(Name, Telephone, Email and/or Facsimile number
and Address of Company Contact Person)
Securities registered or to be registered pursuant to
Section 12(b) of the Act.
Securities registered or to be registered pursuant to
Section 12(g) of the Act.
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report:
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transaction report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check
one):
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PAST FIVE YEARS.)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court.
Except where the context otherwise requires and for purposes
of this annual report on Form 20-F only, references to:
This annual report on Form 20-F
includes our audited consolidated statements of comprehensive income (loss) data for the years ended December 31, 2014, 2015
and 2016, and audited consolidated balance sheet data as of December 31, 2015 and 2016.
We completed the initial public offering
of 10,000,000 ADSs and a private placement concurrent with our initial public offering of 8,333,332 Class A common shares
in November 2014. Our ADSs are listed on the New York Stock Exchange under the symbol “EHIC”.
This annual report on Form 20-F
contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts
are forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry.
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 “aim”, “anticipate”, “believe”,
“continue”, “estimate”, “expect”, “intend”, “is/are likely to”, “is
projected to”, “may”, “plan”, “potential”, “will” or other similar expressions.
The forward-looking statements included in this annual report relate to, among others:
The forward-looking statements made
in this annual report relate only to events or information as of the date on which the statements are made in this annual report.
All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained or referred to in this section. 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.
PART I
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.KEY INFORMATION
|
A.
|
Selected Financial Data
|
The
following selected consolidated statements of comprehensive income (loss) data for each of the three years ended December 31,
2014, 2015 and 2016
, and the selected consolidated balance sheet data as of December 31, 2015 and 2016, have been derived
from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statements
of comprehensive income (loss) data for each of the two years ended December 31, 2012 and 2013, and the selected consolidated
balance sheet data as of December 31, 2012, 2013 and 2014 have been derived from our audited consolidated financial statements
for these periods, which are not included in this annual report. The selected consolidated financial data should be read in conjunction
with, and are qualified in their entirety by reference to, our consolidated financial statements and related notes and Item 5,
“Operating and Financial Review and Prospects” in this annual report. Our historical results do not necessarily indicate
results expected for any future period. Our consolidated financial statements are prepared and presented in accordance with U.S.
GAAP.
Selected Consolidated Statements of Comprehensive Income (Loss)
Data:
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
US$
|
|
|
% of Net
Revenues
|
|
|
|
(in thousands, except percentages, shares, per share and per ADS data)
|
Summary
consolidated statements of comprehensive income (loss) data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
450,085
|
|
|
|
100.0
|
%
|
|
|
566,394
|
|
|
|
100.0
|
%
|
|
|
851,165
|
|
|
|
100.0
|
%
|
|
|
1,450,630
|
|
|
|
100.0
|
%
|
|
|
2,108,944
|
|
|
|
303,751
|
|
|
|
100.0
|
%
|
Cost of revenues
(1)(3)
|
|
|
432,448
|
|
|
|
(96.1
|
)
|
|
|
(526,446
|
)
|
|
|
(92.9
|
)
|
|
|
(718,699
|
)
|
|
|
(84.4
|
)
|
|
|
(1,137,978
|
)
|
|
|
(78.4
|
)
|
|
|
(1,515,281
|
)
|
|
|
(218,246
|
)
|
|
|
(71.9
|
)
|
Gross profit
(2)
|
|
|
17,637
|
|
|
|
3.9
|
|
|
|
39,948
|
|
|
|
7.1
|
|
|
|
132,466
|
|
|
|
15.6
|
|
|
|
312,652
|
|
|
|
21.6
|
|
|
|
593,663
|
|
|
|
85,505
|
|
|
|
28.1
|
|
Selling and marketing expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party
|
|
|
(38,209
|
)
|
|
|
(8.5
|
)
|
|
|
(40,439
|
)
|
|
|
(7.1
|
)
|
|
|
(33,721
|
)
|
|
|
(4.0
|
)
|
|
|
(48,869
|
)
|
|
|
(3.4
|
)
|
|
|
(67,789
|
)
|
|
|
(9,764
|
)
|
|
|
(3.2
|
)
|
Related party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,595
|
)
|
|
|
(0.2
|
)
|
|
|
(16,190
|
)
|
|
|
(1.1
|
)
|
|
|
(29,399
|
)
|
|
|
(4,234
|
)
|
|
|
(1.4
|
)
|
Total selling and marketing
expenses
(3)
|
|
|
(38,209
|
)
|
|
|
(8.5
|
)
|
|
|
(40,439
|
)
|
|
|
(7.1
|
)
|
|
|
(35,316
|
)
|
|
|
(4.2
|
)
|
|
|
(65,059
|
)
|
|
|
(4.5
|
)
|
|
|
(97,188
|
)
|
|
|
(13,998
|
)
|
|
|
(4.6
|
)
|
General and administrative
expenses
(3)
|
|
|
(94,431
|
)
|
|
|
(21.0
|
)
|
|
|
(112,416
|
)
|
|
|
(19.8
|
)
|
|
|
(132,125
|
)
|
|
|
(15.5
|
)
|
|
|
(183,549
|
)
|
|
|
(12.7
|
)
|
|
|
(251,938
|
)
|
|
|
(36,286
|
)
|
|
|
(11.9
|
)
|
Other operating income
|
|
|
11,041
|
|
|
|
2.5
|
|
|
|
13,549
|
|
|
|
2.3
|
|
|
|
17,122
|
|
|
|
2.0
|
|
|
|
10,764
|
|
|
|
0.7
|
|
|
|
10,310
|
|
|
|
1,485
|
|
|
|
0.5
|
|
Total
operating expenses
|
|
|
(121,599
|
)
|
|
|
(27.0
|
)
|
|
|
(139,306
|
)
|
|
|
(24.6
|
)
|
|
|
(150,319
|
)
|
|
|
(17.7
|
)
|
|
|
(237,844
|
)
|
|
|
(16.5
|
)
|
|
|
(338,816
|
)
|
|
|
(48,799
|
)
|
|
|
(16.1
|
)
|
Income (loss) from operations
|
|
|
(103,962
|
)
|
|
|
(23.1
|
)
|
|
|
(99,358
|
)
|
|
|
(17.5
|
)
|
|
|
(17,853
|
)
|
|
|
(2.1
|
)
|
|
|
74,808
|
|
|
|
5.1
|
|
|
|
254,847
|
|
|
|
36,706
|
|
|
|
12.1
|
|
Interest income
|
|
|
1,146
|
|
|
|
0.3
|
|
|
|
360
|
|
|
|
0.1
|
|
|
|
4,397
|
|
|
|
0.5
|
|
|
|
2,653
|
|
|
|
0.2
|
|
|
|
8,414
|
|
|
|
1,212
|
|
|
|
0.4
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party
|
|
|
(66,636
|
)
|
|
|
(14.8
|
)
|
|
|
(50,880
|
)
|
|
|
(9.0
|
)
|
|
|
(76,938
|
)
|
|
|
(9.0
|
)
|
|
|
(109,566
|
)
|
|
|
(7.6
|
)
|
|
|
(206,425
|
)
|
|
|
(29,731
|
)
|
|
|
(9.8
|
)
|
Related party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,203
|
)
|
|
|
(1.0
|
)
|
|
|
(18,534
|
)
|
|
|
(2,670
|
)
|
|
|
(0.9
|
)
|
Total interest expense
|
|
|
(66,636
|
)
|
|
|
(14.8
|
)
|
|
|
(50,880
|
)
|
|
|
(9.0
|
)
|
|
|
(76,938
|
)
|
|
|
(9.0
|
)
|
|
|
(123,769
|
)
|
|
|
(8.6
|
)
|
|
|
(224,959
|
)
|
|
|
(32,401
|
)
|
|
|
(10.7
|
)
|
Gain from waiver of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,870
|
|
|
|
1.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gain from sale of cost method
investment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
803,060
|
|
|
|
55.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other income (expense),
net
|
|
|
(1,046
|
)
|
|
|
(0.3
|
)
|
|
|
(1,108
|
)
|
|
|
(0.3
|
)
|
|
|
(840
|
)
|
|
|
(0.1
|
)
|
|
|
10,205
|
|
|
|
0.7
|
|
|
|
1,444
|
|
|
|
208
|
|
|
|
0.1
|
|
Income
(loss) before income taxes
|
|
|
(170,498
|
)
|
|
|
(37.9
|
)
|
|
|
(150,986
|
)
|
|
|
(26.7
|
)
|
|
|
(91,234
|
)
|
|
|
(10.7
|
)
|
|
|
783,827
|
|
|
|
54.0
|
|
|
|
39,746
|
|
|
|
5,725
|
|
|
|
1.9
|
|
Provision for income taxes
|
|
|
(5,212
|
)
|
|
|
(1.1
|
)
|
|
|
(1,228
|
)
|
|
|
(0.2
|
)
|
|
|
(1,912
|
)
|
|
|
(0.2
|
)
|
|
|
(87,488
|
)
|
|
|
(6.0
|
)
|
|
|
(6,611
|
)
|
|
|
(952
|
)
|
|
|
(0.3
|
)
|
Net
income (loss)
|
|
|
(175,710
|
)
|
|
|
(39.0
|
)
|
|
|
(152,214
|
)
|
|
|
(26.9
|
)
|
|
|
(93,145
|
)
|
|
|
(10.9
|
)
|
|
|
696,339
|
|
|
|
48.0
|
|
|
|
33,135
|
|
|
|
4,773
|
|
|
|
1.6
|
|
Net
income (loss) attributable to common shareholders
|
|
|
(330,763
|
)
|
|
|
(73.5
|
)
|
|
|
(371,783
|
)
|
|
|
(65.6
|
)
|
|
|
(343,920
|
)
|
|
|
(40.4
|
)
|
|
|
696,339
|
|
|
|
48.0
|
|
|
|
33,135
|
|
|
|
4,773
|
|
|
|
1.6
|
|
Weighted
average number of common shares used in computing net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,096,842
|
|
|
|
|
|
|
|
6,096,842
|
|
|
|
|
|
|
|
19,198,145
|
|
|
|
|
|
|
|
126,758,363
|
|
|
|
|
|
|
|
137,621,702
|
|
|
|
137,621,702
|
|
|
|
|
|
Diluted
|
|
|
6,096,842
|
|
|
|
|
|
|
|
6,096,842
|
|
|
|
|
|
|
|
19,198,145
|
|
|
|
|
|
|
|
128,403,877
|
|
|
|
|
|
|
|
138,552,031
|
|
|
|
138,552,031
|
|
|
|
|
|
Net
income (loss) per common share attributable to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(54.25
|
)
|
|
|
|
|
|
|
(60.98
|
)
|
|
|
|
|
|
|
(17.91
|
)
|
|
|
|
|
|
|
5.49
|
|
|
|
|
|
|
|
0.24
|
|
|
|
0.03
|
|
|
|
|
|
Diluted
|
|
|
(54.25
|
)
|
|
|
|
|
|
|
(60.98
|
)
|
|
|
|
|
|
|
(17.91
|
)
|
|
|
|
|
|
|
5.42
|
|
|
|
|
|
|
|
0.24
|
|
|
|
0.03
|
|
|
|
|
|
Net
income (loss) per ADS*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(108.50
|
)
|
|
|
|
|
|
|
(121.96
|
)
|
|
|
|
|
|
|
(35.82
|
)
|
|
|
|
|
|
|
10.99
|
|
|
|
|
|
|
|
0.48
|
|
|
|
0.07
|
|
|
|
|
|
Diluted
|
|
|
(108.50
|
)
|
|
|
|
|
|
|
(121.96
|
)
|
|
|
|
|
|
|
(35.82
|
)
|
|
|
|
|
|
|
10.85
|
|
|
|
|
|
|
|
0.48
|
|
|
|
0.07
|
|
|
|
|
|
* Each ADS represents two Class A common shares.
(1) We previously reported the caption “vehicle operating
expenses”. Commencing in 2015, we evaluated the presentation of results of operations and concluded all relevant costs
of revenues are included in “vehicle operating expenses”. Accordingly, “vehicle operating expenses”
have been re-titled “cost of revenues” for the current period and all historical periods.
(2) Commencing in 2015, we began reporting gross profit as
a GAAP measure included in our results of operations. This measure is defined, consistent with generally accepted accounting principles,
as net revenues reduced by cost of revenues. Gross profit has been presented for the current period and all historical periods.
(3) Includes
share-based compensation charges of RMB6.7 million, RMB6.2 million, RMB12.7 million, RMB14.0 million and RMB16.0
million (US$2.3 million) in 2012, 2013, 2014,
2015 and 2016, respectively, allocated as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Cost of revenues
|
|
|
(81
|
)
|
|
|
(29
|
)
|
|
|
(134
|
)
|
|
|
(362
|
)
|
|
|
(840
|
)
|
|
|
(121
|
)
|
Selling and marketing expenses
|
|
|
(35
|
)
|
|
|
(9
|
)
|
|
|
(490
|
)
|
|
|
(894
|
)
|
|
|
(401
|
)
|
|
|
(58
|
)
|
General and administrative expenses
|
|
|
(6,567
|
)
|
|
|
(6,168
|
)
|
|
|
(12,057
|
)
|
|
|
(12,727
|
)
|
|
|
(14,800
|
)
|
|
|
(2,131
|
)
|
Total share-based compensation expenses
|
|
|
(6,683
|
)
|
|
|
(6,206
|
)
|
|
|
(12,681
|
)
|
|
|
(13,983
|
)
|
|
|
(16,041
|
)
|
|
|
(2,310
|
)
|
Selected Consolidated Balance Sheets Data:
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except share data)
|
|
Summary consolidated balance sheets data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
133,453
|
|
|
|
630,733
|
|
|
|
926,208
|
|
|
|
2,610,088
|
|
|
|
529,519
|
|
|
|
76,267
|
|
Restricted cash
|
|
|
—
|
|
|
|
30,247
|
|
|
|
192,758
|
|
|
|
206,944
|
|
|
|
257,059
|
|
|
|
37,024
|
|
Total current assets
|
|
|
239,192
|
|
|
|
803,742
|
|
|
|
1,426,458
|
|
|
|
3,427,263
|
|
|
|
1,941,705
|
|
|
|
279,664
|
|
Property and equipment, net
|
|
|
844,380
|
|
|
|
1,062,331
|
|
|
|
1,940,048
|
|
|
|
4,096,618
|
|
|
|
5,723,569
|
|
|
|
824,365
|
|
Vehicle purchase deposits
|
|
|
—
|
|
|
|
119,173
|
|
|
|
174,185
|
|
|
|
216,728
|
|
|
|
420,923
|
|
|
|
60,626
|
|
Total assets
|
|
|
1,116,659
|
|
|
|
2,026,422
|
|
|
|
3,755,640
|
|
|
|
7,800,920
|
|
|
|
8,160,959
|
|
|
|
1,175,423
|
|
Accounts payable
|
|
|
5,516
|
|
|
|
6,554
|
|
|
|
5,487
|
|
|
|
785,899
|
|
|
|
179,878
|
|
|
|
25,908
|
|
Short-term debt
|
|
|
171,823
|
|
|
|
219,640
|
|
|
|
540,519
|
|
|
|
803,132
|
|
|
|
926,219
|
|
|
|
133,403
|
|
Total current liabilities
|
|
|
531,773
|
|
|
|
333,475
|
|
|
|
676,015
|
|
|
|
1,881,994
|
|
|
|
1,396,109
|
|
|
|
201,082
|
|
Long-term debt due to third parties
|
|
|
6,483
|
|
|
|
375,726
|
|
|
|
713,233
|
|
|
|
1,669,453
|
|
|
|
2,667,823
|
|
|
|
384,246
|
|
Long-term debt due to a related party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
100,000
|
|
|
|
14,403
|
|
Total liabilities
|
|
|
543,506
|
|
|
|
709,552
|
|
|
|
1,389,248
|
|
|
|
3,852,847
|
|
|
|
4,169,830
|
|
|
|
600,580
|
|
Total shareholders’ equity (deficit)
|
|
|
(596,487
|
)
|
|
|
(956,651
|
)
|
|
|
2,366,392
|
|
|
|
3,948,073
|
|
|
|
3,991,130
|
|
|
|
574,842
|
|
Common share capital
|
|
|
40
|
|
|
|
40
|
|
|
|
728
|
|
|
|
867
|
|
|
|
878
|
|
|
|
127
|
|
Common shares outstanding
|
|
|
6,096,842
|
|
|
|
6,096,842
|
|
|
|
114,379,243
|
|
|
|
137,133,413
|
|
|
|
138,860,287
|
|
|
|
138,860,287
|
|
Exchange Rate Information
Our
business is primarily conducted in China and substantially all of our revenues are denominated in RMB. However, periodic reports
made to shareholders will include current period amounts translated into U.S. dollars using the then current exchange rates,
for the convenience of the readers. The conversion of RMB into U.S. dollars in this annual report is based on the noon buying rate
in New York City for cable transfers in RMB as certified for customs purposes by the Federal Reserve Board. Unless the amounts
were from transactions originally denominated in U.S. dollars or otherwise noted in this annual report, all translations from RMB
to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.9430 to US$1.00, the noon buying
rate in effect as of December 31, 2016. We make no representation that any RMB or U.S. dollar amounts could have been, or
could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes
control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and
through restrictions on foreign trade. On April 21, 2017, the noon buying rate was RMB6.8845 to US$1.00.
The
following table sets forth various information concerning exchange rates between the Renminbi and the U.S. dollar for the periods
indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this
annual report or will use in the preparation of our periodic reports or any other information to be provided to you.
|
|
Noon Buying Rate
|
|
Period
|
|
Period End
|
|
|
Average
(1)
|
|
|
Low
|
|
|
High
|
|
|
|
(RMB per U.S. Dollar)
|
|
2012
|
|
|
6.2301
|
|
|
|
6.2990
|
|
|
|
6.3879
|
|
|
|
6.2221
|
|
2013
|
|
|
6.0537
|
|
|
|
6.1412
|
|
|
|
6.2438
|
|
|
|
6.0537
|
|
2014
|
|
|
6.2046
|
|
|
|
6.1704
|
|
|
|
6.2591
|
|
|
|
6.0402
|
|
2015
|
|
|
6.4778
|
|
|
|
6.2827
|
|
|
|
6.4896
|
|
|
|
6.1870
|
|
2016
|
|
|
6.9430
|
|
|
|
6.6549
|
|
|
|
6.9580
|
|
|
|
6.4480
|
|
October
|
|
|
6.7735
|
|
|
|
6.7303
|
|
|
|
6.7819
|
|
|
|
6.6685
|
|
November
|
|
|
6.8837
|
|
|
|
6.8402
|
|
|
|
6.9195
|
|
|
|
6.7534
|
|
December
|
|
|
6.9430
|
|
|
|
6.9198
|
|
|
|
6.9580
|
|
|
|
6.8771
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8768
|
|
|
|
6.8907
|
|
|
|
6.9575
|
|
|
|
6.8360
|
|
February
|
|
|
6.8665
|
|
|
|
6.8694
|
|
|
|
6.8821
|
|
|
|
6.8517
|
|
March
|
|
|
6.8832
|
|
|
|
6.8940
|
|
|
|
6.9132
|
|
|
|
6.8687
|
|
April (through April 21, 2017)
|
|
|
6.8845
|
|
|
|
6.8871
|
|
|
|
6.8988
|
|
|
|
6.8778
|
|
Source: Federal Reserve Statistic Release.
|
(1)
|
Annual
average for any given year is calculated by using the average of the exchange rates on the end of each month during such
year.
Monthly average for any given month is calculated by using the average of the daily rates during such month.
|
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
Risks related to our business
and industry
We may not be able to sustain our growth rates or manage our
expansion plan, which could adversely affect our operating results.
We
have experienced significant growth in recent years. Our total net revenues increased from RMB851.2 million in 2014
to RMB1,450.6 million in 2015, and further increased to RMB2,108.9 million (US$303.8 million) in 2016
. We increased
the total fleet size from 19,746 vehicles as of December 31, 2014 to 38,070 vehicles as of December 31, 2015 and further
to 56,916 vehicles as of December 31, 2016, and we expanded our geographic coverage from 1,180 services locations in
99 cities as of December 31, 2014 to 1,861 service locations in 151 cities as of December 31, 2015 and further to 3,249
service locations in 216 cities across China as of December 31, 2016. We may not be able to sustain these high growth
rates in future periods and you should not rely on the growth in our revenue or fleet size in any prior period as an
indication of our future performance.
We
plan to continue to expand our fleet size and geographic coverage. We believe geographical expansion is particularly important
for us to acquire more customers and enhance our brand recognition. Nonetheless, expanding into new geographical markets imposes
additional burdens on our managerial, financial, operational, information technology and general administrative resources. Our
planned expansion will also require us to maintain consistent and high-quality services to ensure our brand does not suffer as
a result of any deviations, whether actual or perceived, in our service quality. As China is a large and diverse market, business
travel or leisure
travel demands may vary significantly by region. As a result, we may not be able to leverage our experience
in the markets in which we currently operate to expand into other parts of China, and we cannot assure you that we will be able
to effectively manage the growth of our operations or maintain our service quality. If we are unable to expand our operations in
a timely and cost effective manner, our results of operations may be materially adversely affected.
We have a history of operating
and net losses, and we may not be able to achieve or sustain profitability.
We have a history of operating and net
losses. In 2014, we incurred an operating loss of RMB17.9 million and a net loss of RMB93.1 million. Our historical operating
and net losses were primarily due to significant upfront investments in connection with the expansion of our nationwide
service network and infrastructure in recent years, which expose us to significant fixed costs and expenses. In 2015 and
2016, we recorded operating income of RMB74.8 million and RMB254.8 million (US$36.7 million), respectively, and net income of
RMB696.3 million and RMB33.1 million (US$4.8 million), respectively. Although we generated net income in 2015 and 2016, our
net income in 2015 was the result of a net gain of RMB736.8 million related to sales of our investment assets (after
transaction costs and tax provision). If market demand for our car rentals and car services does not continue to
increase as quickly as we have anticipated, or if there is a rapid and unexpected decline in such demand, we may be unable to
generate sufficient revenues to offset fixed costs and achieve economies of scale, our operating results may be materially
adversely affected as a result of high operating expenses and underutilized capacity, and we may incur operating or net
losses in the future.
In
addition, our ability to achieve profitability is affected by various factors, many of which are beyond our control. For example,
our revenues and profitability depend on the continuous growth of the car rental and car service industry in China and customer
demands for such services. We cannot assure you that car rentals and car services, as relatively new alternatives to car ownership,
will become widely accepted in China. Furthermore, vehicle purchases have historically accounted for the majority of our capital
expenditures. We expect to continue to incur significant costs and expenses to increase the scale of our operations, which may
make it difficult for us to achieve and sustain profitability.
Furthermore,
our historical and future results of operations in a specific period may be subject to the impact of various factors and events,
which may make our results of operations in different periods less comparable with each other and may not be necessarily
indicative
of future trends. While we intend to implement various measures to control the increases in our cost of revenues as we ramp up
our business rapidly, we cannot assure you that these measures will be as effective as we currently expect, or at all. If we cannot
significantly increase our net revenues to offset our continuously increasing operating and other expenses, we will incur losses
and our business, financial condition and results of operations will be materially and adversely affected. We may also incur significant
losses in the future for a number of other reasons, including changes in the macroeconomic and regulatory environment, competitive
dynamics, our inability to respond to these changes in a timely and effective manner and the other risks described in this annual
report, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events.
We face intense competition, and if we fail to compete effectively,
we may lose market share, our revenues and margin may decrease and our results of operations may be adversely affected.
The
car rental and car service industry in China is competitive and fragmented. We expect competition in China’s car rental and
car service industry to persist and intensify.
As
we provide comprehensive service offerings, we compete with different market participants in different market sectors at
different
levels. For car rentals, we compete with both national and regional players, such as CAR Inc., or Shenzhou, Xiaoju
Kuaizhi, Inc., or Didi, and Beijing Shouqi Group Co., Ltd., or Shouqi. For business-to-business car services, we
primarily compete with Avis China and China Yongda Automobiles Services Holdings Limited, or Yongda. In late 2014, we
started to expand our car services to a business-to-consumer model. Although it is only complementary to our business-to-business oriented car services, we
may face competition from business-to-consumer car services providers such as Didi, UCAR (an affiliate company of Shenzhou)
and Shouqi, all of which are GPS based mobile taxi and car hailing service providers. In April 2017, we launched car sharing
business initiative in Shanghai and Guangzhou, which is currently at a very early stage and only complementary to our car
rental business. However, our car sharing business may compete with other national and regional car sharing players, such as
Car2Go (operated by Daimler Mobility Services), GoFun (operated by Shouqi) and ToGo (operated by Beijing Tuge Technology Co.,
Ltd.).
For
car rentals, we compete primarily on the basis of rental price, value-added services, user experience, brand recognition, convenience
of service locations, geographic coverage and service quality. For car services, we compete primarily on the basis of quality and
convenience of services, ability to provide tailored solutions and timely response to ad-hoc situations, brand recognition, network
coverage, and, to a
lesser extent, service charge. For car sharing, we compete primarily on the basis of rental price, geographic coverage, accessibility and the technology
to monitor and optimize utilization. Our competitors, some of which may have access to greater financial resources,
often seek to compete aggressively on the basis of pricing. If we do not price our services competitively, we may lose rental volume,
or if we do, our revenue and margins will suffer, either of which could have a material adverse impact on our results of operations.
In
addition, technological advances may materially impact the competitive landscape of China’s car rental and car service industry
and our competitiveness in the evolving industry. For example, an increasing number of customers in China have chosen to
reserve car rental services through websites or mobile applications due to the convenience of these channels. As a result, it is
critical for us to continue to enhance and improve the responsiveness, functionality and features of our websites and mobile applications
to remain competitive. The development of websites, mobile applications and other proprietary technology requires substantial expenditures
and resources, and entails significant technical and business risks. Our competitors may use new technologies more effectively,
develop more appealing and popular websites and mobile applications, or adapt more quickly than us to evolving industry trends
or changing market requirements. Some of our competitors may form closer relationships with, or be acquired by, major Internet
companies in China. Furthermore, the proliferation of the Internet has increased the price transparency among car rental companies
by enabling cost-conscious customers to more easily obtain the lowest rates available among car rental companies for any given
trip. Such increased price transparency may further contribute to the prevalence and intensity of price competition in the future.
Our
competitors may also compete against us in the selection of new service locations, or offer better terms for our existing leased
properties, thereby slowing down our anticipated expansion. Furthermore, some competitors may initiate negative publicity
campaigns against us, which may harm our brand and reputation. If we fail to effectively compete with large players on scale or
small players on cost and flexibility, we may not be able to compete successfully against our current and future competitors.
We face risks arising from our heavy reliance on our proprietary
technology platform.
