F-1 1 d771852df1.htm FORM F-1 FORM F-1
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As filed with the Securities and Exchange Commission on October 30, 2019

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Meili Auto Holdings Limited

(Exact name of Registrant as specified in its charter)

 

 

 

Cayman Islands   7389   Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

20/F, Greenland Building

Wangjing Hongtai Dong Street

Chaoyang District, Beijing 100102

People’s Republic of China

+86-10-8303-0999

(Address and Telephone Number of Registrant’s Principal Executive Offices)

 

 

Cogency Global Inc.

10 East 40th Street, 10th Floor

New York, N.Y. 10016

+1 (800) 221-0102

(Name, address and telephone number of agent for service)

 

 

Copies to:

 

Chris K.H. Lin, Esq.   Allen Wang, Esq.
Daniel Fertig, Esq.   Benjamin Su, Esq.
Simpson Thacher & Bartlett LLP   Latham & Watkins LLP
35th Floor, ICBC Tower   18th Floor, One Exchange Square
3 Garden Road   No. 8 Connaught Place
Central, Hong Kong   Central, Hong Kong
+852-2514-7600   +852 2912 2500

 

 

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(1)

  Proposed Maximum
Aggregate Offering
Price(2)(3)
  Amount of
Registration Fee

Class A ordinary shares, par value US$0.0001 per share

  US$100,000,000   US$12,980

 

 

(1)

American depositary shares, or ADSs, issuable upon deposit of the Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-                ). Each ADS represents                Class A ordinary shares.

(2)

Includes (a)                 Class A ordinary shares represented by                 ADSs that may be purchased by the underwriters pursuant to their over-allotment option and (b) all Class A ordinary shares represented by ADSs initially offered and sold outside the United States that may be resold from time to time in the United States either as part of the distribution or within 40 days after the later of the effective date of this registration statement and the date the securities are first bona fide offered to the public.

(3)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

 

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.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the United States Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated                 , 2019.

American Depositary Shares

 

LOGO

Meili Auto Holdings Limited

Representing                  Class A Ordinary Shares

This is an initial public offering of American depositary shares, or ADSs, representing Class A ordinary shares of Meili Auto Holdings Limited.

We are offering                  ADSs. Each ADS represents                 Class A ordinary shares, US$0.0001 par value per share. We anticipate the initial public offering price per ADS will be between US$                     and US$                    .

Prior to this offering, there has been no public market for the ADSs or our shares. We will apply to list the ADSs on the New York Stock Exchange, or the NYSE, under the symbol “ML.”

We are an “emerging growth company” under applicable United States federal securities laws and are eligible for reduced public company reporting requirements.

See “Risk Factors” on page 19 to read about factors you should consider before buying the ADSs.

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.

 

     Per ADS      Total  

Initial public offering price

   US$                    US$                

Underwriting discounts and commissions(1)

   US$                    US$                

Proceeds, before expenses, to us

   US$                    US$                

 

(1)

For additional information on underwriting compensation, see “Underwriting.”

To the extent that the underwriters sell more than                  ADSs in this offering, the underwriters have a 30-day option to purchase up to an aggregate of                  additional ADSs from us at the initial public offering price less the underwriting discounts and commissions.

Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to 30 votes and will be convertible to one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Meili Equity Incentive Trust, or the Equity Incentive Trust, will beneficially own all of our issued Class B ordinary shares representing in the aggregate             % of the voting power of our total issued shares immediately after the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. The advisory committee of the Equity Incentive Trust will have the power to direct the voting of the Class B ordinary shares to be held by the Equity Incentive Trust. The advisory committee will consist of Mr. Allen Chonglun Gu, our chief executive officer, Mr. Julian Wang, our chief financial officer, and Ms. Yun Sun, director and vice president for legal and compliance.

The underwriters expect to deliver the ADSs against payment in New York, New York on                     , 2019.

 

UBS Investment Bank    Deutsche Bank Securities      Nomura    CICC

 

Needham & Company    Tiger Brokers

Prospectus dated                     , 2019


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LOGO


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

     1  

Summary Consolidated Financial and Operating Data

     15  

Risk Factors

     19  

Special Note Regarding Forward-Looking Statements and Industry Data

     68  

Use of Proceeds

     69  

Dividend Policy

     70  

Capitalization

     71  

Dilution

     72  

Enforcement of Civil Liabilities

     74  

Our History and Corporate Structure

     76  

Selected Consolidated Financial and Operating Data

     80  

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

     84  

Industry Overview

     112  

Business

     121  

Regulations

     144  

Management

     156  

Principal Shareholders

     165  

Related Party Transactions

     168  

Description of Share Capital

     170  

Description of American Depositary Shares

     182  

Shares Eligible for Future Sale

     190  

Taxation

     192  

Underwriting

     198  

Expenses Related to this Offering

     209  

Legal Matters

     210  

Experts

     211  

Where You Can Find More Information

     212  

Index to the Consolidated Financial Statements

     F-1  

No dealer, salesperson or other person is authorized to give any information or to represent as to anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell, and we are seeking offers to buy, only the ADSs offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of the ADSs.

Neither we nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where other action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any free writing prospectus filed with the United States Securities and Exchange Commission, or SEC, must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until             , 2019 (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

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the ADSs. You should carefully read the entire prospectus, including “Risk Factors” and the financial statements, before making an investment decision. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, an independent market research firm, to provide information regarding our industry and our market position in China. We refer to this report as the Frost & Sullivan Report.

Our Mission

Redefine used car loan experience in China.

Overview

We are a pioneer and leader in China’s used car financing market, focusing on facilitating loans from financial institutions to prime borrowers in used car transactions. We facilitated a total of 206,116 used car financing transactions in 2018, which ranked us among top three used car financing solution providers in China, according to the Frost & Sullivan Report. In the six months ended June 30, 2019, we facilitated 112,682 used car financing transactions with a transaction value of RMB7,886.7 million, representing a 43.1% increase from the transaction value in the six months ended June 30, 2018.

Used car financing is a nascent and fast-growing market in China. According to the Frost & Sullivan Report, China’s used car financing market grew at a CAGR of 81.3% from RMB7.7 billion in 2013 to RMB150.2 billion in 2018. In the meantime, the used car financing market presents massive untapped potential for financial solution providers. As per capita disposable income rises in China, a massive number of prime borrowers have become capable of financing used car purchases on credit. Nonetheless, these prime borrowers have been underserved by traditional financial institutions due to such institutions’ lack of salesforce to cover China’s dispersed dealer network, industry knowhow, including the ability of assessing the value of used cars, and technological and risk management capabilities. As a first mover in the market, we leverage our offline salesforce, industry knowledge and data-driven proprietary technology to enable prime borrowers to access car loans from financial institutions.

Our strong offline presence sets a solid foundation for our growth. We believe offline marketplaces will remain as a major channel for used car transactions. According to the Frost & Sullivan Report, approximately 80% of used car transactions occur offline. We operate an extensive offline salesforce with approximately 4,000 sales personnel covering approximately 75,000 dealers across over 300 cities, accounting for 30 of all 31 provinces in mainland China, as of June 30, 2019. Our offline salesforce has established close relationships with dealers by understanding their business needs, facilitating financing transactions and offering other value-added services. Our offline salesforce also help with car buyers’ loan application to enhance customer experience during the loan application process.

We have developed deep industry knowledge of used car transactions through four years of offline operation. We tailor our products to best fit transaction processes so that we become the preferred used car financing solutions provider by our dealer partners and car buyers. For instance, we shortened the credit approval process to an average of 10 minutes from submission of credit application to provision of credit decision in the six months ended June 30, 2019, significantly enhancing on-the-spot customer experience and dealers’ productivity. We are one of the first independent used car financing solutions providers to have obtained a financial leasing license in China, which allows us to pre-finance car purchases before proceeds from loans granted by our funding partners are disbursed to the car buyers. We continue to improve our product design to enhance user experience.



 

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Our proprietary data-driven technology and risk assessment models serve as another engine of our business expansion. We have established comprehensive risk assessment models on customers, used cars as well as dealers. We are one of the first independent used car financing solution providers in China to have obtained direct access to PBOC’s credit reference center and incorporate 43 external sources of personal information data, behavior data, social network data and location data into our risk assessment models through data mining, knowledge graph and machine learning. We are able to accurately assess credit risk of prospective car buyers by analyzing potential relationships among approximately 30,000 variables. To ensure the effectiveness of risk models and risk policies, we also run a back-test program to test the significance, stability and accuracy of risk assessment models and variables on a daily basis. Our well-established pre-loan assessment, post-loan monitoring and delinquent loan management mechanisms enable us to expand our business scale prudently. Benefiting from our stringent credit assessment procedures and exceptional risk management capability, we are able to continually optimize our risk assessment models and increase the quality of our new loans. As a result, we have been able to maintain a stable M3+ overdue ratio, which was 0.8% as of June 30, 2019, while we significantly expanded the outstanding balance of auto financing transactions we facilitated to RMB21.9 billion as of the same date.

Our ability to effectively identify and acquire a large number of prime borrowers in used car transactions and provide effective credit assessment and risk management services is particularly attractive to financial institutions seeking to expand into the rapidly growing used car financing market in China. We have continually expanded our cooperation with financial institutions in recent years. The amount of auto financing transactions we facilitated with financial institutions increased by 106.9% from RMB7.0 billion in 2017 to RMB14.5 billion in 2018, and increased by 68.8% from RMB5.4 billion in the six months ended June 30, 2018 to RMB9.1 billion in the six months ended June 30, 2019. We have a diversified roster of financial institution partners, including internet banks, large national banks and joint stock banks. As of June 30, 2019, we cooperated with seven financial institutions, which provided 99.9% of the funding for the loans we facilitated during the six months ended June 30, 2019. We have strengthened relationships with reputable financial institutions that offer higher lines of credit and lower interest rates to customers. The average annualized interest rate charged by our funding partners decreased from 9.1% in 2017 to 8.4% in the six months ended June 30, 2019. As we collaborate exclusively with institutions, instead of retail investors, we are able to significantly reduce our compliance risk compared to other consumer financing service platforms.

Our value proposition to car buyers. We focus on enabling prime borrowers to access used car loans from financial institutions. Prime borrowers accounted for 71.8% and 75.0% of the car buyers we served in 2018 and the six months ended June 30, 2019, respectively. Our financing solutions make car ownership accessible to more customers and help them upgrade their cars. We provide them a fast, convenient and simple transaction experience by accelerating credit decision and easy access to funding, while also offering value-added services, such as insurance solutions and auto accessories.

Our value propositions to business partners:

 

   

Automotive dealers. We broaden their customer base by offering seamless and fast financing solutions to prime borrowers, enabling dealers to not only sell more cars but also sell more expensive cars. As such, we help dealers grow business, accelerate inventory turnover as well as improve customer experience. Furthermore, our value-added services enable dealers to grow their revenues by earning commissions.

 

   

Funding partners. We enable our funding partners, particularly financial institutions, to acquire a large number of prime borrowers in an efficient manner and expand into the used car financing market in China.

 

   

Other partners. We attract a wide variety of partners to our platform such as insurance companies and auto device manufacturers by cross-selling our customers various value-added services and products,



 

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including automotive and life insurance policies as well as personal loans to form a comprehensive ecosystem.

The increasing number of participants in our ecosystem has created a significant network effect. The increased number of car buyers enables us to refine our risk assessment models through more transaction data. Our stronger risk assessment capabilities enable us to collaborate with more reputable financial institutions, which in turn reduces the interest rate of our auto financing solutions. This in turn increases the attractiveness of our financing solutions and enables us to serve more car buyers and dealers. We believe this forms a virtuous cycle which brings benefits to all participants in our ecosystem.

Car Loans Facilitated by Us

We strategically focus on financing solutions for used cars, which have accounted for the majority of the auto financing transactions we facilitated. We also facilitate financing solutions for new cars through our sales network. Used car financing transactions accounted for 83.5%, 87.2% and 86.5% of the total amount of auto financing transactions we facilitated in 2017, 2018 and the six months ended June 30, 2019.

We facilitated 175,796 and 233,291 auto financing transactions in 2017 and 2018, respectively, representing an increase of 32.7%, and 95,700 and 128,793 auto financing transactions in the six months ended June 30, 2018 and 2019, respectively, representing an increase of 34.6%. The outstanding balance of auto financing transactions we facilitated was RMB21.9 billion as of June 30, 2019, representing an increase of 18.0% from December 31, 2018.

Car buyers who utilize our financing solutions are required to provide down payments, pledge cars they have purchased as collateral and make repayments in equal monthly installments which include interest as well as repayments of principal. In the six months ended June 30, 2019, the car loans we facilitated had principal amounts ranging from RMB34,970 to RMB116,818 with a term of 12 to 36 months, while the transaction price of the cars pledged as collaterals ranged from RMB40,000 to RMB144,000.

We charge car buyers service fees for facilitating loan transactions. In the six months ended June 30, 2019, such service fees typically ranged from RMB2,887 to RMB10,540 and represented 4.9% to 11.4% of the loan principal. The average annualized interest rate charged by our funding partners was 8.4% in the same period.

Risk Management

We bear credit risk for all of the loans that we facilitate according to the respective arrangements with different funding partners. At the early stage of a car buyer’s delinquency, we are obligated to make the overdue payment to the relevant funding partner. We are also typically obligated to purchase the financing receivables from the relevant funding partner upon a specified event of default. As assurance of such obligation, we provide a security deposit that typically equals to a percentage of the outstanding balance or the amount of the loans provided by the relevant funding partner to car buyers referred by us.

We have implemented a rigorous risk management system and a cost-effective delinquent loan management system, which have enabled us to minimize our loss due to car buyers’ defaults. We have developed algorithms to holistically analyze results of our anti-fraud system, credit assessment system and car appraisal system. Leveraging our risk management capability, our M3+ overdue ratio for all auto financing transactions that we facilitated and remained outstanding was 0.7%, 0.7% and 0.8% as of December 31, 2017 and 2018 and June 30, 2019, respectively.

We historically engaged third-party repossession agents to help us repossess car collateral from car buyers in default. We ceased such repossession operation in April 2019 due to our adjustment in business operations and



 

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management of legal and regulatory risks, and we do not expect to resume such operation until the relevant PRC regulatory authorities provide clear guidance, which may not be available in the near term or at all. We currently utilize court proceedings, the improved credit reporting system in China, as well as negotiation with car buyers in default for voluntary surrender of the collateral as part of the plan to settle their outstanding debts.

Our total net revenues grew from RMB866.7 million in 2017 to RMB1,656.4 million (US$214.3 million) in 2018, representing an increase of 91.1%. Our total net revenues increased from RMB709.9 million in the six months ended June 30, 2018 to RMB984.4 million (US$143.4 million) in the same period in 2019, representing an increase of 38.7%. Our net income was RMB318.5 million (US$46.4 million) in 2018, compared to a net loss of RMB358.5 million in 2017. Our net income increased by 273.0% from RMB62.2 million in the six months ended June 30, 2018 to RMB232.0 million (US$33.8 million) in the same period in 2019.

Our Strengths

We believe the following strengths contribute to our success and reinforce our market-leading position:

 

   

first-mover in an immense, fast-growing and underserved market;

 

   

extensive offline salesforce with targeted and cost-effective customer acquisition;

 

   

diversified and scalable institutional funding with improving funding costs;

 

   

attractive user base with strong life-time monetization opportunity;

 

   

proprietary and accurate credit risk assessment with proven results;

 

   

superior user experience supported by a highly automated technology platform; and

 

   

experienced management team and strong shareholder support.

Our Strategies

We seek to continue to redefine used car loan experience in China. We plan to pursue the following strategies to achieve our goal:

 

   

geographic and customer segment expansion;

 

   

further diversify funding sources and improve funding terms;

 

   

continue to invest into data and technology;

 

   

expand products and services offerings to car buyers; and

 

   

continue to pursue strategic alliances, investments and acquisitions.

Our Challenges

Our business and successful execution of our strategies are subject to certain challenges, risks and uncertainties including:

 

   

our limited operating history in an emerging and fast growing market;

 

   

our ability to effectively manage our growth, control our expenses and implement our business strategies;

 

   

our ability to attract prospective car buyers by providing a differentiated and superior customer experience;



 

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our ability to successfully expand and maintain and effectively manage relationships with our network of dealers;

 

   

our reliance on a limited number of financial institutions and other funding partners to fund the auto financing transactions we facilitate (for example, in 2017, 2018 and the six months ended June 30, 2019, 52.6%, 89.9% and 87.4% of the amount of financing transactions we facilitated were funded by our two largest funding partners, respectively);

 

   

our ability to maintain low overdue ratios for financing transactions we facilitate, as we guarantee such financing transactions and therefore bear credit risk;

 

   

the amount of service fees for our auto financing facilitation services; and

 

   

the growth of the Chinese auto financing market in general, and the used car financing market in particular.

In addition, we face risks and uncertainties related to our corporate structure and regulatory environment in China, including:

 

   

further changes and interpretation of laws and regulations governing the auto financing market in the PRC;

 

   

risks associated with our control over our consolidated variable interest entity, or VIE, in China, which is based on contractual arrangements rather than equity ownership; and

 

   

changes in the political and economic policies of the PRC government.

In particular, the Circular on Regulating and Rectifying Cash Loan Business on December 1, 2017, or Circular 141, may be interpreted by the regulatory authorities to contain restrictions on certain aspects of our business, such as (i) providing credit assessment service to funding partners, (ii) purchasing the relevant financing receivables from funding partners upon certain specified events of default by car buyers and (iii) charging car buyers service fees for facilitating auto financing transactions.

Furthermore, according to the Regulations on the Administration of Financing Guarantee Companies, the establishment of financing guarantee companies shall be subject to the approval by the competent government authority, and unless otherwise stipulated, no entity may operate a financing guarantee business without such approval. If any entity violates these regulations and operates a financing guarantee business without approval, the entity may be subject to penalties including ban or suspension of business, fines of RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal liability shall be imposed in accordance with the law. Furthermore, the CBIRC, together with several other governmental authorities, jointly issued the Supplementary Provisions on the Supervision and Administration of Financing Guarantee Companies on October 9, 2019, which became known to the public on October 23, 2019. Pursuant to such supplementary provisions, institutions providing clients recommendation, credit evaluation and other services for lending institutions shall not provide financing guarantee services or provide such services in a disguised form without necessary approval from competent government authorities. If an institution without any financing guarantee business approval is actually engaged in a financing guarantee business, such unapproved financing guarantee business shall be banned by regulators and be required to be properly settled. As we are obligated to purchase the relevant financing receivables upon certain specified events of default by car buyers for financing transactions funded by certain of our funding partners, according to the above laws and regulations, there is a risk that we may be deemed by relevant regulatory authorities to operate a financing guarantee business without approval because of our current arrangements with such funding partners. If we were so deemed, we may be required to (i) cease the arrangements with the funding partners from which we are obligated to purchase the financing receivables upon default of car buyers, or (ii) obtain necessary approval to operate a financing



 

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guarantee business, and we may also be subject to penalties including ban or suspension of business, fines, confiscation of illegal gains and even criminal liabilities. As of the date of this prospectus, we have not received any notice from a regulatory authority that would require us to obtain regulatory approval in relation to our current business.

We also facilitate the sale of insurance policies by insurance brokers or insurance companies, and we may be deemed to operate an insurance agency business without the required insurance agency business permit.

Our History and Corporate Structure

We commenced our auto financing business in 2014, and we used to operate within Meili Finance Holdings Limited, or Meili Finance. We undertook a restructuring in 2017 to spin off from Meili Finance and strengthen our positioning as an auto financing solutions provider. In connection with the restructuring, subsidiaries of Meili Finance that engaged in the auto financing business were transferred to Meili Auto Holdings Limited, or Meili Auto, which was established in June 2017 as our current ultimate holding company. In addition, the shareholders of Meili Finance received shares of Meili Auto in proportion to the shares they held in Meili Finance. We conduct our business through our wholly foreign owned enterprises and consolidated VIE in China.



 

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The following diagram illustrates our corporate structure with our principal subsidiaries, consolidated VIE and its subsidiaries as of the date of this prospectus. Certain entities that are immaterial to our results of operations, business and financial condition are omitted. Except as otherwise specified, equity interests depicted in this diagram are held as to 100%. The relationships among Meili Auto (Beijing) Internet Technology Co., Ltd., or Meili Beijing and Beijing Feima Changyou Information Technology Co., Ltd., or Beijing Feima, as illustrated in this diagram are governed by contractual arrangements and do not constitute equity ownership.

 

LOGO

 

(1)

Meili Auto Holdings Limited was incorporated on June 7, 2017. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its negative equity as of June 30, 2019 was RMB1,778.7 million.

(2)

Meili Auto Financing Holdings Limited was incorporated on June 15, 2017. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its equity as of June 30, 2019 was RMB96.2 million.

(3)

Meili Auto Alliance Holdings Limited was incorporated on June 15, 2017. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its equity as of June 30, 2019 was nil.

(4)

China Huachang Lease Co., Ltd. was incorporated on August 1, 2011. Its equity as of June 30, 2019 was RMB217.1 million. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019.

(5)

Meili Auto Alliance Holdings HK Limited was incorporated on July 5, 2017. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its equity as of June 30, 2019 was nil.

(6)

Huachang was incorporated on March 12, 2013. Its standalone revenue amounted to RMB512.0 million, RMB850.8 million and RMB612.9 million in 2017, 2018 and the six months ended June 30, 2019, respectively. Its standalone equity as of June 30, 2019 was RMB264.6 million. Its five subsidiaries include Liyun Automobile Consulting Services (Shanghai) Co., Ltd. (PRC), Hangzhou Junkai Automobile Trade Co., Ltd. (PRC), Wuhan Feima Information Technology Co., Ltd. (PRC), Shanghai Xiefang Information Technology Co., Ltd. (PRC) and Xinjiang Meili Auto Information Technology Co., Ltd. (PRC). These subsidiaries are 100% held by Huachang. Huachang and its subsidiaries primarily engage in the facilitation of auto financing transactions.



 

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(7)

Meili Auto (Beijing) Internet Technology Co., Ltd. was incorporated on November 22, 2017. It primarily engages in providing operation and technology support services. Its standalone revenue amounted to nil, RMB163.9 million and RMB77.5 million in 2017, 2018 and the six months ended June 30, 2019, respectively. Its standalone equity as of June 30, 2019 was RMB9.6 million.

(8)

Beijing Feima was incorporated on December 4, 2017. We plan to engage in value-added online services through Beijing Feima. It did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its standalone negative equity as of June 30, 2019 was RMB0.3 million. Its subsidiary is Meili Auto Alliance (Beijing) Information Technology Co., Ltd. (PRC), which is 85% held by Beijing Feima.

Related Party Transactions

Similar to our company, both Youyong Holdings Limited, or Youyong, and Lendora Holdings Limited were historically part of Meili Finance. Concurrently with our restructuring in 2017, Youyong and Lendora Holdings Limited also spun off from Meili Finance. The shareholders of Meili Finance received shares of each of our company, Youyong and Lendora Holdings Limited in proportion to the shares they held in Meili Finance. Several shareholders have substantial influence over each of our company, Youyong and Lendora Holdings Limited. Therefore, Youyong and Lendora Holdings Limited are deemed to be our related parties.

We provide operation support services, which primarily includes risk management and loan collection, and customer referral services to Youyong, which provides consumer financing solutions. We expect our fees relating to operation support services to significantly decrease in 2019, as Youyong starts to rely on its own staff for risk management and loan collection tasks. We recognized RMB113.0 million, RMB289.3 million (US$42.1 million) and RMB133.4 million (US$19.4 million) of revenues relating to service fees from Youyong in 2017, 2018 and the six months ended June 30, 2019, respectively, which accounted for 13.0%, 17.5% and 13.6% of total net revenues during the corresponding periods, respectively.

