collection and asset management based on our technical know-how, scale, innovation and quality services.
Overview
We are a leading business service provider of delinquent consumer debt collection in China. According to iResearch, we are the largest provider of delinquent credit card receivables recovery service in terms of total value of receivables under collection, total commission, and number of collection specialists employed in 2017 and for the six months ended June 30, 2018. We offer nation-wide consumer debt collection services. We collect delinquent consumer receivables such as credit card receivables originated by commercial banks, and online receivables originated by online lenders. Our clients, which include six of the top 10 commercial banks by the number of credit cards issued in China and reputable online lenders in China in 2017, engage our services to collect delinquent consumer receivables and we generate commission-based fees based on our collection success. Our industry expertise, operation scale, innovative approach and IT infrastructure allow us to offer our clients a cost-effective and trustworthy solution to recover delinquent consumer receivables. We intend to continue to leverage our strengths and grow our business through our disciplined and responsible strategy, which has contributed to our growth and success to-date.
We focus on the collection of tertiary receivables. According to iResearch, for the six months ended June 30, 2018, we outperformed the second largest service provider in the tertiary receivables recovery market in terms of total value of receivables under collection, total amount collected, total commission, and number of collection specialists employed by a large margin. The commission rate for the collection of tertiary receivables is typically higher than that of fresher receivables, such as primary and secondary receivables, because tertiary receivables are past due for a longer period of time or may be charged-off, and thus more difficult to collect compared to fresher receivables. In most cases, prior to engaging us, our clients had unsuccessfully attempted to collect these delinquent consumer receivables through their in-house collection teams and other service providers before the receivables became tertiary. In 2017, we derived 96.6% of our revenues from the collection of credit card receivables and 3.1% from the collection of other receivables, substantially all of which consist of online receivables.
To maintain our industry leading position and competitive advantage, we monitor our performance during certain periods of time using several operational data, including the monthly average delinquent consumer receivables under collection, weighted monthly average collection rate, and effective commission rate.

Monthly average delinquent consumer receivables under collection, or MARC, is calculated pursuant to the following formula:
MARC
=
V1 + V2 + ... + Vn
n
V
=
the value of delinquent consumer receivables under collection on the last day of each month.
n
=
the number of months during a set period of time.

Weighted monthly average collection rate, is calculated pursuant to the following steps:
(1)
We first calculate the monthly average collection rate for each batch or portfolio of receivables pursuant to the following formula:
Monthly average collection rate
=
(
C
)
÷
N
A
C
=
the total value of receivables collected during the assigned collection period within a specific year (disregarding the value of receivables collected during the assigned collection period but in the next year(s), if the assigned collection period spans over years).
A
=
the cumulative (or in the case of portfolio collection, the total) value of receivables assigned for collection.
N
=
the number of months we performed collection work in a specific year within the assigned collection period.
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(2)
We then weigh the monthly average collection rate for all batches or portfolios completed within a specific year with their respective proportion to the total value of delinquent consumer receivables assigned for collection during the same year.