We rely heavily on our proprietary technology
platform with various features specifically designed to improve and streamline our operations in accepting reservations, processing
payments, managing our fleet, accounting for our various business activities and otherwise conducting our business. The satisfactory
performance, reliability and availability of our proprietary technology platform are critical to our reputation, our ability to
attract and retain customers and maintain adequate service levels. Any system interruption that results in the unavailability of
our website or a disruption in our proprietary technology platform could result in negative publicity, damage our reputation and
brand and cause our business and operating results to suffer. We may experience temporary system interruptions for a variety of
causes, including network failures, power failures, cyber attacks, software errors or overwhelming user traffic to our website
during periods of strong demand. In addition, we are dependent in part on third parties for the implementation and maintenance
of certain aspects of our systems and because some of the causes of system interruptions may be outside of our control, we may
not be able to remedy such interruptions in a timely manner, or at all. Although we regularly back up our data on servers in different
locations or on hard drives stored in our offices, there can be no assurance that our systems back-up will successfully mitigate
or eliminate these risks. Any disruption, termination, or provision of substandard services could adversely affect our brand, customer
relationships, operating results and financial condition.
If we are unable to dispose of our used vehicles at desirable
prices or timing or through appropriate channels, the residual value of our fleet may drop significantly and we may incur significant
financial losses.
We
generally hold vehicles in our fleet for a term of three to four years, except for program cars as described below which typically
have a holding period of 12 to 24 months. Depending on the conditions of our vehicles, our actual
vehicle holding period
may vary. As our fleet grows and matures, we expect vehicle dispositions to become a significant part of our operations. We have
developed an internal rating system to assess the general conditions of our vehicles, and dispose of our used vehicles through
a variety of disposition channels according to the rating results, including auctions, brokered sales, dealers and online used
car marketplace. We also maintain a well-managed and disciplined vehicle disposition process which takes into consideration market
timing, disposal price and seasonality. Given that China’s used vehicle market is still at its early stage and lacks a well-established
credit system, we face uncertainties in our ability to dispose of our used vehicles at reasonable prices, in a timely manner or
through appropriate channels.
As
China’s car dealers tapped into used car sales market, in late 2014, we started to have some program car arrangements with
car dealers, and in some cases with used car sales brokers and online platforms. Program cars refer to vehicles of which disposal
price and holding period have been predetermined and fixed by agreements. Pursuant to program car agreements, we have the option
to sell, and car dealers have the obligation to repurchase, or in some cases, used car sales brokers/online platforms have the
obligation to purchase, our vehicles
at a specified repurchase price and after a specified holding period (typically 12
to 24 months), subject to certain vehicle condition, mileage and holding period requirements. Repurchase prices of program cars
are generally based on a predetermined percentage of original vehicle cost and the month in which the vehicle is repurchased. We
calculate the depreciation costs of such vehicles separately, based on their respective contractual repurchase prices and holding
periods, and adjust the depreciation costs if the repurchase conditions of such vehicles are not met or we elect not to sell such
vehicles as program cars. We believe program car arrangements could hedge certain risk from fluctuations in used car prices in
the secondary market and offer additional alternatives of our vehicle acquisition and disposal channels. However, car dealers,
used car sales brokers and online platforms may discontinue to offer program car arrangements to us on terms or at prices consistent
with the current agreements, or at all. In addition, failure by a car dealer, used car sales broker or online platform to fulfill
its obligations under any program car agreement may impact our results of operations if we are unable to dispose of such vehicles
at prices estimated at the time of purchase.
We
carry substantial risk that the market value of a used vehicle at the time of its disposition may be less than its estimated
residual
value at such time. If we are unable to dispose of our used vehicles at prices that are equal to or greater than their estimated
residual value, our depreciation costs will increase and we will incur losses resulting from the disposal, which may have material
and adverse impact on our financial results. As our fleet size continues to grow, inability to dispose of our used vehicles at
desirable prices or timing or through appropriate channels could have significant impact on our business.
Our
limited operating history in an emerging and rapidly evolving industry may not provide an adequate basis on which to evaluate
our
business and future prospects.
We
have a limited operating history. We began to provide chauffeured car services and car rental services in 2006 and 2008,
respectively.
We believe our future success depends on our ability to significantly increase revenues as well as maintain profitability from
our operations. Our limited operating history makes it difficult to evaluate our business and future prospects. You should consider
our future prospects in light of the risks and challenges encountered by a company with a limited operating history in an emerging
and rapidly evolving industry. These risks and challenges include, among other things,
|
·
|
our ability to continue our growth as well as maintain profitability;
|
|
·
|
preservation of our competitive position in the car rental and car service industry in China;
|
|
·
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providing consistent and high-quality services to attract and retain individual customers as well as corporate and institutional
clients;
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our ability to implement our strategies and make timely and effectively respond to competition and changes in customer preferences;
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our ability to increase awareness of our “eHi” brand and continue to develop customer loyalty; and
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recruitment, training and retaining of qualified managerial and other personnel.
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Our
failure to raise sufficient capital to fund and expand our operations at a reasonable cost could reduce our ability to compete
successfully.
Our business requires a significant amount of
capital in large part because we are prompted to continue to grow our fleet and expand our business in existing markets and to
additional markets where we currently do not have operations. Our capital expenditures totaled RMB1,327.7 million, RMB2,183.4 million
and RMB3,687.8 million (US$531.2 million) in 2014, 2015 and 2016, respectively, which were primarily used for vehicle purchases.
We may require additional funding to implement our expansion strategy by offering additional equity or debt securities or obtaining
additional credit facilities in the future. The sales of additional equity or equity linked securities could result in dilution
of your shareholding. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties,
including:
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economic, political and other conditions in China and elsewhere;
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our future results of operations, financial condition and cash flows; and
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general market conditions for capital raising activities in our industry.
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In addition, pursuant to the
documents governing our US$200 million senior unsecured notes issued in 2015, our $150 million syndicated bank facility
entered into in 2016 as well as other financing indebtedness, we are subject to various restrictive covenants including,
among other things, limitations on our ability to incur additional indebtedness or liens, various financial covenants and
limitations on our ability to sell or dispose of certain assets, pay or distribute dividend, redeem or repurchase share
capital, make certain capital contributions or investments, merger or consolidate with or acquire other companies, change
the nature of our business, enter into derivative transactions, amend our charter documents and make loans. As a result of
the covenants, our ability to pay dividends or other distributions on our common shares, including those represented by ADSs,
may be limited. These covenants could also restrict our ability to operate our business, raise additional capital in the
future through bank borrowings and debt and equity issuances and may restrict our ability to engage in some transactions that
we expect to be of benefit to us.
If we fail to raise sufficient capital to fund
and expand our operations at a reasonable cost, we may not be able to, among others:
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increase our fleet size;
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expand our operations in current or additional cities in China;
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enhance our sales and marketing and strengthen our general and administrative teams;
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continue to improve our proprietary technology platform;
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acquire businesses complementary to ours;
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hire, train and retain qualified employees;
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develop and introduce service enhancements to our clients; or
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respond to competitive pressures or unanticipated working capital requirements.
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Uncertainties
regarding the growth and profitability of the car rental and car service industry in China could adversely affect our
revenues
and business prospects.
Substantially all of our revenues are generated
from our car rentals and car services. While car rentals and car services have existed in China since the 1990s, the long-term
prospects of the car rental and car service industry in China remain relatively untested. Our future operating results will depend
on numerous factors affecting the development of the car services industry in China, some of which may be beyond our control. These
factors include:
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the growth of demand for car rentals and car services in China, and the rate of any such growth;
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the trust and confidence level of customers in car rentals and car services providers in China, as well as changes in customer
demographics and preferences;
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the selection, price and popularity of vehicles that we and our competitors offer;
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the emergence of alternative transportation service models such as car-hailing, car-sharing, ride-sharing business and
innovation of driver-less vehicles services;
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general economic conditions, particularly economic conditions affecting discretionary consumer spending; and
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the legal environment that may impact our business operations or expansions.
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A decline in the popularity of driving, car
rentals or car services in general, or any failure by us to adapt our business model and improve customer experience in response
to trends and customer needs and preferences, will adversely affect our revenues and prospects.
Various
government policies on automobile control and management, such as vehicle plate control and restrictions on automobile
purchases
and ownership, may increase our operating costs, limit our future expansion or otherwise adversely affect our business, results
of operations and prospects.
The
significant increase in the number of vehicles in China, primarily in major cities, and the traffic and pollution
resulting from this increase have drawn the attention of both the government and the public. To address this issue, local
governments in China have promulgated various policies to limit the increase in the number of vehicles, such as restricting
the number of new local vehicle plates issued. For example, Beijing, Shanghai, Shenzhen, Guangzhou, Tianjin, Hangzhou and
Guiyang city governments have adopted policies regarding issuing a limited number of local vehicle plates and/or restricting
the entrance of vehicles with non-local vehicle plates into certain areas of the city. In addition, some cities in China,
such as Beijing, Shanghai, Guangzhou, Tianjin, Shijiazhuang, Nanjing, Wuhan, Lanzhou, Harbin, Changchun, Jinan, Nanchang,
Chengdu, Hangzhou, Linfen, Langfang, Baoding, Dalian and Guiyang, also implemented traffic control
measures banning
vehicles with certain license plate numbers from being on the road in or entering into certain areas of the city during
certain hours in a workday or certain days in a given week. If more cities adopt vehicle plate control policies, our costs to
obtain new vehicle plates in such cities may significantly increase and our future expansion in these cities may be limited,
which may materially and adversely affect our business, results of operations and prospects. In addition, if a large number
of our rental cars are found in violation of these traffic control measures, we may be subject to fines for such violations
which may increase our operating costs and expenses.
Other
government policies on automobile purchases, ownership, related taxes and other charges may also have a material effect on our
business. In the past years the PRC government has provided some tax reductions or government subsidies on certain types of
automobile
purchases. We are not in a position to predict whether any tax reduction or government subsidy for automobile purchases will be
granted or continued in the future. In the event that any adverse changes of existing government policies on automobile purchases,
ownership, related taxes and other charges are adopted by the PRC government, it may materially and adversely affect our results
of operations and limit our further expansion.
Our business is seasonal, and a disruption in our operations
during our peak or off peak seasons could materially adversely affect our results of operations.
We
generally experience some effects of seasonality due to increases in leisure travel and decreases in business travel activities
during the summer season and public holidays in China such as Chinese New Year, Labor Day and National Day, although the
seasonal impacts on our car rentals and car services may, to some extent, offset each other. In addition, we typically launch
promotions for certain car rentals and car services in selected cities after major holidays in China. Seasonal changes in our revenues
do not alter certain of our expenses, such as depreciation, store expenses and insurance, that are fixed in the short run, typically
resulting in higher profitability in periods when our revenues are higher and lower profitability in periods when our revenues
are lower. Our revenues may also fluctuate due to inclement weather conditions, such as snow or rain storms. In addition, other
seasonality trends may develop and the existing seasonality that we experience may change.
Unidentified individuals claiming to be company employees
with information about the operations of our company previously alleged that we publicly misrepresented financial information and
key operating metrics. Our company investigated these allegations and determined they were without merit. However the public dissemination
of these allegations or similar allegations could affect our reputation, our business and the market for our securities and the
price of our ADSs.
We have been, and in the future may be, the
target of anti-competitive, harassing, or other detrimental conduct by third parties. Such conduct includes malicious allegations,
anonymous or otherwise, regarding our personnel, business, operations, accounting, prospects or business ethics. Additionally,
allegations, directly or indirectly against us, may be posted in internet chat-rooms or on blogs, social networks websites or any
other websites by anyone on an anonymous basis. We have been, and in the future may be, required to expend significant time and
incur substantial costs to address such malicious allegations or other detrimental conduct.
In October 2014, our independent registered
public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, or PwC, received a letter from one or more unidentified individuals
claiming to be a group of company employees and alleging that we had misrepresented our financial performance and key operating
metrics in the registration statement and prospectus that we had filed with the SEC earlier that month. The underwriters whose
names appeared on the cover of the registration statement we filed in October 2014 also received a similar letter. The unidentified
author or authors of the letter appeared to have had access to information about our company not in the public domain. They alleged
that we had: (i) misrepresented the size of our fleet by including certain cars that were lost or otherwise no longer in our possession;
(ii) misrepresented the size of our fleet by including certain cars, even though those cars were allegedly no longer suitable for
rental or otherwise no longer operating, and accounted for those cars on our balance sheet at a high residual value, above their
actual residual value, because we allegedly set a low depreciation rate; (iii) exaggerated fleet utilization rates by counting
lost and idle cars as if they were still operating rental cars, and thus inflated our rental transaction volume; (iv) fabricated
contracts to generate phony rental revenue from lost and idle cars, and increasingly so during the period leading up to this offering;
(v) set up or acquired several sham companies for the purpose of engaging in fake transactions with us in the first two quarters
of 2014; (vi) misrepresented our costs by delaying payments to a large number of third-party service providers in the first two
quarters of 2014; and (vii) inflated the amount of traffic to our website (as measured by Alexa, an internet data provider) by
hiring a traffic-generating service provider (collectively, the “Allegations”). In support of the Allegations, the
unidentified author or authors provided lists of allegedly lost or idle vehicles identified by license plate and vehicle identification
number, screen shots of our internal system data, charts providing financial information and operating metrics, and tables comparing
our web traffic to that of other companies. The unidentified author or authors of the letter, however, declined to provide additional
information including contact details when asked. They have also refused requests to identify themselves or to speak with our company
or the lead underwriters.
Promptly after receiving a copy of the letter,
the law firm of O’Melveny & Myers LLP, or OMM, was instructed to conduct an investigation into the Allegations at the
direction of our audit committee. OMM then retained Kroll Associates (Asia) Limited, or Kroll, an international investigations
and forensic accounting firm to assist with its investigation. OMM undertook an extensive investigation with the assistance of
Kroll. Based on their investigation, OMM concluded that the Allegations were without merit. We also concluded that the Allegations
were without merit. PwC considered the results of OMM’s work and also performed additional audit procedures. It did not
qualify or modify its audit report on our consolidated financial statements for the years or periods affected by the Allegations,
including the 2014 financial statements.
On November 12, 2014, PwC received a communication
from a non-employee who allegedly obtained information from one of our employees, alleging that (i) certain cars in our fleet were
not suitable for rental and were accounted for at a high residual value above their actual residual value, and (ii) we had misrepresented
the size of our fleet by including certain cars that were lost. These allegations mirror those made in the letters received in
October 2014 by PwC and the underwriters whose names appeared on the cover of the registration statement. With respect to the allegation
that certain cars in our fleet were not suitable for rental and were accounted for at a high residual value above their actual
residual value, the majority of the cars identified in the November 12, 2014 communication were included in the October 2014 communication.
With respect to the allegation that we had misrepresented the size of our fleet by including certain cars that were lost, all of
the cars identified in the November 12, 2014 communication were included in the October 2014 communication. We instructed OMM to
conduct a supplemental investigation into the allegations contained in the November 12, 2014 communication. Based on that supplemental
investigation, OMM concluded that the allegations in the November 12, 2014 communication were without merit. After conducting further
procedures to evaluate the vehicles identified in the November 12, 2014 communication, as well as the source of the allegations
contained therein, we have concluded that the allegations in the November 12, 2014 communication were without merit and that the
accounting treatment of the additional identified cars is consistent with our policies as described in the registration statement.
Although we concluded that these allegations
were without merit, there may be additional future allegations that similarly are without merit, either in the press or on the
internet, and it is possible that those allegations would then result in adverse publicity for our company. That publicity could
have a materially adverse effect on our business and our reputation, and as a result, could adversely affect the market for our
securities or the price of our ADSs. Even though the allegations were without merit, they may lead to one or more investors to
file securities class action or other lawsuits against us, which could harm our reputation and business, and could distract our
management from day-to-day operations of our business. We cannot assure you that we will be able to obtain the dismissal of any
such lawsuits, even if they were without merit. We will also incur costs in managing and defending any such litigation and may
incur related indemnity obligations. We may need to pay damages or settle any such litigation with a substantial amount of cash.
These costs could have a material adverse impact on our business, our reputation, our results of operation and cash flow.
If
we are unable to enhance our brand recognition and maintain a high level of customer satisfaction, we may not be able to attract
or retain customers, and our brand and results of operations may be adversely affected.
We
believe our “eHi” brand is integral to our success, including the success of our sales and marketing efforts and our
efforts to
grow our car rentals and car services business. Our continued success in enhancing our brand depends, to a large
extent, on our ability to consistently provide quality services and customer experience across our service network and introduce
new services and vehicle models to meet customer demands, and to respond to competitive pressures and changing regulatory environment.
Failure to provide customers with high-quality services and experiences could harm our reputation and adversely affect our efforts
to develop “eHi” as a trusted brand. From time to time, our customers express dissatisfaction with our services, including
those related to the availability, condition and reservation time of our vehicles, and our response time to customers’ questions
or vehicle incidents. To the extent dissatisfaction with our services is widespread or not adequately addressed, our reputation
could be harmed, our efforts to develop “eHi” as a trusted brand and to provide enhanced customer experience would
be adversely impacted, which may in turn adversely affect our operating results and our ability to attract new customers and retain
existing customers.
In
addition, any negative publicity, regardless of its veracity, could harm our brand image and reputation. Furthermore,
pursuant to
the global affiliation agreement we entered into with Enterprise China, our signage and logo are displayed
alongside the signage and logos of certain subsidiaries of Enterprise, including “Enterprise,” “Enterprise
Rent-A-Car,” “Alamo,” “Alamo Rent A Car,” “National” and “National Rent A
Car,” in several cities in China and certain locations where Enterprise has operations. Any negative publicity
involving such brands or deterioration in the quality of services provided by these subsidiaries of Enterprise may also harm
our brand image.
Customer
violation of traffic rules could result in suspension of some of our vehicles from operation and we may not be able to fully
recover the fines arising from our customers’ violations.
China
operates a “traffic points” system under which each driver is allotted 12 points for each calendar year. Traffic violations
are
penalized through, among other things, fines and deduction of the traffic points. For traffic violations caught by law
enforcement officers, the point deduction is imposed on the driver. For traffic violations caught by automated traffic enforcement
systems, for example, running a red light that was recorded by a traffic camera, the point deduction is imposed on the vehicle.
Vehicles
in use for less than five years in China used to be subject to mandatory biennial inspection by transportation authorities. Such
rules were changed by the Opinion regarding Strengthening and Improving the Inspection Work of Automobile Vehicles, or the
Inspection Work Opinion, issued in April 2014. According to the Inspection Work Opinion, starting from September 1, 2014,
non-
operational cars and other small-size, mini-type passenger vehicles which are registered for less than six years are
exempted for vehicle inspections, and such vehicles which are registered for more than six years (including six years) are still
subject to vehicle inspections. For a vehicle to pass the inspection, all point deductions recorded on the vehicle must be offset
by applying the drivers’ available points.
Some of our vehicles have point deductions recorded
on them due to customer traffic violations caught by automated traffic enforcement systems. For our vehicles to pass their mandatory
biennial inspection, we coordinate with our customers who committed the traffic violations to offset the point deductions recorded
on our vehicles by applying their available points. However, sometimes certain customers who committed the traffic violations refused
or were unwilling to offset the point deductions by themselves. For example, if a customer travelled long way from Beijing to Hainan
and committed a traffic violation when renting car in Hainan, he may be unwilling to flight back to Hainan for the sole purpose
of offsetting his point deduction. In such cases, we may charge the customer a penalty fee according to the rental agreement, and
may also need to engage a third-party agent to coordinate with the customer for settling the point deduction. Depending on the
volume of vehicles due for inspection and the time required to coordinate with our customers, we sometimes have been unable to
timely offset all the point deductions on our vehicles before their inspection dates, and may be unable to do so in the future.
If we fail to promptly offset the point deductions recorded on our vehicles, our vehicles will not be able to pass the inspection
and will be suspended from road use and disposition until all points deductions are offset, which may materially and adversely
affect our business, results of operation and financial condition. Historically, the number of our vehicles that did not pass the
mandatory vehicle inspection was minimal.
In addition, while we obtain pre-authorized
credit card payments when our car rental customers pick up or return the rental vehicles, such pre-authorized payments may not
be sufficient to cover fines arising from such customers’ traffic violations. In the event that traffic fines exceed the
pre-authorized payment amount, we may not be able to fully recover outstanding balances from such customers in time or at all,
which may materially and adversely affect our business, results of operations and financial condition.
If
we fail to protect our customers’ confidential information stored in our systems, our reputation or brand may be harmed,
and we
may be exposed to liability and loss of customers.
Our
reservation system stores, processes and transmits our customers’ confidential information, including identity information,
driver’s license numbers, contact information and other sensitive data. We rely on encryption, authentication and other technologies,
as
well as administrative and physical safeguards, to secure such confidential information. Any compromise of our information
security could damage our reputation and brand and expose us to risks of costly litigation and liability that could materially
harm our business and operating results. We and our third-party data center facilities may not have adequately assessed the internal
and external risks posed to the security of our systems and information and may not have implemented adequate preventative safeguards
or take adequate reactionary measures in the event of a security incident. Any failure to protect such confidential information
could harm our reputation and brand and expose us to liability and loss of customers.
We rely on third-party service providers for certain aspects
of our business.
We depend on third-party service providers for
certain aspects of our business. For example, we rely on third parties to complement our coverage for chauffeured car services
in certain cities, implement and maintain certain aspects of our technology system, and supplement our vehicle repair and maintenance
capabilities. Although we actively monitor the operations of these third- party service providers, and under certain circumstances
have the ability to terminate their services for failure to adhere to contracted operational standards, we are unlikely to detect
all the problems. If these third-party service providers do not provide adequate services to our customers or us, we have to seek
to replace such service providers or remedy the inadequate services, and our reputation, brand image and our business could be
materially adversely affected. We may also be held responsible for actions or non- actions of such third parties, which may expose
us to possible liabilities.
Restrictive covenants contained in the agreements governing
our indebtedness may impose restrictions on our business, and failure to comply with these restrictions may adversely affect our
liquidity, financial condition and result of operations.
We are subject to financial and other restrictive
covenants in our various debt related documents, including agreements governing our arrangements with various financing companies
and entered into connection with our US$200 million senior unsecured notes and our $150 million syndicated bank facility. Financial
covenants, include limitations on our ability to incur additional indebtedness with the other restrictive covenant including limitation
on our ability to grant additional security interests, sell or dispose of certain assets, pay or distribute dividend, redeem or
repurchase share capital, make certain capital contributions or investments, merger or consolidate with or acquire other companies,
change the nature of our business, enter into derivative transactions, amend our charter documents and make loans.
Failure to meet any financial covenants or to
comply with any other restrictive covenants in our current or future debt agreements may lead to a default by us under the terms
of these agreements and entitle lenders to terminate their commitments to lend to us, where applicable, declare all outstanding
indebtedness thereunder to be immediately due and payable and requires us to pay accrued and unpaid interest at higher interest
rates, as the case may be. Furthermore, any event or default or acceleration of payment under any of such debt agreements may trigger
cross-default or cross acceleration provisions in other agreements governing our indebtedness. If lenders accelerate the repayment
of our borrowings, we may not have sufficient cash to timely repay the borrowings we may not be able to find alternative financing,
and any repayment may disrupt our cash flow and liquidity plans. Even if we could obtain alternative financing, we cannot assure
you that it would be on terms that are favorable or acceptable to us. Additionally, we have provided collateral under certain credit
facilities. If we cannot repay these borrowings, lenders may take ownership of such collateral granted to them or choose to enforce
their security rights thereunder. As a result, we may lose access to our assets pledged as collateral and be unable to engage in
certain business activities or finance future operations or capital needs, and our business, financial condition and results of
operations would be materially and adversely affected.
Shortage in vehicle supply or failure to pass on increased
vehicle acquisition costs to customers may adversely affect our business and results of operations.
As of December 31, 2016, approximately
76% of our period-end fleet size were purchased through dealers of Volkswagen, SAIC Motor, PSA Peugeot Citroen and General Motors
vehicles located in China. We may experience a shortage in the supply of certain vehicle models in the future. For example, if
any supplier is unwilling or unable to provide us with vehicles in required quantities or to deliver vehicles on time, we may not
be able to find alternative sources on satisfactory terms in a timely manner, or at all. If any shortage in vehicle supply occurs,
our business and results of operations may be materially adversely affected.
In addition, we may face risks of increased
vehicle acquisition costs, which may correlate with rising commodity and structural costs. Our average vehicle acquisition cost
is also affected by other factors such as vehicle purchase tax and the mix of economy and premium vehicle models that we purchase.
We generally do not enter into long-term contracts with our vehicle suppliers. If our suppliers do not offer us competitive prices
and we are not able to purchase sufficient quantities of vehicles from alternative sources at commercially reasonable prices, or
at all, we may be forced to purchase vehicles at higher prices and our vehicle acquisition costs may increase significantly. We
cannot assure you that we will be able to pass on increased vehicle acquisition costs to our customers. Failure to pass on significant
cost increases to our customers may have a material adverse effect on our business, results of operations and financial condition.
If any of our major vehicle suppliers encounter serious vehicle
recall problems, our fleet size may be reduced for a certain period and our clients’ trust in the quality and safety of our
fleet may be adversely affected.
Our vehicles may be subject to safety recalls
by their manufacturers. Under certain circumstances, the recalls may cause retrieval of rented vehicles or temporary decline of
reservations. If a large number of vehicles are the subject of simultaneous recalls, or if replacement parts needed are not in
adequate supply, we may not be able to use the recalled vehicles for an extended period of time. Those types of disruptions could
jeopardize our ability to fulfill existing contractual commitments and/or satisfy demand for our cars and car services, and result
in the loss of business to our competitors. We could also face liability claims from our customers related to our vehicles subject
to a safety recall. Depending on the severity of the recall, it could materially adversely affect our results of operations and
adversely impair our customers’ trust in the quality and safety of our fleet.
If property rental costs, including rentals for parking spaces,
increase significantly in the cities we currently have operations or we are unable to find suitable locations to expand our service
network at a reasonable cost, our results of operations will be materially adversely impacted.
We plan to open more service locations in markets
where we have a presence and to expand into additional cities in China to further grow our business. To operate our business, we
need to rent offices, service locations and parking spaces for our staff and vehicles at convenient locations. We may not be successful
in identifying and leasing additional properties and parking spaces at desirable locations and on commercially reasonable terms,
or at all. In addition, we may not be able to renew our current lease agreements after expiration or secure replacement properties
or parking spaces with reasonably commercial terms, or at all. In such cases, our ability to execute our growth strategy could
be impaired and our business, results of operations and prospects may be materially adversely affected. Furthermore, if property
rental costs increase significantly, in particular for parking spaces, our results of operations may be materially adversely affected.
We depend on key and highly skilled personnel to operate our
business, and if we are unable to retain our current personnel or hire additional personnel compatible to our expansion size, our
ability to successfully develop and market our business could be harmed.