Amounts due from Youyong were RMB107.8 million, RMB403.4 million (US$58.8 million) and RMB115.5 million (US$16.8 million) as of December 31, 2017 and 2018 and June 30, 2019, respectively, relating to service fees from Youyong. Amounts due to Youyong were RMB0.06 million, RMB0.3 million (US$0.04 million) and RMB0.2 million (US$0.03 million) as of December 31, 2017 and 2018 and June 30, 2019, respectively, relating to deposits paid by Youyong.

After our restructuring, we have received administrative support services and loan collection services from Lendora Holdings Limited. Expenses charged by Lendora Holdings Limited amounted to RMB152.6 million, RMB47.2 million (US$6.9 million) and RMB14.8 million (US$2.1 million) in 2017, 2018 and the six months ended June 30, 2019, respectively, relating to service fees. We expect such expenses to significantly decrease in 2019, as we start to primarily rely on our own staff for administrative and loan collection tasks.

Amounts due from Lendora Holdings Limited were RMB5.3 million, RMB51.6 million (US$7.5 million) and RMB20.3 million (US$3.0 million) as of December 31, 2017 and 2018 and June 30, 2019, respectively. Such amounts represented monthly installments Lendora Holdings Limited collected from car buyers as part of its loan collection services for us. We expect such arrangements to significantly decrease in 2019, as we start to primarily rely on our own staff for administrative and loan collection tasks. Amounts due to Lendora Holdings Limited were RMB273.5 million, RMB219.9 million (US$32.0 million) and RMB121.6 million (US$17.7 million) as of December 31, 2017 and 2018 and June 30, 2019, respectively, relating to service fees.

For information with respect to other related party transactions, see “Related Party Transactions” for details.

Our Corporate Information

Our principal executive offices are located at 20/F, Greenland Building, Wangjing Hongtai Dong Street, Chaoyang District, Beijing, People’s Republic of China. Our telephone number at this address is



 

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+86-10-8303-0999. Our registered office in the Cayman Islands is located at the offices of Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Our telephone number at this address is +1-345-949-1040. Investors should submit any inquiries to the address and telephone number of our principal executive offices set forth above.

Our main website is www.mljr.com, and the information contained on this website is not a part of this prospectus. Our agent for service of process in the United States is Cogency Global Inc., located at 10 East 40th Street, 10th Floor, New York, N.Y. 10016.

Implications of Being an Emerging Growth Company and a Foreign Private Issuer

As a company with less than US$1,070,000,000 in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or 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, or Section 404, related to the assessment of the effectiveness of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of the benefits of this extended transition period for complying with new or revised accounting standards as required when they are adopted for public companies. As a result, our operating results and financial positions may not be comparable to the operating results and financial positions of other companies who have adopted the new or revised accounting standards.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt; or (d) 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 the 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.

We are also a foreign private issuer within the meaning of the rules under the Exchange Act and, as such, we are permitted to follow the corporate governance practices of our home country, which is the Cayman Islands, in lieu of the NYSE corporate governance standards applicable to U.S. domestic companies. For example, we are not required to have a majority of the board be independent nor have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors. We intend to continue to follow our home country’s corporate governance practices as long as we remain a foreign private issuer. As a result, you may not have the same protection afforded to shareholders of U.S. domestic companies that are subject to NYSE corporate governance requirements. As a foreign private issuer, we are also subject to reduced disclosure requirements and are exempt from certain provisions of the U.S. securities rules and regulations applicable to U.S. domestic issuers such as the rules regulating solicitation of proxies and certain insider reporting and short-swing profit rules.



 

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Conventions that apply to this prospectus

Unless we indicate otherwise, references in this prospectus to:

 

   

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

 

   

“amount of auto financing transactions” are to the principal amount of auto financing transactions we facilitated in a specified period;

 

   

“CAGR” are to compound annual growth rate;

 

   

“car” are to wheeled motor vehicles used for transporting less than nine passengers, such as sedans, crossover vehicles, multiple-purpose vehicles and sport utility vehicles;

 

   

“Car PARC” are to the total number of cars in operation in a specified region;

 

   

“CBIRC” are to the China Banking and Insurance Regulatory Commission;

 

   

“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region;

 

   

“Convertible Notes” are to the unsecured convertible notes of US$40.0 million we issued on September 26, 2019;

 

   

“Convertible Notes Investor” are to holder(s) of the Convertible Notes from time to time, currently being Oceanfront Investments V Limited;

 

   

“dealers” are to points of sale that engage in retail automobile transactions;

 

   

“Equity Incentive Trust” are to Meili Equity Incentive Trust, which will be established prior to the completion of this offering for the sole purpose of holding shares, dividends and other rights and interests deriving from such shareholding relating to awards pursuant to our equity incentive plans;

 

   

“exposure at risk” are to the amount of outstanding principal of specified auto financing transactions as of a specified date;

 

   

“KS ratio” are to an indicator for measuring the performance of classification models and is used to assess a model’s ability of distinguishing risks. Typically the higher the KS ratio, the stronger the ability of such model to distinguish risks (i.e. to distinguish creditworthy borrowers from those with high credit risks);

 

   

“M1+ overdue ratio” are to (i) exposure at risk relating to auto financing transactions for which any installment payment is 31 or more calendar days past due as of a specified date, excluding amounts of principal that have been charged off, divided by (ii) exposure at risk relating to all auto financing transactions which remain outstanding as of such date, excluding amounts of principal that have been charged off;

 

   

“M3+ overdue ratio” are to (i) exposure at risk relating to auto financing transactions for which any installment payment is 91 or more calendar days past due as of a specified date, excluding amounts of principal that have been charged off, divided by (ii) exposure at risk relating to all auto financing transactions which remain outstanding as of such date, excluding amounts of principal that have been charged off;

 

   

“OEMs” are to automotive original equipment manufacturer;

 

   

“ordinary shares” prior to the completion of this offering are to our ordinary shares, par value US$0.0001 per share, and upon and after the completion of this offering are to our Class A and Class B ordinary shares, par value US$0.0001 per share;



 

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“PBOC” are to the People’s Bank of China;

 

   

“preferred shares” are to our Series A-1, Series A-2, Series B-1 and Series B-2 convertible redeemable preferred shares, par value US$0.0001 per share;

 

   

“prime borrowers” are to individuals having PBOC credit records and no late payment record in the previous 60 days;

 

   

“registered dealers” are to dealers who are eligible to refer car buyers to our company;

 

   

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

 

   

“tier-one cities” are to Beijing, Shanghai, Guangzhou and Shenzhen;

 

   

“tier-two cities” are to Tianjin, Chongqing, Harbin, Changchun, Shenyang, Hohhot, Shijiazhuang, Urumchi, Lanzhou, Xining, Xi’an, Yinchuan, Zhengzhou, Jinan, Taiyuan, Hefei, Changsha, Wuhan, Nanjing, Chengdu, Guiyang, Kunming, Nanning, Lhasa, Hangzhou, Nanchang, Fuzhou, Haikou, Qingdao, Dalian, Ningbo and Xiamen;

 

   

“tier-three cities” are to Suzhou, Dongguan, Wuxi, Foshan, Wenzhou, Changzhou, Quanzhou, Yantai, Jiaxing, Nantong, Jinhua, Zhuhai, Huizhou, Xuzhou, Shaoxing, Zhongshan, Taizhou, Weifang, Baoding, Zhenjiang, Yangzhou, Guilin, Tangshan, Sanya, Huzhou, Langfang, Luoyang, Weihai, Yancheng, Linyi, Jiangmen, Shantou, Taizhou, Zhangzhou, Handan, Jining, Wuhu, Zibo, Liuzhou, Mianyang, Zhanjiang, Anshan, Ganzhou, Daqing, Yichang, Baotou, Xianyang, Qinhuangdao, Zhuzhou, Putian, Jilin, Huai’an, Zhaoqing, Ningde, Hengyang, Nanping, Lianyungang, Dandong, Lijiang, Jieyang, Yanbian, Zhoushan, Jiujiang, Longyan, Cangzhou, Fushun, Xiangyang, Shangrao, Yingkou, Sanming, Bengbu, Lishui, Yueyang, Qingyuan, Jingzhou, Tai’an, Quzhou, Panjin, Dongying, Nanyang, Ma’anshan, Nanchong, Xiaogan and Qiqihar;

 

   

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

 

   

“VIE” are to variable interest entity;

 

   

“Warrants” are to the warrants entitling the holders to subscribe up to US$20.0 million of our Class A ordinary shares we issued on September 26, 2019;

 

   

“Warrants Investor” are to holder(s) of the Warrants from time to time, currently being Oceanfront Investments V Limited; and

 

   

“we,” “us,” “our company” and “our” are to Meili Auto Holdings Limited, its consolidated VIE and their respective subsidiaries, as the context requires.

Unless specifically indicated otherwise or unless the context otherwise requires, all references to our ordinary shares exclude (i) ordinary shares issuable upon the exercise of outstanding options with respect to our ordinary shares under our share incentive plan adopted in 2017, or the 2017 Plan, and (ii) assumes that the underwriters will not exercise their over-allotment option to purchase additional ADSs.

This prospectus contains translations between Renminbi and U.S. dollars for the convenience of the reader. The translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.8650 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on June 28, 2019. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On October 25, 2019, the noon buying rate for Renminbi was RMB7.0647 to US$1.00.



 

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The offering

 

Price per ADS

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

 

ADSs Offered by Us

                ADSs

 

ADSs Outstanding Immediately After This Offering

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

 

Ordinary Shares Outstanding Immediately After This Offering

                 Class A ordinary shares and                  Class B ordinary shares (or                  Class A ordinary shares and                 Class B ordinary shares if the underwriters exercise in full the over-allotment option).

 

The ADSs

Each ADS represents                  Class A ordinary shares.

 

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

 

  You may surrender your ADSs to the depositary to withdraw the Class A ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

  We and the depositary may amend or terminate the deposit agreement for any reason without your consent. Any amendment that imposes or increases fees or charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

 

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

 

Ordinary Shares

Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares upon the completion of this offering. In respect of all matters subject to a shareholder’s vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 30 votes, voting together as one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not



 

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convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person or entity, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares. See “Description of Share Capital” for more information.

 

Over-Allotment Option

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of                  additional ADSs at the initial public offering price, less underwriting discounts and commissions, solely for the purpose of covering over-allotments.

 

Use of Proceeds

We estimate that we will receive net proceeds of approximately US$                  million from this offering, assuming an initial public offering price of US$ per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us.

 

  We anticipate using the net proceeds of this offering for (i) expansion of loan facilitation services, (ii) investment in research and development and (iii) general corporate purposes.

 

  See “Use of Proceeds” for more information.

 

Lock-up

We, our directors, executive officers, all of our existing shareholders [, the current Convertible Notes Investor, the current Warrants Investor and certain holders of our share options] have agreed with the underwriters not to sell, transfer or dispose of any ADSs, Class A 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 the risks relating to investing in the ADSs. You should carefully consider these risks before deciding to invest in the ADSs.

 

[Directed Share Program]

[At our request, the underwriters have reserved up to             % of the ADSs being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees, business associates and related persons. The sales will be made by                 , an underwriter of this offering, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved ADSs, but any purchases they do make will reduce the number of ADSs available to the general public. Any reserved ADSs not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs. Certain participants may be subject to the lock-up agreements as described in “Underwriting—Directed Share Program” in this prospectus.]


 

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Listing

We have applied to list the ADSs on the NYSE. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

 

Proposed NYSE Trading Symbol

ML

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment on             , 2019, through the facilities of the Depositary Trust Company, or DTC.

 

Depositary

 

The total number of ordinary shares that will be outstanding immediately after this offering will be                  Class A ordinary shares and                 Class B ordinary shares, which is based upon (i) the designation of all ordinary shares beneficially owned by                  into                  Class B ordinary shares on one-for-one-basis upon the completion of this offering; (ii) the designation of all of the remaining outstanding ordinary shares and the automatic conversion of all our outstanding convertible redeemable preferred shares in                  Class A ordinary shares on a one-for-one-basis upon the completion of this offering; and (iii)                  Class A ordinary shares issued in connection with this offering (assuming the underwriters do not exercise their option to purchase additional ADSs), but exclude:

 

   

                 ordinary shares issuable upon the exercise of outstanding share options under the 2017 Plan; and

 

   

                 ordinary shares reserved for future issuance under the 2017 Plan; and

 

   

26,040,290 ordinary shares issuable upon full conversion of the Convertible Notes and full exercise of the Warrants, at their initial conversion and exercise price, which are subject to downward adjustment if the initial public offering price of the ADSs divided by the number of Class A ordinary shares represented by each ADS is below US$2.8966.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated statements of comprehensive (loss)/income data and summary consolidated statements of cash flows data for the years ended December 31, 2017 and 2018 and summary consolidated balance sheets data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of comprehensive (loss)/income data and summary consolidated statements of cash flows data for the six months ended June 30, 2018 and 2019 and summary consolidated balance sheet data as of June 30, 2019 have been derived from our unaudited interim condensed 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 the U.S. GAAP. Our historical results are not necessarily indicative of results to be expected for any future period. The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.

Summary Consolidated Statements of Comprehensive (Loss)/Income Data

 

    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018
Restated(1)
    2018
Restated(1)
    2019
Restated(1)
 
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net Revenues:

                   

Loan facilitation revenue

    294,415       34.0       805,779       117,375       48.6       300,177       42.3       547,949       79,818       55.7  

Value-added services revenue

    92,130       10.6       232,003       33,795       14.0       79,596       11.2       207,153       30,175       21.0  

Net financing income

    364,178       42.0       319,741       46,576       19.3       187,186       26.4       94,252       13,729       9.6  

Other revenues

    115,956       13.4       298,835       43,530       18.1       142,935       20.1       135,090       19,678       13.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    866,679       100.0       1,656,358       241,276       100.0       709,894       100.0       984,444       143,400       100.0  

Cost of revenues

    (208,549     (24.1     (396,707     (57,787     (24.0     (184,484 )      (26.0 )      (229,960 )      (33,497 )      (23.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    658,130       75.9       1,259,651       183,489       76.0       525,410       74.0       754,484       109,903       76.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loans and advances

    (373,608     (43.1     (238,964     (34,809     (14.4     (145,486 )      (20.5 )      (100,630 )      (14,658 )      (10.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit after provision for loans and advances

    284,522       32.8       1,020,687       148,680       61.6       379,924       53.5       653,854       95,245       66.4  

Operating expenses:

                   

Sales and marketing

    (481,525     (55.6     (565,979     (82,444     (34.2     (267,755     (37.7     (293,617     (42,770     (29.8

General and administrative

    (105,303     (12.2     (145,497     (21,194     (8.8     (68,741     (9.7     (76,894     (11,201     (7.8

Research and development

    (72,296     (8.3     (119,609     (17,423     (7.2     (50,838     (7.2     (49,487     (7,209     (5.0

Gains from guarantee liabilities

    2,126       0.2       122,130       17,790       7.4       69,540       9.8       9,518       1,386       1.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (656,998     (75.8     (708,955     (103,271     (42.8     (317,794     (44.8     (410,480     (59,794     (41.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from operations

    (372,476     (43.0     311,732       45,409       18.8       62,130       8.7       243,374       35,451       24.8  

Interest expense, net

    (11,525     (1.3     (5,736     (836     (0.3     (3,128     (0.4     (3,158     (460     (0.3

Foreign exchange (losses)/gains

    (224     *       6,393       931       0.4       4,195       0.6       (69     (10     *  

Gains on disposal of subsidiary

    25,156       2.9       —         —         —         —         —         —         —         —    

Other income, net

    2,289       0.3       12,547       1,828       0.8       262       *       3,837       559       0.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before income tax expense

    (356,780     (41.2     324,936       47,332       19.6       63,459       8.9       250,300       36,460       25.5  

Income tax expense

    (1,723     (0.2     (6,471     (943     (0.4     (1,265 )      (0.2 )      (18,328 )      (2,670 )      (1.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018
Restated(1)
    2018
Restated(1)
    2019
Restated(1)
 
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net (loss)/income

    (358,503     (41.4     318,465       46,390       19.2       62,194       8.7       231,972       33,790       23.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to Meili Auto Holdings Limited

    (354,457     (40.9 )     320,472       46,682       19.3       63,907       9.0       232,050       33,801       23.6  

Accretion to redemption value

    (986     (0.1     (639,569     (93,164     (38.6     (302,124     (42.6     (302,837     (44,113     (30.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

    (355,443     (41.0     (319,097     (46,482     (19.3     (238,217     (33.6     (70,787     (10,312     (7.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders

    (5.34           (5.71     (0.83           (4.11           (1.32     (0.19      

 

*

Less than 0.1%.

(1)

During the course of preparing our condensed consolidated financial statements for the nine months ended September 30, 2019, we discovered certain errors in our 2018 consolidated financial statements in relation to the reporting of our redeemable convertible preferred shares. More information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Note 2(b) of our consolidated financial statements.

Summary Consolidated Balance Sheets Data

 

     As of December 31,      As of June 30,
2019
Restated(1)
 
     2017      2018
Restated(1)
 
     RMB      RMB      US$      RMB      US$  
     (in thousands)  

Cash and cash equivalents

     210,982        78,761        11,473        186,819        27,213  

Restricted cash

     99,748        781,869        113,892        1,076,640        156,830  

Short-term investments

     7,800        —          —          —          —    

Total loans and advances, net

     7,373,733        4,281,646        623,692        2,700,154        393,322  

Total assets

     8,097,110        5,883,592        857,042        4,430,667        645,400  

Short-term borrowings

     55,450        20,100        2,928        40,100        5,841  

Total payable to funding partners

     6,216,836        3,902,714        568,494        2,598,002        378,442  

Guarantee liabilities

     172,701        336,506        49,018        405,463        59,062  

Total liabilities

     8,830,971        5,574,797        812,061        3,882,170        565,502  

Mezzanine equity

     699,717        2,264,477        329,858        2,576,867        375,363  

Total shareholders’ deficit

     (1,433,578      (1,955,682      (284,877      (2,028,370      (295,465

 

(1)

During the course of preparing our condensed consolidated financial statements for the nine months ended September 30, 2019, we discovered certain errors in our 2018 consolidated financial statements in relation to the reporting of our redeemable convertible preferred shares. More information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Note 2(b) of our consolidated financial statements.



 

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Summary Consolidated Statements of Cash Flows Data

 

    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018
Restated(1)
    2018
Restated(1)
    2019
Restated(1)
 
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Net cash generated from operating activities

    36,710       419,463       61,102       164,981       546,028       79,538  

Net cash (used in)/generated from investing activities

    (3,730,012     2,853,316       415,632       1,146,919       1,542,084       224,629  

Net cash generated from/(used in) financing activities

    3,858,915       (2,720,386     (396,269     (915,363     (1,686,571     (245,677

Cash and cash equivalents, restricted cash at the beginning of the year

    144,543       310,730       45,263       310,730       860,630       125,365  

Cash and cash equivalents, restricted cash at the end of the year

    310,730       860,630       125,365       699,101       1,263,459       184,043  

 

(1)

During the course of preparing our condensed consolidated financial statements for the nine months ended September 30, 2019, we discovered certain errors in our 2018 consolidated financial statements in relation to the reporting of our redeemable convertible preferred shares. More information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Note 2(b) of our consolidated financial statements.

Key Operating Metrics

We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

 

     As of/for the Year Ended
December 31,
     As of/for the Six Months
Ended June 30,
 
     2017      2018      2018      2019  

Amount of auto financing transactions (RMB in thousands)

     10,944,544        15,273,061        6,062,021        9,118,351  

Outstanding balance of auto financing transactions (RMB in thousands)

     11,435,490        18,546,772        13,889,783        21,880,665  

Number of auto financing transactions

     175,796        233,291        95,700        128,793  

Number of registered dealers

     34,316        63,329        43,595        74,918  

M1+ overdue ratio (%)

     1.3        1.3        1.5        1.6  

M3+ overdue ratio (%)

     0.7        0.7        0.9        0.8  

Percentage of credit decisions made automatically (%)

     19.0        53.1        41.5        71.0  

Non-GAAP Financial Measure

We use adjusted net (loss)/ income, which is an non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net (loss)/ income represents net



 

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loss or income before share-based compensation expenses and impairment of goodwill. We believe that such non-GAAP financial measure helps identify underlying trends in our business that could otherwise be distorted by the effects of share-based compensation expenses and impairment of goodwill. We believe that such non-GAAP financial measure also provides useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

The non-GAAP financial measure is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. It should not be considered in isolation or construed as alternatives to net loss or income or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measure in light of the most directly comparable GAAP measures, as shown below. The non-GAAP financial measure presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measure differently, limiting its usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

The table below sets forth a reconciliation of the non-GAAP financial measure for the periods indicated:

 

     Year Ended December 31,      Six Months Ended June 30,  
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Net (loss)/income

     (358,503      318,465        46,390        62,194        231,972        33,790  

Add: Share-based compensation expenses

     2,803        8,618        1,255        3,354        6,442        938  

Add: Impairment of goodwill

     7,044        —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net (loss)/income

     (348,656      327,083        47,645        65,548        238,414        34,728  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


 

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RISK FACTORS

An investment in the ADSs involves significant risks. You should carefully consider all the information in this prospectus, including the risks and uncertainties described below, before making an investment in the ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of the ADSs could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Industry

We have a limited operating history in an emerging and fast growing market. Our historical financial and operating performance may not be indicative of our future prospects and results of operations.

We launched our business in 2014 and have a limited operating history. The PRC auto financing market is relatively new and at an early stage of development. We may not have sufficient experience to address the risks to which companies operating in new or rapidly evolving markets may be exposed. As part of our business, we provide financing and other services to various participants in the auto transaction value chain, including dealers, funding partners, car buyers and other industry participants. We have limited experience in most aspects of our business operation, such as car buyer engagement, data-driven risk management and the development of long-term relationships with business partners, such as dealers and funding partners. The laws and regulations governing the auto financing market in the PRC remain at a nascent stage and subject to further changes and interpretation. While the financing market is growing faster for used cars than new cars in China, it is uncertain whether this trend will continue or will not be reversed. Furthermore, a decline in new car sales could adversely affect the supply of used cars in the future. As the market, the regulatory environment or other conditions evolve, our existing services and business model may not continue to deliver the expected business results. We may introduce new services and make adjustments to our existing services, business model and various aspects of our operations. Any significant change to our services, business model and operations we may implement in the future may not be able to achieve our intended results and may have a material and adverse impact on our business and results of operations.

As a result, while we have achieved significant growth in the past few years, there is no assurance that we will continue to grow at the same rate or at all. Our historical financial and operating performance may not be indicative of our future prospects and results of operations. You should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly-evolving market in which we operate and our limited operating history.

We may not be able to effectively manage our growth, control our expenses or implement our business strategies, in which case we may be unable to maintain high quality services or compete effectively.

We experienced a period of rapid growth and expansion, which placed significant strain on our management and resources. We derive revenue primarily through used car loan facilitation. Our total net revenues grew from RMB866.7 million in 2017 to RMB1,656.4 million (US$214.3 million) in 2018, representing an increase of 91.1%, and increased from RMB709.9 million in the six months ended June 30, 2018 to RMB984.4 million (US$143.4 million) in the same period in 2019, representing an increase of 38.7%. There can be no assurance that our level of revenue growth and profitability can or will be sustainable or achieved at all in the future. We believe that our growth and expansion will depend on our ability to expand and continually improve our services, expand our revenue sources, attract car buyers, collaborate with additional financial institutions, retain and expand our dealer networks, capture growth opportunities in new geographical regions, implement our marketing strategies and compete against our existing and future competitors. There can be no assurance that we will achieve any of the above.