Effective commission rate is calculated pursuant to the following formula:
Effective commission rate
=
I − D
G
I
=
total commission received during a specific period of time.
D
=
the total value of non-refundable deposits we paid on the receivables that we collected.
G
=
the total value of receivables collected during the same period of time.
In 2017, our MARC was RMB15.0 billion (US$229.8 million), and our effective commission rate was 42.6%. In 2017, our weighted monthly average collection rate for tertiary receivables was 0.71% compared to the market rate of 0.4%. According to iResearch, in 2017 and for the six months ended June 30, 2018, all of our operating metrics are superior to those of our key competitors.
Our centralized management and remote collection ability contribute to our overall success. According to iResearch, we are one of the pioneers in the industry to provide collection services solely by remote means, such as telephone and text messages, or remote collection, without on-site visit or face-to-face negotiation with debtors. We purposefully do not engage in face-to-face interaction to avoid potential physical confrontation with debtors, control compliance-related risks, streamline and standardize the collection process, and increase collection efficiency. Our quality assurance team leverages our technology and IT system to monitor the conduct of collection specialists more efficiently through remote collection. For example, our operating portal records all telephone conversations with debtors, and our quality assurance team reviews these recordings internally for quality assurance purposes in accordance with our quality assurance protocol. For the six months ended June 30, 2018, 28.9% of all cases assigned were inspected. In addition, we coordinate and manage all client engagements and collection assignment allocations centrally through our Changsha headquarters as part of an integrated and centralized operation management system, or centralized management, while we have offices located in all provinces of China primarily to carry out our collection activities. Our proprietary operating portal automatically and centrally assigns collection tasks to collection specialists at headquarters and other call centers monthly following its pre-set distribution rules considering factors such as the current workload of a particular collection specialist and the value and difficulty of the collection tasks. We believe our centralized management allows us to consolidate marketing efforts, standardize collection process and monitor quality compliance of thousands of collection specialists. We believe our centralized management enables us to expand rapidly and efficiently while maintaining our work quality.
We believe the expertise of our collection team is critical to the success of our business. Our experience is that the tenure and the productivity of our collection specialists are positively correlated in performance measures, especially in the first two years of the collection specialists’ employment. Experienced collection specialists are critical in conducting skip tracing and negotiation with debtors. As a result, we place considerable focus on the hiring, training, retention and motivation of our collection team by providing mentorship, continued education and promotion track based on performance. Our senior collection specialists in each work group including the department leader, deputy manager and manager-in-charge, have more than two years of experience working with us on average. In addition, we employ a performance monitoring system to monitor our collection specialists’ activities and set daily minimum performance standards, which is linked to our compensation structure based on performance. We expect continued improvement in productivity and profitability as our collection specialists accumulate experience over time. As of June 30, 2018, we had 7,734 full time collection specialists in our offices located in 32 cities in China, which constituted 94.9% of our employees. Monthly average amount collected per collection specialist reached RMB22,827 (US$3,508) for the six months ended June 30, 2018, which was 14.7% higher than that for the year ended December 31, 2017.
We are committed to maintaining and upgrading our technological advances. We focus on building our technology platform, which is supported by our proprietary customer database. Our integrated platform and information technology ensure efficient data mapping and robust reporting capabilities to generate continuously improving collection results. For example, our self-developed proprietary information technology system, or operating portal, supports the core processing functions of our business under a set of integrated databases and are designed to be both replicable and scalable to accommodate our organic growth. Our system is also configured with multiple layers of security modules, as part of our overall data privacy and security program, to protect our database from unauthorized access.
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We and Mr. Tan, our founder, have more than 15 years of experience in collecting delinquent consumer receivables. Mr. Tan has utilized his backgrounds in law and entrepreneurship to lead our business operation. Mr. Tan also devoted his expertise and resources to the development of legislation, industry standards, as well as education in the area of delinquent consumer receivables recovery. In addition, our senior management is comprised of executives with over 10 years of industry experience on average. Our senior management team’s experiences paired with its understanding of the Chinese delinquent consumer receivables recovery industry have helped and, we believe, will continue to help us become a strong industry leader.
Our revenues grew by 36.6% from RMB435.6 million in 2016 to RMB595.3 million (US$91.5 million) in 2017. Our gross profit grew by 8.2% from RMB191.5 million in 2016 to RMB207.2 million (US$31.8 million) in 2017. Our net income grew by 12.2% from RMB97.6 million in 2016 to RMB109.6 million (US$16.8) in 2017.
Our Competitive Strengths
We believe that the following competitive strengths contribute to our success and differentiate us from our competitors.
Leading position in the delinquent consumer receivables recovery industry and strong relationships with major credit originators
We are a leading business service provider of delinquent consumer debt collection in China. According to iResearch, we are the largest provider of delinquent credit card receivables recovery service in terms of total value of receivables under collection, total commission, and number of collection specialists employed in 2017 and for the six months ended June 30, 2018. We have the largest market shares of 11.4% of the total value of tertiary receivables and 20.1% of the total amount collected for the six months ended June 30, 2018, which was more than seven and six times of the market share of the second largest service provider within the same period, respectively.
According to iResearch, the market for tertiary receivables collection service is expected to grow from RMB319.9 billion (US$49.2 billion) to RMB2,532.6 billion (US$389.3 billion) from 2017 to 2022 in terms of total transaction volume, representing a projected CAGR of 51%. As the market leader, we are well positioned to capture the growth potential of the industry. From 2016 to 2017, the total number of cases we were engaged to collect grew from approximately 1.1 million to 2.0 million, and reached 2.6 million for the six months ended June 30, 2018. We believe that the more cases we handle, the more experience and know-how we accumulate and, accordingly, the more effective our collection services become. This virtuous cycle has allowed us to increase our market share overtime and we believe makes it increasingly difficult for competitors to replicate our success.
We provide our nation-wide tertiary receivables collection services to many of the leading consumer lenders in China. We serviced six of the top 10 commercial banks for the collection of credit card receivables. In addition, we collaborate with reputable online lenders for the collection of online receivables. Most of these online lenders are financial arms of China’s largest internet giants with a large number of online users and consumers. Currently, we do not service any P2P lenders in China. From our clients’ perspective, any violation of industry standard practices and regulations can taint their reputation and increase their regulatory risks. Therefore, our clients, especially commercial banks, often apply rigorous criteria when selecting collection agencies. We are shortlisted by several PRC banks as their preferred service provider and are their trusted business partner in improving the delinquency rate of their consumer receivables. Our strong relationships with consumer lenders are based on our business reputation, industry experience, scale of business operation, geographic reach, infrastructure, and commitment to compliance and data security. These elements and their combination essentially serve as entry barriers for the tertiary receivables market segment because most of our competitors have more localized practices with smaller scales of operations and lack these qualifications to engage and develop long-term relationships with major consumer lenders such as commercial banks.