Our managerial and other employees operate our
service locations and interact with our customers on a daily basis and are critical to maintaining our consistent and high-quality
services, as well as our established brand and reputation. We aim to recruit, train and retain skilled and motivated customer oriented
managerial and other employees. We need to recruit and train qualified managerial and other employees on a timely basis to keep
pace with our rapid growth. There may be a limited supply of such qualified individuals in some markets in China where we have
operations and cities into which we intend to expand. We also need to provide continuous training to our managerial and other employees
so that they can stay abreast of changes in our operations and consumer preferences and demands, and meet and implement our quality
standards. If we fail to recruit, train and retain qualified managerial and other employees, our service quality may decrease,
which in turn may have a material and adverse effect on our brand, our business, and our financial condition and results of operations.
Our success significantly depends upon the continuing
service of our senior management team, including Mr. Ray Ruiping Zhang, our founder, chairman and chief executive officer,
Mr. Leo Lihong Cai, our executive vice president of sales and marketing, Mr. Colin Chitnim Sung, our chief financial
officer and Mr. Chun Xie, our chief information officer. We rely on our management team’s experience in business operations,
their business vision, management skills and working relationships with our employees, customers, suppliers, third-party service
providers and other business partners to execute our business strategies and to achieve our business objectives. In addition, our
ability to attract and retain key personnel is a critical aspect of our competitiveness. If one or more members of our senior management
team or other key employees are unable or unwilling to continue in their present position, we may not be able to replace them easily,
or at all. As a result, our business could be severely disrupted and our financial condition and results of operations could be
materially adversely affected.
If the average salary or statutory welfare expenses of our
employees increase significantly, our profitability may be materially adversely impacted.
As of December 31, 2016, we had 6,134 full-time
and 737 part-time employees. We believe we will continue to hire additional employees to keep in line with our expansion.
China has recently experienced a significant
increase in employment compensation levels. If the average salary of our employees increases significantly, our profitability may
be materially adversely impacted. In addition, under various PRC labor-related laws, rules and regulations, employers are
required to contribute, on behalf of their employees, to a number of social security funds, including funds for basic pension insurance,
unemployment insurance, basic medical insurance, work-related injury insurance, maternity leave insurance, and housing accumulation
funds. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee
benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties.
If the relevant PRC authorities determine that we must make supplemental social insurance and housing fund contributions and/or
that we are subject to fines and legal sanctions, our business, financial condition and results of operations may be adversely
affected.
Significant increases in fuel costs or limitations in fuel
supplies could seriously harm our business.
We are generally responsible for fuel costs
and supplies when providing chauffeured car services. While customers using our car rental services are typically responsible for
the costs of fuel during the rental term, any increase in fuel costs or limitation in fuel supplies may discourage them from renting
vehicles from us. Fuel prices in China increased significantly in 2012 and 2013, which has increased our cost of revenues. Future
significant increases in fuel prices or a severe or protracted disruption of fuel supplies could have a material adverse effect
on our financial condition and results of operations.
We face risks related to liabilities resulting from the use
of our vehicles by our customers.
We are exposed to claims for personal injury
or death and property damage as a result of automobile accidents involving vehicles driven by our customers or chauffeured car
services provided by our drivers or third party service providers outsourced by us. We depend on our staff, customers and, in some
cases, third party operators, for pre-rental inspections in order to identify any apparent or potential damage or safety concerns
with the vehicles. However, if a customer uses a car that has worn tires or some mechanical or other problem, including a manufacturing
defect, which contributed to a motor vehicle accident that results in a death or property damage, we may still be a defendant of
the claims for the alleged liabilities of the accident and the damage resulting from it. Furthermore, according to the PRC Torts
Law, when the driver of a rental car who is not the owner of the vehicle is held liable for a traffic accident, liability will
first be covered by the insurance company providing the compulsory traffic accident insurance of the vehicle, and the driver shall
be responsible for the portion not covered by the compulsory traffic accident insurance. However, since judicial proceedings determining
the cause of a motor vehicle accident can be lengthy and costly, and the results of such proceedings may be uncertain, we may not
be successful in defending ourselves each time such an incident occurs. If a significant number of such claims cannot be resolved,
our reputation could suffer.
We could be negatively affected if our insurance coverage
proves to be limited or inadequate.
We may suffer from insufficient insurance coverage
for our vehicles or liabilities resulting from our operations. We bear the risk of damage to or losses of our vehicles, including
those caused by accident, theft or natural disaster. We are also exposed to claims for personal injury or death and property damage
as a result of automobile accidents involving vehicles driven by our customers or chauffeured car services provided by our drivers
or third party service providers outsourced by us. We maintain motor vehicle damage insurance, third-party liability insurance,
compulsory traffic accident insurance and other insurance coverage, although there can be no assurance that such coverage will
be sufficient or adequate. Furthermore, due to the large volume and broad geographic coverage and rapid growth of our fleet, we
may fail to renew our insurance policies on a timely basis. A successful claim against us beyond the scope or limit of our or our
third party service providers’ insurance coverage may have a material adverse effect on our business, financial condition
and results of operations. In addition, uninsured claims filed against us or the inability of our insurers to pay otherwise-insured
claims would have an adverse effect on our financial condition. Moreover, if the insurance premiums we pay to the insurance companies
increases significantly, our results of operations would be materially adversely affected.
In addition, we face risks and contingent losses
resulting from car theft. We equip all of our vehicles with GPS-based tracking devices that monitor the precise location of the
vehicles at all times, and a significant majority of such devices are covered by GPS product liability insurance. However, sophisticated
thieves could locate and disable such devices, which may lead to an increase in our lost vehicles from car theft. Since our inception
in 2006, we had written off a total of 162 vehicles as of December 31, 2016 as a result of car theft and other reasons. As
we have not maintained any robbery or theft insurance for our vehicles, such losses may not be sufficiently covered by the GPS
product liability insurance, which may adversely affect our results of operations.
Future investments and acquisitions could prove
difficult to integrate, disrupt our business or lower our operating results.
Our growth strategy may
involve the investment in or acquisition of businesses and/or entities, or entering into strategic partnerships or alliances
in areas in which we do not currently operate, or have sufficient capacity to operate. For example, we previously invested in
Travice Inc., the company operating the Kuaidi mobile taxi and car hailing app and later merged into DiDi, which investment
was profitably sold in 2015. In January and June 2016, through entrusted bank loan arrangements we extended an aggregate of
RMB50 million in credit to Shanghai Chenghuan Car Rental Company Limited, or Shanghai Chenghuan, a local car rentals and car
services provider, with an initial one-year term (now extended to January 2018). We also have an option to convert our
creditor rights into equity interests of Shanghai Chenghuan at a pre-determined valuation. Our future strategic investments
and acquisitions may expose us to potential risks, including risks associated with:
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potential loss of all or a portion of our investment;
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fluctuations in our future financial results, such as potential decrease in our margins and profitability;
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integration of new operations, services and personnel;
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exposure to unforeseen or hidden liabilities;
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diversion of resources from our existing businesses and technologies;
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our failure to generate sufficient revenues to offset the costs of acquisitions; and
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potential loss of, or harm to, relationships with suppliers, clients or employees.
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If any of these happens, it may have a material
adverse effect on our ability to manage our business or otherwise have a material adverse effect on our business, financial condition
or results of operations.
We may be exposed to intellectual property infringement and
other claims, which could be time-consuming or costly to defend and may result in substantial damages.
Our success depends on our ability to use and
develop our proprietary, comprehensive suite of technology systems, and our other intellectual property rights. We may face challenges
to our intellectual property rights and be subject to claims that we have infringed on third parties’ intellectual property
rights. The validity and scope of claims relating to our proprietary technologies or other intellectual property rights may involve
complex scientific, legal and factual questions and analysis, and therefore the outcomes may be highly uncertain. The defense and
prosecution of intellectual property suits and related legal and administrative proceedings may be costly and may significantly
divert the attention and resources of our personnel. An adverse determination in any such litigation or proceedings to which we
may become a party may subject us to significant liability, require us to seek licenses from third parties, pay royalties or subject
us to injunctions prohibiting the use of the relevant intellectual property rights.
We have entered into a global affiliation agreement
with Enterprise China in connection with our Series D private placement with The Crawford Group, Inc., or Crawford, the
parent company of Enterprise Holdings. Under this agreement which Enterprise China, its affiliate, Enterprise Holdings and their
affiliates, or collectively Enterprise, have granted us, in certain designated region, a royalty free license with the right to
sublicense certain of their trademarks, service marks, trade names, signage and logos, symbols and designs associated with the
names “Enterprise,” “Enterprise Rent-A-Car,” “Alamo,” “Alamo Rent A Car,” “National”
and “National Rent A Car” for the purpose of pursuing business referrals between Enterprise and us, processing such
referrals and servicing business referred to us by Enterprise. If we or any of our sublicensees use these licensed intellectual
properties improperly or outside the scope of the license granted to us, we may be subject to claims of trademark or other intellectual
property infringement by Enterprise. In the case that Enterprise does not have all the requisite rights to grant us an exclusive
license to use such marks, we may be subject to claims of trademark or other intellectual property infringement by the rightful
owners of these marks for using these intellectual property rights for unauthorized using these intellectual property rights. Any
resulting litigation may be time-consuming and costly, with inherent uncertainty as to the outcome. If these owners successfully
assert a claim for intellectual property infringement against us, the liability may adversely impact our business, financial condition
and results of operations.
Failure to adequately protect our intellectual property rights
could substantially harm our brand, our business and results of operations.
We
believe our brand, trademarks, software copyrights, trade secrets and other intellectual property rights are critical to our
success.
Any unauthorized use of our intellectual property rights could harm our competitive advantage and business. We have granted Enterprise,
in certain designated region, a royalty free license with the right to sublicense certain of our trademarks, service marks, trade
names, signage and logos, symbols and designs associated with the name “eHi” for the purpose of pursuing business referrals
between Enterprise and us, processing such referrals and servicing business referred to Enterprise by us. If Enterprise or any
of its sublicensees uses these licensed intellectual properties improperly or outside the scope of our license, our brand and intellectual
property rights may be harmed. Our efforts in protecting our brand and intellectual property rights may not always be effective.
We regularly file applications to register our trademarks in China, but may not be able to register such trademarks, or register
them within the categories we seek. Similar trademarks registered under other different categories may dilute our brand and image.
Historically, China has not protected intellectual property rights to the same extent as the United States, and infringement of
intellectual property rights continues to pose a serious risk in doing business in China. Monitoring and preventing unauthorized
use is difficult. The measures we take to protect our intellectual property rights may not be adequate or sufficient. As the right
to use Internet domain names is not rigorously regulated in China, other companies may have incorporated in their domain names
elements similar in writing or pronunciation to our trademarks and domain names. We have also entered into confidentiality and
non-compete agreements with our key employees that prohibit them from disclosing confidential information. However, these agreements
may not effectively prevent unauthorized disclosure of confidential information and it may be difficult or expensive for us to
enforce these agreements. Our business may be materially adversely affected if we fail to adequately or sufficiently protect our
brand, trademarks, copyrights, trade secrets and our other intellectual property rights.
We have granted, and may continue to grant, employee share
options, restricted shares or other equity incentives in the future, which may result in increased share-based compensation expenses
and adversely affect our results of operations.
We adopted the 2010 Performance Incentive
Plan, or the 2010 Plan, in April 2010, which was amended and restated in December 2010 and August 2014. In
October 2014, we adopted the 2014 Performance Incentive Plan, or the 2014 Plan, which became effective immediately after
the completion of our initial public offering in November 2014. We are required to account for share-based compensation
as an expense based on the grant date fair value of share options, restricted shares or other equity incentives to employees
with the compensation expense recognized over the period in which the recipient is required to provide service in exchange
for the equity award. As of the date of this annual report, a total of 3,369,500 options and 456,000 issued but not fully
vested restricted shares granted under the 2010 Plan and the 2014 Plan were outstanding. If we grant more options, restricted
shares or other equity incentives, we could incur significant compensation charges and our results of operations could be
adversely affected.
An economic downturn could result in a decline in business
and leisure travel activities, which could materially adversely affect our business.
Our results of operations are affected by many
economic factors, including the level of economic activity in the car rental and car service industry in China. Any actual or perceived
threat of a financial crisis in China could have an adverse impact on the car rental and car service industry, including a tightening
of the credit markets, reduced business and leisure travels, reduced customer spending and volatile fuel prices. According to the
National Bureau of Statistics of China, China’s GDP growth slowed to 6.7% in 2016. Any prolonged slowdown in China’s
economy might lead to tightened credit market, increased market volatility, sudden drops in business and consumer confidence and
dramatic changes in business and consumer behaviors. In response to their perceived uncertainty in economic conditions, our customers
may also delay, reduce or cancel their travel activities. To the extent any fluctuations in the Chinese economy significantly affect
our customers’ demand for our services or change their spending habits, our results of operations may be materially adversely
affected.
Disputes with our strategic partners may arise during our
cooperation with such partners, which may result in indemnification or other claims against us and/or termination of the cooperation
and have an adverse impact on our business, results of operations and prospects.
We have established strategic
partnerships with two leading travel service providers, Enterprise and Ctrip. We are the designated and preferred business
partner of Ctrip in providing car rental services and Ctrip integrated access to our online reservation system in its Ctrip
Travel mobile application in June 2014 as part of our cooperation. In December 2014, we started to expand our
chauffeured car services to a business-to-consumer model, primarily through Ctrip’s platform. In addition, our global
affiliation agreement with Enterprise China, entered into in March 2012, provides a wide range of arrangements,
including rental referrals and trademark licensing. In performing the obligations under these cooperation, disputes may arise
with respect to matters such as the improper use of the relevant licensed intellectual property rights, non-compliance of
performance standards, non-competition, resolutions of customer complaints, and reimbursement of expenses relating to rental
referrals. We and our strategic partners may have different interpretations of certain contractual provisions in relevant
agreement, in particular, the various provisions in these agreements that require, for instance, “reasonable
efforts” in rental referrals and “commercially reasonable efforts” to facilitate and support the other
party’s marketing activities. Our failure to resolve these disputes may subject us to indemnification or other claims
from our strategic partners. In addition, our strategic partners may terminate these cooperation if we commit a material
breach of relevant agreements. Such claims and/or termination of these agreements may adversely affect our business, results
of operations and prospects.
We face risks related to natural disasters and health epidemics
in China, which may materially adversely affect our business and results of operations.
Our business may be materially adversely affected
by natural disasters or the outbreak of health epidemics in China. For example, in May 2008, Sichuan Province suffered a strong
earthquake measuring approximately 8.0 on the Richter scale, and in April 14, 2010, another severe earthquake measuring approximately
7.1 hit part of Qinghai province in western China, each of which caused widespread damage and casualties. In addition, in the last
decade, China has suffered health epidemics related to the outbreak of avian influenza (including H1N1 and H7N9 subtypes) and severe
acute respiratory syndrome. If such health epidemics become widespread in China or increase in severity, it may have an adverse
effect on economic activities in China, with the potential to severely disrupt our business operations and harm our results of
operations. Any future natural disasters or health epidemics in the PRC may also materially adversely affect our business and results
of operations. In addition, unfavorable developments in domestic and international politics, including military conflicts, political
turmoil and social instability, may also adversely affect consumer confidence and reduce customer spending, which could in turn
materially and adversely affect our growth and profitability.
If we fail to implement and maintain an effective system of
internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence
and the market price of our ADSs may be materially and adversely affected.
We
are subject to reporting obligations under the U.S. securities laws. Among other things, the SEC, as required by Section 404
of
the Sarbanes-Oxley Act of 2002, or Section 404, adopted rules requiring every public company, including us,
to include a report from management on the effectiveness of its internal control over financial reporting in its second annual
report on Form 20-F. We began to be subject to these requirements since the annual report for the year ended December 31,
2015.
In connection with management’s assessment
of the effectiveness of our internal control over financial reporting for the year ended December 31, 2016, our management identified
two material weaknesses and other control deficiencies in our internal control over financial reporting, and determined that as
of December 31, 2016, our disclosure controls and procedures and our internal control over financial reporting were ineffective.
See “Item 15 — Controls and Procedures.” Our independent registered public accounting firm has not conducted
an audit of our internal control over financial reporting, as we are not required to comply with the auditor attestation requirements
of Section 404 for as long as we are an emerging growth company, a status which prevails until the earlier of the fifth anniversary
from the date of our initial public offering or until certain other specific criteria are met, pursuant to the JOBS Act. However,
in connection with the audits of our consolidated financial statements as of and for the three years ended December 31, 2016,
our independent registered public accounting firm identified the same material weaknesses and control deficiencies in our internal
control over financial reporting as of December 31, 2016. As defined in the standards established by the U.S. Public Company
Accounting Oversight Board, or the PCAOB, a “material weakness” is a significant deficiency, or combination of significant
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is
a control deficiency, or a combination of control deficiencies, that adversely affects our ability to initiate, authorize, record,
process, or report external financial data reliably in accordance with U.S. GAAP such that there is more than a remote likelihood
that a misstatement of our financial statements that is more than inconsequential will not be prevented or detected by our employees.
The material weaknesses identified
related to insufficient accounting resources and expertise necessary to comply with U.S. GAAP and a lack of sufficient and
documented financial closing policies and procedures, specifically those related to period end financial closing process,
period end cut-off, account clarification and presentation. These material weaknesses were identified in the prior year and
determined to be continuing matters as of December 31, 2016. Although we have taken measures and plan to continue to
take measures to remedy these deficiencies, the implementation of these measures may not fully address the deficiencies in
our internal control over financial reporting, and we may not conclude that they have been fully remedied. The process of
designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and
react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain
a financial reporting system that satisfies our reporting obligations. In addition, during the course of documenting
and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify
other material weaknesses and deficiencies in our internal control over financial reporting. In addition, our
independent registered public accounting firm has not undertaken a comprehensive assessment of our internal control for
purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over
financial reporting. In light of the material weaknesses and control deficiencies that were identified as a result of the
limited procedures performed, we believe it is possible that, had our independent registered public accounting firm performed
an audit of our internal control over financial reporting, additional material weaknesses and control deficiencies may have
been identified.
Our failure to correct these control deficiencies
or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements
and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on
a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price
of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly
hinders our ability to prevent fraud. We may also incur additional costs and use management and other resources in order to comply
with Section 404 and remediate the material weaknesses and control deficiencies.
Our auditor, like other independent registered public accounting
firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board and, as
such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting
firm that issued the audit report included in this annual report filed with the SEC, as an auditor of companies that are traded
publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular
inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor
is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC
authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected
by the PCAOB.
Inspections of other firms that the PCAOB has
conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct
inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness
of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of
PCAOB inspections and lose confidence in our reported financial information and procedures and the quality of our 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 the firms’ failure to meet specific criteria set by the SEC, we could be unable to timely file future
financial statements in compliance with the requirements of the Exchange Act.
In December 2012, the SEC instituted administrative
proceedings against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, alleging
that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide
to the SEC the firms’ audit work papers with respect to certain PRC-based companies that are publicly traded in the United
States. On January 22, 2014, the Administrative Law Judge, or ALJ, presiding over the matter rendered an initial decision
that each of the firms had violated the SEC’s rules of practice by failing to produce audit workpapers to the SEC. The
initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months. The Big
Four PRC-based accounting firms appealed the ALJ’s initial decision to the SEC. The ALJ’s decision does not take effect
unless and until it is endorsed by the SEC.
In February 2015, each of the Big Four
PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their
ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures
and to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission,
or the CSRC. If future document productions 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.
If
the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with
SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements
could ultimately lead to the delisting of our ADSs from the New York Stock Exchange or the termination of the registration of our
ADSs under the Exchange Act, or both, which would substantially reduce or effectively
terminate the trading of our ADSs
in the United States and our access to the capital markets in the United States.
We are an “emerging growth company” within the
meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are a “foreign private issuer,”
as such term is defined in Rule 405 under the Securities Act, and are not required to comply with certain periodic disclosure
and current reporting requirements of the Exchange Act. In addition, we are an “emerging growth company,” pursuant
to the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other
public companies that are not “emerging growth companies” including, most significantly, not being required to comply
with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company until the earlier
of the fifth anniversary from the date of our initial public offering or until certain other specific criteria are met. We intend
to rely on the exemption from the auditor attestation requirement under Section 404.
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 “opt out” of this
provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public
companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We incur increased costs as a result of being a public company,
and may incur additional costs after we cease to qualify as an “emerging growth company.”
As a public company, we incur significant legal,
accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently
implemented by the SEC and the 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 particular,
as an emerging growth company, we intend to rely on certain exemptions from various reporting requirements that are applicable
generally to public companies. After 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 and the
other rules and regulations of the SEC. In addition, we have incurred, and will continue to 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 the company following periods of instability in the market price of that company’s
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.
Risks related to doing business in China
Adverse changes in economic and political policies of the
PRC government could have a material adverse effect on the overall economic growth of China, which could materially and adversely
affect our business.
Substantially all of our business operations
are conducted in China. As the car rental and car service industry is highly sensitive to business and personal discretionary spending
levels, it tends to decline during periods of general economic downturn. If China’s car rental and car service industry fails
to grow as fast as it is forecasted, our focused car rentals and car services business will also be adversely affected. Accordingly,
our business, results of operations, financial condition and prospects are subject to a significant degree to economic, political
and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise
significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and other
government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the
exchange between Renminbi and foreign currencies, and regulate the growth of the general or a specific market. This government
involvement has been instrumental in China’s significant growth in the past 30 years. The PRC government has adopted policies
aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese
economy achieve further growth or if any aspect of the PRC government’s policies, such as measures related to the car rental
and car service industry or on interest rate and tax regulations, limits the growth of the car rental and car service industry
in China, our business, growth rate, strategies or results of operations could be materially and adversely affected.
Uncertainties with respect to the PRC legal system could adversely
affect us.
We conduct our business primarily through our
subsidiaries in China. Our operations in China are governed by the PRC laws and regulations. The PRC legal system is based on statutes.
Prior court decisions may be cited for reference but have limited precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments
in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently
cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because
of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. 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) that may have a retroactive effect. As a result, we may not be aware of
our violation of these policies and rules until some time after the violation. Furthermore, intellectual property rights,
trade mark and confidentiality protections in China may not be as effective as in the United States or other countries. We cannot
predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing
laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties
could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China
may be protracted and result in substantial
costs and diversion of resources and management attention.
Failure in obtaining all of the requisite permits, licenses
or making all of the requisite filings or registrations or meeting other regulatory requirements for operating car rentals and
car services business in China by us or any third-party service provider who cooperates with us may subject us to fines or other
administrative actions.
As a car rentals and car services provider in
China, we are subject to a number of permit, license, filing and other regulatory requirements for the car rentals and car services
business. As the car rental and car service industry is at an early stage of development in China, the legislations continue to
evolve and there are currently no national laws or regulations specifically regulating the car rental and car service industry
except for the Notice on Promoting the Healthy Development of Car Rental Industry, or the 2011 MOT Notice, promulgated in April 2011
by the Ministry of Transport, or the MOT, which only sets forth certain general guidelines for the emerging car rental industry
in China. The car rental and car service industry is mainly regulated by government authorities at local levels, which impose various
regulatory requirements on the operating entities, vehicles or drivers, and such regulatory requirements vary from one place to
another. The practice of local authorities may also deviate from the existing local rules. Some local authorities do not accept
or process applications for certain permits, licenses or filings as required under the local rules. Furthermore, due to the unclear
regulatory boundaries between car rentals or car services business and road transportation businesses or taxi businesses, although
we do not believe any of our operating subsidiaries is a road passenger transportation service provider or a taxi service provider
as our services are characterized by distinctive features, we cannot assure you that the government authorities take the same view
as ours or will not change their views in the future.
According to the 2011 MOT Notice, a car rental
company must obtain appropriate approval before it may conduct road passenger transportation business. However, the 2011 MOT Notice
does not define the term “road passenger transportation business.” Furthermore, some local rules explicitly restrict
a car rental company from concurrently providing chauffeur services and car rental services through the same entity. In August 2011,
Shanghai Municipal Transport and Port Authority issued Certain Opinions on Standardizing the Regulation of Car Rental Industry,
which provides that car rental companies shall not provide drivers for the vehicles they rent but may at the requests of their
customers sign service agent contracts on behalf of their customers with third-party labor service companies, under which the labor
service companies may provide drivers to car rental customers. We currently provide chauffeured car services primarily to our corporate
and institutional clients and generally enter into long-term framework agreements with these clients, pursuant to which our vehicles
and chauffeur services are provided by different subsidiaries. Our PRC counsel, Grandall Law Firm (Shanghai), has advised us that
such business arrangements are not in violation of any existing applicable laws, regulations at national level or local rules of
cities where we currently provide chauffeured car services in China. However, we cannot assure you that relevant local government
authorities will not interpret the laws and regulations differently, find our activities in violation of relevant laws and regulations
and impose penalties on us. If the relevant local government authorities is of the view that our business arrangements of chauffeured
car services are not in compliance with applicable laws and regulations, we may be subject to fines and other administrative actions
in some cities where we have provided such services. Furthermore, a company that sets up a branch to conduct business in a location
outside its domicile must have such the branch registered with the local counterpart of the State Administration for Industry and
Commerce, or the SAIC.
As a result of the inconsistency in local rules and
their interpretation and implementation, as well as fast expansion of our business, we have not obtained, made or timely renewed
all of the requisite permits, licenses, filings or registrations for our business operations or fully complied with all other regulatory
requirements applicable in the cities in which we currently operate our car rentals and car services business. We cannot assure
you that we will obtain or successfully renew all of the requisite permits and/or licenses, make all of the requisite filings or
registrations or set up all necessary branches in a timely manner, or comply with all other regulatory requirements in the future.
Moreover, we cannot assure you that all the third-party service providers engaged by us have met all such regulatory requirements
either, which may subject us to fines and other administrative actions. Government authorities at various levels may promulgate
new regulations or rules, or change their interpretation or implementation of existing regulations and rules, which may subject
us to new regulatory requirements that we may not be able to meet in a timely manner, or at all.
In
July 2016, Ministry of Transportation, together with other six governmental authorities, issued the Interim Measures for the Administration
of Online Car Hailing Business Operations and Services which came into effect on November 1, 2016, or the Car Hailing Measures.
The Car Hailing Measures require online car-hailing platform operators to obtain licenses from governmental authorities,
be capable of providing online and offline services and meet certain conditions. The vehicles and drivers shall also meet certain
conditions and obtain the online car hailing vehicle licenses and driver licenses respectively issued by the relevant governmental
authorities to engage in online car hailing business.
Following the Car Hailing Measures, some local governmental authorities
in cities of Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Qingdao, Chongqing further adopted policies regarding the online
car-hailing business operations and services in their administrative regions. In addition to the conditions set out in the Car
Hailing Measures, almost all these local governments require that the vehicles engage in online car hailing business operations
must be registered in the city administrative regions and meet certain vehicle conditions such as minimum wheel base, installment
of GPS system and emergency alarm system. Beijing and Shanghai city governments specially require the drivers who engage in online
car hailing business operations to have the city census register. We expect more cities may adopt similar local policies regarding
the online car-hailing business operations and services. The Car Hailing Measures and those new local rules may materially increase
our costs if we expand our business to operate an online car hailing platform.