To manage our growth and expansion and maintain profitability, we anticipate that we will need to continually improve and upgrade our operational and financial systems, procedures and controls, including

 

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improving our technology infrastructure as well as accounting and other internal management systems. We will also need to further expand, train, manage and motivate our workforce and manage our relationships with business partners and car buyers. All of these endeavors involve risks and will require substantial management efforts and skills and significant additional expenditures. Our further expansion may divert our management, operational or technological resources from our existing business operations. In addition, our expansion may require us to penetrate into new geographical regions, where we may have difficulties in satisfying local market demands and regulatory requirements. We cannot assure you that we will be able to successfully maintain our growth rate or implement our future business strategies effectively, and failure to do so may materially and adversely affect our business, financial condition, results of operations and future prospects.

Our success depends on our ability to attract prospective car buyers. If we fail to provide a differentiated and superior customer experience, the size of our customer base and the number of financing transactions we facilitate could decline.

The number of auto financing transactions we facilitated increased from 175,796 in 2017 to 233,291 in 2018, and increased from 95,700 for the six months ended June 30, 2018 to 128,793 for the six months ended June 30, 2019. The growth of our auto financing business depends on our ability to attract prospective car buyers. In order to expand our car buyer base, we must continue to invest significant resources in the improvement of our services and solutions and the development of new solutions and services as well as building and strengthening relationships with funding partners, dealers and other business partners. Our ability to successfully launch, operate and expand our solutions and services and to improve user experience to attract prospective car buyers depends on many factors, including our ability to anticipate and effectively respond to changing interests and preferences of car buyers, anticipate and respond to changes in the competitive landscape, and develop and offer solutions and services that address the needs of car buyers. If our efforts in these regards are unsuccessful, our customer base, and the number of financing and other transactions we facilitate for them, may not increase at the rate we anticipate, or at all. As a result, our business, prospects, financial condition and results of operations may be materially and adversely affected.

In order to attract car buyers, we must also devote significant resources to enhancing user experience on an ongoing basis. We must continually enhance our speed for processing credit applications without compromising our risk management function. If we fail to provide superior customer service or address complaints of car buyers in a timely manner, we may fail to attract prospective car buyers to use our solutions and services, the number of financing transactions we facilitate may decline. In the meantime, we also seek to cross-sell new solutions and services to car buyers, such as insurance policies. However, there can be no assurance that we will be able to achieve such objective.

We may not be able to successfully expand or maintain or effectively manage relationships with our network of dealers.

We rely on our extensive dealer network to engage prospective car buyers across China. As of June 30, 2019, our dealer network comprised approximately 75,000 dealers across over 300 cities, accounting for 30 of all 31 provinces in mainland China. We plan to expand our dealer network, including by further penetrating our existing markets and expanding our geographic coverage. As China is a large and diverse market, business practices and demands may vary significantly by region and our experience in the markets in which we currently operate may not be applicable in other parts of China. As a result, we may not be able to leverage our experience to expand our dealer network into other parts of China. Furthermore, our efforts to expand into new geographical markets and attract new dealers may impose considerable burden on our sales, marketing and general managerial resources. If we are unable to manage our expansion efforts effectively, if our expansion efforts take longer than planned or if our costs for these efforts exceed our expectations, our results of operations may be materially and adversely affected.

Our relationships with dealers are not exclusive, and they are not obligated to refer any car buyers to us. There can be no assurance that they will maintain their level of business with us or at all. Dealers may find the

 

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amount of commissions offered in connection with our auto financing solutions to be unattractive. Our relationships with dealers may also be affected by various factors that are beyond our control, including the decrease in popularity of the car models offered by our dealers. A decrease in the number of car buyers referred by our dealers could materially and adversely affect our business, financial condition and results of operations.

We rely on a limited number of financial institutions to fund the auto financing transactions we facilitate. Any adverse change in our relationships with such financial institutions may materially and adversely impact our business and results of operations.

We rely on a limited number of financial institutions to fund financing transactions to car buyers. As of June 30, 2019, we collaborated with seven financial institutions. For the six months ended June 30, 2019, the amount of financing transactions we facilitated was RMB9.1 billion (US$1.3 billion), 99.9% of which was funded by financial institutions, and the remainder was funded by our own capital. The availability of funding from financial institutions depends on many factors, some of which are out of our control. Financial institutions may find our services, such as car buyer engagement or risk management, to be ineffective. In addition, regardless of our risk management efforts, financing transactions we facilitate may nevertheless be considered riskier and may have a higher overdue ratio than financing transactions funded to car buyers with more established credit histories by traditional financial institutions.

We have relied on, and we may continue to rely on, two financial institutions to arrange funding for a substantial portion of financing transactions we facilitate. In 2017, 2018 and the six months ended June 30, 2019, 37.3%, 75.6% and 65.6% of the amount of financing transactions we facilitated were funded by our largest funding partner, respectively. In 2017, 2018 and the six months ended June 30, 2019, 15.3%, 14.3% and 21.8% of the amount of financing transactions we facilitated were funded by our second largest funding partner, respectively. There can be no assurance that we will be able to rely on these two financial institutions or other funding partners in the future. For example, these financial institutions may decide to reduce the amount that they will fund or increase the borrowing costs to car buyers for financing transactions we facilitate in the future or discontinue such funding altogether. While we endeavor to increase the number of financial institutions and other funding partners to collaborate with us, there can be no assurance that we will be successful in this regard. Given our current dependence on a relatively small number of financial institutions, if any such financial institution determines not to collaborate with us or limits the funding that is available for financing transactions we facilitate, or if any such financial institution encounters liquidity issue in general, our business, financial condition and results of operations may be materially and adversely affected.

In addition, certain funding partners with which we collaborate have limited operating history in auto financing. Our ability to collaborate with financial institutions and other funding partners may become subject to new regulatory limitations, as the laws and regulations governing the auto financing market and the finance industry in the PRC in general continue to evolve. We may from time to time experience constraints as to the availability of funds from our funding partners, especially as our business continues to grow and the need for funding increases. Such constraints may affect user experience, including by limiting our ability to facilitate financing transactions. Such limitations may also restrain the growth of our business. Any prolonged constraint as to the availability of funds from financial institutions and other funding partners may also harm our reputation or result in negative perception of the services we offer, thereby decreasing the willingness of prospective car buyers to seek auto financing solutions facilitated by us or the willingness of dealers and other business partners to collaborate with us.

The laws and regulations governing the auto financing market in the PRC are subject to further changes and interpretation. If our business practices or the business practices of third parties that we collaborate with are deemed to violate any PRC laws or regulations, our business, financial condition, results of operations and prospects would be materially and adversely affected.

Our business may be subject to a variety of laws and regulations in the PRC governing the auto and finance industries in general, and the auto financing market in particular. The application and interpretation as to certain

 

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of these laws and regulations are currently ambiguous, and may be interpreted and administered inconsistently between the different government authorities and local bureaus. The PRC government may also implement measures to control credit supply, which would affect the auto financing market.

Our wholly owned subsidiary in China, Huachang Finance Lease (China), Co., Ltd., or Huachang, has received the approval to engage in the financial lease business. After a credit application is approved by us as well as the relevant financial institution, we pre-finance the car purchase in the form of a financial lease to enhance user experience. The financial institution then extends a loan to the car buyer. If the PRC government tightens regulatory framework for the auto and finance industries in the future, and subject industry participants such as our company or our funding partners to new or specific requirements (including without limitation, capital requirements, licensing requirements and geographical restrictions), our business, financial condition and prospects could be materially and adversely affected. Compliance with existing and future rules, laws and regulations can be costly and if our practice is deemed to violate any existing or future rules, laws and regulations, we may face injunctions, including orders to cease non-compliant activities, and may be exposed to other penalties as determined by the relevant government authorities as well.

The Office of the Leading Group for Specific Rectification against Online Finance Risks and the Office of the Leading Group for Specific Rectification against P2P Online Lending Risks jointly issued the Circular on Regulating and Rectifying Cash Loan Business on December 1, 2017, or Circular 141. There is still uncertainty as to the interpretation and application of the requirements in Circular 141. The opening paragraph of Circular 141 states, in relevant parts, that while the growth of cash loan business “has helped certain groups in society satisfy their needs for normal consumption credit to a certain extent, it has created several significant problems including, among other things, over-borrowing, repetitive credit approvals, improper collection practice, excessively high interest rates and intrusions on personal privacy, posing relatively large financial risk and societal risk.” While this statement suggests that the regulatory authorities are primarily concerned about abuses in the cash loan industry, it is uncertain whether any requirements in Circular 141 may be applicable to the auto financing market. As of the date of this prospectus, we have not received any notice from a relevant regulatory authority that requires us to abide by Circular 141. Among other things, Circular 141 provides restrictions on banks’ collaboration with third parties in cash loan business. Pursuant to Circular 141, a bank may not outsource its core business functions, such as credit assessment and risk management, to third parties. Circular 141 also prohibits a bank participating in loan facilitation transactions from accepting credit enhancement services from a third party which has not obtained any license or approval to provide guarantees, including credit enhancement service in the form of a commitment to assume default risks. In addition, a bank may not permit its third-party partner in cash loan business to collect interest or fees from borrowers. In connection with our auto financing facilitation business, we provide credit assessment service to financial institutions and other funding partners to assist them in making ultimate credit decisions. Under our arrangements with certain financial institutions and other funding partners, we are obligated to purchase the relevant financing receivables upon certain specified events of default by car buyers. In addition, we charge car buyers service fees for facilitating auto financing transactions. If the relevant regulatory authorities determine that Circular 141 is applicable to the auto financing market, and our business is deemed to be in violation of Circular 141, we could be subject to penalties and/or be required to significantly change our business model.

We may be deemed to operate a financing guarantee business without required approval by PRC regulatory authorities, which may subject us to various penalties, and adversely affect our business and access to funding.

The State Council promulgated the Regulations on the Administration of Financing Guarantee Companies, or the Financing Guarantee Rules, on August 2, 2017, which became effective on October 1, 2017. Pursuant to the Financing Guarantee Rules, “financing guarantee” refers to the activities in which guarantors provide guarantee to the guaranteed parties as to loans, bonds or other types of debt financing, and “financing guarantee companies” refer to companies legally established and operating financing guarantee business. According to the Financing Guarantee Rules, the establishment of financing guarantee companies shall be subject to the approval

 

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by the competent government authority, and unless otherwise stipulated, no entity may operate a financing guarantee business without such approval. If any entity violates these regulations and operates a financing guarantee business without approval, the entity may be subject to penalties including ban or suspension of business, fines of RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal liability shall be imposed in accordance with the law.

On April 2, 2018, the CBIRC, together with several other governmental authorities, jointly adopted (i) the Administrative Measures for the Financing Guarantee Business Permit, (ii) Measures for Measuring the Outstanding Amount of Financing Guarantee Liabilities, (iii) Administrative Measures for the Asset Percentages of Financing Guarantee Companies and (iv) Guidelines on Business Cooperation between Banking Financial Institutions and Financing Guarantee Companies, or the Four Supporting Measures of the Financing Guarantee Rules, which further stipulate that “financing guarantee business” under the Four Supporting Measures of the Financing Guarantee Rules, among other things, includes “guarantee business related to loans,” which refers to the activities whereby a guarantor provides guarantee for loans, online lending, financial leasing, commercial factoring, bill acceptance, letters of credit or other forms of debt financing. Furthermore, the CBIRC, together with several other governmental authorities, jointly issued the Supplementary Provisions on the Supervision and Administration of Financing Guarantee Companies on October 9, 2019, which became known to the public on October 23, 2019. Pursuant to such supplementary provisions, institutions providing clients recommendation, credit evaluation and other services for lending institutions shall not provide financing guarantee services or provide such services in a disguised form without necessary approval from competent government authorities. If an institution without any financing guarantee business approval is actually engaged in a financing guarantee business, such unapproved financing guarantee business shall be banned by regulators and be required to be properly settled. If the aforesaid institution intends to continue the financing guarantee business, it shall establish a financing guarantee company with necessary approval in accordance with applicable laws to conduct the financing guarantee business.

As we are obligated to purchase the relevant financing receivables upon certain specified events of default by car buyers for financing transactions funded by certain of our funding partners, according to the above laws and regulations, there is a risk that we may be deemed by relevant regulatory authorities to operate a financing guarantee business without approval because of our current arrangements with such funding partners. If we were so deemed, we may be required to (i) cease the arrangements with the funding partners from which we are obligated to purchase the financing receivables upon default of car buyers, or (ii) obtain necessary approval to operate a financing guarantee business, and we may also be subject to penalties including ban or suspension of business, fines, confiscation of illegal gains and even criminal liabilities. We have been proactively communicating with our funding partners and third-party financing guarantee companies to take necessary measures, including adjusting our current business arrangements with such funding partners or introducing third-party financing guarantee companies with necessary approval to provide guarantees for the funding partners, to fully comply with the foregoing laws and regulations on financing guarantee business. If we were unable to implement effective measures, we may no longer be able to collaborate with the relevant financial institutions, or become subject to penalties, and our business, financial condition, results of operations and prospects could be materially and adversely affected. As of the date of this prospectus, we have not received any notice from a regulatory authority that would require us to obtain regulatory approval in relation to our current business.

If we are unable to maintain low overdue ratios for financing transactions we facilitate, our business and results of operations may be materially and adversely affected. Historical overdue ratios for financing transactions we facilitated may not be indicative of future results.

We may not be able to maintain low overdue ratios for financing transactions we facilitate, and such overdue ratios may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual car buyers. M3+ overdue ratios for all financing transactions which we facilitated and remained outstanding were 0.7%, 0.7% and 0.8% as of December 31, 2017 and 2018 and June 30, 2019. However, we cannot assure you that we will be able to maintain low overdue ratios in the future

 

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or that the historical overdue ratio is indicative of the future credit performance of financing transactions that we facilitate. Overdue ratios for financing transactions we facilitate may deteriorate over time or as our business volume expands.

At the early stage of a car buyer’s delinquency, we are obligated to make the overdue payment to the relevant financial institutions. If a car buyer has been delinquent for a longer period of time as specified in the relevant agreement, we are obligated to purchase the relevant financing receivables from the financial institutions. As assurance of our obligations, we provide a security deposit that typically equals to a percentage of the outstanding balance or the amount of the loans provided by the financial institutions to car buyers referred by us. Payment of such security deposit diverts capital that could otherwise be used to fund our operations. Furthermore, the security deposit may not be sufficient to cover our payment or purchase obligations to the funding partners. If overdue ratio increases, we may be required to spend additional amount of working capital to fulfill our obligations to the funding partners. If we fail to fulfill such obligations in a timely manner or at all, our business relationships with the relevant funding partners would be harmed, which could materially and adversely affect our ability to secure funding from them at competitive costs or at all. Such arrangement also subjects us to credit risks of the car buyers. We may not be able to recover the amounts we pay to the funding partners in connection with car buyer defaults from the relevant car buyers. Any of the above could have a material adverse effect on our results of operation and financial position.

We maintain an allowance for loans and advances and guarantee liabilities that we believe is appropriate to provide for probable losses inherent in our on-balance sheet loans and off-balance sheet loans, respectively. The determination of allowance for loans and advances and guarantee liabilities inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which are subject to change. Changes in economic conditions affecting borrowers, new information regarding the loans we facilitated, and other factors, both within and outside of our control, may require an increase in the allowance for loans and advances and/or recognition of losses from guarantee liabilities. If net charge-offs in future periods exceed the allowance for loans and advances, we will need to make additional provisions to increase the allowance for loans and advances. Similarly, if the expected credit loss on off-balance sheet loans is higher than the guarantee liabilities we initially record at inception, we will need to increase guarantee liabilities by recognizing losses from guarantee liabilities.

The service fees for our auto financing facilitation services may decline in the future, and any material decrease in such service fees could harm our business, financial condition and results of operations.

We generate most of our revenue from auto financing facilitation services provided to car buyers. Any material decrease in our service fees from auto financing facilitation services would have a substantial impact on our revenue and profit margin. The service fees we charge car buyers could be affected by a variety of factors, including the competitive landscape of the auto financing market and regulatory requirements. Our service fees from car buyers may also be affected by a change over time in the mix of the types of services we offer. Our competitors may also offer lower service fees, which may require us to reduce our service fees to compete effectively.

In addition, our service fees are sensitive to many macroeconomic factors beyond our control, such as inflation, recession, the state of the credit markets, changes in market interest rates, global economic downturns, unemployment and fiscal and monetary policies. For example, if prevailing market interest rates decline and we do not sufficiently lower our service fees and keep our fees competitive in such instances, car buyers may decide not to utilize our services because of our less competitive service fees and may take advantage of lower service fees offered by other companies, and our ability to attract and engage prospective car buyers as well as our competitive position may be severely undermined. On the other hand, if prevailing market interest rates increase, car buyers would be less likely to finance car purchases with credit or we may need to reduce our service fees to mitigate the impact of increased interest rates. In the event that the amount of service fees we charge car buyers decrease significantly in the future and we are not able to adopt any cost control initiatives, our business, financial condition and results of operations would be materially and adversely affected.

 

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Uncertainties relating to the growth of the Chinese auto financing market in general, and the used car financing market in particular, could adversely affect our business and results of operations.

We generate substantially all of our revenue from service fees for auto financing facilitation services. As a result, the amount of revenue is affected by the development of the auto industries, and in particular the auto financing market, in China. The long-term viability and prospects of various auto financing models in China remain relatively untested. As such, demand for our solutions and services and our future results of operations will depend on numerous factors affecting the development of used car financing market in China, which may be beyond our control. These factors include:

 

   

the growth in car ownership and the rate of any such growth;

 

   

changes in car buyer demographics, tastes and preferences;

 

   

changing financing behavior of car buyers;

 

   

the selection, price and popularity of used cars offered by car dealers; and

 

   

whether alternative channels or business models that better address the pain points of used car transactions emerge in China.

China’s new car sales volume generally increased from 2008 to 2017, but experienced a drop in 2018. On the other hand, the used car market is expected to grow at a CAGR of 18.1% from 2019 to reach 21.2 million unit sales by 2023, according to the Frost & Sullivan Report. A general decline in the use of and demand for cars, or any failure by us to adapt our solutions and services and maintain and improve the experience of various business partners and car buyers as to our solutions and services in response to new trends and requirements, may adversely affect our results of operations and business prospects.

Government policies on car purchases and ownership may have a material effect on our business due to their influence on consumer behaviors. In August 2014, several PRC governmental authorities jointly announced that from September 2014 to December 2017, purchases of new energy cars designated on certain catalogs will be exempted from the purchase taxes. In April 2015, several PRC governmental authorities also jointly announced that from 2016 to 2020, purchasers of new energy cars designated on certain catalogs will enjoy subsidies. In December 2016, relevant PRC governmental authorities further adjusted the subsidy policy for new energy cars. We cannot predict whether government subsidies will remain in the future or whether similar incentives will be introduced, and if they are, their impact on auto retail transactions in China. Auto retail transactions may decline significantly upon expiration of the existing government subsidies if consumers have become used to such incentives and delay purchase decisions in the absence of new incentives. If auto retail transactions indeed decline, our revenues may decrease and our results of operations may be materially and adversely affected.

Some local governmental authorities also issued regulations and relevant implementation rules in order to control urban traffic and the number of cars within particular urban areas. For example, local Beijing governmental authorities adopted regulations and relevant implementing rules in December 2010 to limit the total number of license plates issued to new car purchases in Beijing each year. Local Guangzhou governmental authorities also announced similar regulations, which came into effect in July 2013. There are similar policies that restrict the issuance of new license plates in Shanghai, Tianjin, Hangzhou, Guiyang and Shenzhen. In September 2013, the State Council released a plan for the prevention and remediation of air pollution, which requires large cities, such as Beijing, Shanghai and Guangzhou, to further restrict the number of motor vehicles. In October 2013, the Beijing government issued an additional regulation to limit the total number of vehicles in Beijing to no more than six million by the end of 2017. Such regulatory developments, as well as other uncertainties, may adversely affect the growth prospects of China’s auto industry, which in turn may have a material adverse impact on our business.

 

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We operate in a market where the credit infrastructure development is still in its infancy. Information that we receive from third parties concerning car buyers may be outdated, incomplete or inaccurate, which may compromise the accuracy of our credit assessment.

China’s credit infrastructure development is still in its infancy. The Credit Reference Center established by the PBOC in 2002 has been the only personal credit reporting system in China. This centrally managed nationwide credit database operated by the Credit Reference Center only records limited credit information, such as tax payments, civil lawsuits, foreclosures and bankruptcies. Moreover, this credit database is only accessible to banks and a limited number of market players authorized by the Credit Reference Center, including us, and does not support sophisticated credit scoring and assessment. In 2015, the PBOC announced that it would open the credit reporting market to private sectors with a view to spurring competition and innovation, but it may be a long-term process to establish a widely-applicable, reliable and sophisticated credit infrastructure in the market we operate.

While our direct, real-time, and officially authorized read-and-write access to the consumer credit database of the Credit Reference Center offers us certain competitive advantages, if our access to this system is hindered, suspended or terminated, even briefly or to a limited extent or for a short period, the data analytics for our credit assessment may be impaired, causing our credit assessment to become inaccurate, and therefore our reputation, business and results of operation may suffer.

For the purpose of credit assessment, we also obtain credit information directly from the prospective car buyers, and with their authorization, obtain credit data from external parties to assess applicants’ creditworthiness. We may not be able to source credit data from such external parties at a reasonable cost or at all. Termination of our cooperation with, exclusion from or restricted use of a data provider’s information could decrease the information available for us to use in risk management and other aspects of our business and may have a material adverse effect on our business, financial condition and results of operations. In addition, credit data provided by external parties may have limitations in measuring prospective car buyers’ creditworthiness. If there is an adverse change in the economic condition, credit data provided by external parties may no longer be a reliable reference to assess an applicant’s creditworthiness, which may compromise our risk management capabilities. As a result, our assessment of a prospective car buyer’s credit profile may not reflect that particular car buyer’s actual creditworthiness because assessment may be based on outdated, incomplete or inaccurate information. Following our obtaining a prospective car buyer’s information, the car buyer may have become delinquent in the payment of an outstanding obligation, defaulted on a pre-existing debt obligation, taken on additional debt, including pledging the car as collateral for such debt, or sustained other adverse financial events. Such outdated, incomplete or inaccurate information could compromise the accuracy of our credit assessment model and adversely affect the effectiveness of our control over our overdue ratios, in which case our results of operations and financial condition could be materially and adversely affected.

We rely on our credit assessment models and risk management team in evaluating credit applications. Our current risk management system may not be able to assess or mitigate all risks to which we are exposed.

Credit applications by prospective car buyers are evaluated based on credit assessment conducted by our credit assessment models, and our risk management team conducts a manual evaluation when necessary. Our risk management system automatically approved 33.4% of applications and automatically rejected 37.6% of applications in the six months ended June 30, 2019. Our risk management team manually evaluates the rest of the applications. In addition, with respect to applications that are automatically approved, our risk management team reviews application materials to confirm their authenticity and make a phone call to each approved applicant to verify the applicant’s information before funding the transaction. If our credit assessment models or our risk management team fail to perform effectively, our business and results of operations may be materially and adversely affected.