Advanced know-how and proven track record in an emerging industry
China’s delinquent consumer receivables recovery market is still in the early stage of development and is highly fragmented compared to countries such as the United States, which has a more mature market compared to China. Together with the overall growth of delinquent consumer receivables, the value of tertiary receivables in China is increasing at a faster pace compared with fresher receivables and grows exponentially due to a flow-on effect and a multiplying effect as fresher receivables age and accrue overdue interest. Due to their longer delinquency period and lower probability of collection, tertiary receivables are generally more difficult to collect than fresher receivables. The collection of tertiary receivables requires specific know-hows in skip tracing and negotiation expertise. We believe we have the better client resources, know-how, expertise, reputation and capacity to compete with other service providers in the tertiary receivables market segment.
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We have sophisticated industry insight and business expertise that are well demonstrated by our service record. We achieved strong collection results, with collections growth from RMB920.5 million in 2016 to RMB1.4 billion (US$220.7 million) in 2017, representing a growth of 56.0%. We use our proprietary analytical processes coupled with the experience gained through the 5.7 million tertiary receivables cases we serviced from 2016 to June 30, 2018 to provide customized solutions to our clients.
We also maintain an operation that is in compliance with laws and regulations and our clients’ compliance policies. We developed an Employee Code of Conduct and a Quality Assurance Management Plan, and we require all of our employees to strictly comply with these compliance policies and laws and regulations. In addition, we established a department of quality inspection, a department of supervision, a department of security and a legal department to control all phases of the collection process. As a result, our complaint rate, calculated based on the total number of complaints we receive per the total number of collection cases was 0.06% as of June 30, 2018, which decreased from 0.14% in 2016 and 0.13% in 2017. As of August 31, 2018, we have not been involved in any material litigation regarding our collection practice.
Innovative collection process supported by developed proprietary IT systems and infrastructure
Our innovative collection process is characterized by centralized management and nation-wide remote collection. We coordinate and manage all client engagements and collection assignment allocations centrally through our Changsha headquarters, while we have offices located in all provinces of China primarily to carry out our collection activities. Our standardized operating procedures enable us to provide collection service solely through telephone and text messages without any geographical limitation, and we utilize an integrated and centralized operation management system to coordinate substantially all client engagements and collection assignment allocations. Our centralized management differentiates us from the localized practice of most of our competitors, through which their local offices independently engage local clients and only collect consumer receivables from these local clients. We, on the other hand, offer nation-wide collection service and further distribute collection assignments to our offices and collection specialists across China based on our pre-set distribution rules without over-emphasizing geographic orientation.
We devote significant efforts to standardize and improve our collection process in order to optimize our collection results through developing our proprietary IT system and infrastructure. Our operating portal meets all of our client’s security and safety requirements, can process large volume of debtor information and ensure compliance and information security and is designed to be scalable to support the expansion of our business operations. As of June 30, 2018, we owned 56 computer software copyrights and 10 patents. We established statistical models and an operating portal to streamline our collection process, and created various integrated modules to facilitate an efficient, compliant and intelligent operation.
Proven ability to hire, develop and retain a strong team of collection specialists
We place considerable focus on attracting, hiring, training, retaining and motivating our team of collection specialists. According to iResearch, we had the largest number of collection specialists among delinquent consumer receivables collection service providers in China in 2017. We provide multi-stage training and mentorship programs for our newly recruited collection specialists and continuing education programs for experienced collection specialists. We maintain an efficient and sophisticated work specialization system to better utilize our collection specialists’ expertise. We divide our collection specialists into approximately 190 work groups. In general, each work group primarily focuses on one particular client. Collection specialists in each team are assigned to focus on different stages of the collection process. We believe such system allows our collection specialists to quickly familiarize with each client’s collection requirements and become experts in the collection process. We also offer ample opportunities of upward mobility to our collection specialists, including unlimited incentive bonuses and fast promotion track based on their performance. Our senior collection specialists in each work group, including the department leader, deputy manager and manager-in-charge, have more than two years of experience working with us on average.
We also employ a performance monitoring system to monitor our collection specialists’ activities and set daily minimum performance standards. We believe that this system helps us identify and coach low performers, reward high performers, and ultimately achieve high levels of quality for our clients. This performance monitoring system is also linked to our compensation structure to provide an open and transparent compensation system to reward our employees based on their performance.
We believe our significantly higher number of experienced collection specialists compared to our competitors, our large number of high-quality employees, and our performance monitoring system enable us to manage larger portfolios from credit originators with more efficiency. Our clients are also attracted to us due to our capacity to handle a large number of cases. Our ability to hire, develop and retain a strong collection team is critical to our continued growth and profitability, and creates a strong competitive advantage over other smaller delinquent consumer receivables collection agencies.
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Visionary and experienced leadership
We and our founder cumulatively have more than 15 years of experience in the delinquent consumer receivables recovery industry. We have an experienced management team that consists of professionals with extensive expertise in the debt recovery and management industry.
Mr. Tan, our founder, chief executive officer and chairman of the board, is known as a pioneer and leader of the delinquent consumer receivables recovery industry. Mr. Tan has more than 15 years of experience in the industry. Mr. Tan has guided and overseen the development of our company and is instrumental to our continuing success. Mr. Tan has utilized and devoted his experience and resources to perfect the legal framework, industry compliance standards, as well as education to ensure a persistent stream of industry talent. Mr. Tan, along with other industry leaders, founded the Industry League of Outsourced Non-performing Assets Recovery on July 5, 2017. In February 2018, Mr. Tan, on behalf of Yong Xiong Equity Investment, signed an agreement with Xiangtan University and Tulane University to establish an LLM program in credit law at Tulane University Law School.
Mr. Huaqiao Zhang, who we intend to appoint as one of our directors, is a seasoned banker with over 30 years of corporate finance experience and has served in various senior positions at major investment banks and private equity firms.
Our senior management is mainly composed of executives with over 10 years of industry experience. We also have six core team members, each of whom has working with Mr. Tan in the delinquent receivables recovery business since 2010. Each member is able to manage every aspect of our operations. We believe the senior management team’s experiences and the core team members’ understanding of the Chinese consumer receivables recovery market have helped us become a strong industry leader.
Our Strategies
We believe the following strategies will contribute to our goal of becoming a market leading full service consumer debt collection and asset management company.
Continue to invest in and upgrade our big data and AI application
We expect to continue to strengthen our big data application capability and upgrade our IT system for AI compatibility and functionality.