As the car rental and car service industry is
mainly regulated by government authorities at local levels, penalties arising from the failure to obtain or renew any required
permits, licenses or filings in a timely manner or at all or to comply with any existing or future laws and regulations may be
different in different locations, which generally include a fine up to RMB100,000 or up to ten times of the amount of illegal income
per violation (depending on the amount of illegal income, if any), confiscation of illegal income, suspension of operations, detention
of cars and revocation of the licenses or permits required for business operations. In addition, any business operation by a branch
without a valid business license may subject to a fine of up to RMB100,000.
Government control over currency conversion may limit our
ability to issue dividends to our shareholders in foreign currencies, and may therefore adversely affect the value of your investment.
The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our
Cayman Islands holding company may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements
we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions,
interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without
prior
approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Therefore,
our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE by complying with
certain procedural requirements. However, approval from or registration with the appropriate government authorities is required
where Renminbi are to be converted into foreign currencies and remitted out of China to pay capital expenses such as the repayment
of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. In January 2017, the SAFE issued the Notice on Further Promoting the Reform of Foreign
Exchange Administration and Improving the Examination of Authenticity and Compliance, which continues to implement and improve
the policies for the administration of outward remittance of foreign exchange profits from direct investment. A bank that handles
outward remittance of profits more than US$50,000 for a domestic institution shall review documents provided by the domestic institution
and verify the authenticity of the underlying transactions. If the foreign exchange control system prevents us from obtaining
sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders, including holders of our ADSs.
Fluctuations in exchange rate may have a material adverse
effect on our results of operations and the value of your investment.
The value of Renminbi against U.S. dollars
and other currencies is affected by, among other things, changes in China’s political and economic conditions and
China’s foreign exchange policies. In July 2005, the PRC government changed its decade-old policy of pegging the
value of Renminbi to U.S. dollars, and Renminbi appreciated more than 20% against U.S. dollars over the following three
years. However, the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in
Renminbi exchange rates to achieve policy goals. During the period between July 2008 and June 2010, the exchange
rates between Renminbi and the U.S. dollars had been stable and traded within a narrow range. However, Renminbi fluctuated
significantly during that period against other freely traded currencies, in tandem with U.S. dollars. On June 20, 2010, the
People’s Bank of China announced that the PRC government would further reform the Renminbi exchange rate regime and
increase the flexibility of the exchange rate. On March 15, 2014, the People’s Bank of China announced that it further
expanded the daily RMB against U.S. dollar trading band of the inter-bank spot foreign exchange market from 1% to 2% as of
March 17, 2014, to allow Renminbi to move more freely and better reflect market supply and demand. On August 11, 12 and 13,
2015, the People’s Bank of China significantly devalued the Renminbi by fixing its price against the U.S. dollar 1.9%,
1.6%, and 1.1% lower than the previous day’s value, respectively. The value of the Renminbi depreciated approximately
5.8% and 6.2% against the U.S. dollar in 2015 and 2016, respectively. Renminbi was added to its group of global reserve currencies by The
International Monetary Fund on November 30, 2015, which makes Renminbi to some extent more susceptible to market forces. It
is difficult to predict how long the current situation may last and when and how the relationship between Renminbi and U.S.
dollars may change again.
There remains significant international pressure
on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of Renminbi may materially
and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in
U.S. dollars. Substantially all of our revenues and costs are denominated in Renminbi, while a portion of our cash and cash equivalents
from offshore financing activities, long-term loans payable and notes payable are denominated in U.S. dollars. An appreciation
of the Renminbi against the U.S. dollar would make any new RMB-denominated expenditures more costly to us, to the extent that
we need to convert U.S. dollars into Renminbi for such purposes; and it would also result in foreign currency translation losses
for financial reporting purposes when we translate our U.S. dollar-denominated financial assets into Renminbi, our reporting currency.
Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ADSs or
make repayments for our debt denominated in U.S. Dollars, appreciation of the U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us.
Very limited hedging options are available in
China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort
to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future,
the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at
all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to
convert Renminbi into foreign currencies. As a result, fluctuations in exchange rates may have a material adverse effect on your
investment.
PRC regulations regarding mergers and acquisitions may make
it more difficult for us to make future acquisitions or dispositions of our business operations or assets in China.
In
2006, six PRC regulatory agencies, including the CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and was amended on June 22,
2009. The M&A Rules established additional procedures and requirements that could make merger and acquisition activities
by foreign investors more complex and time-consuming. For example, the Ministry of Commerce, or MOFCOM, shall be notified in advance
of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise or a foreign company
with substantial PRC operations if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations
of Undertakings issued by the State Council on August 3, 2008 are triggered. Furthermore, MOFCOM promulgated the Rules of
Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors in August 2011, or the MOFCOM Security Review Rules, which came into effect on September 1, 2011, to implement
the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or Circular No. 6. According to Circular No. 6,
a security review is required for mergers and acquisitions of PRC domestic enterprises by foreign investors (i) having “national
defense and security” concerns, and (ii) where the foreign investors may acquire the “de facto control”
of the PRC domestic enterprises having national security concerns such as key farm products, key energy and resources, and key
infrastructure, transportation, technology and major equipment manufacturing industries. Circular No. 6, however, does not
define the term of “key” or “major,” nor has it exhausted all the industries that may be deemed as sensitive
industries subject to the security review. According to the MOFCOM Security Review Rules, when deciding whether a specific merger
or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM, the principle of “substance
over form” should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring
transactions through nominee holding structure, trusts, indirect investments, leases, loans, control through contractual arrangements,
offshore transactions, or other means. On January 19, 2015, MOFCOM published the draft Foreign Investment Law which sets forth
more specific rules regarding the procedures of national security review. The application and interpretation of the MOFCOM
Security Review Rules remain unclear.
PRC Anti-trust Law also requires certain merger and acquisition transactions
be subject to merger control review by MOFCOM, and we may not be able to obtain the necessary approval in the case of our future
mergers and acquisitions.
If we do not seek the necessary approval, we
could be subject to administrative fines or other penalties imposed by the relevant PRC authorities. However, because there are
not always specific provisions of the fines or penalties for such violations under current PRC laws and regulations, it is uncertain
what penalties we may face. In the future, we may grow our business in part by acquiring complementary businesses. Complying with
the requirements of the M&A Rules, the MOFCOM Security Review Rules, PRC Anti- trust Law and other related regulations to complete
such transactions could be time-consuming and any approval procedures, including obtaining approval from MOFCOM or its local counterparts,
may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain
our market share. In addition, such additional procedures and requirements could make it more difficult or time-consuming for us
to dispose of any of our business operations or assets in China.
We may be classified as a “resident enterprise”
for PRC enterprise income tax purposes; such classification could result in unfavorable tax consequences to us and our non-PRC
shareholders.
Under
the PRC Enterprise Income Tax Law, or the EIT Law, and its Implementing Rules, an enterprise established outside of China
whose “de facto management bodies” is located within the PRC is considered a PRC “resident
enterprise” and will be subject to the uniform 25% PRC enterprise income tax rate on their global income. Under the
Implementing Rules of the EIT Law, a “de facto management body” is defined as a body that has material and
overall management and control over the manufacturing and business operations, personnel and human resources, finances and
other assets of an enterprise. In addition, a tax circular issued by the State Administration of Taxation, or the SAT, on
April 22, 2009, referred to as Circular 82, provides that certain Chinese-invested enterprises controlled by PRC
enterprises or PRC enterprise groups and established outside of China will be classified as resident enterprises only if all
the following are located or resident in China: senior management personnel and departments that are
responsible for
daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books,
company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or
directors with voting rights. Circular 82 also clarified that dividends and other income paid by such resident enterprises
will be considered to be PRC sourced income and subject to PRC enterprise income tax.
The
SAT issued an amendment to SAT Circular 82 delegating the authority to its provincial branches to determine whether a
Chinese-invested entity which is established outside of China should be considered a PRC resident enterprise, in January
2014.
However,
as Circular 82
and its amendment only applies to enterprises established outside of
China that are controlled by PRC enterprises or PRC enterprise groups, it remains unclear how the tax authorities will determine
the location of “de facto management bodies” for overseas incorporated enterprises controlled by foreign individuals
and entities like us or our offshore subsidiaries. We believe that neither our company nor any of offshore subsidiaries meets all
the criteria set forth in Circular 82, because as holding companies, their key assets and records, including board and shareholders
resolutions and minutes of board meetings and shareholders meetings, are located and maintained outside the PRC. In addition, we
are not aware of any offshore holding company with a corporate structure similar to ours that has been deemed a PRC “resident
enterprise” by the PRC tax authorities. Therefore, we believe neither our company nor any of our offshore subsidiaries should
be deemed as a “resident enterprise” for PRC tax purposes. However, the tax resident status of our offshore entities
is subject to determination by relevant PRC tax authorities and uncertainties remain with respect to their interpretation of the
term “de facto management body” as applicable to our offshore entities. We will continue to monitor our tax status.
If our company or any of our offshore subsidiaries
is considered a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, our company or any of our offshore subsidiaries will be subject to the uniform 25% enterprise income tax rate
on our global income and will have PRC enterprise income tax reporting obligations. Second, although under the EIT Law and its
Implementing Rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempted income”, we cannot
assure you that such dividends paid to our company or our Hong Kong subsidiaries will not be subject to enterprise income tax because
the relevant PRC government authorities have not yet issued guidance with respect to the processing of outbound remittances to
overseas incorporated enterprises controlled by foreign individuals and entities like us that are treated as resident enterprises
for PRC enterprise income tax purposes. Finally, dividends payable by us to our non-PRC investors or gains from the transfer of
our common shares or ADSs may become subject to PRC withholding tax. Failure or delay in fulfilling such tax obligations may cause
penalties imposed by PRC tax authorities.
The EIT Law will affect tax exemptions on the dividends we
receive and we may not be able to obtain certain treaty benefits on such dividends.
We are a holding company incorporated under
the laws of the Cayman Islands. We conduct substantially all of our business through our PRC subsidiaries and we derive all of
our income from these subsidiaries. Prior to January 1, 2008, dividends received by foreign investors from foreign-invested
enterprises in China were exempted from withholding tax. However, such tax exemption ceased after January 1, 2008 with the
effectiveness of the EIT Law and its Implementing Rules, and a withholding tax rate of 10% applies to such dividends (subject to
reductions by the relevant tax treaties or similar tax arrangements, if applicable) except for accumulated and undistributed profit
generated by foreign-invested enterprises before January 1, 2008 and distributed to foreign investors after the year of 2008.
According to the Arrangement between Mainland
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with
respect to Taxes on Income, signed on August 21, 2006, or the Hong Kong Tax Treaty, a company incorporated in Hong Kong, such
as eHi Auto Services (Hong Kong) Holding Limited, or eHi Hong Kong, and L&L Financial Leasing Holding Limited, or L&L,
is subject to withholding income tax at a rate of 5% on dividends it receives from its PRC subsidiaries if it holds a 25% or more
interest in such PRC subsidiaries, or at a rate of 10% if it holds less than a 25% interest in such subsidiaries. In addition,
the State Administration of Taxation, or the SAT, promulgated a tax circular on October 27, 2009, or Circular 601, which provides
that tax treaty benefits will be denied to “conduit” or shell companies without business substance, and a beneficial
ownership analysis will be used based on a “substance over form” principle to determine whether or not to grant tax
treaty benefits. On June 29, 2012, the SAT issued the Announcement of the SAT regarding Recognition of “Beneficial Owner”
under Tax Treaties, or Announcement 30, which provides that a comprehensive analysis should be made when determining the beneficial
owner status based on various factors that are supported by various types of documents, including the articles of association,
financial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures,
functions and risk assumption as well as relevant contracts and other information. As a result, although each of Hong Kong subsidiaries
eHi Hong Kong and L&L holds an interest of more than 25% in the PRC subsidiaries, it is more likely than not that eHi Hong
Kong and L&L, as holding companies without other business substance, would not be entitled to tax treaty benefits and enjoy
the favorable 5% rate applicable under the Hong Kong Tax Treaty on dividends. If eHi Hong Kong and L&L cannot be recognized
as the beneficial owners of any dividends to be paid by our PRC subsidiaries to us, such dividends will be subject to a withholding
tax of 10% as provided by the EIT Law. As of the date of this annual report, our PRC subsidiaries have not paid any dividends,
and do not currently plan to pay dividends in the foreseeable future, to our company and Hong Kong subsidiaries.
The PRC government’s replacement of the business tax with a VAT may require us to pay more taxes.
Prior to January 1, 2012, pursuant to the
Provisional Regulation of China on Business Tax and its Implementing Rules, an entity or individual rendering services in China
was generally subject to a business tax at the rate of 5% on revenues generated from the provision of such services. In November 2011,
the Ministry of Finance and the SAT promulgated relevant rules for a VAT Pilot Program, which imposed value-added tax, or
VAT, in lieu of business tax, for certain industries and certain regions at the initial stage. The VAT Pilot Program was implemented
for certain industries in Shanghai in January 2012, and was expanded to Beijing, Tianjing, Jiangsu, Zhejiang, Guangdong and
other regions in August 2012. Since August 2013, the VAT Pilot Program has been expanded nationwide. On March 23,
2016, the Ministry of Finance and the SAT jointly issued the Notice on Comprehensive Implementation of the Pilot Program for Imposition
of Value-Added Tax to Replace Business Tax, or the Notice. Pursuant to the Notice, the VAT became effective on May 1, 2016 and
was implemented comprehensively across the country and extended to all industries. According to the VAT, entities and individuals
engaging in the sale of services, intangible assets or fixed assets within the territory of the PRC are required to pay VAT instead
of business tax.
Most of our key operating subsidiaries
are located in Shanghai, Beijing, Guangzhou and other major cities in China, and since the implementation of VAT Pilot
Program, we had been subject to a 17% VAT for car rental services, a 11% VAT for designated driving services and a 6% VAT
for qualified management services, respectively, which had the effect of reducing our net revenues in the cities subject to
VAT Pilot Program. Despite the decrease in net revenues resulted from the VAT Pilot Program, we were able to benefit
from certain financial subsidies provided by local government authorities to offset such tax burdens during the pilot period.
However, such financial subsidies ceased to apply after the nationwide implementation of VAT in May 2016. The nationwide
implementation of VAT has an effect of reducing our net revenues in general, although we may be able to benefit from the
deductible VAT that we paid for vehicle purchases and other suppliers to offset the increased tax payments. If we are unable
to obtain sufficient qualified VAT invoices from our suppliers to offset the increased tax payments, the VAT will have a
material adverse effect on our financial condition and results of operations.
We and our investors might face uncertainty with respect to
indirect transfers of equity interests in PRC resident enterprises where non-PRC resident holding companies are involved .
Pursuant to the Notice on Strengthening Administration
of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the SAT on December 10,
2009 with retroactive effect from January 1, 2008 and Several Issues Related to Administration of Enterprise Income Tax for Non-Resident
Enterprises, or Bulletin 24, issued by the SAT on March 28, 2011 and came into effect as of April 1, 2011, where a non-PRC resident
enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposing of the equity interests of an overseas
holding company, or an Indirect Transfer, under certain circumstances the PRC tax authority may disregard the existence of the
overseas holding company if the Indirect Transfer lacks a reasonable commercial purpose and is arranged for the purpose of reducing,
avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax
at a rate of up to 10%.
On February 3, 2015, the SAT issued the Bulletin
on Certain Issues Concerning the Enterprise Income Tax on the Indirect Transfer of Properties by Non-resident Enterprises, or Circular
7, which comes into effect upon issuance and abolishes certain provisions in Circular 698 and Bulletin 24 and also provides more
guidance on a number of issues under Circular 698. Circular 7 stipulates that when a non-resident enterprise transfers the assets
(including equity interests) in an overseas holding company, which directly or indirectly owns PRC taxable properties, including
equity interests in a PRC company, or the PRC Taxable Assets, for the purposes of avoiding PRC enterprise income taxes through
an arrangement without reasonable commercial purpose, such an indirect transfer should be re-characterized as a direct transfer
of PRC Taxable Assets in accordance with the Enterprise Income Tax Law, unless the overall arrangements relating to an indirect
transfer of PRC Taxable Assets satisfies either of the safe harbor rules: (i) where a non-resident enterprise derives income from
the indirect transfer of PRC Taxable Assets by acquiring and selling equity interests of a same listed overseas company on a public
market; or (ii) where the non-resident enterprise had directly held and transferred such PRC Taxable Assets, the income from the
transfer of such PRC Taxable Assets would have been exempted from enterprise income tax in the PRC under an applicable tax treaty
or arrangement.
As Circular 7 was newly implemented and only
became effective in February 2015, there might be limited precedents regarding the application and enforcement of Circular 7 and
it remains uncertain whether such exemptions or relevant provisions of Circular 7 will be applicable to the transactions such as
our future disposal of subsidiaries, acquisitions of complementary businesses, or restructuring of our organizational structure
where non-PRC resident investors and PRC Taxable Assets are involved. In addition, our transfer of a 100% equity interest in Elite
Plus in June 2015 was subject to relevant provisions under Circular 7. Elite Plus is a British Virgin Islands company and currently
holds a stake in Xiaoju Kuaizhi Inc., a Cayman Islands company with PRC operations. We have completed the tax filing and payment
with the relevant PRC tax authorities for this transaction.
In addition, our company and our non-PRC resident
investors, other than those both acquiring and selling shares on a public exchange, may, as a result of the above-mentioned transactions,
become at risk of being taxed under Circular 7 and may be required to undergo burdensome procedural formalities to comply with
Circular 7 or to establish that we or our non-PRC resident shareholders should not be taxed under Circular 7, which may have a
material adverse effect on our financial condition and results of operations or such non-PRC resident investors’ investments
in us.
Limitations on the ability of our operating subsidiaries to
pay dividends or other distributions to us could have a material adverse effect on our ability to conduct our business.
As a holding company, we rely principally on
dividends and other distributions on equity paid by our PRC subsidiaries for our cash requirements, including funds necessary to
service any debt we may incur. If any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing
the debt may restrict its ability to pay dividends or make other distributions to us.
Furthermore, relevant PRC laws and regulations
permit payments of dividends by our PRC subsidiaries only out of their retained earnings, if any, determined in accordance with
PRC accounting standards and regulations. Under PRC laws and regulations, our PRC subsidiaries are required to set aside a portion
of their net income each year to fund a statutory reserve or reserve fund. This reserve is not distributable as dividends. As a
result, our PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends,
loans or advances.
Under existing PRC foreign exchange regulation,
payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange
transactions, can be made in foreign currencies without approval from the PRC State Administration of Foreign Exchange, or SAFE,
by complying with certain procedural requirements. However, approval from or registration with competent government authorities
is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such
as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign
currencies for current account transactions in the future. In January 2017, the SAFE issued the Notice on Further Promoting the
Reform of Foreign Exchange Administration and Improving the Examination of Authenticity and Compliance, which continues to implement
and improve the policies for the administration of outward remittance of foreign exchange profits from direct investment. A
bank that handles outward remittance of profits more than US$50,000 for a domestic institution shall review documents
provided by the domestic institution and verify the authenticity of the underlying transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to
pay dividends in foreign currencies to our shareholders. Further, there is no assurance that new regulations will not be promulgated
in the future that would have the effect of further restricting the ability of our operating subsidiaries to pay dividends or
other distributions out of PRC.
PRC regulation of loans and direct investment by offshore
holding companies to PRC entities may delay or prevent us from using the proceeds from the offerings of any securities to make
loans or additional capital contributions to our PRC operating subsidiaries.
In 2015 and 2016, we raised gross proceeds of
approximately US$134.0 million from a private placement of common shares, US$200 million in aggregate principal amount from issuing
senior unsecured notes due 2018, and US$150 million in aggregate principal amount from a syndicated loan facility. As an offshore
holding company, our ability to make loans or additional capital contributions to our PRC operating subsidiaries is subject to
PRC regulations and approvals and there are restrictions for us to make loans to our affiliated Chinese entities. These regulations
and approvals may delay or prevent us from using the proceeds we received in the past or will receive in the future from the offerings
of securities to make loans or additional capital contributions to our PRC operating subsidiaries and our affiliated Chinese entities,
and impair our ability to fund and expand our business which may adversely affect our business, financial condition and result
of operations.
For
example, SAFE promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement
of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 142, on August 29, 2008. Under
Circular 142,
registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business
scope approved by the applicable governmental authority and may not be used for equity investments in the PRC. In addition, foreign-invested
companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay
RMB loans if they have not used the proceeds of such loans. In addition, to strengthen Circular 142, on November 9, 2011 the
SAFE promulgated the Circular on Further Clarifying and Regulating Relevant Issues Concerning the Administration of Foreign Exchange
under Capital Account, or Circular 45, which prohibits a foreign invested company from converting its registered capital in foreign
exchange currency into RMB for the purpose of making domestic equity investments, granting entrusted loans, repaying inter-company
loans, and repaying bank loans that have been transferred to a third party. Circular 142 and Circular 45 may significantly limit
our ability to transfer the net proceeds from offerings of our securities or any future offering to our PRC subsidiaries and convert
the net proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
On March 30, 2015, the SAFE promulgated a Circular on Reforming of Administrative Methods Regarding the Foreign Exchange Capital
Settlement of Foreign-Invested Companies, or Circular 19, which became effective on June 1, 2015, superseding Circular 142.
According to Circular 19, although it restates certain restrictions on use of investment capital in foreign currency by foreign
invested company, it specifies that the registered capital of a foreign-invested company in foreign currency can be converted into
RMB voluntarily and be allowed to use for equity investment in the PRC subject to certain reinvestment registration with local
SAFE made by the invested company. In June 2016, SAFE promulgated SAFE Circular 16, which removed certain restrictions previously
provided under several SAFE circulars, including SAFE Circular 19, in respect of conversion by a foreign-invested enterprise of
foreign currency registered capital into RMB and use of such RMB capital. However, SAFE Circular 16 continues to prohibit foreign-invested
enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business
scope, and providing loans to non-affiliated enterprises except as permitted in the business scope.
In light of the various requirements imposed
by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 16
and Circular 19, 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 by us to our PRC subsidiary or with respect to
future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our
ability to use the proceeds we received from our offshore financing activities 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.
PRC
regulations relating to the establishment of offshore special purpose vehicles by PRC residents may subject our PRC resident
shareholders
or us to penalties and limit our ability to acquire PRC companies or inject capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to increase their registered capital or distribute profits to us, or otherwise adversely affect us.
On
July 4, 2014, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange for Overseas
Investment
and Financing and Reverse Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which replaced the Notice
on Issues Relating to the Administration of Foreign Exchange for the Financing and Reverse Investment by Domestic Residents via
Offshore Special Purpose Vehicles issued by SAFE in October 2005, or Circular 75. Pursuant to Circular 37, any PRC residents,
including both PRC institutions and individual residents, are required to register with the local SAFE branch before making contribution
to a company set up or controlled by the PRC residents outside of the PRC for the purpose of overseas investment or financing with
their legally owned domestic or offshore assets or interests, referred to in this circular as a “special purpose vehicle.”
Under Circular 37, the term “PRC institutions” refers to entities with legal person status or other economic organizations
established within the territory of the PRC. The term “PRC individual residents” includes all PRC citizens (also including
PRC citizens abroad) and foreigners who habitually reside in the PRC for economic benefits. A registered special purpose vehicle
is required to amend its SAFE registration in the event of any change of basic information including PRC individual resident shareholder,
name, term of operation, or PRC individual resident’s increase or decrease of capital, transfer or exchange of shares, merger,
division or other material changes. In addition, if a non-listed special purpose vehicle grants any equity incentives to directors,
supervisors or employees of domestic companies under its direct or indirect control, the relevant PRC individual residents could
register with the local SAFE branch before exercising such options. The SAFE simultaneously issued a series of guidances to its
local branches with respect to the implementation of Circular 37. Circular 37 modified certain defined terms under Circular 75
to clarify the SAFE registration scope. For example, Circular 37 broadened the definition of special purpose vehicle to offshore
entities that were (i) established for the purpose of overseas investments by PRC residents (in addition to for the purpose
of financing as defined under Circular 75) and (ii) established by PRC residents with their legally owned offshore assets
or interests (in addition to domestic assets or interests as defined under Circular 75); and it also broadened the definition of
reverse investment to include establishing new foreign invested entities or projects as a way of domestic direct investment by
PRC residents, directly or indirectly, through special purpose vehicle, which was excluded by Circular 75. Furthermore, Circular
37 modified certain SAFE registration procedures and requirements for special purpose vehicles and clarified the SAFE registration
procedures for equity incentive awards granted by non-listed special purpose vehicles to directors, supervisors or employees of
their controlled domestic companies. We have requested our current shareholders and/or beneficial owners to disclose whether they
or their shareholders or beneficial owners fall within the ambit of the SAFE notice and urge those who are PRC residents to register
with the local SAFE branch as required under the SAFE notice. As Circular 37 was newly promulgated, there is uncertainty as to
its application and interpretation. We cannot assure you that our shareholders and/or beneficial owners have fully complied with
registration requirement under Circular 37. The failure of these shareholders and/or beneficial owners to timely register or amend
their SAFE registrations pursuant to the SAFE notice or the failure of future shareholders and/or beneficial owners of our company
who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such shareholders, beneficial
owners and/or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital
into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company or otherwise adversely
affect our business.
It is unclear how SAFE Circular 37 and any future
regulation concerning offshore or cross-border transactions will be interpreted, amended and implemented by the relevant government
authorities. We cannot predict how these regulations will affect our business operations or future strategy. We may be subject
to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends
and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations.
If
the PRC government deems that the contractual arrangements in relation to our variable interest entities do not comply with PRC
governmental restrictions on foreign investment, or if these regulations or the interpretation of existing
regulations changes in the future, we could be subject to penalties or be forced to relinquish our interests in the variable interest
entities.
Foreign ownership of certain types of Internet
and mobile services is subject to restrictions under applicable PRC laws, rules and regulations. For example, a commercial
operator of Internet content services must obtain a value-added telecommunication business operating license, an ICP license, issued
by the appropriate telecommunications authorities. Our current major operations are not subject to ICP license requirements. To
further expand our Internet and mobile services, in March 2014, we entered into a series of contractual arrangements with
our PRC incorporated variable interest entity eHi Information, and its shareholders. eHi Information obtained the ICP license from
the relevant telecommunication authorities on September 24, 2014. In January 2015, we entered into a series of contractual
arrangements with our PRC incorporated variable interest entity eHi Car Sharing and its shareholders. eHi Car Sharing is currently
not yet in operation.