Our credit assessment models build on machine learning algorithms including logistic regression, gradient boost decision tree and neural network. While we rely on machine learning algorithms to refine our models and

 

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system, there can be no assurance that our application of such algorithms will continue to deliver the expected benefits. In addition, as we have a limited operating history, we may not have accumulated sufficient credit data to optimize our models and system. Even if we have sufficient credit data and our credit assessment models have been tailored for prospective car buyers that we currently target, such data and credit assessment model might not be effective as we continue to increase the amount of financing transactions we facilitate, expand our car buyer base and broaden our engagement efforts with car buyers through different channels in the future. If our system contains programming or other errors, if our models are ineffective or if the credit data we obtained is incorrect or outdated, our credit assessment abilities could be negatively affected, resulting in incorrect approvals or denials of credit applications.

We rely on our risk management team to evaluate a substantial portion of credit applications submitted by prospective car buyers. Our reviewers frequently exercise judgments based on their experience and knowledge, and such judgments are subject to human errors. In addition, if we fail to retain experienced reviewers or effectively train new reviewers, we may be unable to either offer financing solutions to creditworthy car buyers or maintain low overdue ratios of financing transactions we facilitate. To improve our operational efficiency, we plan to enhance the level of automation in the credit assessment process. However, such change in the credit assessment process may lead to approvals of unqualified applicants and/or rejections of qualified applicants, which would materially and adversely impact our business and results of operations.

We believe transaction prices of used cars generally reflect their fair value, as used car buyers typically compare different cars and bargain with dealers before making purchases. Nonetheless, we have implemented a car appraisal system to manage the credit risk. Our model analyzes a variety of relevant data to appraise the fair value of used cars, and our in-house appraisal team reviews appraisal results when necessary. However, our car appraisal system may produce erroneous results from time to time. If we approve used car transactions that are priced above fair market value, we may be exposed to higher credit risks because the loans would be under-collateralized. Even if we were able to recover the collateral after the car buyer’s default, we would not be able to dispose the collateral at a price that is sufficient to cover our credit loss, or at all.

We incurred net losses in the past and may incur net losses in the future.

We had net losses of RMB358.5 million in 2017. We had accumulated deficit of RMB1,430.1 million, RMB1,838.0 million (US$267.7 million) and RMB1,902.3 million (US$277.1 million) as of December 31, 2017 and 2018 and June 30, 2019, respectively. Although we had net income of RMB318.5 million (US$46.4 million) and RMB232.0 million (US$33.8 million) in 2018 and the six months ended June 30, 2019, respectively, we cannot assure you that we will be able to continue to generate net income in the future. We expect our costs and expenses to increase in absolute amounts as we continue to grow our business, engage car buyers, expand financial institution partners and enhance our risk management systems.

Our ability to maintain profitability depends on our ability to enhance our market position, maintain competitive pricing, leverage technology and business model innovation to expand and enhance our service offerings and improve our risk management capability, and increase our operational efficiency. These are affected by many factors which may be beyond our control, such as the overall demand for auto financing solutions and general economic conditions, including levels of automobile consumption. If we are unable to achieve profitability, we may have to reduce the scale of our operation, which may impact our business growth and adversely affect our financial condition and results of operations.

We face intense competition and we may not be able to compete effectively.

The used car financing market in China is large, fragmented yet competitive. We compete against national players such as PingAn and Uxin as well as local players. In addition, companies that primarily focus on financing solutions for new cars, such as Yixin, also offer financing solutions for used cars and therefore compete against us. Our competitors may offer auto financing solutions with lower cost and/or deliver better user

 

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experience to prospective car buyers. We may also in the future face competition from new entrants that will increase the level of competition. Our competitors may operate different business models, have different cost structures or participate selectively in different industry segments. Our competitors may be better at developing new products and solutions and services to suit customer demand, offering more attractive fees, responding more quickly to new regulatory, technological and other developments and undertaking more extensive and effective marketing campaigns. Some of our competitors are online auto transaction platforms that connect various players across the auto transaction value chain to facilitate auto and auto-related transactions. While sales of cars, in particular used cars, to consumers in China are primarily conducted through offline channels such as the dealers with which we cooperate, more of these transactions may be moved to various online channels. If car sales in China are increasingly conducted through online channels, we may lose market share to online auto transaction platforms. Our competitors may also have longer operating history, greater brand recognition and brand loyalty and broader or closer relationships with dealers, financial institutions or other auto financing market participants than us. Additionally, a current or potential competitor may acquire, or form a strategic alliance with, one or more of our other competitors. In response to competition and in order to grow or maintain the amount of financing transactions facilitated to car buyers, we may have to lower and/or adjust the various fees that we charge or pay to the different business partners, which could materially and adversely affect our business, profit margins and results of operations. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our services could stagnate or substantially decline, which could harm our business and results of operations.

Actions of dealers and third-party sales agents are outside of our control and could materially and adversely affect our business, financial condition and results of operations.

We rely on our dealer network to engage prospective car buyers and we manage our dealer network through two models, namely direct sales model and third-party sales model. Under the direct sales model, our in-house sales team is responsible for explaining auto financing solutions to prospective car buyers and assisting them to complete credit applications. Under the third-party sales model, we rely on employees of third-party sales agents or dealers, as the case may be, for direct interaction with prospective car buyers. Each of our third-party sales agents and dealers may collaborate with multiple providers of auto financing solutions, and they may promote auto financing solutions offered by our competitors more actively than ours. Furthermore, third-party sales agents and dealers may misrepresent or omit key terms of our auto financing solutions or otherwise fail to meet the expected service standards, which would harm our reputation. We have implemented a rigorous procedure to screen third-party sales agents and dealers based on their licensing status, operation history, scale, location and other relevant factors, and maintain an internal blacklist of fraudulent third-party sales agents. We are also entitled to keep the deposits paid to us for the losses we incur due to their misconduct or negligence. However, the deducted commissions may not be sufficient to compensate our loss in full, and our recourse against these third-party sales agents and dealers may be limited in the event their misconduct or negligence has caused us harm, and we may encounter significant difficulties in enforcing our legal rights.

Since dealers and sales agents do not bear credit risk, they may refer prospective car buyers without regard to such individuals’ creditworthiness. For example, they may refer us prospective car buyers who have been turned down by other financing solutions providers, and such prospective car buyers may be of poor credit quality. Certain dealers and sales agents may even assist fraudulent car buyers in preparing credit applications. If we fail to detect prospective car buyers with poor credit quality or fraudulent car buyers who are referred by dealers and sales agents, we may experience higher overdue ratios and/or suffer damage in our relationships with funding partners. While we monitor our dealers and sales agents on an ongoing basis and terminate our relationships with dealers and sales agent which we believe present significant credit risk, such risk management measures may not be effective and may also contribute to significant turnover among our dealers and sales agents. Significant turnover would require us to devote considerable resources in identifying and screening new dealers and/or sales agents, which could have an adverse impact on our operational efficiency.

 

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Collection efforts by our in-house team and third-party collection agents may become less effective and may also subject us to regulatory risks and reputational risks.

We utilize our in-house team and third-party collection agents to collect repayments. The effectiveness of our collection efforts is critical to our business. If we fail to recruit and retain skilled employees for our in-house team, or if the third-party collection agents fail to provide services that meet our expectations, our collection efforts will become less effective, which will have a material adverse effect on our business operations and financial position. As the amount of financing transactions we facilitate increases in the future, we may devote additional resources into our collection efforts. However, we cannot assure you that our collection efforts will be successful and that we would be able to utilize such additional resources in a cost-efficient manner.

We endeavor to ensure our collection efforts comply with the relevant laws and regulations in the PRC and we have established strict policies and implemented measures to ensure that our collections personnel and third-party collection agents do not engage in aggressive or predatory practices. However, such teams could engage in any misconduct while performing their tasks. In particular, we have no direct control over the employees of third-party collection agents. Any misconduct by our collection personnel and third-party collection agents or the perception that our collection practices are considered to be aggressive, predatory or not compliant with the relevant laws and regulations in the PRC may result in harm to our reputation and business, which could further undermine our ability to collect repayments from car buyers in default, lead to a decrease in the willingness of prospective car buyers to apply for and utilize financing transactions we facilitate, or result in fines and penalties being imposed by the relevant regulatory authorities, any of which may have a material adverse effect on our results of operations.

We may not be able to obtain car collateral from car buyers in default.

The financing transactions we facilitate are secured by car collateral. With respect to the financing transactions that are recorded on our funding partners’ balance sheets, we are obligated to purchase the relevant financing receivables upon certain specified events of default by car buyers. After purchasing such financing receivables, security interest in the collateral is also transferred to us. With respect to the financing transactions that are recorded on our balance sheet, we hold security interest in the relevant car collateral. We historically engaged third-party repossession agents to repossess car collateral from car buyers in default. However, the PRC government issued a series of directives that target organized crimes in April 2019. While we believe the repossession agents we collaborated with engaged in a lawful business, we ceased collaboration with them in April 2019 due to our adjustment in business operations and management of legal and regulatory risks. We do not expect to resume repossession measures until the relevant regulatory authorities provide guidance on lawful ways to repossess collateral, and there can be no assurance that such guidance will be available in the near term, or at all. As an alternative to repossession, we negotiate with car buyers in default and may offer to accept the collateral as part of the plan to settle the outstanding amount. We also inform them about the adverse effects of credit defaults. In particular, our financial institution partners may report credit defaults to PBOC’s credit reference center. We may also bring lawsuits against such car buyers. However, these measures may be less effective than repossession, and our inability to repossess car collateral could have a material and adverse effect on our business, results of operations and financial condition.

The amount of financial leases we fund as bridge financing for car buyers may be limited by the total net assets of Huachang.

In September 2013, the Ministry of Commerce, or the MOFCOM, promulgated the Measures for Supervision and Administration of Financial Lease Enterprises, pursuant to which the risk assets of a financial lease enterprise may not exceed ten times of its total net assets. In April 2018, the MOFCOM transferred the duties to make rules on the operation and supervision of financial lease companies to the newly formed China Banking and Insurance Regulatory Commission.

Our wholly owned subsidiary in China, Huachang Finance Lease (China), Co., Ltd., or Huachang, engages in financial lease business and typically pre-finances car purchases in the form of financial leases before proceeds

 

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from loans granted by our funding partners are disbursed to the car buyers. As we continue to expand the offering of auto financing solutions, we expect the amount of loans and advances of Huachang will increase as well. If the amount of loans and advances exceed ten times of Huachang’s total net assets, we may be required to increase the total net assets of Huachang by means of, among others, causing its shareholder to increase the paid-up capital contribution. However, we cannot assure you that we will be able to make such capital contribution timely, or at all. Our inability to make such capital contribution on a timely basis could have an adverse impact on our business.

We may be deemed to operate commercial Internet information services without the required license, and as a result, we may be subject to administrative penalties.

The Administrative Measures on Internet Information Services, or the Internet Content Measures, which was promulgated by the State Council on September 25, 2000 and amended on January 8, 2011, require that the provider of commercial Internet information services must obtain an Internet Content Provider License, or ICP License, from the Ministry of Industry and Information Technology, or MIIT, or its local branch at the provincial or municipal level. In addition, if the internet information services involve provision of news, publication, education, medicine, health, pharmaceuticals, medical equipment and other services that statutorily require approvals from other additional governmental authorities, such approvals must be obtained before applying for the ICP License. Providers of commercial Internet information services who violate this requirement or who violate the terms of the ICP License will be subject to an order to make corrections in a limited time, confiscation of illegal proceeds, substantial fines and, where circumstances are serious, an order to close down the website.

Some uncertainties with regards to the Internet Content Measures remains, in part due to the varying enforcement policies of the local supervisory authorities. Further, new rules and regulations may be promulgated in the future to clarify or add to the current requirements of the Internet Content Measures. We operate our website and mobile applications without an ICP License, and if we were found to violate the requirements of the Internet Content Measures by the relevant authorities, we may be subject to the administrative penalties described above, which could materially and adversely affect our business, financial condition and results of operations.

We may be deemed to operate an insurance agency business without the required permit from the PRC regulatory authorities, and as a result, we may be subject to administrative penalties.

The Insurance Law of the PRC, which was promulgated in 1995 and last amended in 2015, requires that insurance agencies must meet the requirements set out by and obtain an insurance agency business permit from the insurance regulatory body under the State Council, or the insurance regulatory body. Insurance agencies operating without an insurance agency business permit will be subject to administrative penalties, including being banned by the insurance regulatory body, having the illegal proceeds confiscated and receiving substantial fines.

We facilitate the sale of insurance policies by insurance brokers or insurance companies. We receive service fees from the relevant insurance brokers, insurance companies or car buyers, depending on the commercial arrangement for each type of insurance. As a result, we may be deemed by the relevant authorities to be an insurance agency and may therefore be required to obtain the insurance agency business permit, which we currently do not have. In such case, if we are unable to obtain the insurance agency business permit in time, or at all, we may be subject to the administrative penalties described above, which could materially and adversely affect our business and results of operations.

Failure to make adequate contributions to various employee benefit plans as required by PRC regulations and the use of third-party institutions to contribute to employee benefit plans may subject us to penalties.

Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and

 

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must themselves contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of their employees up to a maximum amount specified by the local government from time to time at locations where they operate their businesses. The use of a third-party institution to make contributions to the employee benefit plans is not allowed. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations.

Our PRC entities have not made adequate employee benefit payments for all employees, and as a result, we may be required to make up the contributions for these plans as well as to pay late fees and fines. Further, our PRC entities have, in the past, entrusted third-party institutions to make contributions to the employee benefit payments. In the event that such third-party contributions are found to be illegal, the relevant authorities may order the contributions to be returned to the third-party institutions, and we may be subject to late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

If our new solutions and services do not achieve sufficient market acceptance or provide the expected benefits to customers, our financial condition, results of operations and competitive position will be materially and adversely affected. New solutions and services may also subject us to regulatory risks.

We have incurred and will continue to incur expenses and consume resources to develop and market new solutions and services for car buyers and other industry participants, such as insurance brokers and companies. New solutions and services must achieve high levels of market acceptance in order for us to recoup our investment in developing, acquiring and bringing them to market.

Our existing or new solutions and services could fail to attain sufficient market acceptance for many reasons, including but not limited to:

 

   

our failure to predict market demand accurately and supply solutions and services that meet this demand in a timely fashion;

 

   

business partners and car buyers may not like, find useful or agree with any changes we make;

 

   

our failure to properly price new solutions and services;

 

   

negative publicity about our solutions and services or our performance or effectiveness;

 

   

failure to seamlessly integrate our technology system with those of existing or new funding partners we collaborate with;

 

   

failure to evaluate credit applications efficiently;

 

   

views taken by regulatory authorities that the new solutions and services do not comply with PRC laws, rules or regulations applicable to us; and

 

   

the introduction or anticipated introduction of competing solutions and services by our competitors.

If our new solutions and services do not achieve adequate acceptance in the market or provide the expected benefits to car buyers and business partners, our competitive position, financial condition and results of operations could be harmed. In addition, we may incur higher cost and expenses as a result of new solutions and services. New solutions and services may also subject us to additional regulatory or licensing requirements. Failure by us to comply with any such new regulatory or licensing requirements could materially and adversely affect our business and results of operations.

 

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Any harm to our brand or reputation or any damage to the reputation of financial institutions or other third parties we collaborate with or the auto financing market or failure to enhance our brand recognition could have a material adverse effect on our results of operations and growth prospects.

Enhancing the recognition and reputation of our brand is critical to our business and competitiveness. Factors that are vital to this objective include but are not limited to our ability to:

 

   

maintain the quality and reliability of our solutions and services;

 

   

maintain and develop relationships with dealers and financial institutions and other funding partners;

 

   

provide car buyers with superior experience;

 

   

enhance and improve our credit assessment of prospective car buyers;

 

   

effectively manage and resolve any complaints of dealers, financial institutions or car buyers;

 

   

effectively protect personal information and privacy of car buyers and any sensitive data received from financial institutions; and

 

   

effectively train our employees and employees of sales agents and collection agents and prevent employee misconduct.

Any malicious or inadvertent negative allegations made by the media or other parties about the foregoing or other aspects of our company, including but not limited to our shareholders, management, business, compliance with law, financial condition or prospects, whether with merit or not, could severely hurt our reputation and harm our business and results of operations.

As the auto financing market in China is developing rapidly and the regulatory framework for this market is also evolving, negative publicity about this industry may arise from time to time. Negative publicity about China’s auto financing market in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities. Furthermore, any negative development in the auto financing market, such as bankruptcies or failures of platforms providing auto financing solutions, and especially a large number of such bankruptcies or failures, or negative perception of the industry as a whole, such as any unethical or illegal activity by other industry players or any failure of platforms providing auto financing solutions to detect or prevent unethical or illegal activities, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and impose a negative impact on our ability to attract new car buyers and business partners, such as dealers and financial institutions. Negative developments in the auto financing market, such as widespread defaults, unethical or illegal activities by industry players and/or the closure of platforms providing auto financing solutions, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted by companies like us. If any of the foregoing takes place, our business and results of operations could be materially and adversely affected.

We collaborate with various auto transaction industry participants in providing our solutions and services. Such participants include dealers, financial institutions, other funding partners, collection agents, insurance brokers and companies and other business partners. Negative publicity about such counterparties, including any failure by them to adequately protect the information of car buyers, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm our reputation.

Fraudulent activities associated with car buyers could negatively impact our results of operations, brand and reputation and cause the use of our services to decrease.

We are subject to the risk of fraudulent activities associated with car buyers, who may provide us with information that is inaccurate or misleading. While we have established a rigorous anti-fraud system and a dedicated team to evaluate credit applications, we do not and may not be able to verify all the information we

 

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receive from car buyers. To the extent we verify car buyers’ information, our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Furthermore, parties that handle information, such as dealers and sales agents, may aid car buyers in committing fraud. A significant increase in fraudulent activities could negatively affect our results of operations, harm our brand and reputation, discourage financial institutions from collaborating with us, reduce the amount of financing transactions facilitated to car buyers and lead us to take additional steps to reduce fraud risk, which could increase our costs. An overall increase of fraudulent activities in the auto financing market or the consumer finance industry or incidence of high profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. Although we have not been materially affected by fraudulent activities associated with car buyers in the past, such fraudulent activities could materially and adversely affect our business, financial condition and results of operations in the future.

Our quarterly results may fluctuate significantly partly due to seasonality and may not fully reflect the underlying performance of our business.

Our quarterly results of operations, including the levels of our revenues, operating cost and expenses, net (loss)/income and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the price of the ADSs. Factors that may cause fluctuations in our quarterly financial results include:

 

   

our ability to attract car buyers;

 

   

our ability to maintain existing relationships with business partners and establish new relationships with additional business partners, such as dealers and financial institutions;

 

   

the amount of financing transactions we facilitate;

 

   

overdue ratios of financing transactions we facilitate;

 

   

the mix of solutions and services we offer;

 

   

the amount and timing of our operating cost and expenses and the maintenance and expansion of our business, operations and infrastructure;

 

   

financial institutions’ willingness and ability to fund financing transactions through collaboration with us on reasonable terms;

 

   

the timing of expenses related to the development or acquisition of technologies or businesses;

 

   

network outages or security breaches;

 

   

general economic, industry and market conditions; and

 

   

changes in applicable laws and regulations.

In addition, we have experienced, and expect to continue to experience, seasonal fluctuations in our revenues and results of operations, reflecting car buyers’ purchase patterns. The Chinese New Year holiday contributes to fewer car purchases in the first quarter of each year, which leads to lower demand for our services. There is also generally lower demand in the early part of the second quarter of each year. On the other hand, more car purchases tend to be made in the fourth quarter. As a result, our revenues may vary from quarter to quarter. Our actual results may differ significantly from our targets or estimated quarterly results. Therefore, you may not be able to predict our annual results of operations based on a quarter-to-quarter comparison of our results of operations. The quarterly fluctuations in our revenues and results of operations could result in volatility and cause the price of the ADSs to fall. As our revenues grow, these seasonal fluctuations may become more pronounced.

 

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We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptable to us, or at all.

As we intend to continue to make investments to support the growth of our business, we may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, including developing new solutions and services, increasing the amount of financing transactions we facilitate, enhancing our risk management capabilities, increasing our sales and marketing expenditures to improve brand awareness and engage car buyers through expanded dealer network, enhancing our operating infrastructure and acquiring complementary businesses and technologies.

Volatility in the credit markets may have an adverse effect on our ability to obtain debt financing. If we raise additional funds through issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A ordinary shares. For example, upon full conversion of the Convertible Notes and full exercise of the Warrants, we will issue 26,040,290 Class A ordinary shares (calculated based on the initial conversion price and the initial exercise price) if the initial public offering price of the ADSs divided by the number of Class A ordinary shares represented by each ADS is higher than US$2.8966. See “—Risks Relating to this Offering—The ADSs are subject to substantial dilution upon the conversion of our convertible notes and exercise of warrants held by the Convertible Notes Investor or the Warrants Investor.” If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, financial condition, results of operations and prospects could be adversely affected.

Any significant disruption in our IT systems, including events beyond our control, could prevent us from offering our solutions and services or reduce their attractiveness and result in a loss of business partners as well as car buyers.

In the event of a system outage, malfunction or data loss, our ability to provide services would be materially and adversely affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, services, reputation and our ability to attract new and retain existing car buyers and business partners. Our IT systems infrastructure is currently deployed and our data is currently maintained through a customized cloud computing system. Our servers are housed at third-party data centers, and our operations depend on the ability of the relevant data center providers to protect our systems in their facilities as well as their own systems against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events, many of which may be beyond our control. Our ability to exchange information with financial institutions and obtain credit data from third parties could also be interrupted.

Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with car buyers and business partners and our reputation. We may not have sufficient capacity to recover all data and services lost in the event of an outage. These factors could prevent us from processing credit applications and other business operations, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause car buyers and business partners to abandon our solutions and services, any of which could adversely affect our business, financial condition and results of operations.

Technology is a critical aspect in the efficient operation of our business, and if any of our systems contain undetected errors, or if we fail to effectively implement technology initiatives or anticipate future technology needs or demands, our operations may be materially and adversely affected.

The efficient and reliable operation of our business depends on technology as well as our IT systems. Our systems, enterprise applications and software on which we depend for the operation of our business may contain

 

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programming errors or other defects that our internal testing did not detect. The occurrence of such undetected errors or defects in our systems and software could disrupt our operations, damage our reputation and detract from the experience of our users.

In addition, our future success depends on our ability to anticipate technology development trends and identify, develop and commercialize new technology initiatives in a timely and cost-effective manner in order to deliver services demanded by car buyers. However, we may fail to recruit, train and retain qualified research and development personnel, and there can be no assurance that we will be able to implement new technology initiatives effectively, or that we will be successful in anticipating new technology needs and demands of our customers and of the market at large. Moreover, it may take an extended period of time for our new technologies and services to gain market acceptance, if at all. If we fail to effectively implement technology initiatives or anticipate future technology needs or demands, our operations may materially and adversely affected.

Misconduct and errors by our employees and third parties with which we collaborate could harm our business and reputation.

We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and third-party business partners that we collaborate with. Our business depends on our employees and third parties, such as dealers, funding partners and collection agents, to interact with car buyers, process large numbers of transactions and support the collection process. We could be materially and adversely affected if transactions are improperly executed, if personal information is disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems. It is not always possible to identify and deter misconduct or errors by employees or third-party business partners, and the precautions we take in this regard may not be effective in controlling unknown or unmanaged risks or losses. If any of our employees or third-party business partners take, convert or misuse funds, documents or data or fail to follow our rules and procedures when interacting with car buyers, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow our rules and procedures, and therefore be subject to civil or criminal liability. Any of these occurrences could result in our diminished ability to operate our business, potential liability to car buyers, inability to attract car buyers, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.

If we are unable to safeguard the security of the confidential information of car buyers, dealers or third parties we collaborate with and adapt to the relevant regulatory framework as to protection of such information, our business and operations may be adversely affected.