Big data platform: We aim to extract greater use of the industry data and debtor information by strengthening our big data processing capabilities and applications to our collection work. In addition, we are developing a skip tracing application which can continuously gather and process publicly-available information that could be helpful to our collection activities, such as information related to actions against the debtors. We believe such platform forms the basis for more analytical and AI application that can improve employee productivity, receivables portfolio pricing efficiency and overall financial performance. We also rely on our big data platform and applications to provide value-added services to our existing and future clients.

AI-based Platform: We expect our AI-based platform to enhance our standard collection process by automating the debtor relationship mapping function and adding models to evaluate receivables portfolio and collection specialist performance. The AI-based relationship mapping function identifies a new debtor’s connection to existing debtors, guarantors and contact persons in the database we are authorized to use and generates analytical profile that evaluates the debtor’s payment ability, willingness to pay and viable payment plans to recommend a negotiation strategy to our collection specialists. The AI-based receivables evaluation model utilizes our proprietary algorithm to analyze the collectability of target receivables and recommends bidding terms we would offer to our clients. We will continue to upgrade and fine tune our model and algorithm to establish more accurate connections between debtor profiles or factors and the probability of recovery.
We hope to continue both in-house development and external acquisition of technology to better utilize our technical know-how in the delinquent consumer receivables recovery industry to provide better collection results.
On May 24, 2018, we entered into a big data service agreement with China United Network Communication Group Co., Ltd., or China Unicom, which is one of the largest telecommunication companies in China, to further improve our skip tracing system. Under such contract, China Unicom will provide us with a special platform accessible from our operating portal, through which our collection specialists can enter the personal identification number of the debtor, and the platform can automatically call the debtor using the current telephone number stored in China Unicom’s databases. The collection specialist will not have access to the real contact information of such debtor. We believe this will improve our collection efficiency by allocating fewer resources to skip tracing and by focusing on negotiations with debtors on repayment, which we believe is our core competence.
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Broaden our industry and market participation
We believe our successful tertiary receivables collection business can serve as a foundation for us to broaden our industry participation and service offering. We expect to expand our business to offer credit originators a complete outsourced solution for all stages of delinquent consumer receivables. We also expect to expand our business beyond the collection of consumer receivables by offering our services for the collection for non-consumer receivables. With our expertise and success in the more challenging tertiary receivables recovery market, we believe that we are more likely to succeed in other stages and areas of the delinquent consumer receivables recovery market than vice versa. Our goal is to be a comprehensive recovery solution provider for all delinquent receivables to our clients.
In addition to providing comprehensive collection services for all stages of delinquent consumer receivables, we expect to expand our business into the financial distressed asset portfolio management industry in which we acquire delinquent consumer debt portfolios for our own collection. We believe that debt acquisition can be more profitable than our collection services. Currently, the PRC government does not allow the trading of delinquent credit card receivables. To engage in the financial distressed asset portfolio management business, we need an asset management license issued by the China Banking and Insurance Regulatory Committee, or CBIRC. We plan to obtain this license to further expand our business, and to tap into the provincial and national distressed asset management markets, with a focus on acquiring credit card loan portfolios.
Continue to expand our regional presence
As of the date of this prospectus, we have 40 offices that primarily operate as local call centers in 37 cities throughout China, with at least one office in each province of China. Certain of our existing and potential clients, such as the state-owned banks, which have large delinquent credit card receivables portfolios, typically only enter into contracts with service providers that have local presence. We expect to further expand our geographic presence to work with more branch banks of our existing and potential clients. We believe this geographic penetration will also help us attract more local talent to support our business growth in regional debt collection service.
Strengthen cooperation with major credit originators and diversify our business
As of the date of this prospectus, our business focuses mostly on the provision of delinquent credit card receivables collection services to major commercial banks in China, who have become our long-term major clients. We also provide online receivables collection services to online lenders. Following the rapid expansion of the online loan market in China in the past three years, the delinquency rate for online receivables has increased to relatively high levels due primarily to over-expansion and regulation shortfalls. We believe that online receivables delinquencies present a business opportunity for us in which we can leverage our collection expertise and experience to work with fintech platforms to expand our service scope.
We expect to continue to deepen our business collaboration and diversify our operation in the following respects:

develop regional consumer receivables collection service business for commercial banks;

develop online receivables collection services with existing and potential online lenders;

cooperate with fintech platforms to expand our service scope; and

launch an external interface, which enables our clients to initiate engagements, upload portfolio information and monitor collection status, and simplifies the overall engagement process with lowered costs and improved efficiency for us to develop potential clients.
Our Services
Business Model
We provide collection services to our clients by leveraging an experienced collection team, standardized remote collection process, centralized management and developed IT infrastructure. We focus on the collection of tertiary receivables, including credit card receivables that are past due for more than 12 months or are charged-off and online receivables that are past due for more than six months or are charged-off. These delinquent consumer receivables usually have been subjected to multiple unsuccessful collection efforts by our clients’ in-house collection teams or other collection service providers as primary and secondary receivables.
Our clients engage us to collect, on their behalf, delinquent consumer receivables on a portfolio basis, or portfolio collection, or under a general engagement, or general collection. Portfolio collection is when commercial banks engage us to collect delinquent consumer receivables that are aggregated into a portfolio and the total value of such a portfolio is typically over RMB500 million. The delinquent consumer receivables subject to portfolio collection are often overdue for
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more than 24 months and are charged-off by our clients. The portfolio collection term is usually set for a fixed period, typically in a range of three to 24 months. In general collection, we enter into a framework agreement with the client for a term of 12 to 24 months and within such term, the client periodically assigns receivables in batches to us for collection, typically with a fixed collection period of three to four months for each batch. The delinquent consumer receivables from commercial banks subject to general collection are often overdue for more than 12 months, and the online receivables from online lenders subject to general collection are often overdue for six to 24 months.
The determination of commission fees is generally based on the quality of the delinquent consumer receivables, which generally include the number of prior collection attempts, the ratio between principal and interest, the geographic location of debtors, the amount of deposit required and the delinquency period. For example, tertiary receivables, which usually have been subjected to multiple unsuccessful collection efforts by our clients’ in-house collection teams or other collection service providers, generally have a higher proportion of the receivables in interest compared to principal due to the longer period of time past due, a lower probability of collection and therefore, command a higher commission fee compared to primary and secondary receivables. The clients typically pay us a commission fee based on the amount we collect from the debtor and the upfront deposit arrangement. The effective commission rate we receive typically averages approximately 40% of the delinquent consumer receivables collected and certain clients pay us a commission fee as high as 74% of the delinquent consumer receivables collected.
Our collection specialists are organized based on specific areas of expertise and levels of seniority. Our team is structured to maximize our collection efficiency. Our collection specialists are organized by work groups based on client coverage, with each work group under the supervision of several senior specialists, who in turn report to a single senior manager responsible for the work group. We have approximately 190 work groups as of June 30, 2018. Collection specialists in each team are assigned to focus on different stages of the collection process, which is a key differentiator compared to our competitors. As a result, such system allows our collection specialists to quickly familiarize with each client’s collection requirements and become experts in the collection process. For the six months ended June 30, 2018, our weighted monthly average collection rate for tertiary receivables was 0.61% and the MARC for tertiary receivables was approximately RMB21.3 billion (US$3.3 million), representing an increase of 51.2% compared to the same period in 2017 and an increase of 393.7% compared to the same period in 2016.
According to iResearch, the total value of tertiary receivables in China grew from RMB15.0 billion in 2013 to RMB319.9 billion (US$49.2 billion) in 2017, and is expected to reach RMB2,532.6 billion (US$389.3 billion) in 2022. In addition, the Chinese government has promulgated several administrative measures and guidance requiring banks and online lenders to strengthen their efforts in recovering non-performing assets. Furthermore, iResearch believes that credit card holders in China generally have a better risk profile than debtors of other types of unsecured loan instruments. Therefore, we believe we are in a market with increasing demand and lower operational risks, which provides us with ample business opportunities and a predictable revenue stream.
Engagement
We obtain engagements for collection services from our clients either through a bidding process or by direct engagement. Substantially all engagements are coordinated and executed centrally. Engagements for portfolio collections are generally obtained through a bidding process, while engagements for general collections are usually obtained on an individual basis after service providers are shortlisted in the clients’ panels of trusted service providers. All of our online receivables collection engagements are conducted through general collection. For the six-month period ended June 30, 2018, our MARC for tertiary receivables was RMB7.4 billion (US$1.1 billion) for portfolio collection and RMB12.2 billion (US$1.9 billion) for general collection.
Portfolio Collection: We evaluate a portfolio based on a number of factors, including receivables size and debtor demographics, prior attempts made by clients internally or through service providers, any specific requirement such as a baseline guaranteed collection rate and required deposit rate, and our calculation of the projected collectability. We leverage our proprietary analytical model to analyze the data we gathered from past bidding processes and collection processes in order for us to make more accurate evaluations.
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There are generally three types of portfolio collection:

Non-Refundable Deposit: We are required to pay a non-refundable deposit for this type of portfolio collection upon engagement, which serves as a minimal collection for the client. We are entitled to keep the entire amount collected under this arrangement. The effective commission rate for this type of portfolio collection, taking into consideration the amount of upfront deposit, was generally between 40% and 57% of the collected value in 2017.

Refundable Deposit: We are required to pay a refundable deposit for this type of portfolio collection upon engagement. If we achieve a certain minimum collection rate, the clients would refund the deposit at the end of the collection period. The effective commission rate for this type of portfolio collection was generally between 45% and 51% of the collected value in 2017.

No Deposit: We are not required to pay a deposit for this type of portfolio collection, but we are required to guarantee a minimal collection rate, or agree to receive commission or reward until we reach certain performance target, i.e., certain amount collected, and we will only receive commission on the collection with such minimum target amount collected deducted. The effective commission rate for this type of portfolio collection was generally between 33% and 67% of the collected value in 2017, which is paid over a certain period of time when certain performance targets are achieved. If we do not achieve the guaranteed collection rate or value, we are not entitled to receive any commission. For some clients, we may need to make up the difference between the minimum value guaranteed and the value we actually collected.
General Collection: Before we enter into a general collection arrangement, we consider and negotiate the total receivables value and the commission rate. There are two models under general collection: assignment model and scramble model.

Assignment Model: Under the assignment model, our clients assign a certain number of delinquent consumer receivables for collection to us on regular basis which is generally three months. The assignment of the receivables is based on our direct business development communications for first-time clients and prior service performances and business interactions for existing clients, which typically include elements such as the total value of receivables that we agree to collect and the commission rate. The effective commission rate for this assignment model was typically between 25% and 52% in 2017.