These
contractual arrangements provide us with effective control over the variable interest entities and provide us the right to
obtain
substantially all of the economic benefits from the variable interest entities. Although this structure is commonly adopted by
many Internet companies in China, the relevant PRC regulatory authorities have broad discretion in determining whether a particular
contractual structure is in violation of the law. For example, on July 13, 2006, the Ministry of Information Industry, the
predecessor of the Ministry of Industry and Information Technology, or the MIIT publicly released the Notice on Strengthening the
Administration of Foreign Investment in Operating Value-added Telecommunications Business, or the MIIT Notice, which reiterates
certain provisions under the Administrative Rules for Foreign Investments in Telecommunications Enterprises promulgated by
the State Council in 2001 and amended in 2008 prohibiting a domestic company that holds an ICP license, from renting, transferring
or selling a telecommunications license to foreign investors in any form, or providing any resources, sites or facilities to foreign
investors that intend to conduct value-added telecommunication business illegally in China. Trademarks and domain names that are
used in the provision of Internet content services must be owned by the ICP license holder. There is currently no official interpretation
or implementation practice under the MIIT Notice. Due to a lack of interpretative materials from the authorities, it is uncertain
whether the MIIT would consider our corporate structure and the contractual arrangements as a kind of foreign investment in telecommunication
services. Therefore, it is unclear what impact the MIIT Notice might have on us. The PRC government may not agree that these 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.
In the opinion of Grandall Law Firm (Shanghai),
our PRC counsel, the ownership structures of our wholly foreign owned enterprise and our variable interest entity in China do not
violate any applicable PRC law, regulation or rule currently in effect; and the contractual arrangements between our wholly
foreign owned enterprise, our variable interest entity and its equity holders governed by PRC law are valid, binding and enforceable
in accordance with their terms and applicable PRC laws and regulations currently in effect and do not violate any applicable PRC
law, rule or regulation currently in effect. However, our PRC counsel has also advised us that there are substantial uncertainties
regarding the interpretation and application of current PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities
and PRC courts may in the future take a view that is contrary to the opinion of our PRC legal counsel.
It
is uncertain whether any new PRC laws, rules or regulations relating to variable interest entities structures will be adopted
or if
adopted, what they would provide. If we, our PRC subsidiaries or our variable interest entities are found to be in
violation of any existing or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required permits
or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations
or failures, including revoking the business and operating licenses of our PRC subsidiaries or the variable interest entities,
requiring us to discontinue or restrict certain Internet operations, requiring us to restructure or taking other regulatory or
enforcement actions against us. If we are not able to restructure our ownership structure and operations in a satisfactory manner,
our ability to expand our Internet and mobile services may be limited.
Our contractual arrangements may not be as effective in providing
control over the variable interest entities as direct ownership.
We
entered into contractual arrangements with our variable interest entities. These contractual arrangements may not be as
effective
as direct ownership in providing us with control over our variable interest entities.
If
we had direct ownership of the variable interest entities, we would be able to exercise our rights as an equity holder directly
to effect changes in the boards of directors of the entity, which could effect changes at the management and operational level.
Under our contractual arrangements, we rely on the variable interest entities and the variable interest entities equity holders
to perform their obligations in order to exercise our control over the variable interest entities. The variable interest entities
equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests of our company
or may not perform their obligations under these contracts. We may replace the equity holders of the variable interest entities
at any time pursuant to the
contractual arrangements. However, if any dispute relating to these contracts remains unresolved,
we will have to enforce our rights under the contractual arrangements through the operations of PRC law and courts, which will
be subject to uncertainties in the PRC legal system. Consequently, the contractual arrangements may not be as effective in ensuring
our control over the relevant portion of our business operations as direct ownership.
The
draft PRC Foreign Investment Law, if enacted as proposed, may impact the viability of our current corporate structure,
corporate
governance and business operations.
MOFCOM published a discussion draft of the proposed
Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign
investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise
Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The
draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime
in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign
and domestic investments. While MOFCOM solicited public comments on this draft in January and February 2015, substantial
uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law,
if enacted as proposed, may materially impact the entire legal framework regulating the foreign investments in China and may impact
viability of our current corporate structure, corporate governance and business operations.
Among
other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle
of
“actual control” in determining whether a company is considered a foreign-invested enterprise, or a FIE. The draft
Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors
will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by
MOFCOM or its local branches, treated as a PRC domestic investor provided that the entity is “controlled” by PRC entities
and/or citizens. In this connection, “control” is broadly defined in the draft law to cover, among others, having the
power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial
matters or other key aspects of business operations. Once an entity is determined to be a FIE and its investment amount exceeds
certain thresholds or its business operation falls within a “negative list”, to be separately issued by the State Council
in the future, market entry clearance by MOFCOM or its local braches would be required. Otherwise, all foreign investors may make
investments on the same terms as Chinese investors without being subject to additional approval from the government authorities
as mandated by the existing foreign investment legal regime.
The
“variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, to obtain necessary
licenses and permits in the industries that are currently subject to foreign investment restrictions in China. We set up the VIE
structure
to address the uncertainties for securing licenses and permits which may be required for our business operation
if the local authorities deem our business operation as value-added telecommunication business. See “—If the PRC government
deems that the contractual arrangements in relation to our variable interest entities do not comply with PRC governmental restrictions
on foreign investment, or if these regulations or the interpretation of existing regulations changes in the future, we could be
subject to penalties or be forced to relinquish our interests in the variable interest entities.’’ Under the draft
Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as FIEs,
if they are ultimately ‘‘controlled’’ by foreign investors.
Therefore,
for any companies with a VIE structure in an industry category that is on the ‘‘negative list,’’ the VIE
structure may be
deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC
individual, or PRC government and its branches or agencies). Conversely, if the actual controlling person(s) is/are of foreign
nationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the ‘‘negative
list’’ without market entry clearance may be considered as illegal.
The
draft Foreign Investment Law has not taken a position on what actions shall be taken with respect to the existing companies
with
a VIE structure, although a few possible options were proffered in the draft. Under these options, a company with VIE structures
and in the business on the ‘‘negative list’’ at the time of enactment of the new Foreign Investment Law
has either the option or obligation to disclose its corporate structure to the authorities, while the authorities, after reviewing
the ultimate control structure of the company, may either permit the company to continue its business by maintaining the VIE structure
(when the company is deemed ultimately controlled by PRC citizens), or require the company to dispose of its businesses and/or
VIE structure based on circumstantial considerations. Moreover, it is uncertain whether the business, which our eHi Information
and eHi Car Sharing operate, will be subject to the foreign investment restrictions or prohibitions set forth in the ‘‘negative
list’’ to be issued. If the enacted version of the Foreign Investment Law and the final ‘‘negative list’’
mandate further actions, such as MOFCOM market entry clearance, to be completed by companies with existing VIE structure like us,
we face uncertainties as to whether such clearance can be timely obtained, or at all. If it is likely that we would not be considered
as ultimately controlled by PRC domestic investors, further actions required to be taken by us, if any, under the enacted Foreign
Investment Law may adversely affect our business.
The
draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and
increase
our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting
requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment
report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign
investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these
information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons
directly responsible may be subject to criminal liabilities.
It
may be difficult to effect service of process upon, or to enforce judgments against us, our directors or our senior management
members who reside in the PRC.
Because
most of our officers and directors will reside outside of the United States, it may be difficult, if not impossible, to acquire
jurisdiction over these persons in the event a lawsuit is initiated by shareholders in the United States against us and/or our
officers and
directors. It is also unclear if the Treaty of People’s Republic of China and United States of America
on Criminal Judicial Assistance currently in effect between the United States and the PRC would permit effective enforcement of
criminal penalties under United States federal securities laws. Furthermore, because substantially all of our assets are located
in the PRC, it would also be extremely difficult to access those assets to satisfy an award entered against us in a United States
court. Moreover, we have been advised that the PRC does not have treaties with the United States providing for the reciprocal recognition
and enforcement of judgments of courts. As a result, it may not be possible for investors in the United States to enforce their
legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated
upon civil liabilities and criminal penalties of our directors and officers under federal securities laws.
We may be subject to fines and legal sanctions imposed by
the SAFE or other Chinese government authorities if we or our employees fail to comply with PRC regulations relating to employee
share incentive plans adopted by overseas-listed companies for PRC domestic individuals.
On
December 25, 2006, the PBOC issued the Administration Measures on Individual Foreign Exchange Control, or the PBOC Regulation.
On January 5, 2007, the SAFE issued the Implementing Rules for the PBOC Regulation. Both of these regulations became
effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding
plans, share option plans or similar plans of overseas-listed companies with domestic individuals’ participation require
approval from the SAFE or its local branch. In February 2012, the SAFE promulgated the Notice on Issues Concerning the Foreign
Exchange
Administration for Domestic Individuals Participating in Share Incentive Plan of Overseas-Listed Company, or the
Share Option Rule, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating
in Employee Share Holding Plan or Share Option Plan of Overseas-Listed Company issued by the SAFE on March 28, 2007. Under
the Share Option Rule, PRC domestic individuals who participate in any share incentive plan including employee shareholding plan,
share option plan or similar plan in an overseas-listed company are required to register with the relevant local SAFE branch and
complete certain other procedures related to the share incentive plan through a PRC agent. Under the Share Option Rule, PRC domestic
individuals include PRC citizens (including Hong Kong, Macau and Taiwan nationals) and foreign nationals who have continuously
resided in China for at least a year, and a PRC agent may be a domestic company participating in the share incentive plan or a
domestic institution that is qualified to engage in assets custodian business and has been duly designated by a domestic company.
We
and our employees who are PRC domestic individuals and have participated in our 2010 Plan and 2014 Plan have been subject to the
Share Option Rule since the listing of our ADSs on the NYSE. If we or our employees fail to comply with these regulations,
we or our
employees may be subject to fines or other legal sanctions imposed by the SAFE or other Chinese government authorities.
See “Regulations—Regulations on employee share options.” In addition, the SAT has issued several circulars concerning
employee share options. Under these circulars, our employees working in China who exercise our share options will be subject to
PRC individual income tax. Our PRC subsidiaries have obligations to make filings with relevant tax authorities related to employee
share options and withhold individual income taxes resulting from the exercise of their share options. If our employees fail to
pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or other PRC government authorities.
Our
current employment practices may be restricted under the Labor Contract Law and other labor-related laws of the PRC and our
labor
costs may increase as a result.
On
June 29, 2007, the PRC National People’s Congress enacted the Labor Contract Law, which became effective on January 1,
2008, as amended on December 28, 2012 and effective on July 1, 2013. On September 18, 2008, the PRC State
Council issued the Implementing Rules for the PRC Labor Contract Law. The Labor Contract Law and its Implementing Rules impose
requirements concerning, among other things, the types of contracts to be executed between an employer and its employees, time
limits for probationary periods and for how long an employee can be placed in a fixed-term employment contract. As the interpretation
and implementation of the Labor Contract Law and other labor-related laws are still evolving, and PRC government has continued
to introduce various new labor-related regulations, our employment policies and practice may not be deemed in compliance at all
time. For example, in accordance with the Labor Contract Law and its Implementing Rules, the Ministry of Human Resources and Social
Security promulgated Interim Provisions on Labor Dispatching, or Circular 22, effective from March 1, 2014, which provides
that an employer shall strictly control the number of employees under labor dispatching arrangements and dispatched employees can
only be used in temporary, ancillary and replaceable positions. The number of dispatched workers shall be reduced to no more than
10% of the total number of employees within two years after March 1, 2014. In the past we outsourced substantially all of
our employees from Qian Jin Network Information Technology (Shanghai) Co., Ltd., or Qian Jin, an independent third-party professional
human resources company. We are in the process of adjusting our employment arrangements gradually to comply with the requirements
under Circular 22. If we fail to reduce the number of our dispatched employees as required by Circular 22 and could not correct
our practice after receiving warnings from government authority, we may be subject to a fine ranging from RMB1,000 to RMB5,000
per dispatched employee. In addition, under the Labor Contract Law, a human resources company shall perform an employer’s
obligations, including payment of remuneration to the dispatched employees and contribution of social insurance premiums. Under
the labor dispatch service agreements between us and Qian Jin, we, as the entity receiving labor dispatch services, shall make
a monthly payment in an amount that includes the dispatched employees’ salaries, social insurance contributions and our service
fees to Qian Jin. However, we cannot assure you that Qian Jin has fully performed or will consistently fulfill its obligations,
including any social insurance or housing fund contributions. We may also be held jointly and severally liable with Qian Jin for
damages any violation caused to dispatched employees. If we are held liable for any shortage in the social insurance or housing
fund contribution for the dispatched employees or other penalties or fees related to our employment practice, our results of operations
and financial condition may be adversely affected.
In
addition, according to the Labor Contract Law and its implementing rules, if we intend to enforce the non-compete provision
with
our employees in the employment contracts or confidentiality agreements, we have to compensate our employees on a monthly basis
during the term of the restriction period after the termination or ending of the employment contract, which may cause extra expenses
to us.
The discontinuation of any tax incentives and government subsidies
available to us could, in each case, decrease our net income and materially and adversely affect our financial condition and results
of operations.
Our PRC subsidiaries are incorporated in
the PRC and are governed by applicable PRC income tax laws and regulations. Under the EIT Law and its Implementing Rules,
both of which became effective on January 1, 2008, the PRC has adopted a uniform enterprise income tax rate of 25% for
all PRC enterprises (including foreign-invested enterprises). The EIT Law and its Implementing Rules also permit
qualified small-scaled enterprises with low profit margins to enjoy a reduced 20% enterprise income tax rate. On April 8,
2014, March 13, 2015, and September 2, 2015, the SAT and the MOF jointly issued three circulars, which further provided that,
during the period between January 1, 2014 and December 31, 2016, between January 1, 2015 and December 31, 2017, and between
October 1,2015 and December 31, 2017 respectively, if a qualified small-scaled enterprise with low profit margins has an
annual taxable income of not more than RMB100,000, RMB200,000 and RMB300,000, respectively, then 50% of its taxable income
can be exempted from enterprise income tax, reducing the effective enterprise income tax rate to 10%. Nine of our PRC
subsidiaries were eligible for this tax incentive and paid enterprise income tax at a reduced rate of 10% for the taxable
year of 2016. In addition, on December 29, 2015, the State Administration of Taxation issued the announcement on
the “Pre-tax Weighted Deduction Policy for Corporate Research and Development Costs", which provided that in some
permitted industries, certain research and development expenses could enjoy weighted deduction from the taxable income for
the current year. One of our PRC subsidiaries, eHi Car Rental Management Services (Shanghai) Co., Ltd., or eHi Management,
was eligible for the extra pre-tax deduction from research and development expenses for the taxable year of 2016.
In addition, some local
governments allowed certain enterprises registered in their jurisdictions to receive certain government subsidies according
to local policies. According to the agreements between a local government agency in Shanghai and eHi Rental and Shanghai
Smart Brand, respectively, such local government agency agreed to grant to eHi Rental and Shanghai Smart Brand, at its own
discretion, certain subsidies which are calculated based on a certain portion of the business taxes paid by eHi Rental and
Shanghai Smart Brand based on their revenues. In 2014, 2015 and 2016, eHi Rental received government subsidies of RMB4.2
million, RMB4.4 million and RMB8.4 million (US$1.2 million), and Shanghai Smart Brand received government subsidies of RMB1.1
million, RMB0.9 million and RMB1.8 million (US$0.3 million), respectively. In 2016, eHi Management received government
subsidies of RMB1.5 million (US$0.2 million). In 2015 and 2016, Shanghai Taihao Financial Leasing Co., Ltd., or Shanghai
Taihao, received government subsidies of RMB2.6 million and RMB1.8 million (US$0.3 million), respectively.
Furthermore, the PRC government recently adopted
the VAT Pilot Program, which was initiated in Shanghai and now is rolled out nationwide. Pursuant to this program, starting from
January 1, 2012, our subsidiaries in Shanghai, including eHi Rental, are required to pay VAT instead of business tax. In February 2012,
Shanghai Bureau of Finance and Bureau of Taxation jointly released the Notice [2012] No. 5 which provided a temporary financial
subsidy in connection with the VAT Pilot Program, pursuant to which we received financial subsidies from various levels of local
governments in relation to the VAT Pilot Program. In 2015, the government cancelled the temporary financial subsidy as the Notice
[2012] No. 5 expired and the VAT has been applicable to all taxpayers from May 1, 2016. We also received government subsidies
for the purchase of certain vehicle models approved by the local government as well as government grants for our technology achievements
from the Scientific and Technological Commission of Shanghai. However, preferential tax treatments and government subsidies are
subject to review and may be adjusted or revoked at any time in the future. The discontinuation of any preferential tax treatments
or government subsidies available to us will cause our effective tax rate to increase, which will decrease our net income and our
financial condition and result of operations may be materially and adversely affected.
Our
legal rights to lease certain properties could be challenged, which could prevent us from continuing to operate the affected
service
locations or increase the costs associated with operating these service locations.
We
rely on leases with third parties who either own the properties or lease the properties from the ultimate property owner.
As of
December 31, 2016, 195 of our service locations were leased from lessors who were unable to provide us
with copies of title certificates or documents evidencing the authorization or consent of the owners of such properties, or
leased with other title defects in property. Where the lessors do not have the proper legal right to lease the properties, the
corresponding lease agreements may be deemed invalid. Furthermore, some properties may not be designated for commercial use.
If we are not adequately indemnified by the lessors for our related losses, our business may be adversely affected. Some of
the properties we lease from the third parties have been mortgaged by the owners prior to leasing to us. We may not be able
to continue using such properties if the mortgage is foreclosed. In addition, under the PRC law, failure to register a
lease agreement with the local housing bureau may result in the risk that we may not be able to continue to occupy the
relevant properties if the lease is challenged by third parties. Our standard lease agreement generally requires the lessor
to make such registrations, however, as of December 31, 2016, the lease agreements relating to a number of our service
locations had not been duly registered by the relevant lessors. Accordingly, if these lessors do not have the appropriate
titles to the properties or necessary approvals from the ultimate owners or fail to make the requisite registrations, or if
the mortgage over the leased properties is foreclosed, we may be unable to continue to operate the affected properties
or incur additional costs associated with operating these service locations.
Risks related to our ADSs
The trading price for our ADSs has fluctuated and may be volatile,
which could result in substantial losses to investors.
The
trading price for our ADSs has fluctuated since we listed our ADSs. In 2016, the trading price of our ADSs ranged from US$8.32
to US$13.70 per ADS, and the last reported
trading price on April 26, 2017 was US$10.25 per ADS. The trading price for our
ADSs may be volatile and subject to wide fluctuations in response to factors such as actual or anticipated fluctuations in our
quarterly results of operations, changes in financial estimates by securities research analysts, changes in the economic performance
or market valuations of other car rentals and car services providers, announcements by us or our competitors of material acquisitions,
strategic partnerships, joint ventures or capital commitments, fluctuations of exchange rates between the Renminbi and the U.S.
dollar, announcements regarding litigation or administrative proceedings involving us, release or expiry of lock-up or other transfer
restrictions on our outstanding shares or ADSs, sales or perceived sales of additional common shares or ADSs and economic or political
conditions in China. In addition, the performance, and fluctuation in market prices, of other companies with business operations
located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading
volumes of our ADSs. The securities of some China-based companies that have listed their securities in the United States 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 these China-based companies’ securities after their offerings may
affect the attitudes of investors toward China-based companies listed in the United States, which consequently may impact the trading
performance of our 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 other matters of other China-based companies may
also negatively affect the attitudes of investors towards China- based companies in general, including us, regardless of whether
we have engaged in any inappropriate activities. Volatility in global capital markets, such as the recent global financial services
and economic crises, could also have an adverse effect on the trading price of our ADSs. Furthermore, the securities market has
from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. These market fluctuations may also materially and adversely affect the trading price of our ADSs.
The sale or availability for sale of substantial amounts of
our ADSs could adversely affect their market price.
Sales
of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely
affect
the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. As
of December 31, 2016, we had an aggregate of 139,917,575 common shares issued and outstanding based on our Cayman Islands
registrar, of which 59,165,708 Class A common shares were represented by 29,582,854 ADSs (including 528,644 ADSs issued and
reserved for the future exercise of options or the vesting of other awards under the 2010 Plan and the 2014 Plan). All our common
shares represented by ADSs were freely transferable by persons other than our “affiliates” without restriction or additional
registration under the Securities Act of 1933, or the Securities Act. The remaining common shares will be available for sale subject
to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act and applicable lock-up
agreements. In addition, certain holders of our common shares have the right to cause us to register the sale of those shares under
the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered
shares in the public market could cause the price of the ADSs to decline. We cannot predict what effect, if any, market sales of
securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale
will have on the market price of our ADSs.
Our dual-class voting structure will limit your ability to
influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A
common shares and ADSs may view as beneficial.
Our
common shares are divided into Class A common shares and Class B common shares. Holders of Class A common shares
are
entitled to one vote per share, while holders of Class B common shares are entitled to ten votes per share. In
addition, certain matters including those related to the change of control of our company require an additional approval by the
holders of a majority of Class A common shares voting as a separate class. Each Class B common share is convertible into
one Class A common share at any time by the holder thereof. Class A common shares are not convertible into Class B
common shares under any circumstances. Class B common shares will be automatically converted into the same number of Class A
common shares under certain circumstances, including any transfer of Class B common shares by a holder thereof to any person
or entity which is not an affiliate of such holder.
Due
to the disparate voting powers attached to these two classes of common shares, Class B common shares issued and
outstanding
as of December 31, 2016, represented 51.0% of our total issued and outstanding shares and 91.2% of the then total voting power.
Therefore, our Class B common shareholders will have decisive influence over matters requiring shareholders’ approval,
including election of directors and significant corporate transactions, and their interest may not be aligned with us or other
shareholders of our company. This concentrated control will limit your ability to influence corporate matters and could discourage
others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A common
shares and ADSs may view as beneficial, which could deprive our shareholders of an opportunity to receive a premium for their shares
as part of a sale of our company and may reduce the price of our ADSs.
Holders of ADSs have fewer rights than shareholders and must
act through the depositary to exercise their rights.
Holders
of our ADSs do not have the same rights as our shareholders and may only exercise the voting rights with respect to the underlying
Class A common shares in accordance with the provisions of the deposit agreement. Under our ninth amended and restated
memorandum
and articles of association, the minimum notice period required to convene a general meeting is seven 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
common 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 instructions to you or carry out your voting instructions in a timely manner. We will make reasonable
efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you 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 request. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’
meeting.
You
may not receive distributions on our common shares or any value for them if such distribution is illegal or if any required
government
approval cannot be obtained in order to make such distribution available to you.
The
depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on
Class A
common shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these
distributions in proportion to the number of Class A common shares your ADSs represent. However, the depositary is not responsible
if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would
be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities
Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also
determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions
may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have
no obligation to register under U.S. securities laws any ADSs, common shares, rights or other securities received through such
distributions. We also have no obligation to take any other action to permit the distribution of ADSs, common shares, rights or
anything else to holders of ADSs. This means that you may not receive distributions we make on our common shares or any value for
them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the
value of our ADSs.
You may not be able to participate in rights offerings and
may experience dilution of your holdings as a result.
We may from time to time distribute rights to
our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not
offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are registered
under the Securities Act, or the distribution of them to ADS holders is exempted from registration under the Securities Act with
respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or
underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be
able to rely on an exemption from registration under the Securities Act to distribute such rights and securities. Accordingly,
holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or
from
time to time when it deems expedient in connection with the performance of its duties. In addition, subject to the limitations
and requirements under Form F-6 of the SEC, the depositary may refuse to deliver, transfer or register transfers of ADSs generally
when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because
of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any
other reason in accordance with the terms of the deposit agreement.
You
may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may
be
limited because we are organized under Cayman Islands law, conduct substantially all of our operations
in China and a majority of our directors and officers reside outside the United States.
We
are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our wholly owned
subsidiaries
in China. A majority of our directors and officers reside outside the United States and some or all of the assets of those persons
are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us
or against these individuals in the United States in the event that you believe that your rights have been infringed under the
U.S. securities laws or otherwise. Even if you are successful in bringing an action of this kind, the respective laws of the Cayman
Islands and China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. In
addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of
U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States
or any state, and it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought
in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.
There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the
Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial
on the merits.
Our
corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2016 Revision) and common
law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority
shareholders
and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common
law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent
in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman
Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as
clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular,
because the Cayman Islands law has no legislation specifically dedicated to the rights of investors in securities, and thus no
statutorily defined private causes of action to investors in securities such as those found under the Securities Act or the Exchange
Act in the United States, it provides significantly less protection to investors. In addition, Cayman Islands companies may not
have standing to initiate a shareholder derivative action before the federal courts of the United States.
As
a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions
against
our management, directors or major shareholders than would shareholders of a corporation organized in a jurisdiction in the United
States.
Our
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 common shares represented by
our ADSs,
at a premium.
Our
ninth amended and restated memorandum and articles of association contain provisions that may limit the ability of others to
acquire
control of our company or cause us to engage in change-of-control transactions. For example, we have adopted a dual-class voting
structure that gives disproportionate voting power to Class B common shares. In addition, change of control event requires
an additional approval by the holders of a majority of Class A common shares voting as a separate class. We also have a staggered
board. These provisions may 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
transactions.
We
may be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax
consequences
to U.S. Holders of our ADSs or common shares.
Depending
upon the value of our common shares and ADSs and the nature of our assets and income over time, we could be
classified as
a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.
We
will be classified as a PFIC for any taxable year if either (i) at least 75% of our gross income for the taxable year is passive
income or (ii) at least 50% of the value of our assets (based on the average quarterly value of the assets during the
taxable year) is attributable to assets that produce or are held for the production of passive income. In determining the average
percentage value of our gross assets, the aggregate value of our assets will generally be deemed to be equal to our market capitalization
(determined by the sum of the aggregate value of our outstanding equity) plus our liabilities. Therefore, a drop in the market
price of our ADSs or common shares would cause a reduction in the value of our non-passive assets for purposes of the asset test.
Accordingly, we would likely become a PFIC if our market capitalization were to decrease significantly while we hold substantial
cash.
We
believe we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2016. Although we
intend to conduct our business activities in a manner to reduce the risk of our classification as a PFIC in the future, we currently
hold,
and expect to continue to hold, a substantial amount of cash and other passive assets, and, because the value of our
assets is likely to be determined in large part by reference to the market prices of our common shares and ADSs, which are likely
to fluctuate, there can no assurance that we will not be classified as a PFIC in 2017 or any future taxable year. If we are a PFIC
for any taxable year during which a U.S. investor holds our common shares or ADSs, certain adverse U.S. federal income tax consequences
would apply to the U.S. investor. For details, please refer to Item 10.E, “Additional Information — Taxation.”
We are exempt from certain corporate governance requirements
of the NYSE. This may afford less protection to the holders of our ADSs.