We collect, store and process certain personal and other sensitive data from car buyers, dealers and other third parties, such as telematics data from cars. As a result, we may be an attractive target for, and potentially vulnerable to, cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect the confidential information that we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our system could cause confidential information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with car buyers, dealers and/or financial institutions could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.

 

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In addition, PRC government authorities have enacted a series of laws and regulations regarding the protection of personal information, under which financial service providers are required to comply with the principles of legality, justification and necessity, to clearly indicate the purposes, methods and scope of any information collection and usage, and to obtain the consent of users, as well as to establish user information protection systems with appropriate remedial measures. As part of our loan facilitation process, we obtain consent from car buyers to use their personal information within the scope of authorization and we have taken technical measures to ensure the security of such personal information and prevent the personal information from being divulged, damaged or lost. Furthermore, pursuant to confidentiality provisions in our cooperation agreements with financial institutions, we have the obligation to safeguard car buyers’ personal information and to only use such information within the authorized scope. We may face litigation brought by financial institutions or car buyers, if we fail to satisfy our confidentiality obligations in the relevant cooperation agreements, or if our use of car buyers’ data fall outside of the scope of their authorization, as the case may be. Furthermore, there is uncertainty as to the interpretation and application of such laws which may be interpreted and applied in a manner inconsistent with our current policies and practices or require changes to the features of our system. There can be no assurance that our existing information protection system and technical measures will be considered sufficient under applicable laws and regulations. If we are unable to address any information protection concerns, or to comply with the then applicable laws and regulations, we may incur additional costs and liability and our reputation, business and operations might be adversely affected. See “Regulations—Regulations on Internet Information Security and Privacy Protection” for more details. We believe that we have complied with, and have not been subject to fines or other penalties for failing to comply with, applicable data privacy and protection laws and regulations in China. However, these laws and regulations are complex and relatively new, and may continue to rapidly evolve. As a result, we could face penalties or other disciplinary actions for past and future non-compliance. Furthermore, if our third-party data providers fail to comply with applicable data privacy and protection laws, we could face adverse publicity and possible legal or regulatory action, which may have a negative impact on our brand, reputation, results of operations and financial performance.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal control and procedures. 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. In the course of auditing our consolidated financial statements for the years ended December 31, 2017 and 2018, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2017 and 2018, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States.

The material weakness identified relates to the lack of sufficient financial reporting and accounting personnel to formalize and implement key controls over the financial reporting process and to prepare, review and report financial information based on U.S. GAAP and SEC reporting requirements. For example, in determining the related accretion for changes in the redemption value over the year of 2018, we erroneously included the foreign currency translation in the accretion amount, which should have been recorded in other comprehensive loss. As a result, we restated our 2018 consolidated financial statements to correct the accretion of the changes in the redemption value and the related impact on the loss per share calculation. For details, please refer to Note 2(b) to our consolidated financial statements included elsewhere in this prospectus. We have implemented and are continuing to implement a number of measures to address the material weakness and the deficiencies that have been identified. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” However, we cannot assure you that we will be able to continue implementing these measures in the future, or that we will not identify additional material weaknesses or significant deficiencies in the future.

 

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We will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the NYSE after the completion of this offering. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Commencing with our fiscal year ending December 31, [2020], we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Form 20-F filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. In addition, once we cease to be an “emerging growth company” as the term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. This will require that we incur substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures, and we were never required to test our internal controls 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.

In addition, our internal controls over financial reporting will not prevent or detect all errors or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of the ADSs could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatory authorities.

We may not be able to prevent others from unauthorized use of our intellectual property and we may be subject to intellectual property infringement claims, either of which could harm our business and competitive position.

We regard our trademarks, domain names, copyrights, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. See “Business—Intellectual Property.” However, any of our intellectual property rights could be challenged, invalidated or circumvented, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition, other parties may misappropriate our intellectual property rights, which would cause us to suffer economic or reputational damage. Because of the rapid pace of technological change, there can be no assurance that all of our proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner, or at all. Furthermore, parts of our business rely on technologies developed or licensed by other parties, or co-developed with other parties, including open source software, and we may not be able to obtain or continue to obtain licenses and technologies from these other parties on reasonable terms, or at all.

It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the

 

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lack of clear guidance on statutory interpretation. For instance, we may seek to register new trademarks in the future, and there is no assurance that the relevant applications for trademark registrations in the PRC will be approved by competent governmental authority. If such trademarks could not be successfully registered in the categories related to our business, we may fail to prevent others from using such trademarks in businesses similar to ours, and our business, financial condition and results of operations may be materially and adversely affected. In addition, confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

Meanwhile, our operations or any aspects of our business could infringe upon or otherwise violate trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights held by other parties. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, other parties’ trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights may be infringed by our services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the U.S. or other jurisdictions. For example, certain companies, some of which operate in the same industry, use trademarks that may be perceived as similar to our own, and this may lead to trademark infringement disputes in the future. If any infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

We currently use open source software for certain aspects of our business operations, and we expect to continue to use open source software in the future. We may face claims from others claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our technologies, any of which would have a negative effect on our business and operating results. In addition, if the license terms for the open source software we utilize change, we may be forced to reengineer or discontinue our solutions or incur additional costs. We cannot be certain that we have incorporated open source software in our solutions in a manner that is consistent with our policies.

Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights in China are still evolving and are uncertain, and there can be no assurance that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.

If we fail to keep up with the technological developments and implementation of advanced technologies, our business, results of operations and prospects may be materially and adversely affected.

We apply technology to serve car buyers more efficiently and bring them better user experience. Our success will in part depend on our ability to keep up with the changes in technology and the continued successful adoption and implementation of advanced technology, including cloud computing and big data analytics. If we

 

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fail to adapt our solutions and services to changes in technological developments in an effective and timely manner, our business may suffer. Changes in technologies may require substantial expenditures in research and development as well as in modification of our services. Technical hurdles in implementing technological advances may result in our services becoming less attractive to car buyers, which, in turn, may materially and adversely affect our business, results of operations and prospects.

As our business develops, we may be required to obtain additional licenses.

The Telecommunications Regulations of the PRC and other relevant regulations on the operation of value-added telecommunication service business provide a license requirement for operating such business in the PRC. As we continually enrich our service offerings, we plan to engage in telecommunications-related businesses, including value-added online services for car buyers, in the future. However, we cannot assure you that we will be able to obtain the requisite license for providing value-added telecommunications services on a timely basis or at all. Our inability to obtain such license or any delay in obtaining such license could have a material and adverse impact on our business and results of operations.

Any failure by us or third parties with which we collaborate to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations could damage our reputation, expose us to significant penalties, and decrease our revenues and profitability.

We have implemented various policies and procedures in compliance with all applicable anti-money laundering and anti-terrorist financing laws and regulations, including internal controls, for preventing money laundering and terrorist financing. In addition, we rely on financial institutions to have their own appropriate anti-money laundering policies and procedures. The financial institutions with which we collaborate are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the PBOC. We have adopted commercially reasonable procedures for monitoring the financial institutions with which we collaborate.

We have not been subject to fines or other penalties, or suffered business or other reputational harm, as a result of actual or alleged money laundering or terrorist financing activities in the past. However, our policies and procedures may not be completely effective in preventing other parties from using us or any financial institutions with which we collaborate as a conduit for money laundering (including illegal cash operations) or terrorist financing without our knowledge. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could suffer and we could become subject to regulatory fines, sanctions, or legal enforcement, including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us, all of which could have a material adverse effect on our financial condition and results of operations. Even if we and financial institutions with which we collaborate comply with applicable anti-money laundering laws and regulations, we and these financial institutions may not be able to fully eliminate money laundering and other illegal or improper activities in light of their complexity and the secrecy of these activities. Any negative perception of the industry, such as that which may arise from any failure of other auto financing solution facilitation dealers to detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established, and negatively impact our financial condition and results of operation.

We may evaluate and potentially consummate strategic alliances, investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our shareholders’ interests.

We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our services, better serve car buyers, and enhance our competitive position.

These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the

 

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transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction, which may result in investment losses.

Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:

 

   

difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;

 

   

inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits, including the failure to successfully further develop the acquired technology;

 

   

difficulties in retaining, training, motivating and integrating key personnel;

 

   

diversion of management’s time and resources from our normal daily operations and potential disruptions to our ongoing businesses;

 

   

strain on our liquidity and capital resources;

 

   

difficulties in executing intended business plans and achieving synergies from such strategic investments or acquisitions;

 

   

difficulties in maintaining uniform standards, controls, procedures and policies within the overall organization;

 

   

difficulties in retaining relationships with existing dealers, financial institutions, car buyers, employees and other partners of the acquired business;

 

   

risks of entering markets in which we have limited or no prior experience;

 

   

regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;

 

   

assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;

 

   

liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and

 

   

unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

Any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. If we were to issue equity or convertible debt securities as consideration for future investments or acquisitions, our existing shareholders could suffer significant dilution.

Our business depends on the continued efforts of our senior management. If one or more members of our senior management were unable or unwilling to continue in their present positions, our business may be severely disrupted.

Our business operations depend on the continued services of our senior management, particularly the executive officers named in this prospectus. In particular, Mr. Allen Chonglun Gu, our chief executive officer, Mr. Julian Wang, our chief financial officer and Ms. Weixi Zheng, our director and chief risk officer, are critical to the management of our business and operations and the development of our strategic direction. While we have

 

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provided various incentives to our management, there can be no assurance that we can continue to retain their services. If one or more members of our senior management were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. Any new executive we recruit may fail to develop or implement effective business strategies. In addition, although we have entered into confidentiality and non-competition agreements with our management, a member of our management team could join a competitor or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

Intense competition for employees and increases in labor costs in the PRC may adversely affect our business and results of operations.

We believe our success depends on the efforts and talent of our employees, including sales and marketing, operations, risk management, research and development and finance personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled sales and marketing, operations, risk management, research and development and finance personnel is extremely intense. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than us and may be able to offer more attractive terms of employment.

In addition, we invest significant time and resources in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve dealers, financial institutions, car buyers and other industry participants could diminish, resulting in a material adverse effect to our business.

The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension insurance, housing funds, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs, our financial condition and results of operations may be adversely affected.

Our corporate actions will be substantially controlled by certain of our principal shareholders, who will have the ability to control or exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of an opportunity to receive a premium for your ADSs and materially reduce the value of your investment.

Upon the completion of this offering, we will adopt the seventh amended and restated memorandum and articles of association which will provide for two classes of ordinary shares with different voting rights as of the completion of this offering. We will also have in our authorized share capital 450,000,000 ordinary shares of such class or classes as our board of directors may determine in accordance with the seventh amended and restated memorandum and articles of association. The Equity Incentive Trust will beneficially own all of our Class B ordinary shares while our other shareholders, including investors in this offering, will own Class A ordinary shares. Our memorandum and articles of association after the completion of this offering will provide that in respect of all matters subject to a shareholders’ vote, each Class A ordinary share will be entitled to one vote, while each Class B ordinary share will be entitled to 30 votes. As a result, the Equity Incentive Trust will be able to exercise         % of the aggregate voting power of our issued share capital immediately after this offering,

 

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assuming no exercise by the underwriters of options to purchase additional ADSs. The advisory committee of the Equity Incentive Trust will have the power to direct the voting of the Class B ordinary shares to be held by the Equity Incentive Trust. The advisory committee will consist of Mr. Allen Chonglun Gu, our chief executive officer, Mr. Julian Wang, our chief financial officer, and Ms. Yun Sun, director and vice president for legal and compliance. As a result of the ownership concentration, such shareholder[s] have the ability to control or exert significant influence over important corporate matters, investors may be prevented from affecting important corporate matters involving our company that require approval of shareholders, including:

 

   

the composition of our board of directors and, through it, any determinations with respect to our operations, business direction and policies, including the appointment and removal of officers;

 

   

any determinations with respect to mergers or other business combinations;

 

   

the disposition of substantially all of our assets; and

 

   

any change in control.

These actions may be taken even if they are opposed by our other shareholders. Furthermore, this concentration of ownership may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of the ADSs. As a result of the foregoing, the value of your investment could be materially reduced.

In addition, the Convertible Notes Investor (together with the Warrants Investor) is entitled to from time to time appoint one individual to be a director and our non-executive chairman if the combined value of the outstanding Convertible Notes (with reference to the principal amount) and Class A ordinary shares issued upon conversion of the Convertible Notes or exercise of the Warrants (with reference to the current trading price of the ADSs) directly or indirectly held by the Convertible Notes Investor (together with the Warrants Investor) is no less than US$20.0 million. The director appointed by the Convertible Notes Investor (together with the Warrants Investor) shall have the veto power for certain major corporate matters, including, among others, major mergers and acquisitions and strategic alliances, change of the size of our board of directors, appointment of our chief executive officer and auditor and the incurrence of significant indebtedness. See “Management—Non-executive Chairman.” To the extent this director does not consent to any of these corporate actions, we will not be able to undertake these corporate actions even if other directors consider these actions to be beneficial to us.

We have granted, and may continue to grant share options or other equity incentives in the future, which may result in increased share-based compensation expenses.

We adopted a share incentive plan in December 2017, or the 2017 Plan, and the 2019 Equity Incentive Plan, or the 2019 Plan, in October 2019. See “Management—Share Incentive Plans” for a detailed discussion. In 2017, 2018 and the six months ended June 30, 2019, we recorded RMB2.8 million, RMB8.6 million (US$1.3 million) and RMB6.4 million (US$0.9 million) in share-based compensation expenses, respectively. The amount of these expenses is based on the fair value of the share-based compensation awards we granted, and the recognition of unrecognized share-based compensation cost will depend on the forfeiture rate of our unvested restricted shares. As of the date of this prospectus, the maximum numbers of ordinary shares that may be subject to equity awards pursuant to the 2017 Plan and the 2019 Plan are 26,994,966 and 19,599,198, respectively. Options to purchase                ordinary shares under the 2017 Plan have been granted and outstanding, excluding options that were forfeited or canceled after the relevant grant dates. Expenses associated with share-based compensation have affected our net income and may reduce our net income in the future, and any additional securities issued under share-based compensation schemes will dilute the ownership interests of our shareholders, including holders of the ADSs. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel, employees and consultants, and we will continue to grant share-based compensation in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

 

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We may not have sufficient insurance coverage.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. We do not maintain property insurance policies covering our equipment and other property. We also do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key-man insurance. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our financial condition and results of operations.

We are or may be subject to potential liability in connection with pending or threatened legal proceedings and other matters, which could adversely affect our business or financial results.

From time to time, we have become and may in the future become a party to various legal or administrative proceedings arising in the ordinary course of our business, including breach of contract claims, anti-competition claims and other matters. Such proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome and merit of such proceedings, any such legal action could have an adverse impact on our business because of defense costs, negative publicity, diversion of management’s attention and other factors. In addition, it is possible that an unfavorable resolution, including any judgment or settlement subjecting us to liability, of one or more legal or administrative proceedings, whether in the PRC or in another jurisdiction, could materially and adversely affect our business, financial position, results of operations or cash flows in a particular period or damage our reputation.

Our use of certain leased properties could be challenged by third parties, which may cause interruptions to our business operations.

As of the date of this prospectus, lessors of some of our leased properties 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. Any relocation would require us to locate and secure additional facilities, expenditures of additional funds in connection with the relocation and preparation of replacement facilities. This could affect our ability to provide uninterrupted services to our customers and harm our reputation. As of the date of this prospectus, we have not incurred expenditures associated with the relocation and preparation of replacement facilities.

In addition, we have not registered certain of our lease agreements with the relevant government authorities. Under the relevant PRC laws and regulations, we may be required to register and file with the relevant government authority executed leases. The failure to register the lease agreements for our leased properties will not affect the validity of these lease agreements, but the competent housing authorities may order us to register the lease agreements in a prescribed period of time and impose a fine ranging from RMB1,000 to RMB10,000 for each non-registered lease if we fail to complete the registration within the prescribed timeframe.

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

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures or Internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide our services.

 

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Our business could also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having contagious disease or condition, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business, financial condition and results of operations.

Any severe or prolonged slowdown in the Chinese or global economy may have a negative impact on our business, financial condition and results of operations. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect consumers’ demand for cars, car buyers’ willingness to seek credit and financial institutions’ ability and willingness to fund financing transactions we facilitate. Economic conditions in China are sensitive to global economic conditions. The global macroeconomic environment is facing challenges, including the economic slowdown in the Eurozone since 2014 and uncertainties over the expected withdrawal of the United Kingdom from the European Union. The Chinese economy has shown slower growth since 2012 compared to the previous decade and the trend may continue. There have also been concerns over unrest in North Korea, Ukraine and the Middle East, which have resulted in volatility in financial and other markets in recent years. There have also been concerns over the trade and economic policies of the United States government, which have contributed to, among other things, tensions between the United States and China. In particular, the imposition of tariffs on Chinese products by the United States may result in a decrease in China’s exports and a slowdown of the Chinese economy, which would in turn reduce domestic consumption. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries. If present Chinese and global economic uncertainties persist, we may have difficulty in securing financial institutions to fund financing transactions to car buyers. Any potential changes in monetary policies in the PRC may increase the overall funding costs and reduce the funding availabilities from our funding partners, which may adversely affect our business and results of operations. See also “—Fluctuations in interest rates could negatively affect our reported results of operations.” Adverse economic conditions could also reduce the number of quality car buyers seeking credit from us, as well as their ability to make payments, which may in turn increase overdue ratios for financing transactions we facilitate. See “—If we are unable to maintain low overdue ratios for financing transactions we facilitate, our business and results of operations may be materially and adversely affected. Historical overdue ratios for financing transactions we facilitated may not be indicative of future results.” Should any of these situations occur, the amount of financing transactions facilitated to car buyers as well as our revenue will decline, and our business and financial condition will be negatively impacted. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

Risks Relating to Our Corporate Structure

We rely on contractual arrangements with our consolidated VIE and its shareholders to exercise control over our consolidated VIE, which may not be as effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business.

We plan to engage in value-added online services through our consolidated VIE. We rely on contractual arrangements with our consolidated VIE and its shareholders to exercise control over our consolidated VIE. For a description of these contractual arrangements, see “Our History and Corporate Structure—Contractual Arrangements among Meili Beijing, Beijing Feima and Its Shareholders.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated VIE. If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by our consolidated VIE is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC

 

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legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of record holder of equity interest in our consolidated VIE, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to the contractual arrangements or ownership by the record holder of the equity interest.

Any failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

We, through one of our subsidiaries and a wholly foreign-owned enterprise in the PRC, have entered into a series of contractual arrangements with our consolidated VIE and its shareholders. For a description of these contractual arrangements, see “Our History and Corporate Structure—Contractual Arrangements among Meili Beijing, Beijing Feima and Its Shareholders.” If our consolidated VIE or its shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of our consolidated VIE were to refuse to transfer their equity interests in the consolidated VIE to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws 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 U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. 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 laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. 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 that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated VIE and relevant rights and licenses held by it which we require in order to operate our business, and our ability to conduct our business may be negatively affected. See “—Risks Relating to Doing Business in China—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.”

The arbitration provisions under these contractual arrangements have no effect on the rights of our shareholders to pursue claims against us under United States federal securities laws.

The shareholders of our consolidated VIE may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The interests of the shareholders of our consolidated VIE in their capacities as such shareholders may differ from the interests of our company as a whole, as what is in the best interests of our consolidated VIE, including matters such as whether to distribute dividends or to make other distributions to fund our offshore requirement, may not be in the best interests of our company. There can be no assurance that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or those conflicts of interest will be resolved in our favor. In addition, these shareholders may breach or cause our consolidated VIE to breach or refuse to renew the existing contractual arrangements with us.

 

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Currently, we do not have arrangements to address potential conflicts of interest the shareholders of our consolidated VIE may encounter, on one hand, and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option under the exclusive option agreement to cause them to transfer all of their equity ownership in our consolidated VIE to a PRC entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of attorney-in-fact of the then existing shareholders of our consolidated VIE as provided under the power of attorney, directly appoint new directors of our consolidated VIE. We rely on the shareholders of our consolidated VIE to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict with another corporate governance regime. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our consolidated VIE, 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.

If the PRC government deems that the contractual arrangements in relation to our consolidated VIE do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, 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.

As we continually enrich our service offerings, we plan to engage in telecommunications-related businesses, including value-added online services for car buyers, in the future. The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in telecommunications-related businesses. Specifically, foreign investors are generally not allowed to own more than a 50% equity interest in any PRC company engaging in value-added telecommunications businesses. The primary foreign investor must also have experience and a good track record in providing value-added telecommunications services, or VATS, overseas.

Because we are an exempted company incorporated in the Cayman Islands, we are classified as a foreign enterprise under PRC laws and regulations, and our wholly foreign-owned enterprise in the PRC is a foreign-invested enterprise, or a FIE. Accordingly, our subsidiary is not eligible to operate VATS business in China, and we plan to operate VATS business through our consolidated VIE in the future. Our PRC subsidiary has entered into a series of contractual arrangements with our consolidated VIE and its shareholders, which enable us to (i) exercise effective control over the consolidated VIE, (ii) receive substantially all of the economic benefits of the consolidated VIE, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in the consolidated 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 the consolidated VIE and hence consolidate its financial results as our consolidated VIE under U.S. GAAP. For a description of these contractual arrangements, see “Our History and Corporate Structure—Contractual Arrangements among Meili Beijing, Beijing Feima and Its Shareholders.”

We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, Fangda Partners, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-owned PRC subsidiary, our consolidated VIE and its shareholders is valid, binding and enforceable in accordance with its terms. However, as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, there can be no assurance that the PRC government authorities would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations

 

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governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

If our corporate structure and contractual arrangements are deemed by the regulators having competent authority to be illegal, either in whole or in part, we may lose control of our consolidated VIE and have to modify such structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption to our plan to engage in value-added online services. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:

 

   

revoking our business and operating licenses;

 

   

levying fines on us;

 

   

confiscating any of our income that they deem to be obtained through illegal operations;

 

   

shutting down our services;

 

   

discontinuing or restricting our operations in China;

 

   

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

 

   

requiring us to change our corporate structure and contractual arrangements;

 

   

restricting or prohibiting our use of the proceeds from overseas offering to finance our consolidated VIE’s business and operations; and

 

   

taking other regulatory or enforcement actions that could be harmful to our business.

Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. See “—Substantial uncertainties exist with respect to the interpretation and implementation of the newly adopted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.” Occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations. In addition, if the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the rights to direct the activities of our consolidated VIE or our right to receive their economic benefits, we would no longer be able to consolidate the financial results of such VIE in our consolidated financial statements. However, we do not believe that such actions would result in the liquidation or dissolution of our company, our wholly-owned subsidiary in China or our consolidated VIE. See “Our History and Corporate Structure—Contractual Arrangements among Meili Beijing, Beijing Feima and Its Shareholders.”

Contractual arrangements in relation to our consolidated VIE may be subject to scrutiny by the PRC tax authorities and they may determine that our consolidated VIE owes 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. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our wholly-owned PRC subsidiary, our consolidated VIE and its shareholders 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, regulations and rules, and adjust their income in the form of a transfer pricing adjustment.

 

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A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our wholly-owned PRC subsidiary or consolidated VIE for PRC tax purposes, which could in turn increase their tax liabilities without reducing their tax expenses. In addition, if our wholly-owned PRC subsidiary requests the shareholders of our consolidated VIE to transfer their equity interests in our consolidated VIE at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject the relevant subsidiary to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our PRC subsidiary and consolidated VIE for adjusted but unpaid taxes according to applicable regulations. Our financial position could be materially and adversely affected if the tax liabilities of our PRC subsidiary and consolidated VIE increase, or if they are required to pay late payment fees and other penalties.