Scramble Model: Under the scramble model, a client places its delinquent consumer receivables for collection in a pool and invites us and other qualified service providers to participate in an online real-time “scramble” process to obtain exclusive rights to collect on certain delinquent consumer receivables within a certain collection period. Each service provider is entitled to obtain exclusive collection right to a maximum value of delinquent consumer receivables from the pool. The value is determined and updated monthly by the client based on historical collection results and business relationships, which is positively correlated to the value of delinquent consumer receivables that a qualified service provider like us can successfully collect. Therefore, we purposefully obtain a fair share of receivables from each client’s pool every month in order to maintain our presence among prominent clients. Depending on our workload from portfolio collections and the assignment model, we have the flexibility to adjust the number of work groups we assign to participate in the “scramble” model each month to optimize our utilization of human resources. Previously selected receivables are returned to the pool once the exclusive period expires, which is usually up to three months. Once a receivable is returned to the pool, it becomes available to be selected by other service providers or us again. The effective commission rate for the scramble model was typically between 38% and 43% in 2017. During the same period, the total value of the delinquent consumer receivables that we obtain from the scramble model for collection constitutes 33.2% among all receivables under our collection through general collection.
Our scope of service currently does not include initiating lawsuits against debtors on behalf of the client.
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Collection Process
We rely on our operating portal to navigate through the collection process. The following is an overview of our collection process:
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(1)
Filters the telephone numbers of the debtors on the record and screens out the ones that are no longer active.
(2)
Conducts debtor profiling through our proprietary analytical model to make a preliminary evaluation on the debtors’ willingness to repay the debtor.
(3)
We assign the cases to collection specialists through our operating portal based on the value of receivables, the numbers of cases and debtor profiles.
(4)
Each collection specialist performs skip tracing through a series of online / offline public channels, as well as a series of proprietary skip tracing applications in our operation portal, based on information such as household information, registered telephone numbers, registered emails or other contact information, and related personnel information.
(5)
Our operating portal can cross-map all newly-engaged debtors with our database to cross check any available information related to previous repayment record or repayment obligations between the debtors and any of our clients.
(6)
Collaborate with China Unicom to build a platform accessible from our operating portal that allows us to contact the debtors without being able to access the real contact information of such debtor.
(7)
Develop an effective debtor profile to facilitate more efficient negotiation by our collection specialists.
(8)
Successfully connect with the debtors to notify their repayment obligations.
(9)
We inform the debtor through telephone call or text messages about our identity, our relationship with our clients, his / her repayment obligations and the benefits of resolving his or her account fully and promptly during the initial contact. We also discuss the reason for the debtor’s delinquency and his / her latest financial status in order to better assess the debtor’s ability to repay.
(10)
We will propose certain payment plan, such as installment plans, partial debt waiver and other arrangements, suitable for the debtor as approved by the client.
(11)
We also conduct analysis on the reason why the collection is unsuccessful, and retain and analyze this information for our improvement.
(12)
If a certain collection specialist fails to collect the receivables within one month after a case is assigned to him/her, we will re-assign such case to another collection specialist, and the process repeats until the expiration of the collection period.
(13)
For debts successfully collected, our clients usually require debtors’ payments be made directly to our clients, and we bill our clients by the end of each month for our collection services. Once the clients receive the debtors’ payments, they will usually notify us.
Our Clients and Client Relationship
Our clients include six of the top 10 commercial banks and certain large online lenders in China. In addition, we collaborate with major online lenders in the online loan industry. We believe that we have earned a reputation as a reliable and responsible provider of collection services for delinquent consumer receivables, particularly in tertiary receivables collection.
We identified five commercial banks as our major clients in 2017, which individually provided over 10% and, in the aggregate, 89% of our revenues. In the same year, we derived 96.6% of our revenues from our credit card receivables collection services and 3.1% from other receivables, substantially all of which consist of online receivables. Our clients, especially banks, are very selective in choosing collection agencies and usually maintain a list of preferred agencies that are selected from an annual bidding process. Our clients typically require the collection agencies to meet certain qualifications, such as having substantial prior experience servicing multiple clients, a minimum number of collection specialists, prior collection performance and a developed IT infrastructure. We are shortlisted by several PRC banks as their preferred service provider and are their trusted business partner in improving the deliquency rate of their consumer receivables.
We enter into collection service contracts with our clients that define, among other things, fee arrangements, scope of services and termination provisions. Generally, the collection service contracts are non-exclusive, which means that the client may engage a number of service providers at the same time. However, while the delinquent consumer receivables are assigned to us or obtained through the scramble process, we have the exclusive right to collect these receivables within the collection period provided under our collection service agreement or any placement assignment underlying the collection service agreement.
From our clients’ perspective, any violation of industry standard practices and regulations can significantly taint their reputation and increase their regulatory risks. Therefore, our clients, especially commercial banks, are highly selective with respect to which collection agencies may be chosen for receivables recovery assignments and handling of debtor information. As a result, the clients would prefer to form a stable and long-term business relationship with collection agencies with good track records. Under the terms and conditions of most of the collection contracts, the clients may remove any agency from its preferred list, rescind existing contracts and even suspend future business relationships if an agency fails to observe the legal requirements and contractual requirements in the collection service contracts.
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We believe our proven track record, industry reputation, business scale and centralized management in providing collection services are the cornerstones of our strong relationships with major banks and online lenders.
Compliance and Quality Control
We have undertaken the following measures to ensure compliance.
Our Compliance Policies
We have adopted the following compliance policies:

Employee Code of Conduct. Our efforts to maintain compliant operations starts with the training and continuing education of our employees. The Employee Code of Conduct sets forth the basic code of ethics, proper business conduct and obligations to our clients and to the debtors. In particular, the code emphasizes the importance of keeping proprietary information confidential and maintaining a high level of professionalism in the performance of work functions, and have strict guidelines that prohibit certain actions such as selling debtor information, impersonating government officials, threat of violence, and use of vulgar or inappropriate language. In addition, the code specifies the reward and disciplinary actions for employees abiding by or violating this Employee Code of Conduct and other company regulations.