We are exempt from certain corporate governance
requirements of the NYSE by virtue of being a foreign private issuer. As a foreign private issuer, we are permitted to, and plan
to, follow home country practice in lieu of certain corporate governance requirements of the NYSE. We are required to provide a
brief description of the significant differences between the corporate governance practices of our home country, the Cayman Islands
and the corporate governance practices required to be followed by
U.S.
domestic companies under the NYSE rules. The standards applicable to us are considerably different than the standards applied to
U.S. domestic issuers. The significantly different standards applicable to us do not require us to:
|
·
|
have a majority of the board be independent (other than due to the requirements for the audit committee under the Exchange
Act);
|
|
·
|
have a minimum of three members on our audit committee;
|
|
·
|
have a compensation committee, a nominating or corporate governance committee;
|
|
·
|
provide annual certification by our chief executive officer that he or she is not aware of any noncompliance with any corporate
governance rules of the NYSE;
|
|
·
|
have regularly scheduled executive sessions with only non-management directors;
|
|
·
|
have at least one executive session of solely independent directors each year;
|
|
·
|
seek shareholder approval for (i) the implementation and material revisions of the terms of share incentive plans, (ii) the
issuance of more than 1% of our outstanding common shares or 1% of the voting power outstanding to a related party, (iii) the
issuance of more than 20% of our outstanding common shares, and (iv) an issuance that would result in a change of control;
|
|
·
|
adopt and disclose corporate governance guidelines; or
|
|
·
|
adopt and disclose a code of business conduct and ethics for directors, officers and employees.
|
We
intend to rely on all such exemptions provided by the NYSE to a foreign private issuer, except that we have a compensation
committee
and a corporate governance and nominating committee, an audit committee consisting of three members, and we have adopted and disclosed
corporate governance guidelines and a code of business conduct and ethics for directors, officers and employees. As a result, you
may not be provided with the benefits of certain corporate governance requirements of the NYSE.
ITEM 4. INFORMATION ON THE COMPANY
|
A.
|
History and Development of the Company
|
We
commenced our business in 2006, which was initially focused on providing car services to premium corporate clients. In
2008,
we began to provide car rentals to individual customers. Our company, eHi Car Services Limited (previously known as Prudent Choice
International Limited or eHi Auto Services Limited), was incorporated in the Cayman Islands on August 3, 2007. eHi Car Services
Limited is a holding company. Currently we operate our car rental and car services business through our PRC subsidiaries.
For
our car rental business, we provide vehicles through our PRC subsidiaries Shanghai
eHi Car Rental Co., Ltd., or eHi
Rental, and eHi Auto Services (Jiangsu) Co., Ltd., or eHi Jiangsu, and their subsidiaries and branches in different cities;
and we provide fleet management, information technology support and other car rental related services through eHi Car Rental Management
Services (Shanghai) Co. Ltd., or eHi Management, which is a subsidiary of eHi Rental.
For
our car services business, we provide vehicles through eHi Rental, eHi Jiangsu and their subsidiaries and branches, and provide
chauffeur services through our PRC subsidiary Shanghai Smart Brand Auto Driving Services Co., Ltd., or Shanghai Smart Brand,
and its subsidiaries and
branches.
Our current major operations are not subject
to the ICP license requirements. To further expand our Internet and mobile services, in March 2014, we entered into a series
of contractual arrangements with our PRC incorporated variable interest entity Shanghai eHi Information Technology Service Co., Ltd.,
or eHi Information, and its shareholders. eHi Information obtained an ICP license from the relevant telecommunication authorities
on September 24, 2014. eHi Information currently does not have any material operation. In January 2015, we entered into
a series of contractual arrangements with our PRC incorporated variable interest entity Shanghai eHi Car Sharing Information Technology
Co., Ltd., or eHi Car Sharing, and its shareholders. eHi Car Sharing is currently not yet in operation. For additional information
on our organizational structure, see Item 4.C, “Information on the Company— Organizational Structure”.
In
November 2014, we completed an initial public offering of 10,000,000 ADSs at the price of US$12.00 per ADS. Each ADS represents
two Class A common shares. On November 18, 2014, our ADSs were listed on the New York Stock Exchange under the
symbol
“EHIC”. In November 2014 we also issued 5,000,000, 1,666,666 and 1,666,666 Class A common shares to Dongfeng
Asset Management Co. Ltd., China Universal Asset Management Co., Ltd. and Ctrip, respectively, at the price of US$6.00 per
share (equivalent to US$12.00 per ADS), in a private placement concurrent with the initial public offering.
In May 2015, we entered into
definitive securities purchase agreements with Tiger Fund and SRS Funds, pursuant to which we agreed to issue a total of
22,337,924 of our Class A common shares to the buyers at a price of US$6.00 per Class A common share (equivalent to
US$12.00 per ADS). We raised gross proceeds of approximately US$134.0 million from this private placement transaction. In
addition, two of our shareholders, Ctrip and Crawford, also entered into definitive agreements with the buyers for the sale
of an aggregate of 2,666,666 Class A common shares (including certain shares represented by ADSs) at a price of US$6.00
per Class A common share (equivalent to US$12.00 per ADS).
On
June 30, 2015, in connection with the private placement, we also entered into a registration rights agreement with Tiger Fund
and SRS Funds, pursuant to which, at any time after the later of (i) November 22, 2015 and (ii) we have become eligible
to register the purchased securities for resale on Form F-3, the holders of at least a majority of the purchased securities
may request us to file no more than two registration statements in any 12-month period to register the purchased
securities and their relevant equity rights. The registration rights set forth therein shall terminate on November 18,
2017.
In December 2015, we completed an offering
of US$200 million in aggregate principal amount of senior unsecured notes due 2018, or the 2018 Senior Notes. The 2018 Senior Notes
were offered by our Cayman holding company, and all of our offshore subsidiaries jointly and severally provided guarantees. The
2018 Senior Notes were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and certain
non-U.S. persons in compliance with Regulation S under the Securities Act. The 2018 Senior Notes bear a fixed interest rate at
7.5% per annum, payable semiannually in arrears, and will mature on December 8, 2018, unless previously repurchased in accordance
with their terms prior to such date.
In August 2016, we entered into a
facility agreement of US$150 million in principal amount with a syndicate of banks, or the 2016 Facility. Pursuant to the
2016 Facility, 50% of the proceeds has been used to repay our existing indebtedness, and remaining proceeds will be used for
fund capital expenditures and other general corporate purposes. The 2016 Facility is jointly and severally guaranteed by our
existing and future-established offshore subsidiaries, subject to certain exceptions according to terms therein. The 2016
Facility bears a floating interest rate of LIBOR plus 3.50% margin per annum. We shall repay the 2016 Facility in full in
three installments, subject to prepayment: (i) on May 31, 2018, 30% of the then outstanding principal amount; (ii) on
November 30, 2018, 30% of the then outstanding principal amount; and (iii) on August 30, 2019, 40% of the
then outstanding principal amount. We are also required to maintain a certain balance of cash deposit in the interest reserve
account collateralized in favor of the lenders to cover three-month payable interests in connection with the 2016 Facility.
As of December 31, 2016, US$1,547,240 of such required cash deposit was classified as restricted cash on our consolidated
balance sheet.
Our principal executive offices are located
at Unit 12/F, Building No.5, Guosheng Center, 388 Daduhe Road, Shanghai, 200062, the People’s Republic of China, and our
telephone number is +86-21-6468-7000. Our principal website address is
http:// www.1hai.cn
. The information on our website
does not form a part of this annual report. Our agent for service of process in the United States is Law Debenture Corporate Services
Inc. located at 400 Madison Avenue, 4th Floor, New York, New York 10017.
We provide car rentals and car services
to both individual customers as well as corporate and institutional clients. Since our establishment, we have focused on investing
in our infrastructure and technology, which enables us to benefit from increasing economies of scale.
Our services
Car rentals
We
provide self-drive car rental services to both individual customers as well as corporate and institutional clients to meet their
travel, leisure, business
and ground transportation needs. Our short-term car rentals have a term of less than one year
and are primarily provided to individual customers on an hourly, daily, weekly or monthly basis. Our long-term car rentals have
a term of one year or longer and are primarily provided to corporate and institutional clients. In 2016, we derived approximately
78.9% of our net revenues from car rentals.
As
of December 31, 2016, our car rentals were offered in 216 cities, 319 train stations and 97 airports across China through
our extensive service network of 3,249 directly operated service locations. Our extensive service network enables our customers
to pick up
and return cars at any of our service locations. To better serve our customers, we also provide vehicle delivery
and pickup services to customer-designated locations. To ensure the consistency of our service quality and customer experience,
we directly operate all of our service locations rather than franchising or outsourcing them to third parties. In addition to our
service network in China, we cooperate with Enterprise and provide our customers access to Enterprise’s car rental services
outside China.
As
of December 31, 2016, our car rental fleet included 53,658 vehicles of over 200 models primarily from major automobile
manufacturers
such as Volkswagen, SAIC Motor, PSA Peugeot Citroen and General Motors. Based on our operating experience, we observe that Chinese
customers are generally more sensitive to rental vehicle models than western customers. The variety of our car classes and models
enables our customers to choose the vehicles they prefer to. In the event that the vehicle model requested by a customer is not
available, our proprietary technology platform will automatically advise the customer when such particular model will become available
or if similar models are available at the selected time. The customer also has an option to choose to be put on a waiting list
for the particular model requested. Through our user interface, our technology platform also provides information to customers
about discounts, special offers and other promotions to encourage them to rent for a longer period or upgrade to a more premium
vehicle model.
We
provide convenient and efficient reservation channels to our customers, which primarily include our user-friendly website and
dedicated
mobile applications. We believe we were the first car services provider in China to introduce mobile applications for customers
to make reservations. In 2016, approximately 17% and 79% of our car rentals were derived from reservations made through website
and mobile applications, respectively. The remainder were derived from reservations made through offline channels such as our call
center or walk-in customers. As social media gain popularity, we are also exploring ways for our customers to make car rental reservation
though social networking platforms such as Tencent WeChat.
First-time
users of our car rental services are required to register as members before making a reservation. After a customer
chooses
the start and end dates of the rental period, the type and model of vehicle and the location of vehicle pickup or delivery, our
technology platform confirms the reservation on a real-time basis and sends an email and/or text message to the customer. Before
handing over the vehicle to the customer, we perform checks on the customer’s driver’s license, identity card and credit
card information. We only accept credit card payments for our car rental services and can trace the credit records of our car rental
customers for risk management purposes. As of December 31, 2016, over 1.5 million registered members had used our car rental
services. Approximately 66%, 68% and 66% of our short-term car rental transactions in 2014, 2015 and 2016, respectively, were generated
from customers that used our services more than once.
A
majority of our revenues derived from short-term car rental services are from our basic car rental service package, the charges
for which include an hourly or daily rental fee, a transaction-based handling fee and a basic insurance charge. We also
provide value-added services for customers to choose, such as increased insurance coverage. We have adopted a dynamic pricing mechanism
to determine our rental rates. This mechanism determines a specific vehicle model’s rental rate based on its purchase price
taking into consideration other variables such as pickup/drop-off time and location, the availability of our vehicles during such
period at the location, prevailing prices, demand for such vehicle model and the length of rental period. Our management reviews
the dynamic pricing system on a regular basis. Our customers typically bear the cost of gasoline consumed during the rental period.
For
long-term car rentals, we typically enter into individually negotiated contracts with our corporate and institutional clients to
address the
specific needs and requirements of such clients, and the rental rate is typically negotiated in such contracts.
In addition, vehicles deployed for our long-term car rentals are supported by all our service locations across China, thereby ensuring
our vehicles are in good condition. We regularly provide repair and maintenance services to long-term car rental clients and provide
free substitute vehicles during the repair and maintenance period.
In April 2017, we launched car sharing
business initiative in Shanghai and Guangzhou. Car sharing business provides time sharing car rentals, with free floating to customers
and a fully automated rental and payment process. Car sharing fee is calculated based on both rental time and driving distance
by customers. Our car sharing business is currently at a very early stage and only complementary to our car rental business.
Car services
We
provide chauffeured car services primarily to corporate and institutional clients. Our car services include routine services such
as airport pickup
and drop-off, inter-office transfers and other business transportation needs, as well as event-driven
activities such as conventions, promotional tours and special events. We generally enter into long-term framework agreements with
our corporate and institutional clients pursuant to which our vehicles and chauffeur services are provided by different subsidiaries.
In 2016, we derived approximately 21.1% of net revenues from our car services operations.
As
of December 31, 2016, car services were offered by us and our contracted service providers in 190 cities across China, with
a focus on first-tier cities including
Beijing, Shanghai, Guangzhou and Shenzhen. To accommodate occasional demands from
some corporate and institutional clients, we retain contracted service providers to provide car services to our clients in cities
where we currently do not provide such services or the demand for such services exceeds our existing capacity. During the peak
time of our car services, we also deploy vehicles from our car rental fleet for cross-usage to meet the needs of our corporate
and institutional clients.
As
of December 31, 2016, our car services fleet consisted of 3,258 vehicles, which included a higher percentage of premium
vehicle
models compared to our car rental fleet, and we had over 2,735 well-trained drivers. Our sizable car services fleet and our flexibility
to cross-use our car rental fleet for car services enable us to serve the diverse needs of corporate and institutional clients
for a large number of chauffeured vehicles. Leveraging our established service network, infrastructure and technology platform,
we believe we are well- positioned to capture and address the evolving demands for car services.
We
systematically screen and assess each driver on a regular basis to ensure they meet our standards of safety, courtesy and experience.
We generally require our drivers to have at least five years of driving experience. The compensation of our drivers includes
a
base salary and a performance based compensation, which incentivizes our drivers to provide quality services. We constantly seek
to improve the service quality of our drivers by strengthening our screening procedures, conducting background checks and offering
training programs, such as regular safety trainings. Our car services clients can place or modify their orders and locate the vehicles
and drivers they book on a real-time basis via our proprietary mobile application and fleet management system.
Our
sizable fleet, broad geographic coverage and well-trained drivers enable us to provide tailored services to meet our corporate
and institutional
clients’ needs. As of December 31, 2016, we had over 37,000 corporate and institutional clients
that used our car services. Our corporate accounts include many Global Fortune 500 companies in China. No single corporate or institutional
client accounted for more than 5% of our net revenues in 2014, 2015 or 2016, respectively.
We
determine the rates for our car services based on a number of factors, including vehicle model, service type, the length of
rental
period, time and location of pickup and drop-off, and prevailing prices. Our management reviews these rates on a regular basis.
Our framework agreements with our corporate and institutional clients provide for predetermined price ranges and, as a result,
our rates for car services are generally more stable.
In
December 2014, we started to expand our car services to business-to-consumer model, primarily through Ctrip’s platform.
In July 2015, we began to cooperate with certain mobile car hailing service providers to provide car services to individual customers.
Our nationwide service network
Customers
of our car rental services can pick up cars at any of our service locations in China after they make reservations through
our
website, mobile application or other channels. As of December 31, 2016, our car rental services were offered in 216 cities,
319 train stations and 97 airports in China through an extensive network of 3,249 directly operated service locations, which included
391 stores and 2,858 pick-up points. As of December 31, 2016, car services were offered by us and our contracted service providers
in 190 cities across China, with a focus on first-tier cities including Beijing, Shanghai, Guangzhou and Shenzhen. Our extensive
network enables us to consistently provide quality service nationwide and offer flexibility and convenience to our customers.
The following map and table
set forth the geographic locations where we operated our car rentals and car services as of December 31, 2016:
|
|
Car rentals
|
|
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Car services
|
|
Cities or provinces
|
|
Cities
|
|
|
Stores
|
|
|
Pick-up points
|
|
|
Cities
(1)
|
|
Key cities and provinces
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai
|
|
|
1
|
|
|
|
43
|
|
|
|
198
|
|
|
|
1
|
|
Jiangsu
|
|
|
15
|
|
|
|
39
|
|
|
|
472
|
|
|
|
17
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|
Guangdong (excluding Guangzhou and Shenzhen)
|
|
|
20
|
|
|
|
33
|
|
|
|
151
|
|
|
|
17
|
|
Guangzhou
|
|
|
1
|
|
|
|
27
|
|
|
|
68
|
|
|
|
1
|
|
Zhejiang
|
|
|
13
|
|
|
|
26
|
|
|
|
127
|
|
|
|
11
|
|
Shenzhen
|
|
|
1
|
|
|
|
24
|
|
|
|
65
|
|
|
|
1
|
|
Beijing
|
|
|
1
|
|
|
|
19
|
|
|
|
83
|
|
|
|
1
|
|
Other cities and provinces
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
15
|
|
|
|
16
|
|
|
|
166
|
|
|
|
13
|
|
Hunan
|
|
|
12
|
|
|
|
13
|
|
|
|
167
|
|
|
|
14
|
|
Hubei
|
|
|
10
|
|
|
|
12
|
|
|
|
116
|
|
|
|
16
|
|
Liaoning
|
|
|
8
|
|
|
|
12
|
|
|
|
95
|
|
|
|
5
|
|
Fujian
|
|
|
9
|
|
|
|
11
|
|
|
|
27
|
|
|
|
6
|
|
Sichuan
|
|
|
13
|
|
|
|
10
|
|
|
|
243
|
|
|
|
6
|
|
Hebei
|
|
|
7
|
|
|
|
9
|
|
|
|
51
|
|
|
|
8
|
|
Anhui
|
|
|
12
|
|
|
|
9
|
|
|
|
26
|
|
|
|
8
|
|
Henan
|
|
|
9
|
|
|
|
8
|
|
|
|
48
|
|
|
|
13
|
|
Tianjin
|
|
|
1
|
|
|
|
7
|
|
|
|
52
|
|
|
|
1
|
|
Yunnan
|
|
|
7
|
|
|
|
7
|
|
|
|
32
|
|
|
|
1
|
|
Heilongjiang
|
|
|
4
|
|
|
|
7
|
|
|
|
72
|
|
|
|
2
|
|
Hainan
|
|
|
5
|
|
|
|
7
|
|
|
|
12
|
|
|
|
5
|
|
Jiangxi
|
|
|
11
|
|
|
|
6
|
|
|
|
173
|
|
|
|
9
|
|
Chongqing
|
|
|
1
|
|
|
|
6
|
|
|
|
112
|
|
|
|
1
|
|
Guangxi
|
|
|
8
|
|
|
|
6
|
|
|
|
39
|
|
|
|
5
|
|
Shaanxi
|
|
|
8
|
|
|
|
6
|
|
|
|
63
|
|
|
|
8
|
|
Shanxi
|
|
|
4
|
|
|
|
5
|
|
|
|
36
|
|
|
|
5
|
|
Jilin
|
|
|
3
|
|
|
|
5
|
|
|
|
10
|
|
|
|
2
|
|
Inner Mongolia
|
|
|
3
|
|
|
|
4
|
|
|
|
11
|
|
|
|
3
|
|
Gansu
|
|
|
3
|
|
|
|
4
|
|
|
|
22
|
|
|
|
2
|
|
Guizhou
|
|
|
5
|
|
|
|
3
|
|
|
|
14
|
|
|
|
4
|
|
Ningxia
|
|
|
1
|
|
|
|
3
|
|
|
|
14
|
|
|
|
1
|
|
Qinghai
|
|
|
3
|
|
|
|
2
|
|
|
|
84
|
|
|
|
1
|
|
Xinjiang
|
|
|
1
|
|
|
|
1
|
|
|
|
9
|
|
|
|
1
|
|
Xizang
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
216
|
|
|
|
391
|
|
|
|
2,858
|
|
|
|
190
|
|
(1)
Include cities where car services are provided by our contracted service providers.
Marketing and promotion
We believe that our leading position is
in large part due to our strong brand recognition. We position our brand to be associated with convenience, reliability, innovation
and satisfaction. We promote our business primarily through our principal website, www.1hai.cn. Furthermore, we believe we were
the first car services provider in China to introduce mobile applications to make reservations in 2011. In addition to our website
and mobile applications, our sales and marketing strategies utilize many other channels, such as third party websites and mobile
applications, word-of-mouth referrals, keyword search, outdoor advertising, local sponsorships, public relations and digital and
social media. As of December 31, 2016, our marketing staff consisted of 47 employees, primarily based in our Shanghai headquarters.
Car rentals
As of December 31, 2016, we had over
1.5 million registered members that used our car rental services. As mobile social media applications gain popularity, we shifted
the focus of our marketing activities from traditional ways to social networking platforms such as Tencent WeChat, a popular mobile
instant messaging application, and Weibo, a popular microblog platform website similar to Twitter. Our employees regularly follow
the messages on these social media platforms to gain customer insights to improve the quality of our services. Our website also
offers a customer sharing and discussion platform. “eHi Club”, our online club where our registered customers, mostly
driving and travel enthusiasts, can organize group excursions, has been very helpful in increasing the stickiness of our existing
customers.
In 2016, approximately 17% and 79% of our
car rentals were derived from reservations made through website and mobile applications, respectively. In particular, the total
number of our mobile application downloads increased from approximately 665,000 in 2014 to over 3.2 million in 2015 and further
to over 18.4 million in 2016. Aside from the social networking platforms and mobile applications, our quality of service also played
an important role in our brand promotion. Based on our internal survey and feedbacks from our car rental service customers, word-of-mouth
referrals have become important channels for attracting new customers. In addition, to fully utilize our cross-selling opportunities,
we have entered into promotion contracts with some of our corporate and institutional clients, pursuant to which we provide discounts
on car rentals, test drive of specified car models or other add-on services and benefits to their employees or designated participants,
which incentivizes them to use our services and further expands our customer base.
We established our eHi loyalty program in
2008 which allows our customers to earn loyalty membership points by using our services or through promotional activities we offer
from time to time. The loyalty membership points can be redeemed for numerous types of rewards, such as free GPS-based navigation
device rental, waiver of additional mileage charges or free car rentals. We believe that our eHi loyalty program enhances customer
loyalty, expands our brand recognition through member referrals, promotes our various reservation channels and improves the overall
quality of our services. In addition, we employ a customer creditability system for each customer, which tracks credit history,
driving record and other factors, and provides a quantitative rating for each customer based on this information. A customer with
a high credibility rating can, among other benefits, have more choices of vehicle models, and more favorable discounts on rental
and insurance fees.
We also have an outdoor advertising program
promoting the benefits of car rental. We place many of these advertisements in busy areas such as high speed railway stations,
subways, elevators of office and residential buildings and bus stops. These advertisements are designed both to educate and entertain
our potential customers. In addition, we cooperate with leading global travel service providers and e-commerce platforms to promote
our services.
In December 2016, we entered into a multiyear
marketing partnership with the NBA China and an endorsement agreement with NBA star Stephen Curry, which made the NBA China our
official marketing partner and Stephen Curry our brand ambassador. We expect to promote our car rental services featuring our NBA
China and Stephen Curry connections through various channels, such as placing virtual logo and advertisements during NBA games
when they are broadcasted on CCTV and Tencent Video.
Car services
We provide car services mainly to corporate
and institutional clients that entered into long-term framework agreements with us. As such, we have a dedicated corporate sales
team targeting corporate and institutional clients across various industries. As of December 31, 2016, our corporate sales
team included 131 sales persons across China.
For our car services, we have focused on
creating a unique brand positioning and conveying our core values to our corporate and institutional clients through advertising
and sponsorship activities, such as commercial fairs, business magazines and newspapers, as well as sales force coverage. In addition,
we further strengthen our service quality and enhance brand recognition by providing tailored services according to specific corporate
and institutional client’s needs, such as safety, equipment or procedural requirements. As of December 31, 2016, we
had over 37,000 corporate and institutional clients that used our car services. We analyze our current and potential clients’
available data in our centralized database and design a unique, integrated corporate vehicle services plan for each client, which
helps differentiate us from our competitors.
Customer service
The success of our business hinges on our
customer satisfaction level, which in turn depends on a variety of factors. These factors include, among others, our ability to
(i) consistently provide high-quality customer experience, (ii) continue to offer comprehensive and complementary services
tailored to our customers’ needs, (iii) maintain good vehicle condition, and (iv) provide timely and satisfactory
after-sales services.
We have a dedicated service quality management
team which constantly monitors our services and proactively seeks feedback from our customers. We encourage our customers to share
their experience with us and provide feedbacks through our website, hotline or forums on major social media or messaging applications.
We follow up on specific suggestions or complaints with both the customers and the relevant in-house teams. In certain cases, we
offer loyalty membership points, refunds, coupons or other complimentary services to customers depending on the nature of their
complaints and the extent of the loss or inconvenience suffered. We also incorporate frequently received complaints as case studies
in our internal training programs to prevent repeat occurrences of the same complaint. We are dedicated to providing prompt solutions
to customers’ complaints and actively learning from the experience of Enterprise in car rental services to further enhance
the quality of our services.
Strategic cooperation
Enterprise
We entered into a global affiliation agreement
with Enterprise China in March 2012, pursuant to which we are the exclusive partner of Enterprise in China (including Hong
Kong and Macau) for a term of ten years. Enterprise China is an affiliate of Enterprise Holdings, and through its operating subsidiaries
owns and operates the “National Car Rental” and “Alamo Rent A Car” brands, as well as its flagship “Enterprise
Rent-A-Car” brand in North America. This agreement aims to develop an effective global affiliation, enabling customers of
Enterprise China, Enterprise and their affiliates to access certain of our services in China, and enabling our customers to access
certain of Enterprise’s car rental services outside of China.
Pursuant to this agreement, we and Enterprise
agree to direct rental referrals to each other in different countries and jointly pursue sales and marketing and other collaborative
opportunities to enhance our respective service offerings for the benefit of each other’s customers. Pursuant to this agreement,
we have granted Enterprise in certain designated territories a royalty-free license with the right to sublicense certain of our
trademarks, service marks, trade names, signages, logos, symbols and designs associated with the name “eHi”, and Enterprise
has granted us in certain designated territories a royalty-free license with the right to sublicense certain of its trademarks,
service marks, trade names, signages, logos, symbols and designs associated with the names “Enterprise,” “Enterprise
Rent-A-Car,” “Alamo,” “Alamo Rent A Car,” “National” and “National Rent A Car”.
Furthermore, we and Enterprise established
a steering committee and three subcommittees, namely, a finance subcommittee, an IT subcommittee and a sales and marketing subcommittee,
which consist of senior officers assigned by both companies, to guide our future cooperation. In particular, both of us are required
to use reasonable efforts to facilitate and support each other’s marketing activities in the relevant territories in the
manner determined by the sales and marketing subcommittee. In addition, we regularly send our mid-level management to Enterprise
for various training programs, through which Enterprise shares their in-depth knowledge and know-how to the car rental industry
with our management. Enterprise has also appointed one of its senior management on our board to facilitate better coordination
between the two companies.
Ctrip
Ctrip is a dominant player in the
online travel agency business and a well-known travel brand in China. The cumulative downloads of the Ctrip Travel mobile
application exceeded 2.9 billion as of December 31, 2016. We believe that there are significant synergies for Ctrip and
us to cooperate and offer more competitive travel products to individual customers as well as corporate and institutional
clients in China. We are the designated and preferred business partner of Ctrip in providing car rental services. Ctrip has
integrated access to our car rental reservation system on its website since May 2012 and in its mobile applications
since June 2014. In addition, in December 2014, we started to expand and promote our chauffeured car services to
business-to-consumer model, primarily through Ctrip’s platform. Our partnership with
Ctrip not only provides us with access to Ctrip’s user base and help us grow user traffic and revenue, but also enables
us to benefit from the vision and experience of Ctrip and its Chairman and Chief Executive Officer, James Liang, a member of
our board of directors, to further improve our technology platform, systems and customer services. While we maintain
cooperation with Ctrip in various aspects, we have not entered into any written partnership agreement with Ctrip.