We may lose the ability to use and enjoy assets held by our consolidated VIE that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

We plan to operate VATS business through our consolidated VIE, our consolidated VIE may hold a significant portion of our assets in the future. Under the contractual arrangements, our consolidated VIE may not and its shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our prior consent. However, in the event that the shareholders of our consolidated VIE breach these contractual arrangements and voluntarily liquidate our consolidated VIE, or our consolidated VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, 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. If our consolidated 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.

If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.

Under PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the State Administration for Market Regulation, formerly known as the State Administration for Industry and Commerce, or the SAIC. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.

We have three major types of chops—corporate chops, contract chops and finance chops. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including issuing invoices. Use of corporate chops and contract chops must be approved by our legal department, and use of finance chops must be approved by our finance department. The chops of our subsidiary and consolidated VIE are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiary and consolidated VIE have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.

In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated key employees of our legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiary and consolidated VIE, the procedures may not be sufficient to prevent all instances of abuse or

 

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negligence. There is a risk that our key employees or designated legal representatives could abuse their authority, for example, by binding our subsidiary and consolidated VIE with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations, and our business and operations may be materially and adversely affected.

Substantial uncertainties exist with respect to the interpretation and implementation of the newly adopted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

The variable interest entity structure has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015, or the 2015 Draft FIL, according to which, variable interest entities that are controlled via contractual arrangements would also be deemed as foreign-invested entities, if they are ultimately “controlled” by foreign investors. In March 2019, the PRC National People’s Congress promulgated the Foreign Investment Law, or the FIL, which will become effective from January 1, 2020 and will replace the major existing laws and regulations governing foreign investment in the PRC. Pursuant to the FIL, “foreign investment” refers to investment activities conducted by foreign investors directly or “indirectly” in the PRC, which include any of the following circumstances: (i) foreign investors setting up foreign-invested enterprises in the PRC solely or jointly with other investors, (ii) foreign investors obtaining shares, equity interests, property portions or other similar rights and interests of enterprises within the PRC, (iii) foreign investors investing in new projects in the PRC solely or jointly with other investors, and (iv) investment in other methods as specified in laws, administrative regulations, or as stipulated by the State Council. The FIL does not introduce the concept of “control” in determining whether a company would be considered as a foreign-invested enterprise, nor does it explicitly provide whether the variable interest entity structure would be deemed as a method of foreign investment. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China in other methods as specified in laws, administrative regulations, or as stipulated by the State Council, and as the FIL is newly adopted and relevant government authorities may promulgate more laws, regulations or rules on the interpretation and implementation of the FIL, the possibility can’t be ruled out that the concept of “control” as stated in the 2015 Draft FIL may be embodied in, or the variable interest entity structure adopted by us may be deemed as a method of foreign investment by, any of such future laws, regulations and rules. If our consolidated VIE was deemed as a foreign-invested enterprise under any of such future laws, regulations and rules, and any of the businesses that we operate would be in any “negative list” for foreign investment and therefore be subject to any foreign investment restrictions or prohibitions, further actions required to be taken by us under such laws, regulations and rules may materially and adversely affect our business and financial condition. Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

 

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Risks Relating to Doing Business in China

Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.

Substantially all of our operations are conducted in the PRC and all of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.

The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC 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 PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.

While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operations could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.

There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.

Substantially all of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries and consolidated VIE are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.

In 1979, the PRC government began to promulgate a comprehensive system of laws, rules 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 investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the nonbinding nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.

Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have

 

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significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.

On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, or the SASAC, the State Administration of Taxation, the SAIC, the CSRC, and the State Administration of Foreign Exchange, or the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and were amended on June 22, 2009. The M&A Rules include, among other things, provisions that purport to require that an offshore special purpose vehicle that is controlled by PRC domestic companies or individuals and that has been formed for the purpose of an overseas listing of securities through acquisitions of PRC domestic companies or assets to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. However, substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles.

While the application of the M&A Rules remains unclear, we believe, based on the advice of our PRC legal counsel, Fangda Partners, that the CSRC approval is not required in the context of this offering because (i) Meili Auto (Beijing) Internet Technology Co., Ltd., one of our wholly-owned PRC subsidiaries, was incorporated as a foreign-invested enterprise by means of foreign direct investments rather than by merger with or acquisition of any PRC domestic companies as defined under the M&A Rules, and (ii) there is no statutory provision that clearly classifies the contractual arrangement among our wholly-owned PRC subsidiary and our consolidated VIE and its shareholders as transactions regulated by the M&A Rules. There can be no assurance that the relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal counsel. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for this offering or if the CSRC or any other PRC government authorities promulgates any interpretation or implements rules before our listing that would require us to obtain CSRC or other governmental approvals for this offering, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as our ability to complete this offering. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered by this prospectus. 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 such settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring us to obtain their approvals for this offering, we may be unable to obtain waivers of such approval requirements. Any uncertainties and/or negative publicity regarding such approval requirements could have a material adverse effect on the trading price of the ADSs.

These regulations also established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex. For example, the M&A rules require 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 if (i) any important industry is concerned, (ii) such transaction involves factors that have or may have impact on the national economic security, or (iii) such

 

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transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. The approval from the MOFCOM shall be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Mergers, acquisitions or contractual arrangements that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance to the anti-monopoly authority under the State Council when the threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, or the Prior Notification Rules, issued by the State Council in August 2008 and amended in September 2018, is 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. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the new regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. See “Regulations—Regulations Related to M&A and Overseas Listings.”

PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.

PRC residents are subject to restrictions and filing requirements when investing in offshore companies. The SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by the SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of the SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” Pursuant to SAFE Circular 37, “control” refers to the act through which a PRC resident obtains the right to carry out business operation of, to gain proceeds from or to make decisions on a special purpose vehicle by means of, among others, shareholding entrustment arrangement. SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.

We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation and other compliance obligations relating to offshore investment. Nevertheless, we may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and there can be no assurance that all of our PRC-resident beneficial owners will comply with

 

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SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. The failure of our beneficial owners who are PRC residents to register or amend their foreign exchange registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.

Any failure to comply with PRC regulations regarding our employee share 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 due to their position as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies before they obtain the incentive shares or exercise the share options. Our directors, executive officers and other employees who are PRC residents and who have been granted options may follow SAFE Circular 37 to apply for the foreign exchange registration before our company becomes an overseas listed company. After our company becomes an overseas listed company upon completion of this offering, we and our directors, executive officers and other employees who are PRC residents and who have been granted options will be subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publicly listed company who are PRC residents are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. We will make efforts to comply with these requirements. However, there can be no assurance that they can successfully register with SAFE in full compliance with the rules. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make payment under our share incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-foreign owned enterprise in China and limit our wholly-foreign owned enterprise’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional share incentive plans for our directors and employees under PRC law.

We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries to fund offshore cash and financing requirements. Any limitation on the ability of our PRC operating subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.

We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries and on remittances from the consolidated VIE, for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our principal operating subsidiaries or the consolidated VIE incur additional debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiaries and certain other subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.

Under PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside at least 10% of its net income each year to fund certain statutory reserves until the cumulative amount of

 

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such reserves reaches 50% of its registered capital. These reserves, together with the registered capital, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances. Certain of our subsidiaries did not have any retained earnings available for distribution in the form of dividends as of December 31, 2018. In addition, registered capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary.

Limitations on the ability of our consolidated VIE to make remittance to the wholly-foreign owned enterprise and on the ability of our subsidiaries to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including to make investments or acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.

We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.

Under the PRC Enterprise Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantial and overall management and control over the production and operations, personnel, accounting and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009, which was further amended on November 8, 2013 and December 29, 2017 respectively. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that 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.”

Dividends paid to our foreign investors and gains on the sale of the ADSs or Class A ordinary shares by our foreign investors may become subject to PRC tax.

Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends paid to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Any gain realized on the transfer of ADSs or Class A ordinary shares by such investors is also subject to PRC tax at a current rate of 10%, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our Class A ordinary shares or ADSs, and any gain realized from the transfer of our Class A ordinary shares or ADSs, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed as a PRC resident enterprise, dividends paid to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or Class A ordinary shares by such investors may be subject to PRC tax (which in the case of dividends may be withheld at source) at a rate of 20%.

 

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Any PRC tax liability may be reduced by an applicable tax treaty. However, if we or any of our subsidiaries established outside China are considered a PRC resident enterprise, it is unclear whether holders of the ADSs or Class A ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends paid to our non-PRC investors, or gains from the transfer of the ADSs or Class A ordinary shares by such investors, are deemed as income derived from sources within the PRC and thus are subject to PRC tax, the value of your investment in the ADSs or Class A ordinary shares may decline significantly.

We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.

On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7. Pursuant to this Bulletin 7, an “indirect transfer” of assets, including non-publicly traded equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include, without limitation: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immovable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange. On October 17, 2017, the State Administration of Taxation promulgated the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source (“SAT Circular 37”), which became effective on December 1, 2017. SAT Circular 37, among other things, simplified procedures of withholding and payment of income tax levied on non-resident enterprises.

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, sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions under Bulletin 7 and SAT Circular 37. For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under Bulletin 7 and SAT Circular 37. As a result, we may be required to expend valuable resources to comply with Bulletin 7 and SAT Circular 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these

 

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publications, or to establish that our company should not be taxed under these publications, which may have a material adverse effect on our financial condition and results of operations.

We are subject to restrictions on currency exchange.

All of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans, including loans we may secure from our PRC subsidiaries or consolidated VIE. Currently, our PRC subsidiaries may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities. Since a significant amount of our future revenue and cash flow will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize cash generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of the ADSs, and may limit our ability to obtain foreign currency through debt or equity financing for our onshore subsidiaries and consolidated VIE.

PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of this offering to make loans to our PRC subsidiaries and our consolidated VIE, or to make additional capital contributions to our PRC subsidiaries.

In utilizing the proceeds of this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC laws, through loans or capital contributions. However, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE and capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and registration with other governmental authorities in China.

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of 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, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45. According to Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a

 

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prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to our consolidated VIE and its subsidiary, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of our consolidated VIE and its subsidiary by means of capital contributions given the restrictions on foreign investment in the businesses that are currently conducted or to be conducted by our consolidated VIE and its subsidiary.

In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or any consolidated VIE or future capital contributions by us to our PRC subsidiaries. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or consolidated VIE and its subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreign currency, including the proceeds we received from this offering, and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce 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 and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, 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 (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 Renminbi depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China.

In 2017, the RMB appreciated approximately 6.3% against the U.S. dollar. In 2018, however, the RMB depreciated approximately 5.7% against the U.S. dollar. In 2019, the RMB has continued to depreciate against the U.S. dollar. It remains unclear what fluctuations may occur in future. 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.

All of our revenue and substantially all of our costs are denominated in Renminbi. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on,

 

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the ADSs in U.S. dollars. 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. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our Class A 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.

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, our investors 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 SEC, as auditors of companies that are traded publicly in the U.S. and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. Because our auditors are located in the People’s Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors, as well as all other firms located in the PRC, 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 consolidated financial statements.

If additional remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging such firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements 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 accounting 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 CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed

 

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set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the U.S. 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 the ADSs may be adversely affected.

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 consolidated financial statements, our consolidated 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 delay or abandonment of this offering, delisting of the ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of the ADSs in the U.S.

Risks Relating to This Offering

There has been no public market for our shares or the ADSs prior to this offering, and you may not be able to resell the ADSs at or above the price you paid, or at all.

Prior to this offering, there has been no public market for our shares or ADSs. We will apply for approval of the ADSs representing Class A ordinary shares for listing on the NYSE. Our Class A ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for the ADSs does not develop after this offering, the market price and liquidity of the ADSs will be materially and adversely affected.

Negotiations with the underwriters will determine the initial public offering price for the ADSs which may bear no relationship to their market price after the initial public offering. An active trading market for the ADSs may not develop and the market price of the ADSs may decline below the initial public offering price.

The trading price of the ADSs may be volatile, which could result in substantial losses to you.

The trading prices of the ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed companies based in China. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies’ securities after their offerings, including technology companies and transaction service platforms, may affect the attitudes of investors toward Chinese companies listed in the U.S., which consequently may impact the trading performance of the ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the U.S., China and other jurisdictions in late 2008, early 2009, the second half of 2011 and in 2015, which may have a material and adverse effect on the trading price of the ADSs.

 

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In addition to the above factors, the price and trading volume of the ADSs may be highly volatile due to multiple factors, including the following:

 

   

regulatory developments affecting us or our industry;

 

   

announcements of studies and reports relating to the quality of our product offerings or those of our competitors;

 

   

changes in the economic performance or market valuations of other auto financing solutions providers;

 

   

actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

   

changes in financial estimates by securities research analysts;

 

   

conditions in the markets for car buyers and for financing facilitation services;

 

   

announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;

 

   

additions to or departures of our senior management;

 

   

fluctuations of exchange rates between the Renminbi and the U.S. dollar;

 

   

release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; and

 

   

sales or perceived potential sales of additional Class A ordinary shares or ADSs.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for the ADSs and trading volume could decline.

The trading market for the ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades the ADSs or publishes inaccurate or unfavorable research about our business, the market price for the ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for the ADSs to decline.

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

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$                per ADS (assuming no exercise of outstanding options to acquire ordinary shares and no exercise of the underwriters’ option to purchase additional ADSs), representing the difference between our pro forma net tangible book value per ADS of US$                , as of                 , 2019, after giving effect to this offering, and the assumed initial public offering price of US$                per ADS. In addition, you will experience further dilution to the extent that our Class A ordinary shares are issued or transferred, as the case may be, upon the exercise of share options under our share incentive plans. Class A ordinary shares available to satisfy our obligations under our share incentive plans may be issued or transferred, as the case may be, at a purchase price on a per ADS basis that is less than the public offering price per ADS in this offering. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon completion of this offering.

Because we do not expect to pay cash dividends in the foreseeable future after this offering, you may not receive any return on your investment unless you sell your Class A ordinary shares or ADSs for a price greater than that which you paid for them.

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

 

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dividends in the foreseeable future. See “Dividend Policy.” Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income.

Subject to compliance with the applicable Cayman legal requirements, our board of directors has 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, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the 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 the ADSs and you may even lose your entire investment in the ADSs.

The ADSs are subject to substantial dilution upon the conversion of the Convertible Notes and exercise of the Warrants held by the Convertible Notes Investor or the Warrants Investor.

We have outstanding Convertible Notes in the aggregate principal amount of US$40.0 million. The Convertible Notes Investor has the right to convert all or any portion of the outstanding Convertible Notes into Class A ordinary shares up to the close of business of the fifth business day immediately preceding the maturity date of the Convertible Notes, being September 25, 2022, or September 25, 2023 if extended at the option of the Convertible Notes Investor. In addition, we have issued Warrants entitling the Warrants Investor to subscribe up to US$20.0 million of our Class A ordinary shares at any time until the expiration date of the Warrants, being September 25, 2022 or September 25, 2023 if extended at the option of the Warrants Investor. If the Convertible Notes Investor and/or the Warrants Investor elect(s) to convert the Convertible Notes and/or exercise Warrants in full at the initial conversion and exercise prices, an aggregate of 26,040,290 ordinary shares will be issued, representing approximately 8.9% of our outstanding share capital as of the date of this prospectus. Furthermore, the conversion and exercise prices can be adjusted downward upon the occurrence of a number of events stipulated in the note and warrant instruments, particularly if the initial public offering price of the ADSs divided by the number of Class A ordinary shares represented by each ADS is below US$2.8966, which could result in us issuing more Class A ordinary shares. As such, the conversion of the notes and the exercise of warrants would result in substantial dilution of the ADSs and Class A ordinary shares and could lead to a decline in their market price.

Substantial future sales or perceived potential sales of the ADSs in the public market could cause the price of the ADSs to decline.

Sales of the ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of the ADSs to decline significantly. Upon completion of this offering, we will have                Class A ordinary shares and                Class B ordinary shares outstanding, including                  Class A ordinary shares represented by ADSs newly issued in connection with this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. We, our directors, executive officers, all of our existing shareholders [and certain holders of our share options] have agreed not to sell any Class A ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the representatives on behalf of the underwriters, subject to certain exceptions. All ADSs representing our Class A ordinary shares sold in this offering are expected to be freely transferable by persons other than our “affiliates” without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. All of the other ordinary shares outstanding after this offering will be available for sale, upon the expiration of the lock-up periods described above, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. Any or all of these ordinary shares may be released prior to the expiration of the applicable lock-up period at the discretion of the designated representatives. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market price of the ADSs could decline significantly. See “Shares Eligible for Future Sale—Lock-up Agreements.”

 

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Certain major holders of our ordinary shares after completion of this offering will have the right to cause us to register under the Securities Act the sale of their shares, subject to the applicable lock-up periods in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of ADSs representing these registered shares in the public market could cause the price of the ADSs to decline significantly.

Our dual-class share structure may depress the trading price of our Class A ordinary share.

Our dual-class share structure may result in a lower or more volatile market price of our Class A ordinary share or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. S&P Dow Jones and FTSE Russell have announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500. These changes exclude companies with multiple classes of shares from being added to these indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, our dual-class share structure may prevent the inclusion of our Class A ordinary share in these indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A ordinary share. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A ordinary shares.

You, as holders of ADSs, may have fewer rights than holders of our Class A ordinary shares and must act through the depositary to exercise those rights.

Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under our seventh amended and restated articles of association, the minimum notice period required to convene a general meeting will be ten days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your Class A ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting materials to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but there can be no assurance that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

As an ADS holder, your rights to pursue claims against the depositary are limited by the terms of the deposit agreement, and the deposit agreement may be amended or terminated without your consent.

We and the depositary may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended. See “Description of American Depositary Shares” for more information.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the U.S. unless we register both the distribution and sale of the rights and the securities to which the rights relate under the Securities Act or an exemption from the

 

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registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the distribution and sale of the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.

You may not receive cash dividends or other distributions if the depositary determines it is illegal or impractical to make them available to you.

The depositary will pay cash distribution on the ADSs only to the extent that we decide to distribute dividends on our Class A ordinary shares or other deposited securities, and we do not have any present plan to pay any cash dividends in the foreseeable future. See “Dividend Policy.” To the extent that there is a distribution, the depositary of the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is illegal or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NYSE, impose various requirements on the corporate governance practices of public companies.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. In addition, once we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

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

 

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Our seventh amended and restated memorandum and articles of association contain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell their shares, including Class A ordinary shares represented by the ADSs, at a premium.

We have adopted the seventh amended and restated articles of association to be effective immediately prior to the completion of this offering that 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. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Class A 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 the ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected. In addition, our seventh amended and restated memorandum and articles of association contain other provisions that could limit the ability of third parties to acquire control of our company or cause us to engage in a transaction resulting in a change of control, including a provision that entitles each Class B ordinary share to 30 votes in respect of all matters subject to a shareholders’ vote.

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that holders and beneficial owners of ADSs irrevocably waive the right to a trial by jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including claims under federal securities laws, against us or the depositary to the fullest extent permitted by applicable law. If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court. However, we believe that a jury trial waiver provision is generally enforceable under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a jury trial waiver provision, New York courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim, none of which we believe are applicable in the case of the deposit agreement or the ADSs. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the federal securities laws. If you or any other holder or beneficial owner of ADSs brings a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and / or the depositary. If a lawsuit is brought against us and / or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such claims and the venue of the hearing.

 

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

We are an exempted company incorporated under the laws of the Cayman Islands. Substantially all of our assets are located outside the United States. In addition, substantially all of our directors and executive officers and the experts named in this prospectus reside outside the United States, and most of their assets are located outside the United States As a result, it may be difficult or impossible for you to bring an action against us or against them in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands, China or other relevant jurisdiction 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 “Enforcement of Civil Liabilities.”

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 limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) 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 U.S. In particular, the Cayman Islands have a less developed body of securities laws than the U.S. 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 will have discretion under the seventh amended and restated memorandum and articles of association expected to be effective immediately prior to completion of this offering, 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 resolution or to solicit proxies from other shareholders in connection with a proxy contest.

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 U.S. For a discussion of significant differences between the provisions of the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) 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.”

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 U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the U.S. that are applicable to U.S. domestic issuers,

 

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including: (i) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; (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 are 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 as press releases, distributed pursuant to the rules and regulations of the NYSE. 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 that would be made available to you were you investing in a U.S. domestic issuer.

We are an emerging growth company 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 various 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 of Sarbanes-Oxley Act of 2002 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.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.

We may be classified as a passive foreign investment company, or PFIC, which could result in adverse United States tax consequences to United States investors.

In general, we will be a passive foreign investment company (a “PFIC”) for any taxable year in which:

 

   

at least 75% of our gross income is passive income, or

 

   

at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income.

For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). The determination of whether we are a PFIC is made annually. Accordingly, it is possible that our PFIC status may change due to changes in our income or asset composition.

We consider ourselves as a service provider with the primary business purpose of providing used car financing solutions. In this regard, we generally collaborate with funding partners that provide the ultimate financing to borrowers. However, for many loans we view ourselves as the primary financing provider, record such loans as loans and advances on our balance sheet and recognize net financing income. As such, for purposes of the PFIC rules, it is likely that we would be treated as earning interest income from such loans. There are certain exceptions under the PFIC rules that would characterize interest income that would otherwise be passive income as active income, provided such interest income is earned in connection with the active conduct of certain types of businesses. It is unclear, however, whether we would be eligible for any such exception, and, thus, we

 

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believe there is a significant risk that the interest from such loans will be treated as passive income for purposes of the PFIC rules. Given the foregoing and based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill (which we have determined based on the expected price of the ADSs in this offering), we believe that there is a significant risk that we will be classified as a PFIC for our current taxable year, and may be classified as a PFIC in future taxable years.

If we are a PFIC for any taxable year during which you hold the ADSs or Class A ordinary shares, our PFIC status could result in adverse United States federal income tax consequences to you if you are a United States Holder, as defined under “Taxation—Certain United States Federal Income Tax Considerations.” For example, if we are a PFIC, you may become subject to increased tax liabilities under United States federal income tax laws and regulations, and will become subject to burdensome reporting requirements. See “Taxation—Certain United States Federal Income Tax Considerations—Passive Foreign Investment Company.”

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.

We are a company incorporated in the Cayman Islands, and we have applied for listing of the ADSs on the NYSE. The NYSE market rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards.

For instance, we are not required to: (i) have a majority of the board be independent; (ii) have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors; or (iii) have regularly scheduled executive sessions with only independent directors each year.

We intend to rely on the three exemptions described above. As a result, you may not be provided with the benefits of certain corporate governance requirements of the NYSE.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us and our industry. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry” and “Business.” 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. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The forward-looking statements included in this prospectus relate to, among others:

 

   

our goals and strategies;

 

   

our expansion plans;

 

   

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

 

   

our expectations regarding demand for, and market acceptance of, our solutions and services;

 

   

our expectations regarding keeping and strengthening our relationships with car buyers as well as business partners such as dealers and financial institutions;

 

   

our expectations regarding the use of proceeds from this offering; and

 

   

general economic and business conditions.

This prospectus also contains market data relating to the auto financing market in China, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. This prospectus contains statistical data and estimates published by Frost & Sullivan, including a report which we commissioned Frost & Sullivan to prepare and for which we paid a fee. This information involves a number of assumptions, estimates and limitations. These industry publications, surveys and forecasts generally indicate that the sources from which information has been obtained are believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Nothing in such data should be construed as advice. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The auto financing market in China may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of the ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements.