Quality Assurance Management Plan. The goal of implementing the Quality Assurance Management Plan is to standardize the collection operations, prevent risks related to collection services and ensure compliance with government and internal regulations. The plan sets forth definitions of violating conduct including credit violations, improper management of private and personal information, procedural violations, fraudulent conduct and violations specific to collection services. The plan also includes corresponding penalties for employee violations and subsequent remediation plans to minimize the damage and prevent future incidents of similar violations. The plan consists of  (i) Credit Card Receivables Collection Protocol; (ii) Telephone Record Inspection Regulation; (iii) Complaints Management Regulation; (iv) Information Security Regulation; (v) Work Log Inspection Regulation; and (vi) Trade Secret Protection Regulation.
Our Compliance Structure
In addition to implementing our compliance policies to regulate employee conduct, we also established internal departments to monitor employee conduct, investigate possible violations, and ensure policy adherence. These departments include the department of quality inspection, the department of supervision, the department of security and the legal department. The department of quality inspection monitors employee activities on a daily basis to observe and detect possible violations. The department of supervision conducts investigations into possible violations after the violations have been reported by the department of quality inspection and/or other sources. The department of security communicates with debtors who raise disputes or complaints in person, if necessary, in order to explain and appease the situation. The legal department provides policy interpretation and guidance and systemic support to the other internal compliance departments. As of June 30, 2018, we have 40 dedicated staff in the legal and compliance teams.
Quality Assurance
We emphasize quality control throughout all phases of the collection process.

Daily inspection. The Deputy Manager and Department Leaders of each work group perform daily spot checks on 60 collection cases for potential compliance violations. For the six months ended June 30, 2018, we have inspected 28.9% of the collection cases assigned to work groups. Our operating portal also conducts daily keyword searches against all of the work logs generated that day for potential violations. If a violation is identified, we issue a disciplinary action against the collection specialist. Our disciplinary actions vary from warning to termination, which are issued depending on the seriousness of the violation. Furthermore, we analyze work logs and telephone recordings collected from daily inspections for performance trend and non-compliant activities, and train our collection specialists based on these findings in order to improve their performance.

Quality control. We have a number of quality control teams made up of quality assurance personnel to oversee the quality of the collection process. If a collection specialist believes that a debtor is likely to file complaints based on his/her interaction with the debtor, he/she is required to report the case to the respective quality control team. The quality assurance personnel then contact the debtor directly and seeks to address the debtor’s concern in order to reduce the likelihood of a complaint. If the situation escalates into a dispute or complaint, the department of security may propose to meet with the debtor in person, if possible, in an effort to explain the situation and reconcile with the debtor. Furthermore, a quality control team that oversees partial-payment cases
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reviews on a daily basis all of the work logs for which partial payments are made, and sometimes directly contacts the debtors to verify whether there is any non-compliant activities by our collection specialists, including inducing the debtors to repay by offering unauthorized repayment plans, such as reducing repayment.

Complaints management. We have a protocol to respond to complaints brought by debtors or referred from our clients after debtors file complaints through the clients’ hotline. Once a complaint arises, we contact the debtor to assess the situation while we investigate the allegations made. Based on the investigation findings, we reach an administrative decision on whether the complaint is valid, and whether disciplinary decisions are warranted in accordance with our compliance policies.
We require all of our employees to strictly comply with our compliance policies and laws and regulations. If our employee violates such requirement, we will issue certain penalties that range from warnings to termination of employment.
Certain clients may require an enhanced level of supervisory review and others may require customized reports. We require our collection specialists to contact the debtors only through the means allowed under our standard procedure. Our collection specialists are not allowed to have face-to-face contact with any debtor. When we contact debtors through telephone, our collection specialists are required to make such calls only from our office landline or encrypted mobile phones issued by us, which records all of the telephone conversations and is subject to our system’s real-time automatic monitoring.
We expect to launch an AI-based quality control system that monitors all communications with debtors in real time to ensure compliance and quality of service. The system monitors the collection specialists’ speech patterns. The system also identifies key words used in the conversation to detect possible signs of dispute, insult or unauthorized proposal by the collection specialist to reduce the receivables value as a compromise. If the system detects such behavior, it alerts our quality assurance department personnel to immediately intervene in the process. As we continue to upgrade our system, we plan to program our system to automatically screen such conversation and terminate the call.
Complaints Against Our Service
Debtors may frequently file complaints against our collection practices, with or without merit, due to the contentious nature associated with debt collection and unpredictable debtor behavior. Debtors may file their complaints with our clients or government regulatory agencies, in particular, CBIRC, and other commercial regulatory agencies, alleging improper conduct and violations of law. Our complaint rate was 0.14% in 2016 and 0.13% in 2017. We define major complaints as complaints that (i) involve employees violating laws and regulations, (ii) may materially and negatively affect our reputation, or (iii) may cause material economic loss to the company. In 2017, there were 13 major complaints