Others
In
April 2016 and February 2017, we entered into memorandums of understanding to establish a strategic cooperation with SAIC Motor
Corporation Limited, or SAIC, a leading automobile manufacturer listed on China’s A-share market, and China Yongda Automobiles
Services Holdings Limited, or Yongda, a leading passenger vehicle retailer and comprehensive services provider listed on the
Hong Kong Stock Exchange, respectively. We expect that these memorandums of understanding will enable us to cooperate closely
with automobile manufacturers and retailers in various areas such as vehicle procurement and used car sales.
We currently cooperate with other leading
e-commerce platforms and online travel agencies in China, as well as offline travel service providers and professional association,
to promote our services. Our strategic partners include, among others, map.baidu.com, alipay.com, taobao.com, tuniu.com and the
NBA China.
In addition, we maintain a network of online
advertising partners under “eHi Alliance”, pursuant to which our advertising partners display our ads on blogs, forums,
emails and chat windows maintained or operated by them, in return for commissions based on the revenues generated from these properties.
We believe such cooperation will further expand our service coverage and enhance our brand name. We are selectively pursuing these
opportunities to capitalize on this broader distribution network, thereby further enhancing our strong brand recognition and increasing
our revenue and market share.
In
January 2016, we entered into agreements with Shanghai Chenghuan Car Rental Company Limited, or Shanghai Chenghuan,
pursuant to which we agreed to extend, through entrusted bank loans, an aggregate amount of RMB50 million to Shanghai
Chenghuan. Shanghai Chenghuan is a middle-to-high-end car rentals and car services provider in the local market, and is an
independent third party. Shanghai Chenghuan’s shareholders and affiliated companies provided certain security
interests. Pursuant to these agreements, in January and June 2016, we extended RMB18 million and RMB32 million entrusted bank
loans to Shanghai Chenghuan, respectively. The entrusted bank loans initially had a term of one year and bear an interest
rate of 7.75% per annum. In January 2017, we extended the term of RMB18 million loan agreement for one year, which will be
due in January 2018. We also have an option to convert our creditor rights into equity interest in Shanghai Chenghuan at a
pre-determined valuation, and to waive the accrued interests on the loans upon such conversion.
Our technology platform
Our proprietary technology platform incorporates
various features specifically designed to improve customer experience and streamline our operations. These include the integration
of our various reservation channels, automatic rental price adjustments, automatic vehicle recommendations, GPS vehicle location
system, vehicle management system and online discussion and display forums. Our website and mobile applications feature user-friendly
interfaces designed to allow our customers to easily browse and access our services, register as members, search for specific vehicle
models or services and complete reservations. This centralized e- commerce platform, supported by our integrated systems, allows
us to easily process our membership applications, manage reservations, manage and monitor customers’ vehicle use and other
credit data, manage billing and payment, remotely manage our fleet, and monitor and analyze key metrics of each vehicle such as
utilization rate, mileage and maintenance requirements.
The primary components of our technology platform
include the following:
|
·
|
Online and mobile reservation system. Our online and mobile
reservation system allows our customers to reserve vehicles through our website, mobile applications and various other reservation
channels such as our call center or local stores, by email, text message and instant messengers, or through our sales channel
partners. We have designed our website as a reliable, secure, user-friendly and convenient online reservation platform for our
customers. We introduced mobile applications to make reservations in 2011 and believe we were the first car rental service provider
in China to do so. The total number of our mobile application downloads increased from approximately 665,000 in 2014 to over 3.2
million in 2015 and further to over 18.4 million in 2016. In 2016, approximately 17% and 79% of our car rental services were derived
from reservations made through website and mobile applications, respectively. Once our customers book our services online, they
have around-the-clock access to the complete, real-time inventory of our fleet through our nationwide service network. Because
all of our reservation and customer service data is fed back into our centralized databases on a real-time basis, we are able
to track and analyze aggregated customer usage data to better allocate vehicles among different locations for the convenience
of our customers.
|
|
·
|
Fleet management system. Our fleet management system manages and monitors our widely dispersed fleet, which comprised 56,916
vehicles as of December 31, 2016, with a comprehensive suite of tools focused on real time vehicle tracking, vehicle repair
and maintenance, mileage and fuel consumption, insurance and dispatch. Each of our vehicles is equipped with a control unit, including
a mobile data device, geographic positioning information system, wireless antennae and vehicle interface modules. This hardware
system allows us to monitor our vehicles from our data centers on a real-time basis, provides us with a comprehensive set of fleet
management data that is stored in our centralized databases, and improves fleet management efficiency and customer service quality.
|
|
·
|
Dynamic pricing mechanism. We have adopted a dynamic pricing mechanism to determine our rental rates. Our rental rates are
automatically adjusted by our proprietary technology platform, which determines a specific vehicle model’s rental rate based
on its purchase price, taking into consideration other variables, such as pickup/drop-off time and location, the availability of
our vehicles during such period at such location, prevailing prices, demand of that specific vehicle model, and the length of rental
period. Our management reviews our rental rates on a regular basis.
|
|
·
|
Service location management system. Our service location management system manages our reservations, inventory level and accounting
functions at each of our stores. This system also monitors the key operating metrics and other operating data of each service location
on a real-time basis.
|
|
·
|
Data analysis and operational metrics system. Our data analysis and operational metrics system enables us to conduct a thorough
analysis of the vast amount of data received from our daily operations, including utilization rate, mileage, length of rental period,
time interval from reservation to pick-up, and maintenance requirements of each of our vehicles. Through this system, we are able
to efficiently adjust our operational strategies and policies to be in line with the availability of our vehicles and market demand
as the quantitative analysis serve as key assessment instrument for management’s strategic decisions.
|
|
·
|
Payment and financial system. Our integrated payment and financial system enables our customers to recharge their accounts
online and to make payments from their accounts. This system gives us real-time access to customer payment information, thereby
improving the accuracy and efficiency of our financial reporting and allowing greater flexibility to scale our operations efficiently.
Our financial system software also allows us to provide detailed and itemized bills for our corporate and institutional clients
to accommodate their various internal financial reporting requirements.
|
|
·
|
Customer relationship management system. Our customer relationship management system improves our overall customer experience
and manages our interactions with customers. This system enables us to track our customers’ rental history and preferences
and conduct big data analysis, thereby allowing us to selectively offer tailored rental packages and other targeted marketing efforts.
|
Our data centers store the information contained
in our centralized databases and host our website, web-based applications and mobile applications that we have developed to manage
our integrated technology platform. Our data centers and reservation system software maintain real-time communication with encrypted
message protocols and credit card data. We use industry-standard commercial antivirus, firewall and patch-management technology
to protect and maintain the systems and data located at our data centers. Our website is designed to be fault-tolerant, with a
collection of identical web servers, providing us with the flexibility to scale up our operations without compromising customer
experience.
We continue to invest in improving our technology
platform to better secure the information of our customers and optimize our systems to meet the needs of our growing business.
We also continue to maintain reliable information, management and operational systems, and we have implemented performance monitoring
for all key systems to enable us to respond quickly to potential problems. For example, at our headquarters in Shanghai, we provide
redundant utility systems, a backup electric generator and 24-hour server support. All servers have multiple, uninterrupted power
supplies and redundant file systems to maximize system and data availability. Furthermore, we regularly back up our data to minimize
the impact of data loss due to system failure.
Our fleet management
Leveraging on our integrated technology
platform, we believe we are able to maximize our fleet utilization and control costs via “better acquisition”, “better
deployment” and “better disposition”.
Vehicle acquisition
As
of December 31, 2016, our total period-end fleet size was 56,916 vehicles. We have a wide variety of vehicles, which include
over 200 models primarily from major automobile manufacturers such as Volkswagen, SAIC Motor, PSA Peugeot Citroen and General Motors.
As of December 31, 2016, approximately 34%, 16%, 16% and 10% of our vehicles were acquired from these major brands, respectively.
We take into account customer preferences in fleet acquisition as we observed that customers in China are generally more sensitive
to vehicle models compared to western customers. We also select vehicle models that have a liquid secondary market and seek to
control fleet size of each vehicle model, thereby mitigating the pricing impact when we retire such vehicle model. In addition,
in anticipation of the growing environmental awareness in Chinese market, we were the first car service provider in China to add
alternative energy vehicles to our fleet to capitalize on a growing demand for such vehicles. The acquisition decision is made
based on disciplined and systematic analysis, assisted by our proprietary demand forecast model and database. In addition, leveraging
our large fleet size and procurement needs, we are able to directly negotiate with vehicle manufacturers and benefit from economies
of scale through our centralized vehicle procurement. We also maintain good relationships with car dealers as an alternative channel
for our vehicle procurement.
As China’s car dealers tapped into used car sales market, in late 2014, we started to
have some program car arrangements with car dealers, and in some cases with used car sales brokers and online platforms. Program
cars refer to vehicles of which disposal price and holding period have been predetermined and fixed by agreements. Pursuant to
program car agreements, we have the option to sell, and car dealers have the obligation to repurchase, or in some cases, used car
sales brokers/online platforms have the obligation to purchase, our vehicles at a specified repurchase price and after a specified
holding period (typically 12 to 24 months), subject to certain vehicle condition, mileage and holding period requirements. In 2014,
2015 and 2016, approximately 15%, 29% and 49% of the respective period-end fleet size were subject to such program car arrangements.
The percentage of our newly purchased vehicles subject to such program car arrangements in future periods depends on a number of
factors, including our expectations for future used car prices, our seasonal needs and the availability and attractiveness of car
dealers’ program car arrangements.
We have financed our vehicle purchases
through a variety of sources including our share issuances, note offering, sales of our strategic investments, bank
borrowings and loans from third-party financing companies.
After purchasing a vehicle, we apply to
the relevant government authority to obtain a license plate, purchase insurance for the vehicle and install a GPS-based tracking
device to enable our proprietary fleet management system to monitor the vehicle before deploying the vehicle to our car rentals
or car services fleet. Upon completion of these steps, we consider the vehicle fully operational and available for service. The
price of a license plate, if any, varies greatly depending on the city in which we intend to obtain a license for the vehicle,
as well as by local market conditions.
Vehicle deployment
Based on our operating experience, the peak
time of our car rentals typically falls on weekends and public holidays, while peak time of our car services typically falls on
weekdays. We are able to optimize fleet utilization by efficiently allocating our fleet resource to capture the complementing demand
cycles of different services we offer. Our dynamic pricing system allows us to better leverage supply-demand trends in local markets.
In addition, GPS tracking devices and our
proprietary fleet management system enable us to monitor our fleet on a real-time basis to optimize the geographic allocation of
our fleet. We also conduct personal identity verification and credit check procedures on each of our customers before the vehicles
are handed over to them. These measures help minimize our risk of car-theft.
Repair and maintenance
As of December 31, 2016, we maintained
28 in-house vehicle repair and maintenance centers in 19 major cities in China, such as Shanghai and Beijing, which provide basic
routine repair and maintenance functions for our local fleet. As of December 31, 2016, our repair and maintenance team consisted
of 509 employees. We also engage qualified third-party contractors to perform major repair functions in other cities where we do
not have such in-house centers. We expect to open additional in-house vehicle repair and maintenance centers in cities where our
management determines that the size of our local fleet has justified the costs of such an in- house center. We expect such additional
centers to bring benefits of economies of scale as we continue to expand our fleet size and geographical footprint.
Vehicle dispositions
We
generally hold vehicles in our fleet for a term of three to four years, except for program cars which typically have a holding
period of 12 to 24 months. We have developed an internal rating system to assess the general conditions of our vehicles, and dispose
of our used vehicles through a variety of disposition channels, including auctions, brokered sales, dealers and online used car
marketplaces, according to the rating results. We also maintain a well-managed vehicle disposition system with a deliberated decision
making process taking into consideration market timing, disposal price and seasonality, pursuant to which we would adjust the holding
period of our vehicles. For vehicles subject to program car arrangements, we have the option to sell, and car dealers have the
obligation to repurchase, or in some cases, used car sales brokers/online platforms have the obligation to purchase, our vehicles
at a specified repurchase price and after a specified holding period (typically 12 to 24 months), subject to certain vehicle condition,
mileage and holding period requirements. Repurchase prices of program cars are generally based on a predetermined percentage of
original vehicle cost and the month in which the vehicle is repurchased. We calculate the depreciation costs of such vehicles separately,
based on their respective contractual repurchase prices and holding periods, and adjust the depreciation costs if the repurchase
conditions of such vehicles are not met or we elect not to sell such vehicles as program
cars. We believe program car arrangements
could hedge certain risk from fluctuations in used car prices in the secondary market and offer additional alternatives of our
vehicle acquisition and disposal channels.
Competition
The car rental and car service industry
in China is competitive and fragmented. For car rentals, we compete primarily on the basis of rental price, user experience, brand
recognition, convenience of service locations, geographic coverage and service quality. For car services, we compete primarily
on the basis of service quality, ability to provide tailored services, and, to a lesser extent, service charge. We believe that
the prominence and reputation of our brand, the quality of our services, our nationwide service network and our advanced, proprietary
technology platform differentiate us from our competitors.
As we provide comprehensive service offerings,
we compete with different market participants in different market sectors at different levels. For car rentals, we compete with
both national and regional players, such as Shenzhou, Didi and Shouqi. For business-to-business car services, we primarily compete
with Avis China and Yongda. In late 2014, we started to expand our car services to a business-to-consumer model. Although it is only complementary to our business-to-business
oriented car services, we may face competition from business-to-consumer car services providers such as Didi, UCAR(an affiliate
company of Shenzhou) and Shouqi, all of which are GPS-based mobile taxi and car hailing service providers. In April 2017, we launched
car sharing business initiative in Shanghai and Guangzhou, which is currently at a very early stage and only complementary to
our car rental business. However, our car sharing business may compete with other national and regional car sharing players, such
as Car2Go (operated by Daimler Mobility Services), GoFun (operated by Shouqi) and ToGo (operated by Beijing Tuge Technology Co.,
Ltd.).
Insurance
For car rentals, we charge customers for
basic insurance coverage on an hourly or daily basis, and we encourage our customers to purchase through us supplementary coverage
in addition to the basic insurance. If the damages caused by our customers exceed the insurance coverage, our customers bear the
exceeding liability.
For car services, we bear higher risks and
liabilities and typically purchase insurance coverage with higher limits. We are exposed to claims for personal injury or death
and property damage as a result of automobile accidents involving vehicles operated by our drivers or our contracted service providers.
We purchase motor vehicle damage insurance, third-party liability insurance, compulsory traffic accident insurance, passenger injury
insurance, and other insurance coverage that our management considers adequate to protect our assets and operations under different
situations. If we have a low accident rate of our fleet, we may benefit from the “no-claim discount” and enjoy lower
insurance premium when purchasing relevant insurance for our fleet. We believe that the amount and nature of our insurance coverage
are adequate and in line with the market practice in China.
Any successful claim against us beyond the
scope or limits of the insurance coverage of us or our contracted service providers may have a material adverse effect on our business,
financial condition and results of operations.
Intellectual Property and Trademark
We believe our proprietary technology platform
is critical to our business in China. As of December 31, 2016, we registered 20 software copyright in China.
We believe brand recognition is key
to our success. As of December 31, 2016, we registered 306 trademarks, of which 287 trademarks were registered in the
PRC and 19 trademarks were registered in other countries. Our registered trademarks include “eHi Car Rental” and
,
and other trademarks in connection with our brand name “eHi” and associated logos that we use or plan to use to
market our services or to prevent others from competing with us by using similar logos. In addition, as of December 31,
2016, we registered 244 domain names in connection with our brand name to prevent any dilution of our brand name, of which
107 were registered in the PRC and 137 were registered in other countries.
Pursuant to the global affiliation agreement
with Enterprise, we have granted Enterprise, in certain designated territories, a royalty free license with the right to grant
sublicenses to use certain of our trademarks, service marks, trade names, signages, logos, symbols and designs associated with
the name “eHi” for the purpose of pursuing referral business to us, processing such referrals and servicing business
referred to Enterprise by us, and Enterprise has granted us, in certain designated territories, a reciprocal royalty free license
with the right to grant sublicenses to use certain of its trademarks, service marks, trade names, signages, logos, symbols and
designs associated with the names “Enterprise,” “Enterprise Rent-A-Car,” “Alamo,” “Alamo
Rent A Car,” “National” and “National Rent A Car” for similar purposes.
Chinese Government Regulations
This section sets forth a summary of the
significant regulations or requirements that affect our business activities in China or our shareholders’ rights to receive
dividends and other distributions from us.
Regulations on foreign investment in rental industry
According to the Category of Industry Guideline
for Foreign Investment promulgated by MOFCOM and the NDRC, which was revised in 2007, 2011 and 2015, respectively, foreign investment
in general rental business is permitted. The Administration Measures on Foreign Investment in Rental Industry that was promulgated
by MOFCOM on February 3, 2005 and subsequently amended on October 28, 2015 by MOFCOM applies to foreign-invested enterprises
that operate general rental or leasing businesses in China, including car rental businesses. Under this regulation, foreign investors
of a foreign-invested enterprise operating car rental or financial leasing business shall have total assets of not less than US$5
million and the foreign invested rental company shall follow the general requirements of PRC Company Law and obtain approval from
MOFCOM or its relevant local counterparts for its incorporation. According to this regulation, a foreign-invested rental company
are subject to the following requirements: (i) its registered capital shall comply with the relevant provisions of the PRC
Company Law; (ii) it shall comply with the relevant provisions concerning the registered capital and the total amount of investment
of a foreign-invested enterprise; and (iii) the duration of operation of a foreign-invested rental company in the form of
limited liability company shall generally not exceed 30 years. A foreign-invested financing leasing company shall meet the following
requirements: (i) its registered capital shall be no less than US$10 million; (ii) the duration of operation of a foreign-invested
financing leasing company in the form of limited liability company shall generally not exceed 30 years; and (iii) it shall
have appropriate professionals and its senior management personnel shall have appropriate professional qualification with at least
three years of experience in the sector.
Our
primary PRC subsidiaries, eHi Rental and eHi Jiangsu, as foreign-invested enterprises that operate car rentals business, and our
PRC subsidiaries, Shanghai Taihao and Shanghai Taide, as foreign-invested enterprises that operate financial leasing business,
have obtained the approvals from the relevant local branches of MOFCOM pursuant to the above-mentioned regulations.
Regulations on car rental and car service industry
General requirement on vehicles
Regulations applicable to all automotive
vehicles generally apply to rental vehicles. According to the Road Traffic Safety Law promulgated by the NPC Standing Committee
in October 2003, which was amended in December 2007 and April 2011, respectively, all automotive vehicles are required
to be registered with relevant local administration authorities. Vehicle registration certificates, vehicle plates and vehicle
licenses shall be obtained from the same authorities, and the compulsory traffic accident insurance shall be purchased for each
vehicle. We obtain vehicle registration certificate, vehicle plate and vehicle license and purchase compulsory traffic accident
insurance for each vehicle before its operation.
There are additional requirements for rental
vehicles. In most cities, the usage stated in the vehicle licenses of such vehicles shall be registered as rental or operational.
Some cities require additional licenses or vehicle plates for such vehicles. For instance, in Shanghai, Nanchang, Suzhou, Wuxi,
Shenyang, Dalian, Wuhan and Kunming, a special transport license or passenger rental vehicle license is required for each rental
vehicle. In Shanghai, special vehicle plates shall be obtained for rental vehicles. In Beijing, Guangzhou, Hangzhou and Chongqing,
filing with relevant local authority is required for rental vehicles. However, local practices differ and some of these requirements
are not strictly implemented or may be modified or suspended by the local administration authorities in practice. Due to various
reasons, we have not met all these requirements, which may subject us to penalties and other administrative actions. See “Risk
Factors—Risks related to doing business in China—Failure in obtaining all of the requisite permits, licenses or making
all of the requisite filings or registrations or meeting other regulatory requirements for operating car rentals and car services
business in China by us or any third-party service provider who cooperates with us may subject us to fines or other administrative
actions” for more details.
Car rental related services
As
the car rental industry is at an early stage of development in China, the legislation of the car rental industry continues to evolve.
The MOT and the NPC, the predecessor of NDRC, promulgated the Interim Rules on Administration of Car Rental Industry in 1998,
which was abolished in 2007. Since then, there have been no national laws and regulations in place to specifically regulate the
car rental industry in China except the Notice on Promoting the Healthy Development of Car Rental Industry, or the 2011 MOT Notice,
promulgated in April 2011 by MOT. The 2011 MOT Notice sets forth general guidelines for the car rental industry in China and
requires local government authorities to (i) establish and improve local rules and regulations on car rental business,
(ii) promptly formulate local development plans for the car rental industry, (iii) encourage large and well-managed car
rental companies of good reputation to set up branches and establish national or regional networks without any restrictions due
to local protectionism, (iv) enhance the administration of the car rental business, including requirements to obtain and carry
a valid permit or license for each rental car, and prohibitions of car rental companies from engaging in road transportation businesses
without appropriate approval,
(v) encourage car rental companies to innovate and develop new types of car rental services,
(vi) create a favorable environment for the development of the car rental industry, and (vii) enhance the administration
and supervision of the car rental industry.
The Road Transportation Regulation promulgated
by the State Council in 2004, and amended in 2012, regulates road transportation businesses (including road passenger transportation
business and road freight transportation business) and other business operations related to road transportation (including operations
of transportation terminals (sites), vehicle maintenance and repair businesses and training of drivers). According to the Administrative
Provisions for Foreign Investment in the Road Transport Industry promulgated by MOFCOM and MOT in 2001 and amended in 2014, foreign
investors are generally prohibited from holding more than 49% of the equity interest in PRC entities engaged in road passenger
transportation business. Neither the Road Transport Regulation nor the Administrative Provisions for Foreign Investment in the
Road Transportation Industry, however, include any provisions relating to car rental businesses.
The Administrative Rules on Urban Taxis
promulgated by the Ministry of Construction and the MPS, which became effective in 1998, regulates the planning, operations, administration
and services related to urban taxis, which was abolished in March 2016. MOT promulgated the Administrative Regulations on
Operation and Services of Taxis in September 2014, which became effective on January 1, 2015. According to such regulations,
the term “taxis operating service” refers to operating activities that provide passenger transport services at the
direction of the passengers and charge fees according to travel mileage and travel time by means of seven-under seats car with
identifications sprayed and installed as a taxi and driving services, which tour and pick up customers on the roads.
The regulatory distinctions between car
rental businesses and road transportation businesses or taxi businesses are not clear. As a result, local government authorities
in China have imposed different requirements on the operating entities and/or vehicles that are involved in car rental businesses
in the respective province or city.
Car rental services not accompanied by driving services
Set forth below is a summary of local rules and
regulatory requirements in China regarding the provision of car rental services, which generally do not contemplate the provision
of car rental services concurrently with the provision of driving services.
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Some provinces and cities do not have any specific local rules regulating car rental services.
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Some local authorities promulgated local rules specifically regulating the car rental businesses. For example, the
relevant local authority of Beijing promulgated specific local rules for car rental operations in Beijing including a
notice issued on August 12, 2014. Car rental service providers in Beijing are required to make filings with the local
transportation authority before they may commence their car rental businesses and make subsequent filings with the authority
for any changes in the number of vehicles for rental and other relevant operational conditions and car rental service
providers are strictly prohibited from facilitating to illegal operators. Beijing eHi Car Rental Co., Ltd. and the
Beijing branch of eHi Rental duly completed their filings with the local authority in Beijing on December 15, 2010 and
renewed their filing certificate on June 19, 2014. The filing certificate is valid until June 18, 2017 and we will
renew the relevant filing certificate.
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Although the Road Transportation Regulation does not include any provisions relating to car rental businesses, the local road
transportation rules of certain provinces and cities, such as Shandong, Sichuan and Hubei and Suzhou require car rental service
providers to obtain road transportation licenses from local authorities or make filing with local authorities covering their car
rental businesses.
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In some provinces and cities, local rules regulating taxi businesses also partially cover car rental operations, which
may impose different requirements on car rental service providers from taxi service providers. For example, according to Shanghai
Municipal Administrative Rules on Taxis, car rental service providers in Shanghai are required to obtain car rental licenses,
which are different from taxi operation licenses, from the local transportation authority before commencing car rental businesses.
eHi Rental obtained such a license on April 15, 2009 and renewed such license on December 15, 2014. The license is valid
until December 31, 2017. Under the local rule in Shanghai, the total number of vehicles for rental, parking space, service
locations and networks of car rental service providers are subject to the overall planning of the municipal government.
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Some local authorities promulgated local rules, such as those in Beijing, Guangdong Province, Hubei Province, Chongqing, Xi’an
and Kunming to require that the owner of a rental vehicle must be the same person operating the rental services.
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In addition, among those provinces and cities
that have promulgated local rules to regulate car rental business, the actual practice of the local authorities may differ
from their local rules.
Primarily as a result of the inconsistency
in local rules and practices as described above, we have not met all of the qualifications and regulatory requirements in
all of the provinces and cities where we currently operate our car rental businesses.
Car rental services accompanied by driving services
In addition to the regulatory requirements
mentioned above, under the current PRC regulatory environment, our car rental services accompanied by driving services may subject
us to additional approvals, licenses, permits or other regulatory requirements.
The Road Transportation Regulation requires
an operator of road passenger transportation businesses to have appropriate vehicles, qualified drivers, sound safety systems and
obtain a road transportation operation license covering passenger transportation. The 2011 MOT Notice provides that a car rental
enterprise must obtain appropriate approval before it may conduct road passenger transportation business. However, neither the
Road Transportation Regulation nor the 2011 MOT Notice defines the term “road passenger transportation business.” According
to the Administrative Rules on Road Passenger Transportation and Passenger Transportation Terminals promulgated by MOT in
2005 and last amended in 2012, the term “road passenger transportation services” refers to public bus services, chartered
bus services and travel bus services, which means transportation services provided to unspecified passengers on fixed routes at
fixed rate and stops or to chartered groups of passengers or to tourists from or to a tourist attraction. We do not provide public
bus services, chartered bus services or travel bus services. In particular, our car rental services are not provided to any unspecified
passengers. Therefore, we do not deem any of our operating subsidiaries as a “road passenger transportation service”
provider. According to the Administrative Regulations on Operation and Services of Taxis, “taxis operating service”
refers to operating activities that provide passenger transport services at the direction of the passengers and charge fees according
to travel mileage and travel time by means of seven-under seats car with identifications sprayed and installed as a taxi and driving
services, which tour and pick up customers on the roads. According to such regulations, an enterprise engaged in taxi services
is required to obtain a taxi operation license and meet other relevant requirements. Our chauffeured car services, which may include
driving services under certain circumstances, charge clients based on a number of factors, such as vehicle model, the type of services,
the length of rental period, the specific time and location of pick-up and drop-off and price competition. Therefore, we do not
believe any of our operating subsidiaries is a taxi service provider.