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

 

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USE OF PROCEEDS

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

We plan to use the net proceeds of this offering as follows:

 

   

up to approximately US$                million for expansion of loan facilitation services, including satisfying the related working capital needs;

 

   

up to approximately US$                million for investment in research and development on information technology and risk management; and

 

   

up to approximately US$                million for general corporate purposes.

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

To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits.

In utilizing the proceeds of this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions and to our consolidated VIE only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund their capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. For further information, 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 restrict or prevent us from using the proceeds of this offering to make loans to our PRC subsidiaries and our consolidated VIE, or to make additional capital contributions to our PRC subsidiaries.”

 

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DIVIDEND POLICY

Since inception, we have not declared or paid any dividends on our shares. We do not have any present plan to pay any dividends on our Class A ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Any other future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors, including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay the depositary to the same extent as other holders of our Class A ordinary shares. See “Description of American Depositary Shares.” Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.

We are an exempted company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we may rely on dividends distributed by our PRC subsidiaries. Certain payments from our PRC subsidiaries to us may be subject to PRC withholding income tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards every year to a statutory common reserve fund until the aggregate amount of such reserve fund reaches 50% of the registered capital of such subsidiary. Such statutory reserves are not distributable as loans, advances or cash dividends.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2019 presented on:

 

   

an actual basis;

 

   

a pro forma basis to reflect (i) the designation of all ordinary shares beneficially owned by             into            Class B ordinary shares on a one-for-one-basis upon the completion of this offering; (ii) the designation of all of the remaining outstanding ordinary shares and the automatic conversion of all our outstanding convertible redeemable preferred shares into             Class A ordinary shares on a one-for-one-basis upon the completion of this offering; and

 

   

a pro forma as adjusted basis to give effect to (i) the designation of all ordinary shares beneficially owned by             into             Class B ordinary shares on a one-for-one-basis upon the completion of this offering; (ii) the designation of all of the remaining outstanding ordinary shares and the automatic conversion of all our outstanding convertible redeemable preferred shares into             Class A ordinary shares on a one-for-one-basis upon the completion of this offering; (iii) the issuance and sale of the Class A ordinary shares in the form of ADSs offered hereby at an assumed initial public offering price of US$            per ADS, the mid-point of the estimated public offering price range shown on the front cover of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs.

The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the closing of this offering is subject to adjustment based on the initial public offering price of the ADSs and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2019  
     Actual
Restated(1)
    Pro Forma      Pro Forma as
Adjusted
 
     RMB     US$     RMB      US$      RMB      US$  
     (in thousands)  

Total mezzanine equity

     2,576,867       375,363             

Shareholders’ deficit:

               

Ordinary shares

     32       5             

Subscription receivable

     (32     (5           

Accumulated other comprehensive income

     (119,918     (17,468           

Accumulated deficit

     (1,902,321     (277,104           

Total Meili Auto Holdings Limited shareholder’s deficit

     (2,022,239     (294,572           

Non-controlling interests

     (6,131     (893           

Total shareholders’ deficit

     (2,028,370     (295,465           

Total capitalization

     548,497       79,898             

 

(1)

During the course of preparing our condensed consolidated financial statements for the nine months ended September 30, 2019, we discovered certain errors in our 2018 consolidated financial statements in relation to the reporting of our redeemable convertible preferred shares. More information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Note 2(b) of our consolidated financial statements.

 

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DILUTION

If you invest in 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 Class A ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares and holders of our convertible redeemable preferred shares which will automatically convert into our Class A ordinary shares upon the completion of this offering.

Our net tangible book value as of June 30, 2019 was approximately US$             million, or US$             per ordinary share as of that date, and US$             per ADS. Net tangible book value represents the amount of our total consolidated assets, less the amount of our intangible assets, goodwill and total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share from our consolidated total assets, after giving effect to (i) the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares immediately upon the completion of this offering[, (ii) the issuance of 26,040,290 Class A ordinary shares upon full conversion of the Convertible Notes and full exercise of the Warrants] and (iii) the issuance and sale by us of shares represented by ADSs in this offering at an assumed initial public offering price of US$             per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after June 30, 2019, other than to give effect to (i) the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares immediately upon the completion of this offering[, (ii) the issuance of 26,040,290 Class A ordinary shares upon full conversion of the Convertible Notes and full exercise of the Warrants] and (iii) the issuance and sale by us of             Class A ordinary shares in the form of ADSs in this offering at an assumed initial public offering price of US$             per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) 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 June 30, 2019 would have been US$             million, or US$             per outstanding ordinary share and US$            per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share and US$             per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share and US$             per ADS to investors purchasing ADSs in this offering.

The following table illustrates such dilution:

 

     Per
Ordinary
Share
     Per ADS  

Actual net tangible book value per share as of June 30, 2019

   US$                US$            

Pro forma net tangible book value per share after giving effect to the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares

     

Pro forma as adjusted net tangible book value per share after giving effect to (i) the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares[, (ii) the issuance of 26,040,290 Class A ordinary shares upon full conversion of the Convertible Notes and full exercise of the Warrants] and (iii) this offering

     

Assumed initial public offering price

     

Dilution in net tangible book value per share to new investors in the offering

     

The amount of dilution in net tangible book value to new investors in this offering set forth above is calculated by deducting (i) the pro forma net tangible book value after giving effect to the automatic conversion

 

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of our outstanding convertible redeemable preferred shares from (ii) the pro forma net tangible book value after giving effect to the automatic conversion of our convertible redeemable preferred shares and this offering.

The following table summarizes, on a pro forma basis as of June 30, 2019, the differences between existing shareholders, including holders of our convertible redeemable preferred shares, and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of Class A ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

    

 

Ordinary Shares Total

    Total Consideration     US$ Average
Price per
Ordinary
Share
Equivalent
     Average
Price per
ADS
Equivalent
 
     Number      Percent     Amount      Percent  

Existing shareholders

                                    US$                                 US$                    US$                

New investors

                   US$                     US$        US$    
  

 

 

    

 

 

   

 

 

    

 

 

      

Total

                   US$                       
  

 

 

    

 

 

   

 

 

    

 

 

      

A US$1.00 increase (decrease) in the assumed public offering price of US$             per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$             million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$             per ordinary share and US$             per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no change to the number of ADS offered by us as set forth on the front cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

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

The discussion and tables above take into consideration the automatic conversions of all of our outstanding convertible redeemable preferred shares immediately upon the completion of this offering, and they do not take into consideration of any outstanding share options. As of the date of this prospectus, there are also (i)             Class A ordinary shares issuable upon exercise of outstanding share options and (ii)             Class A ordinary shares available for future issuance upon the exercise of future grants under the 2017 Plan. If any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEMENT OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a lesser extent. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Substantially all of our operations are conducted in the PRC, and substantially all of our assets are located in the PRC. In addition, most of our directors and officers are residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce in United States courts judgments obtained in United States courts based on the civil liability provisions of the United States federal securities laws against us and our officers and directors.

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

Conyers Dill & Pearman, our counsel as to Cayman Islands law, and Fangda Partners, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would, respectively, (1) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States and (2) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Conyers Dill & Pearman has informed us that the uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the United States courts under the civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands. Conyers Dill & Pearman has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.

In addition, Conyers Dill & Pearman has advised us that there is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (i) such courts had proper jurisdiction over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public

 

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policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

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

 

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OUR HISTORY AND CORPORATE STRUCTURE

We commenced our auto financing business in 2014, and we used to operate within Meili Finance. We undertook a restructuring in 2017 to strengthen our positioning as an auto financing solutions provider. In connection with the restructuring, subsidiaries of Meili Finance that engaged in the auto financing business were transferred to Meili Auto, which was established in June 2017 as our current ultimate holding company. In addition, the shareholders of Meili Finance received shares of Meili Auto in proportion to the shares they held in Meili Finance. We conduct our business through our wholly foreign owned enterprises and consolidated VIE in China.

Our Corporate Structure

The following diagram illustrates our corporate structure with our principal subsidiaries, consolidated VIE and its subsidiary as of the date of this prospectus. Certain entities that are immaterial to our results of operations, business and financial condition are omitted. Except as otherwise specified, equity interests depicted in this diagram are held as to 100%. The relationships among Meili Beijing and Beijing Feima as illustrated in this diagram are governed by contractual arrangements and do not constitute equity ownership.

 

LOGO

 

(1)

Meili Auto Holdings Limited was incorporated on June 7, 2017. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its negative equity as of June 30, 2019 was RMB1,778.7 million.

(2)

Meili Auto Financing Holdings Limited was incorporated on June 15, 2017. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its equity as of June 30, 2019 was RMB96.2 million.

(3)

Meili Auto Alliance Holdings Limited was incorporated on June 15, 2017. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its equity as of June 30, 2019 was nil.

 

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(4)

China Huachang Lease Co., Ltd. was incorporated on August 1, 2011. Its equity as of June 30, 2019 was RMB217.1 million. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019.

(5)

Meili Auto Alliance Holdings HK Limited was incorporated on July 5, 2017. It acts as a holding company and did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its equity as of June 30, 2019 was nil.

(6)

Huachang was incorporated on March 12, 2013. Its standalone revenue amounted to RMB512.0 million, RMB850.8 million and RMB612.9 million in 2017, 2018 and the six months ended June 30, 2019, respectively. Its standalone equity as of June 30, 2019 was RMB264.6 million. Its five subsidiaries include Liyun Automobile Consulting Services (Shanghai) Co., Ltd. (PRC), Hangzhou Junkai Automobile Trade Co., Ltd. (PRC), Wuhan Feima Information Technology Co., Ltd. (PRC), Shanghai Xiefang Information Technology Co., Ltd. (PRC) and Xinjiang Meili Auto Information Technology Co., Ltd. (PRC). These subsidiaries are 100% held by Huachang. Huachang and its subsidiaries primarily engage in the facilitation of auto financing transactions.

(7)

Meili Auto (Beijing) Internet Technology Co., Ltd. was incorporated on November 22, 2017. It primarily engages in providing operation and technology support services. Its standalone revenue amounted to nil, RMB163.9 million and RMB77.5 million in 2017, 2018 and the six months ended June 30, 2019, respectively. Its standalone equity as of June 30, 2019 was RMB9.6 million.

(8)

Beijing Feima was incorporated on December 4, 2017. We plan to engage in value-added online services through Beijing Feima. It did not generate any revenue in 2017, 2018 and the six months ended June 30, 2019. Its standalone negative equity as of June 30, 2019 was RMB0.3 million. Its subsidiary is Meili Auto Alliance (Beijing) Information Technology Co., Ltd. (PRC), which is 85% held by Beijing Feima.

Contractual Arrangements among Meili Beijing, Beijing Feima and Its Shareholders

PRC laws and regulations currently restrict foreign ownership and investment in VATS in China. As such, we plan to operate VATS business through Beijing Feima, which is our consolidated VIE, and its subsidiaries. We effectively control the consolidated VIE through a series of contractual arrangements with the consolidated VIE, its shareholders and Meili Beijing, as described in more detail below, which collectively enables us to:

 

   

exercise effective control over our consolidated VIE and its subsidiaries;

 

   

receive substantially all the economic benefits of our consolidated VIE; and

 

   

have an exclusive option to purchase all or part of the equity interests in the equity interest in or all or part of the assets of Beijing Feima when and to the extent permitted by PRC law.

As a result of these contractual arrangements, we are the primary beneficiary of Beijing Feima and its subsidiaries. We have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP.

In the opinion of Fangda Partners, our PRC legal counsel:

 

   

the ownership structures of Meili Beijing and our consolidated VIE in China, both currently and immediately after giving effect to this offering, do not and will not violate any applicable PRC law, regulation, or rule currently in effect; and

 

   

the contractual arrangements among Meili Beijing, Beijing Feima and its shareholders governed by PRC laws are valid, binding and enforceable in accordance with their terms and applicable PRC laws, rules, and regulations currently in effect, and do not violate any applicable PRC law, regulation, or rule currently in effect.

However, we have been further advised by our PRC legal counsel, Fangda Partners, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors—Risks Relating to Our Corporate Structure.”

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. For additional information, see “Risk Factors—Risks

 

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Relating to Our Corporate Structure—Any failure by our consolidated VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.” Such arbitration provisions have no effect on the rights of our shareholders to pursue claims against us under United States federal securities laws.

The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Meili Beijing, our consolidated VIE, Beijing Feima, and its subsidiaries, and the shareholders of Beijing Feima.

Agreements that Provide Us with Effective Control over Our Consolidated VIE and Its Subsidiaries

Equity Interest Pledge Agreements. Pursuant to the equity interest pledge agreements, each shareholder of Beijing Feima shall pledge all of such shareholder’s equity interest in Beijing Feima as a security interest, as applicable, to respectively guarantee Beijing Feima and its shareholders’ performance of their obligations under the relevant contractual arrangement, which include the exclusive technology consulting and service agreement, exclusive option agreement and power of attorney. If Beijing Feima or any of its shareholders breaches their contractual obligations under these agreements, Meili Beijing, as pledgee, will be entitled to certain rights regarding the pledged equity interests. In the event of such breaches, Meili Beijing’s rights include being paid in priority with the equity interest of Beijing Feima based on the monetary valuation that such equity interest is converted into or from the proceeds from auction or sale of the equity interest. Each of the shareholders of Beijing Feima agrees that, during the term of the equity interest pledge agreements, such shareholder shall not transfer the equity interest, place or permit the existence of any security interest or other encumbrance on the equity interest or any portion thereof, without the prior written consent of Meili Beijing, except for the performance of the relevant contractual agreement. Meili Beijing is entitled to collect dividends distributed on the equity interest of Beijing Feima, and Beijing Feima’s shareholders may receive dividends distributed on the equity interest only with prior written consent of Meili Beijing. The equity interest pledge agreements remain effective until all obligations under the relevant contractual agreements have been fully performed and all secured indebtedness have been fully paid. The shareholders of Beijing Feima have registered pledges of equity interest of shareholders in Beijing Feima with the relevant offices of the administration for market regulation in accordance with the PRC Property Rights Law.

Power of Attorney. Pursuant to the power of attorney, each shareholder of Beijing Feima has irrevocably authorized Meili Beijing to exercise the following rights relating to all equity interests held by such shareholder in Beijing Feima during the term of the power of attorney: to act on behalf of such shareholder as its exclusive agent and attorney with respect to all matters concerning its shareholding in Beijing Feima, including without limitation to: (1) attending shareholders’ meetings of Beijing Feima; (2) exercising all the shareholder’s rights and shareholder’s voting rights such shareholder is entitled to under the laws of China and Beijing Feima’s Articles of Association, including but not limited to the sale or transfer or pledge or disposition of its shareholding in part or in whole; and (3) designate and appoint on behalf of such shareholder the legal representative, the directors, supervisors, the chief executive officer and other senior management members of Beijing Feima. During the period that such shareholders remains a shareholder of Beijing Feima, the power of attorney shall be irrevocable and continuously effective and valid from the date of execution of the power of attorney.

Agreements that Allow Us to Receive Economic Benefits from our Consolidated VIE and Its Subsidiaries

Exclusive Technology Consulting and Service Agreement. Under the exclusive technology consulting and service agreement, Beijing Feima appoints Meili Beijing as its exclusive services provider to provide Beijing Feima with comprehensive technical support, consulting services and other services during the term of the exclusive technology consulting and service agreement. In consideration of the services provided by Meili Beijing, Beijing Feima shall pay Meili Beijing fees equal to 100% of the consolidated basis net profits of Beijing Feima. Meili Beijing shall have exclusive and proprietary ownership, rights and interests in any and all

 

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intellectual properties arising out of or created during the performance of the exclusive technology consulting and service agreement. Unless terminated in accordance with the provisions of the exclusive technology consulting and service agreement or terminated in writing by Meili Beijing, the exclusive cooperation agreement shall remain effective for ten years commencing from the execution date.

Agreements that Provide Us with the Option to Purchase the Equity Interest in Beijing Feima

Exclusive Option Agreements. Pursuant to the exclusive option agreements, each of Beijing Feima’s shareholders have irrevocably granted Meili Beijing an irrevocable and exclusive right to purchase, or designate one or more persons to purchase the equity interests in Beijing Feima then held by its shareholders once or at multiple times at any time in part or in whole at Meili Beijing’s sole and absolute discretion to the extent permitted by PRC law. The minimum price regulated by PRC law shall be the purchase price. Beijing Feima and its shareholders have agreed that, without Meili Beijing’s prior written consent, Beijing Feima shall not in any manner supplement, change or amend the articles of association of Beijing Feima, increase or decrease its registered capital, change its structure of registered capital in other manners, sell, transfer, mortgage or dispose of in any other manner any legal or beneficial interest in the equity interests in Beijing Feima held by such shareholders, or allow the encumbrance thereon, except for the interest placed in accordance with the equity interest pledge agreement and the power of attorney. Each of the exclusive option agreement has an initial term of ten years and can be renewed for ten years at the option of Meili Beijing.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of comprehensive (loss)/income data and selected consolidated statements of cash flows data for the years ended December 31, 2017 and 2018 and selected consolidated balance sheets data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of comprehensive (loss)/income data and summary consolidated statements of cash flows data for the six months ended June 30, 2018 and 2019 and summary consolidated balance sheet data as of June 30, 2019 have been derived from our unaudited interim condensed consolidated financial statements 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 to be expected for any future period. The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.

Summary Consolidated Statements of Comprehensive (Loss)/Income Data

 

    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018
Restated(1)
    2018
Restated(1)
    2019
Restated(1)
 
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net Revenues:

                   

Loan facilitation revenue

    294,415       34.0       805,779       117,375       48.6       300,177       42.3       547,949       79,818       55.7  

Value-added services revenue

    92,130       10.6       232,003       33,795       14.0       79,596       11.2       207,153       30,175       21.0  

Net financing income

    364,178       42.0       319,741       46,576       19.3       187,186       26.4       94,252       13,729       9.6  

Other revenues

    115,956       13.4       298,835       43,530       18.1       142,935       20.1       135,090       19,678       13.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    866,679       100.0       1,656,358       241,276       100.0       709,894       100.0       984,444       143,400       100.0  

Cost of revenues

    (208,549     (24.1     (396,707     (57,787     (24.0     (184,484 )      (26.0 )      (229,960 )      (33,497 )      (23.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    658,130       75.9       1,259,651       183,489       76.0       525,410       74.0       754,484       109,903       76.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loans and advances

    (373,608     (43.1     (238,964     (34,809     (14.4     (145,486 )      (20.5 )      (100,630 )      (14,658 )      (10.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit after provision for loans and advances

    284,522       32.8       1,020,687       148,680       61.6       379,924       53.5       653,854       95,245       66.4  

Operating expenses:

                   

Sales and marketing

    (481,525     (55.6     (565,979     (82,444     (34.2     (267,755     (37.7     (293,617     (42,770     (29.8

General and administrative

    (105,303     (12.2     (145,497     (21,194     (8.8     (68,741     (9.7     (76,894     (11,201     (7.8

Research and development

    (72,296     (8.3     (119,609     (17,423     (7.2     (50,838     (7.2     (49,487     (7,209     (5.0

Gains from guarantee liabilities

    2,126       0.2       122,130       17,790       7.4       69,540       9.8       9,518       1,386       1.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (656,998     (75.8     (708,955     (103,271     (42.8     (317,794     (44.8     (410,480     (59,794     (41.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from operations

    (372,476     (43.0     311,732       45,409       18.8       62,130       8.7       243,374       35,451       24.8  

Interest expense, net

    (11,525     (1.3     (5,736     (836     (0.3     (3,128     (0.4     (3,158     (460     (0.3

Foreign exchange (losses)/gains

    (224     *       6,393       931       0.4       4,195       0.6       (69     (10     *  

Gains on disposal of subsidiary

    25,156       2.9       —         —         —         —         —         —         —         —    

Other income, net

    2,289       0.3       12,547       1,828       0.8       262       *       3,837       559       0.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before income tax expense

    (356,780     (41.2     324,936       47,332       19.6       63,459       8.9       250,300       36,460       25.5  

Income tax expense

    (1,723     (0.2     (6,471     (943     (0.4     (1,265     (0.2     (18,328     (2,670     (1.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

    (358,503     (41.4     318,465       46,390       19.2       62,194       8.7       231,972       33,790       23.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018
Restated(1)
    2018
Restated(1)
    2019
Restated(1)
 
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net (loss)/income attributable to Meili Auto Holdings Limited

    (354,457     (40.9 )     320,472       46,682       19.3       63,907       9.0       232,050       33,801       23.6  

Accretion to redemption value

    (986     (0.1     (639,569     (93,164     (38.6     (302,124     (42.6     (302,837     (44,113     (30.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders

    (355,443     (41.0     (319,097     (46,482     (19.3     (238,217     (33.6     (70,787     (10,312     (7.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to ordinary shareholders

    (5.34           (5.71     (0.83           (4.11           (1.32     (0.19      

 

*

Less than 0.1%.

(1)

During the course of preparing our condensed consolidated financial statements for the nine months ended September 30, 2019, we discovered certain errors in our 2018 consolidated financial statements in relation to the reporting of our redeemable convertible preferred shares. More information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Note 2(b) of our consolidated financial statements.

Summary Consolidated Balance Sheets Data

 

     As of December 31,     As of June 30,
2019
Restated(1)
 
     2017      2018
Restated(1)
 
     RMB      RMB     US$     RMB     US$  
     (in thousands)  

Cash and cash equivalents

     210,982        78,761       11,473       186,819       27,213  

Restricted cash

     99,748        781,869       113,892       1,076,640       156,830  

Short-term investments

     7,800        —         —         —         —    

Total loans and advances, net

     7,373,733        4,281,646       623,692       2,700,154       393,322  

Total assets

     8,097,110        5,883,592       857,042       4,430,667       645,400  

Short-term borrowings

     55,450        20,100       2,928       40,100       5,841  

Total payable to funding partners

     6,216,836        3,902,714       568,494       2,598,002       378,442  

Guarantee liabilities

     172,701        336,506       49,018       405,463       59,062  

Total liabilities

     8,830,971        5,574,797       812,061       3,882,170       565,502  

Mezzanine equity

     699,717        2,264,477       329,858       2,576,867       375,363  

Total shareholders’ deficit

     (1,433,578      (1,955,682     (284,877     (2,028,370     (295,465

 

(1)

During the course of preparing our condensed consolidated financial statements for the nine months ended September 30, 2019, we discovered certain errors in our 2018 consolidated financial statements in relation to the reporting of our redeemable convertible preferred shares. More information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Note 2(b) of our consolidated financial statements.

 

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Summary Consolidated Statements of Cash Flows Data

 

    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018
Restated(1)
    2018
Restated(1)
    2019
Restated(1)
 
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Net cash generated from operating activities

    36,710       419,463       61,102       164,981       546,028       79,538  

Net cash (used in)/generated from investing activities

    (3,730,012     2,853,316       415,632       1,146,919       1,542,084       224,629  

Net cash generated from/(used in) financing activities

    3,858,915       (2,720,386     (396,269     (915,363     (1,686,571     (245,677

Cash and cash equivalents, restricted cash at the beginning of the year

    144,543       310,730       45,263       310,730       860,630       125,365  

Cash and cash equivalents, restricted cash at the end of the year

    310,730       860,630       125,365       699,101       1,263,459       184,043  

 

(1)

During the course of preparing our condensed consolidated financial statements for the nine months ended September 30, 2019, we discovered certain errors in our 2018 consolidated financial statements in relation to the reporting of our redeemable convertible preferred shares. More information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Note 2(b) of our consolidated financial statements.

Key Operating Metrics

We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

 

     As of/for the Year Ended
December 31,
     As of/for the Six Months
Ended June 30,
 
     2017      2018      2018      2019  

Amount of auto financing transactions (RMB in thousands)

     10,944,544        15,273,061        6,062,021        9,118,351  

Outstanding balance of auto financing transactions (RMB in thousands)

     11,435,490        18,546,772        13,889,783        21,880,665  

Number of auto financing transactions

     175,796        233,291        95,700        128,793  

Number of registered dealers

     34,316        63,329        43,595        74,918  

M1+ overdue ratio (%)

     1.3        1.3        1.5        1.6  

M3+ overdue ratio (%)

     0.7        0.7        0.9        0.8  

Percentage of credit decisions made automatically (%)

     19.0        53.1        41.5        71.0  

Non-GAAP Financial Measure

We use adjusted net (loss)/income, which is an non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. Adjusted net (loss)/income represents net loss or income before share-based compensation expenses and impairment of goodwill. We believe that such non-GAAP financial measure helps identify underlying trends in our business that could otherwise be distorted

 

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by the effects of share-based compensation expenses and impairment of goodwill. We believe that such non-GAAP financial measure also provides useful information about our operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

The non-GAAP financial measure is not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. It should not be considered in isolation or construed as alternatives to net loss or income or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measure in light of the most directly comparable GAAP measures, as shown below. The non-GAAP financial measure presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measure differently, limiting its usefulness as comparative measures to our data. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

The table below sets forth a reconciliation of the non-GAAP financial measure for the periods indicated:

 

     Year Ended December 31,      Six Months Ended June 30,  
     2017      2018      2018      2019  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Net (loss)/income

     (358,503      318,465        46,390        62,194        231,972        33,790  

Add: Share-based compensation expenses

     2,803        8,618        1,255        3,354        6,442        938  

Add: Impairment of goodwill

     7,044        —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net (loss)/income

     (348,656      327,083        47,645        65,548        238,414        34,728  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this prospectus, particularly in the section titled “Risk Factors.”

Overview

We are a pioneer and leader in China’s used car financing market, focusing on facilitating loans from financial institutions to prime borrowers in used car transactions. We facilitated a total of 206,116 used car financing transactions in 2018, which ranked us among top three used car financing solution providers in China, according to the Frost & Sullivan Report. In the six months ended June 30, 2019, we facilitated 112,682 used car financing transactions with a transaction value of RMB7,886.7 million, representing a 43.1% increase from the transaction value in the six months ended June 30, 2018.

Used car financing is a nascent and fast-growing market in China. According to the Frost & Sullivan Report, China’s used car financing market grew at a CAGR of 81.3% from RMB7.7 billion in 2013 to RMB150.2 billion in 2018. In the meantime, the used car financing market presents massive untapped potential for financial solution providers. As per capita disposable income rises in China, a massive number of prime borrowers have become capable of financing used car purchases on credit. Nonetheless, these prime borrowers have been underserved by traditional financial institutions due to such institutions’ lack of salesforce to cover China’s dispersed dealer network, industry knowhow, including the ability of assessing the value of used cars, and technological and risk management capabilities. As a first mover in the market, we leverage our offline salesforce, industry knowledge and data-driven proprietary technology to enable prime borrowers to access car loans from financial institutions.

We have continually expanded our cooperation with financial institutions in recent years. The amount of auto financing transactions we facilitated with financial institutions increased by 106.9% from RMB7.0 billion in 2017 to RMB14.5 billion in 2018, and increased by 68.8% from RMB5.4 billion in the six months ended June 30, 2018 to RMB9.1 billion in the six months ended June 30, 2019. We have a diversified roster of financial institution partners, including internet banks, large national banks and joint stock banks. We have strengthened relationships with reputable financial institutions that offer higher lines of credit and lower interest rates to customers. The average annualized interest rate charged by our funding partners decreased from 9.1% in 2017 to 8.4% in the six months ended June 30, 2019. As we collaborate exclusively with institutions, instead of retail investors, we are able to significantly reduce our compliance risk compared to other consumer financing service platforms.

We facilitated 175,796 and 233,291 auto financing transactions in 2017 and 2018, respectively, representing an increase of 32.7%, and 95,700 and 128,793 auto financing transactions in the six months ended June 30, 2018 and 2019, respectively, representing an increase of 34.6%. The outstanding balance of auto financing transactions we facilitated was RMB21.9 billion as of June 30, 2019, representing an increase of 18.0% from December 31, 2018.

We derive revenue primarily through used car loan facilitation. Our total net revenues grew from RMB866.7 million in 2017 to RMB1,656.4 million (US$214.3 million) in 2018, representing an increase of 91.1%, and increased from RMB709.9 million in the six months ended June 30, 2018 to RMB984.4 million (US$143.4 million) in the same period in 2019, representing an increase of 38.7%. Our net income was RMB318.5 million (US$46.4 million) in 2018, compared to a net loss of RMB358.5 million in 2017. Our net income increased by

 

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273.0% from RMB62.2 million in the six months ended June 30, 2018 to RMB232.0 million (US$33.8 million) in the same period in 2019.

Key Factors Affecting Our Results of Operations

Market Conditions and Industry Policies in China

The demand for our solutions is dependent upon overall market conditions in China. China’s auto financing market, especially the used car financing market, may be affected by, among other factors, general economic conditions in China, the growth of disposable income, the growth of car sales, car PARC as well as the availability and cost of credit available to finance used car purchases. Car buyers have been increasingly willing to finance car purchases with debt. The growth of our business will depend on part of the continuation of these trends.

Government policies affecting the used car financing market in China are developing and evolving, creating both challenges and opportunities that could affect our financial performance. In contrast to certain other financial technology industries, the regulatory authorities in the PRC have not imposed any regulations to materially restrict the used car financing market. Instead, the regulatory authorities have introduced favorable policies and regulations that benefit the used car market. Examples of favorable regulatory changes include the elimination of restrictions on transfers of used cars and the raising of the maximum permitted loan-to-value ratio to 70%. We believe such regulatory changes have contributed to the growth of our business in recent years. We will continually monitor regulatory developments and make necessary adjustments. While new regulations may create additional market opportunities for us, they may also result in new restrictions on our business.

Our Solution Offerings

We facilitate financing solutions for car purchases as well as provide various related value-added services in China. Our revenue growth depends on our abilities to improve our existing solutions and services, enhance user experience, expand offline sales network and capture new opportunities to provide value-added services. Our revenue growth also depends on our ability to enhance the internal risk control and prudentially apply our “data-driven” artificial intelligence technology in risk management model, as well as our abilities to effectively price our solutions and services and monetize new business opportunities.

We historically derived the majority of our revenues from facilitating auto financing solutions. As such, our financial performance depends in part on our ability to collaborate with our funding partners to offer auto financing solutions that are attractive to prospective car buyers. To complement our auto financing solutions, we also facilitate the sale of insurance solutions from insurance brokers and companies. Such business initiatives and our ability to execute and expand them will affect the growth of our business and profitability. Since our other service offerings may have different pricing strategies and cost structures, expansion of our business and changes to our revenue mix may affect our financial position and profitability.

Car Buyer Engagement and Sales Model

Our revenue growth has been largely driven by the expansion of our prospective car buyers and the corresponding increase in the amount of auto financing solutions and other value-added services we provide to them. We engage our prospective car buyers through two models, namely the direct sales model and third-party sales model, which involve different cost structures. Under the direct sales model, our in-house sales team is responsible for explaining our auto financing solutions to prospective car buyers and assisting them in completing their credit applications. We record commissions for our in-house sales representatives as cost of revenue and their base salary as sales and marketing expenses. Under the third-party sales model, employees of third-party sales agents or dealers are responsible for engaging car buyers. A dealer receives commissions from the relevant funding partner. A third-party sales agent may receive commissions from us or the relevant funding partner, depending on the arrangement among us, the third-party sales agent and the relevant funding partner. Commissions paid by us are recorded as sales and marketing expenses.

 

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We have transitioned from a third-party sales model to a direct sales model in most of our markets. While we believe our in-house sales team enables us to execute our sales strategy more effectively and deliver higher quality services to car buyers, we have also experienced an increase in sales and marketing expenses due to the expansion of our in-house sales team. Our financial performance will be affected by our ability to deploy our in-house sales team in a cost-efficient manner.

Collaboration with Funding Partners

We collaborate with different types of funding partners, which are currently mostly banks. Compared to other types of funding partners, we prefer to collaborate with financial institutions, which are typically capable of providing high volumes of stable funding at lower interest rates to car buyers, while adhering to more stringent compliance standards. The growth of our business is dependent on our abilities to expand both the number of high quality funding partners we collaborate with and the volumes of funding from them. Whether our efforts will be successful will depend on our ability to provide attractive value propositions to our existing and potential funding partners. As a result of our strong credit assessment capability and efficient customer acquisition, we have been able to gradually strengthen the relationships with reputable financial institutions. As a result, we have witnessed a steady downward trend in the average annualized interest rate charged by our funding partners, from 9.1% in 2017 to 8.4% in the first six months of 2019. The growth of our business will depend in part on our ability to sustain such trend.

Our different arrangements with funding partners affect the accounting treatment for the financing transactions that we facilitate. For funding partners that are financial institutions with strong credit assessment capabilities that rely on their own credit assessment process in determining whether to grant loans and setting the interest rate for the loans, we advance funds to borrowers only after the relevant financial institutions have approved loans to the borrowers. In such case, the financial institutions have the contractual rights to receive principal and interest after they fund the loans, and we do not view ourselves as the primary financing provider. We refer to such loans as off-balance sheet loans and recognize loan facilitation revenue when our services are rendered. We have also entered into funding arrangements that do not satisfy all the criteria for off-balance sheet treatment. We record such loans as loans and advances on our balance sheet and recognize net financing income. Most of such loans have been funded by non-financial institutions. As such, the types of funding partners we cooperate with and our arrangements with them have had, and are expected to continue to have, significant impact on our financial statements. For example, we significantly increased our cooperation with financial institutions that rely on their own credit assessment process and reduced cooperation with other funding partners in 2018, and as a result, our loan facilitation revenue increased sharply while our net financing income decreased. Such shift in the composition of our funding source also caused loans and advances, as well as payable to funding partners, recorded on our balance sheet to decrease significantly. We expect such trend to continue in the near future as we expect to continue to expand cooperation with funding partners that are financial institutions that rely on their own credit assessment process. We may also enter into new types of funding arrangements in response to our future business needs and changing market conditions.

Effectiveness of Our Credit Assessment and Risk Management

Our ability to perform credit assessment efficiently affects our ability to attract and retain car buyers. Over the past few years, we have improved the efficiency of our credit assessment process as we have been shifting from manual operation to a data-driven artificial intelligence system in credit assessment. The average time to process an application has decreased to 10 minutes in the first six months of 2019. In addition, our credit assessment capability affects our results of operations as we bear credit risk for loans that car buyers obtain from funding partners. At the early stage of a car buyer’s delinquency, we are obligated to make the overdue payment to the relevant funding partner. We are also typically obligated to purchase the financing receivables from the relevant funding partner upon an event of default as specified in the agreement with such funding partner, such as (i) three consecutive delinquencies, which means three consecutive payments that have been missed, each exceeding seven days or (ii) a cumulative number of six delinquencies that each exceeds seven days. As

 

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assurance of such obligation, we provide a security deposit that typically equals to a percentage of the outstanding balance or the amount of the loans provided by the relevant funding partner to car buyers referred by us. Based on our historical experience of borrower defaults, we recognize allowance for loans and advances with respect to on-balance sheet loans, and we recognize guarantee liabilities for off-balance sheet loans.

After a delinquency occurs, we aim to collect repayments and/or obtain the car collateral from the car buyer. We rely on our delinquent asset management team and third-party collection agents to collect repayments and obtain the car collateral at different stages of delinquent asset management process. Our ability to collect repayments and obtain car collateral in a cost-effective way will affect our results of operations.

Credit Performance

We monitor credit performance based on M1+ overdue ratio and M3+ overdue ratio. We define “M1+ overdue ratio” as (i) exposure at risk relating to auto financing transactions for which any installment payment is 31 or more calendar days past due as of a specified date, excluding amounts of principal that have been charged off, divided by (ii) exposure at risk relating to all auto financing transactions which remain outstanding as of such date, excluding amounts of principal that have been charged off. We define “M3+ overdue ratio” as (i) exposure at risk relating to auto financing transactions for which any installment payment is 91 or more calendar days past due as of a specified date, excluding amounts of principal that have been charged off, divided by (ii) exposure at risk relating to all auto financing transactions which remain outstanding as of such date, excluding amounts of principal that have been charged off.

The table below sets forth M1+ overdue ratio and M3+ overdue ratio for all auto financing transactions which we facilitated and remained outstanding as of the specified dates.

 

    As of  
    March 31,     June 30,     September 30,     December 31,     March 31,     June 30,     September 30,     December 31,     March 31,     June 30,  
    2017     2018     2019  
    (%)  

M1+ overdue ratio

    1.3       1.1       1.2       1.3       1.6       1.5       1.3       1.3       1.4       1.6  

M3+ overdue ratio

    0.5       0.6       0.5       0.7       0.7       0.9       0.7       0.7       0.7       0.8  

The table below sets forth the gross outstanding balance for our on- and off-balance sheet loans that were in default status as of the specified dates.

 

    As of  
    March 31,     June 30,     September 30,     December 31,     March 31,     June 30,     September 30,     December 31,     March 31,     June 30,  
    2017     2018     2019  
    (in thousands)  

Outstanding balance of on-balance sheet loans

    146,962       199,997       281,043       344,603       430,816       503,599       535,538       546,514       550,038       571,767  

Outstanding balance of off-balance sheet loans

    446       2,751       10,083       16,166       51,183       116,682       217,871       315,590       479,656       719,009  

Total

    147,408       202,748       291,126       360,769       481,999       620,281       753,409       862,104       1,029,694       1,290,776  

As a principle, we do not specifically target to cap our loan portfolio under a certain level of delinquency but aim to achieve a level where risk-adjusted return is maximized. We have conducted various testing on our

 

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loan portfolio in the past years which have resulted in marginal fluctuations of delinquencies, but overall the trends were stable. Over the periods, the increase in off-balance sheet default loan balance and tapering of on-balance sheet default loan balance were mainly driven by corresponding loan facilitation volume growth between off-balance sheet loans versus on-balance sheet loans given changes in our funding mix. We observe no underlying material difference in asset quality of loans treated as off-balance sheet versus on-balance sheet.

Components of Our Results of Operations

Revenues

Our revenues are comprised of loan facilitation revenue, value-added services revenue, net financing income and other revenues. Our revenues are primarily generated by our loan facilitation services, value-added services, such as insurance referrals, and others.

When we cooperate with funding partners that are financial institutions with strong credit assessment capabilities that rely on their own credit assessment process in determining whether to grant loans and setting the interest rate for the loans, we advance funds to borrowers only after the relevant financial institutions have approved loans to the borrowers. In such case, the financial institutions have the contractual rights to receive principal and interest after they fund the loans, and we do not view ourselves as the primary financing provider. We refer to such loans as off-balance sheet loans and recognize loan facilitation revenue when our services are rendered.

We have also entered into funding arrangements that do not satisfy all the criteria for off-balance sheet treatment. We record such loans as loans and advances on our balance sheet and recognize net financing income, which represents the difference between our financing income from loans to borrowers and our related financing costs and is amortized over the contractual life of the loans using the effective interest method.

Our value-added service revenue represents fees for our value-added services, such as insurance referrals to insurance brokers or insurance companies and registration of license plates and collaterals with the relevant government authorities.

Our other revenues primarily include revenues from providing operation support services, which primarily includes risk management and loan collection, and customer referral services to Youyong Holdings Limited, or Youyong, a related party that provides consumer financing solutions.

The following table sets forth the breakdown of our total net revenues, both in absolute amount and as a percentage of our total net revenues, for the periods presented:

 

    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018     2018     2019  
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net revenues:

                   

Loan facilitation revenue

    294,415       34.0       805,779       117,375       48.6       300,177       42.3       547,949       79,818       55.7  

Value-added services revenue

    92,130       10.6       232,003       33,795       14.0       79,596       11.2       207,153       30,175       21.0  

Net financing income

    364,178       42.0       319,741       46,576       19.3       187,186       26.4       94,252       13,729       9.6  

Other revenues

    115,956       13.4       298,835       43,530       18.1       142,935       20.1       135,090       19,678       13.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    866,679       100.0       1,656,358       241,276       100.0       709,894       100.0       984,444       143,400       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Revenues

Our cost of revenues primarily consists of commissions for our in-house sales, salaries and benefits expenses for personnel involved in risk control and loan facilitation services, cost of GPS tracking devices and

 

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others. The following table sets forth components of our cost of revenues, both in absolute amount and as a percentage of our total net revenues, for the periods presented.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018     2018     2019  
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Cost of revenues:

                   

Commissions

    96,877       11.2       195,556       28,486       11.8       90,384       12.7       108,473       15,801       11.1  

Salaries and benefits expenses

    5,004       0.6       87,899       12,804       5.2       43,366       6.1       44,969       6,550       4.6  

GPS tracking devices

    60,314       7.0       60,813       8,858       3.7       26,466       3.7       29,094       4,238       3.0  

Others

    46,354       5.3       52,439       7,639       3.2       24,268       3.4       47,424       6,908       4.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    208,549       24.1       396,707       57,787       24.0       184,484       26.0       229,960       33,497       23.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for Loans and Advances

We calculate allowance for losses on our loans and advances based on our historical loss experience using a roll rate-based model. Roll rate indicates the percentage of borrowers who become increasingly delinquent in their accounts. We also adjust the allowance based on loss-to-sale model, which takes into account characteristics of consumer behavior and macroeconomic conditions. For information regarding our accounting policy related to allowance for loans and advances, see “—Critical Accounting Policies, Judgments and Estimates—Allowance for Loans and Advances.” We recognize any change in allowance for loans and advances as provision for loans and advances for the relevant period.

Operating Expenses

Our operating expenses consist of sales and marketing expenses, general and administrative expenses, research and development expenses and gains from guarantee liabilities. The following table sets forth our operating expenses, both in absolute amount and as a percentage of our total net revenues, for the periods presented:

 

    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018     2018     2019  
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Operating expenses:

                   

Sales and marketing

    481,525       55.6       565,979       82,444       34.2       267,755       37.7       293,617       42,770       29.8  

General and administrative

    105,303       12.2       145,497       21,194       8.8       68,741       9.7       76,894       1,201       7.8  

Research and development

    72,296       8.3       119,609       17,423       7.2       50,838       7.2       49,487       7,209       5.0  

Gains from guarantee liabilities

    (2,126     (0.2     (122,130     (17,790     (7.4     (69,540     (9.8     (9,518 )      (1,386 )      (1.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    656,998       75.8       708,955       103,271       42.8       317,794       44.8       410,480       59,794       41.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sales and Marketing

Our sales and marketing expenses primarily consist of salaries, benefits and share-based compensation for our sales and marketing personnel (but excluding commissions), commissions for the third-party sales agents, professional service fees, marketing promotion fees, sales office rental and sales office administrative expenses and costs incurred in other marketing activities.

 

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General and Administrative

Our general and administrative expenses primarily consist of salaries, benefits and share-based compensation for employees engaged in management and administration positions or involved in general corporate functions, office rental for general corporate purposes, professional service fees, surcharges and depreciation.

Research and Development

Research and development expenses primarily consist of salaries, benefits and share-based compensation for employees engaged in developing and improving our technology infrastructure as well as professional and other service fees.

Gains from Guarantee Liabilities

For our off-balance sheet loans, we provide guarantees to our funding partners on the loans we facilitate, as we refer the car buyers to them. Therefore, we record the non-contingent aspect of guarantee liability at fair value on our balance sheet at the inception of the loans. Subsequently, the contingent loss arising from the obligation to make future payments is recognized when the car buyer’s default is probable and the amount of loss is estimable. The non-contingent aspect of guarantee liability is reduced as we are released from the underlying risk when the loan is repaid by the car buyer or when the funding partner is compensated in the event of a default. Changes in the guarantee liability are recognized in the statements of comprehensive (loss)/income over the term of the loan.

Taxation

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 tax based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. In addition, upon payment of dividends by us to our shareholders, no Cayman Islands withholding tax will be imposed.

Hong Kong

On March 21, 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 (the “Bill”) which introduces the two-tiered profits tax rates regime. The Bill was signed into law on March 28, 2018 and was gazetted on the following day. Under the two-tiered profits tax rates regime, the first two million Hong Kong Dollar (“HKD”) of profits of the qualifying group entity will be taxed at 8.25%, and profits above HKD2 million will be taxed at 16.5%. The current tax expense of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% for the year ended December 31, 2017, and 8.25% for the year ended December 31, 2018.

China

Generally, our subsidiary and consolidated variable interest entity in China are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

We are subject to VAT at a rate of 6% on the services we provide to customers, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law.

Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all

 

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the requirements under the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and receives approval from the relevant tax authority, in which case the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%.

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%.

 

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Results of Operations

The following tables set forth a summary of our consolidated results of operations for the periods presented, in absolute amount and as a percentage of our total net revenues. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2017     2018
Restated(1)
    2018
Restated(1)
    2019
Restated(1)
 
    RMB     %     RMB     US$     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Net Revenues:

                   

Loan facilitation revenue

    294,415       34.0       805,779       117,375       48.6       300,177       42.3       547,949       79,818       55.7  

Value-added services revenue

    92,130       10.6       232,003       33,795       14.0       79,596       11.2       207,153       30,175       21.0  

Net financing income

    364,178       42.0       319,741       46,576       19.3       187,186       26.4       94,252       13,729       9.6  

Other revenues

    115,956       13.4       298,835       43,530       18.1       142,935       20.1       135,090       19,678       13.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    866,679       100.0       1,656,358       241,276       100.0       709,894       100.0       984,444       143,400       100.0  

Cost of revenues

    (208,549     (24.1     (396,707     (57,787     (24.0     (184,484 )      (26.0 )      (229,960 )      (33,497 )      (23.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    658,130       75.9       1,259,651       183,489       76.0       525,410       74.0       754,484       109,903       76.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loans and advances

    (373,608     (43.1     (238,964     (34,809     (14.4     (145,486 )      (20.5 )      (100,630 )      (14,658 )      (10.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit after provision for loans and advances

    284,522       32.8       1,020,687       148,680       61.6       379,924       53.5       653,854       95,245       66.4  

Operating expenses:

                   

Sales and marketing

    (481,525     (55.6     (565,979     (82,444     (34.2     (267,755     (37.7     (293,617     (42,770     (29.8

General and administrative

    (105,303     (12.2     (145,497     (21,194     (8.8     (68,741     (9.7     (76,894     (11,201     (7.8

Research and development

    (72,296     (8.3     (119,609     (17,423     (7.2     (50,838     (7.2     (49,487     (7,209     (5.0

Gains from guarantee liabilities

    2,126       0.2       122,130       17,790       7.4       69,540       9.8       9,518       1,386       1.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (656,998     (75.8     (708,955     (103,271     (42.8     (317,794     (44.8     (410,480     (59,794     (41.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from operations

    (372,476     (43.0     311,732       45,409       18.8       62,130       8.7       243,374       35,451       24.8  

Interest expense, net

    (11,525     (1.3     (5,736     (836     (0.3     (3,128     (0.4     (3,158     (460     (0.3

Foreign exchange (losses)/gains

    (224     *       6,393       931       0.4       4,195       0.6       (69     (10     *  

Gains on disposal of subsidiary

    25,156       2.9       —         —         —         —         —         —         —         —    

Other income, net

    2,289       0.3       12,547