At local levels, some provinces and cities,
such as Zhejiang, Shanxi, Jilin, Chongqing, Hubei, Sichuan, Guizhou, Shandong, Jiangxi, Hunan and Shaanxi, have promulgated local
road transportation regulations, which generally restrict an entity engaged in car rental businesses from concurrently providing
driving services. In August 2011, Shanghai Municipal Transport and Port Authority issued Certain Opinions on Standardizing
the Regulation of Car Rental Industry, which provides that car rental companies may not provide drivers for the vehicles they rent
but may at the requests of their customers sign service agent contracts on behalf of their customers with third-party labor service
companies, under which the labor service companies may provide drivers to car rental customers, and the car rental companies are
obligated to provide training to drivers provided by the labor service companies. A few local authorities have also imposed qualification
requirements on drivers engaged by a car rental service provider.
In
order to minimize the uncertainties and potential legal risks caused by the ambiguities of the laws, regulations and
rules
promulgated by various levels of legislative bodies and authorities in China and their enforcement in practice, we established
Shanghai Smart Brand to primarily engage in the provision of driving services in April 2011. We have transferred substantially
all of our drivers to Shanghai Smart Brand, its subsidiaries or branches. Our driving services are currently provided solely by
Shanghai Smart Brand, its subsidiaries or branches, or at the requests of our customers through third-party driving service providers
that cooperate with us, and our car rental services are provided by our other subsidiaries that do not provide driving services.
See “Risk Factors—Risks related to doing business in China—Failure in obtaining all of the requisite permits,
licenses or making all of the requisite filings or registrations or meeting other regulatory requirements for operating car rentals
and car services business in China by us or any third-party service provider who cooperates with us may subject us to fines or
other administrative actions” for more details.
Regulations on penalties for violation of traffic laws and
regulations
According to Road Traffic Safety Law,
penalties for violations of the law on road traffic safety include: disciplinary warning, fine, temporary suspension or
revocation of motor vehicle driver’s license and detention. The traffic administration department of the public
security authority may, on the basis of the technical traffic monitoring records, impose a penalty on the owner or manager of
the motor vehicle involved in violation of law. If the driver can be identified, it may impose a penalty on the driver. On
December 29, 2016, the city government of Shanghai also revised its local regulations on road traffic administration, which
took effect on March 25, 2017, to enhance the road traffic management in the area of Shanghai including, among other things,
imposing various penalties on activities of violations of traffic rules and it also clarified that it is prohibited that
using other person’s driver’s license to deduct points, deducting points for other person and introducing the
aforementioned behaviors.
Motor vehicles are subject to periodic inspection.
According to Rules on Motor Vehicle Registration promulgated on May 27, 2008 and amended on September 12, 2012 by the MPS,
before owners of motor vehicles apply for inspection on their motor vehicles, all the traffic violations related to their motor
vehicles shall be settled.
Regulations on vehicle insurance
Pursuant to Road Traffic Safety
Law, compulsory third party liability insurance must be purchased for each vehicle. Pursuant to Regulations on Compulsory
Traffic Accident Liability Insurance for Motor Vehicles promulgated on March 21, 2006, amended on December 17, 2012
and February 6, 2016 by the State Council, owners or managers of motor vehicles driving on roads within China shall apply for
the compulsory traffic accident liability insurance for their motor vehicles.
Regulations on motor vehicle repair services
The
Road Transportation Regulation requires that motor vehicle repair services shall obtain approval from competent road
transport
administration authority before they start their business.
According
to Administrative Rules on Motor Vehicle Repair promulgated on June 24, 2005 and amended on August 8, 2015 by the
MOT, anyone that applies to engage in operation of motor vehicle repair services shall have (i) an appropriate site for motor
vehicle repair; (ii) necessary equipment and facilities; (iii) necessary technical personnel; (iv) a sound system
for management of motor vehicle repair; and
(v) necessary environmental protection measures.
In addition, motor vehicle repair business
shall comply with regulations and rules promulgated by local government authorities of the provinces and cities where such
business is operated. Such local regulations and rules may provide additional qualifications and detailed requirements for
motor vehicle repair operators.
Regulations on limitation of use and purchase of motor vehicles
Certain cities in China have issued local
regulations or rules to control the number of motor vehicles. For example, Beijing imposes an annual quota on the issuance
of new vehicle license plates. Potential motor vehicle purchasers need to meet specific criteria and enter into a monthly draw.
Only candidates who have been allocated a plate in the draw can apply to have their motor vehicles registered with the local vehicle
administration. Shanghai is implemented an auction system for the issuance of new vehicle license plates. Under this system, each
applicant is required to submit a “blind” bid for a vehicle license plate. Only successful bidders can apply to have
their motor vehicles registered with the local vehicle administration. There are similar policies that restrict the issuance of
new vehicle license plates in Guangzhou, Tianjin, Hangzhou and Guiyang.
In addition, some cities in China
such as Beijing, Shanghai, Shijiazhuang, Nanjing, Wuhan, Harbin, Jinan, Nanchang, Chengdu, Guiyang, Hangzhou, Changchun,
Lanzhou, Guangzhou, Tianjin, Linfen, Langfang, Baoding and Dalian also have promulgated regulations or rules to
prohibit vehicles with certain license plate from driving on road. For instance, in Beijing vehicles with restricted tail
number of license plates are not allowed to drive within five rings road (excluding the fifth ring road) during 7:00 am to
20:00 pm each workday, and the vehicles with non-Beijing license plates shall also be subject to such restrictions. In
Shanghai vehicles bearing non-Shanghai license plates are not allowed on certain roads during specified rush hours on
workdays.
Regulations on online car hailing businesses
In July 2016, MOT, together with other six
governmental authorities, issued the Car Hailing Measures. The Car Hailing Measures require online car-hailing platform operators
to obtain licenses from governmental authorities, be capable of providing online and offline services and meet certain conditions.
The vehicles and drivers shall also meet certain conditions and obtain the online car hailing vehicle licenses and driver licenses
respectively issued by the relevant governmental authorities to engage in online car hailing business. Following the Car Hailing
Measures, some local governmental authorities in cities of Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Qingdao, Chongqing
city governments further adopted policies regarding the online car-hailing business operations and services in their administrative
regions. In addition to the conditions set out in the Car Hailing Measures, almost all those local governments require that the
vehicles engage in online car hailing business operations must be registered in the city administrative regions and meet certain
vehicle conditions such as minimum wheel base, installing GPS system and emergency alarm system. Beijing and Shanghai city governments
specially require the drivers engage in online car hailing business operations to have the city census register.
Regulations on financial leasing
In September 2013, MOFCOM issued the
Administration Measures of Supervision on Financial Leasing Enterprises, or the Financial Leasing Measures, to further strengthen
and administer the business operation of financial leasing companies. Under Financial Leasing Measures, financial leasing companies
are permitted to operate the following business: direct leasing, subleasing, sales and leaseback, leveraged leasing, trust leasing
and joint leasing. In addition, financial leasing companies may also operate business related to financial leasing, such as purchase
of leasing property, residual disposal and maintenance of leasing property, consultancy and security for leasing transactions and
other business as approved by the competent authority. A financial leasing company shall not engage in: (i) such financial
businesses as deposit taking, loan issuing, and loan issuing on commission, (ii) illegal fund-raising activities in the name
of financial leasing, and (iii) inter-bank borrowing and other businesses without the approval from relevant authorities.
The PRC Contract Law promulgated on March 15,
1999 sets forth mandatory rules on financial leasing contracts. Under the PRC Contract Law, a financial leasing contract shall
be made in written form and shall contain such clauses as the name of the leased object, quantity, specifications, technical performance,
inspection method, lease term, composition of rent, payment term, payment method and kind of currency for the payment of rent,
and the ownership over the leased object at the expiration of the lease term. The lessor enjoys the ownership over the leased object
during lease period. If the lessee goes bankrupt, the leased object shall not fall into the category of bankrupt property. Within
the period of possession over the leased object by the lessee, if the leased object causes any personal injury or property loss
to a third party, the lessor shall not bear any liability.
Regulations on Internet content provision service
The Telecommunications Regulations, promulgated
by the State Council in 2000 and amended in 2014, draw a distinction between “basic telecommunication services” and
“value-added telecommunication services.” Internet content provision service is a subcategory of value-added telecommunications
services. The State Council issued the Administrative Measures on Internet Information Services concurrently with the Telecommunications
Regulations in 2000 and subsequently amended it in 2011 to regulate Internet content provision services. According to these measures,
commercial Internet content provision service operators must obtain a value-added telecommunication business operating license,
or ICP license, from the appropriate telecommunication authorities in order to conduct any commercial Internet content provision
operations in China, while non-commercial Internet content provision service operators shall make filings with the appropriate
telecommunication authorities before conducting non-commercial internet content provision operations. These measures further stipulate
that entities providing Internet content provision services regarding news, publishing, education, medicine, health, pharmaceuticals
and medical equipment must procure the approval of the national government authorities responsible for such areas prior to applying
for an operating license from the relevant government authorities.
According
to the Administrative Rules for Foreign Investments in Telecommunications Enterprises, issued on December 11, 2001 by
the State Council and effective as of January 1, 2002 and amended on September 10, 2008, a foreign investor is prohibited
from owning more than 50% equity interest in a PRC entity providing value-added telecommunications services and the major foreign
investor(s) in a foreign invested valued-added telecommunications enterprise is required to be in good standing and have the
relevant experience in operating a value-added telecommunications business. On July 13, 2006, the Ministry of Information
Industry, or the MIIT publicly released the Notice on Strengthening the Administration of Foreign Investment in Operating Value-added
Telecommunications Business, or the MIIT Notice, which reiterates certain provisions under the Administrative Rules for Foreign
Investments in Telecommunications Enterprises prohibiting a domestic company that holds an ICP license, from renting, transferring
or selling a telecommunications license to foreign investors in any form, or providing any resources, sites or facilities to foreign
investors that intend to conduct value-added telecommunication business
illegally in China. Trademarks and domain names
that are used in the provision of Internet content services must be owned by the ICP license holder.
Our current major operations are not subject
to the ICP license requirements. To further expand our Internet and mobile services, in March 2014, we entered into a series
of contractual arrangements with eHi Information and its shareholders. In January 2015, we entered into a series of contractual
arrangements with our PRC incorporated variable interest entity eHi Car Sharing and its shareholders. Both eHi Information and
eHi Car Sharing are our variable interest entities in China. eHi Information obtained an ICP license from the relevant telecommunication
authorities on September 24, 2014. eHi Car Sharing is currently not yet in operation.
Regulations on registration of branch companies
According to the amended PRC Company Law
and the amended Administration Regulations of Company Registration, which both became effective on March 1, 2014, a company
may establish branch companies, which are entities without the status of a legal person and conduct business outside the domicile
of the company. Branch companies must be registered at the competent government agency and obtain a business license. The amended
Administration Regulations of Company Registration, set forth the detailed formalities on the registration of branch companies.
Our PRC subsidiaries have registered 446
branches and obtained a business license for each of them as of December 31, 2016.
Regulations on employment contracts
The Labor Contract Law of the PRC was promulgated
on June 29, 2007, as amended on December 28, 2012 and effective on July 1, 2013. On September 18, 2008, the
PRC State Council issued the PRC Labor Contract Law Implementing Rules, which became effective as of the date of issuance. The
Labor Contract Law and its Implementing Rules govern the establishment of employment relationships between employers and employees,
and the conclusion, performance, termination of, and the amendment to employment contracts. To establish an employment relationship,
a written employment contract must be signed. In the event that no written employment contract was signed at the time of establishment
of an employment relationship, a written employment contract must be signed within one month after the date on which the employer
starts to use the employee’s services. An employer may terminate the labor agreement of an employee under certain specified
circumstances and in some cases, such termination can only be done after fulfillment of certain procedural requirements, such as
30 days’ prior notice or upon payment of one month’s salary in lieu of such notice. In certain cases, the terminated
employee is entitled to receive a severance payment equal to the average monthly salary during the 12-month period immediately
preceding to the termination (inclusive of all monetary income such as base salary, bonus, allowances, etc.), for each year
of service up to the date of termination. If an employer terminate an labor contract in any circumstance other than those specified
under the Labor Contract Law and its implementing rules, including termination without cause, the employer must either reinstate
and continue to perform the employee’s employment contract or pay the employee damages calculated at twice the rate for calculating
the severance payment, subject to the employee’s own request. In the case that the employee requests for damages, the employer
is not required to pay other severance or the remainder of the amount owed under the employment contract unless the employment
contract has otherwise provided for.
In addition, according to the Labor Contract
Law and its implementing rules, in order to enforce the non-compete provision with the employees after the termination or ending
of employment relationship, the employer shall compensate the employees on a monthly basis during the non-competition period after
such termination or ending of employment.
On January 24, 2014 the Ministry of
Human Resources and Social Security promulgated Interim Provisions on Labor Dispatching, or Circular 22, effective from March 1,
2014, which provides that an employer shall strictly control the number of employees under labor dispatching arrangements and dispatched
employees can only be used in temporary, ancillary and replaceable positions. The number of dispatched workers used by an employer
shall be reduced to no more than 10% of the total number of its employees within two years after March 1, 2014. However, the labor
contract and labor dispatching agreement lawfully concluded prior to the promulgation date of the Decision of the Standing Committee
of the NPC on Revising the “Labor Contract Law of the PRC” may continue to be performed until the expiry of the above
contract or agreement if expiry date of such contract or agreement is later than the day after two years calculating from March 1,
2014. If the employer fails to reduce the number of dispatched employees as required by Circular 22 and could not correct its practice
after receiving warnings from government authority, the employer may be subject to a fine ranging from RMB1,000 to RMB5,000 per
dispatched employee.
Regulation on houses lease
According to Administrative Measures for
the Leasing of Commodity Housing promulgated by Ministry of Housing and Urban- Rural Development on December 1, 2010, within
30 days after the execution of the housing lease contract, the parties involved shall handle the filing procedure of the leasing
of housing at local competent authorities. Failure to completion of such filing may result in fines up to RMB10,000.
Regulation on PRC business tax and VAT
Prior to January 1, 2012,
pursuant to the Provisional Regulation of China on Business Tax and its Implementing Rules, an entity or individual rendering
services in China was generally subject to a business tax at the rate of 5% on revenues generated from the provision of such
services. Since January 1, 2012, the MOF and the SAT have started to implement the VAT Pilot Program, which imposes VAT
in lieu of business tax for certain industries in Shanghai. Since August 1, 2012, the VAT Pilot Program has been
expanded to and implemented in other regions, including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong.
On May 24, 2013, the MOF and the SAT jointly issued Notice 37, which expanded the VAT Pilot Program nationwide starting
on August 1, 2013. On December 12, 2013, the MOF and the SAT jointly issued Notice 106, effective on
January 1, 2014, which replaced Notice 37 and improved some tax policies in the VAT Pilot Program. From May 1,
2016, the VAT were expanded to all business tax taxpayers. As a result of the VAT, an entity or individual
rendering services in China is subject to VAT at the rate of 17%, 11% or 6%, as applicable.
Regulations on PRC Enterprise Income Tax on indirect transfer
of non-resident enterprises
Pursuant
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or
Circular 698, issued by the SAT on December 10, 2009 with retroactive effect from January 1, 2008, when a non-PRC resident
enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposing of the equity interests of an overseas
holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has
an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, non-PRC resident enterprise, being
the transferor, shall report this Indirect Transfer to the competent tax authority of the PRC resident enterprise. Using a “substance
over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if the Indirect Transfer
lacks a reasonable commercial purpose and is arranged for the purpose of reducing, avoiding or deferring PRC tax. As a result,
gains derived from such Indirect Transfer may be subject to PRC enterprise income tax at a rate of up to 10%. Circular 698 also
provides that in the event that a non-PRC resident
enterprise transfers its equity interests in a PRC resident enterprise
to its related parties at a price lower than their fair market value, the relevant tax authority has the power to make a reasonable
adjustment to the taxable income of the transaction. In addition, SAT released SAT Public Notice (2011) No. 24, or Public
Notice 24, which took effect on April 1, 2011, to clarify several issues related to Circular 698. Under Public Notice 24,
the term ‘‘effective tax rate’’ refers to the effective tax rate on the gain derived from a disposition
of any equity interest of an overseas holding company. There is uncertainty as to the application of Circular 698.
On February 3, 2015, the SAT issued
the Announcement of the State Administration of Taxation on Certain Issues Concerning the Enterprise Income Tax on the Indirect
Transfer of Properties by Non-resident Enterprises, or Circular 7, which abolishes certain provisions of Circular 698 and Public
Notice 24 and also provides more guidance on a number of issues in Circular 698. Circular 7 stipulates that when a non-resident
enterprise transfers the assets (including equity interests) in an overseas holding company, which directly or indirectly owns
PRC taxable properties, including shares in a PRC company (or PRC Taxable Assets), for the purposes of avoiding PRC enterprise
income taxes through an arrangement without reasonable commercial purpose, such indirect transfer should be reclassified and recognized
to be a direct transfer of the assets (including equity interests) of a PRC resident enterprise in accordance with the Enterprise
Income Tax Law, unless the overall arrangements relating to an indirect transfer of PRC Taxable Assets fulfill one of the following
conditions: (i) where a non-resident enterprise derives income from the indirect transfer of PRC Taxable Assets by acquiring
and selling equity interests of a listed overseas company on a public market; and (ii) where the non-resident enterprise had
directly held and transferred such PRC Taxable Assets, the income from the transfer of such PRC Taxable Assets would have been
exempted from enterprise income tax in the PRC under an applicable tax treaty or arrangement.
Although the exemptions above are clarified
in Circular 7, as Circular 7 was newly implemented and only became effective in February 2015, there might be limited precedents
regarding the application and enforcement of Circular 7 and the related SAT notices and it remains uncertain whether such exemptions
or relevant provisions of Circular 7 will be applicable to the transactions such as our future disposal of subsidiaries, acquisitions
of complementary businesses, or restructuring of our organizational structure where non-PRC resident investors and PRC Taxable
Assets are involved.
Torts law
The
PRC Torts Law was promulgated by the NPC Standing Committee on December 26, 2009 and became effective on July 1, 2010.
According to the Torts Law, in the case of car rental, where the driver is different from the owner of the vehicle, if the driver
is held liable for a traffic accident, such liability will first be covered by the insurance company within the coverage of the
compulsory
traffic accident insurance of the vehicle. If the insurance coverage is not sufficient, the driver shall be responsible
for the remaining compensation, and the vehicle owner shall not be liable for compensation unless the owner has fault in such accident.
However, if we provide driving services, where the driver is our employee or an employee dispatched by other third-party entity,
if the driver causes damages or injuries to others when providing driving service, such liability will first be covered by the
insurance company within the coverage of the compulsory traffic accident insurance of the vehicle. If the insurance coverage is
not sufficient, we will generally be held liable for the remaining compensation.
Regulations on foreign currency exchange and dividend distribution
Foreign currency exchange
The principal regulations governing foreign
currency exchange in China are the Foreign Currency Administration Regulations of 1996, as amended in August 2008 and Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange, or the Administration Rules promulgated by PBOC in June,
1996. Under these regulations, the Renminbi is convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions without SAFE approval except as otherwise explicitly
provided by laws and regulations. However, conversion of the Renminbi for capital account items, such as direct investment, loans,
repatriation of investment and investment in securities outside China, is subject to approvals of or registration with, SAFE or
its competent local branches.
Under the Administration Rules, enterprises
may only buy, sell or remit foreign currencies at banks that are authorized to conduct foreign exchange business after the enterprise
provides valid commercial documents and relevant supporting documents and, in the case of certain capital account transactions,
after obtaining approval from SAFE or its competent local branches. Capital investments by enterprises outside of China are also
subject to limitations, which include approvals by the MOFCOM, SAFE and the National Development and Reform Commission, or their
respective competent local branches.
On August 29, 2008, the SAFE promulgated
a notice, Circular 142, regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting
how the converted Renminbi may be used. The notice requires that the registered capital of a foreign-invested company settled in
Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental
authority and may not be used for equity investments within the PRC. In addition, the SAFE strengthened its oversight of the flow
and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use
of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans
if the proceeds of such loans have not been used. Furthermore, on November 9, 2010, SAFE promulgated the Notice Relating to
Strengthening the Administration of Foreign Exchange Businesses, which tightens the regulation on the settlement of net proceeds
from overseas offerings , and requires (i) that the settlement of net proceeds must be consistent with the uses stated in
the prospectus for the offering, and (ii) the submission of relevant board resolutions for the portion of proceeds that is
over-subscripted or fall outside the uses stated in the prospectus. On March 30, 2015, the SAFE promulgated a Circular on
Reforming of Administrative Methods Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Companies, or Circular
19, which became effective on June 1, 2015, superseding Circular 142. According to Circular 19, although it restates certain
restrictions on use of investment capital in foreign currency by foreign invested company, it specifies that the registered capital
of a foreign-invested company in foreign currency can be converted into RMB voluntarily and be allowed to use for equity investment
in the PRC subject to certain reinvestment registration with local SAFE made by the invested company. In June 2016, SAFE promulgated
SAFE Circular 16, which removed certain restrictions previously provided under several SAFE circulars, including SAFE Circular
19, in respect of conversion by a foreign-invested enterprise of foreign currency registered capital into RMB and use of such RMB
capital. However, SAFE Circular 16 continues to prohibit foreign-invested enterprises from, among other things, using RMB fund
converted from its foreign exchange capitals for expenditure beyond its business scope, and providing loans to non-affiliated enterprises
except as permitted in the business scope.
We derive substantially all of our revenues
in the Renminbi, which is not a freely convertible currency. Under our current structure, our income will be primarily derived
from dividend payments from our subsidiaries in China. The value of the Renminbi against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of
Renminbi into foreign currencies, including the U.S. dollar, has been based on rates set by PBOC. On July 21, 2005, the PRC
government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted
to fluctuate within a band against a basket of certain foreign currencies. There remains significant international pressure on
the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant
appreciation in the value of the Renminbi against the U.S. dollar.
Dividend distribution
The principal regulations governing distribution
of dividends of a company include the amended Company Law (promulgated on December 28, 2013, effective on March 1, 2014),
the amended Wholly Foreign-Owned Enterprise Law (or the WFOE Law, effective on October 31, 2000), and the amended Wholly Foreign-Owned
Enterprise Law Implementing Rules (or the Implementing Rules of WFOE Law, effective on March 1, 2014).
Under the above laws and regulations, a
company may pay dividends only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards
and regulations after funding certain reserve funds. Sino-foreign joint venture companies may make such reservation according to
the percentage determined by the board of directors. Other companies in China, including wholly foreign-owned enterprises are required
to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these
reserves have reached 50% of registered capital. These reserves are not distributable as cash dividends.
According to the EIT Law and the Implementing
Rules dividends paid by a wholly foreign owned enterprise to non-resident enterprise may be subject to a withholding tax at
the rate of 10% unless the non-resident enterprise is entitled to a lower tax rate according to applicable tax treaties or similar
tax arrangements.
Under the EIT Law and its Implementing Rules,
if a company incorporated outside China has its “de facto management body” located within China, the company would
be classified as a resident enterprise and thus would be subject to an enterprise income tax rate of 25% on all of its income on
a worldwide basis, with the possible exception of dividends received directly from another Chinese resident enterprise.
Our Chinese subsidiaries are restricted
from distributing any dividends to us until they have met these requirements set out in the above laws and regulations.
Regulations on employee share options
Pursuant
to the Implementing Rules of the Administration Measure for Individual Foreign Exchange, or the Individual Foreign Exchange
Rule, and the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in
Share
Incentive Plan of Overseas-Listed Companies, or Share Option Rule, issued in January 2007 and February 2012, respectively,
by the SAFE, domestic individuals who have participated in any stock incentive plan including employee stock holding plan, share
option plan or similar plan in an overseas-listed company are required to register with the relevant SAFE branch and complete certain
other procedures related to the share incentive plan through a PRC agent. Under the Share Option Rule, individuals in PRC including
PRC citizens (including of Hong Kong, Macau and Taiwan nationals) and foreign nationals who have continuously resided in China
for at least a year who participate in the share incentive plan of a same overseas listed company shall collectively appoint a
qualified PRC domestic agent or a PRC subsidiary of such overseas listed company, or the PRC agent, to conduct foreign exchange
registration, open bank accounts and transfer and exchange funds and an overseas entity shall be appointed to conduct exercise
of option, buying and selling of relevant stocks or equities and transfer of relevant funds. The individuals’ foreign exchange
income received from the sale of shares or dividends distributed by the overseas-listed company which is repatriated back to China
shall first be remitted into a collective foreign exchange account opened and managed by the PRC agent before distribution to such
individuals in a foreign currency or in RMB. We and our employees who are domestic individuals and have participated in our stock
incentive plan, or PRC optionees, have been subject to these rules since the listing of our ADSs on the NYSE. If we or our
PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions. In addition,
the SAT has issued certain circulars concerning employee share options. Pursuant to these circulars, our employees working in China
who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents
related to employee share options with relevant tax authorities and withhold individual income taxes of those employees who exercise
their share options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by
tax authorities or any other PRC government authorities.
Regulations on foreign exchange registration of offshore
investment by PRC residents
On July 4, 2014, the SAFE issued the
Notice on Issues Relating to the Administration of Foreign Exchange for Overseas Investment and Financing and Reverse Investment
by Domestic Residents via Special Purpose Vehicles, or Circular 37, which replaced the Notice on Issues Relating to the Administration
of Foreign Exchange for the Financing and Reverse Investment by Domestic Residents via Offshore Special Purpose Vehicles issued
by SAFE in October 2005, or Circular 75. Pursuant to Circular 37, any PRC residents, including both PRC institutions and individual
residents, are required to register with the local SAFE branch before making contribution to a company set up or controlled by
the PRC residents outside of the PRC for the purpose of overseas investment or financing with their legally owned domestic or offshore
assets or interests, referred to in this circular as a “special purpose vehicle.” Under Circular 37, the term “PRC
institutions” refers to entities with legal person status or other economic organizations established within the territory
of the PRC. The term “PRC individual residents” includes all PRC citizens (also including PRC citizens abroad) and
foreigners who habitually reside in the PRC for economic benefit. A registered special purpose vehicle is required to amend its
SAFE registration or file with respect to such vehicle in connection with any change of basic information including PRC individual
resident shareholder, name, term of operation, or PRC individual resident’s increase or decrease of capital, transfer or
exchange of shares, merger, division or other material changes. In addition, if a non-listed special purpose vehicle grants any
equity incentives to directors, supervisors or employees of domestic companies under its direct or indirect control, the relevant
PRC individual residents could register with the local SAFE branch before exercising such options. The SAFE simultaneously issued
a series of guidances to its local branches with respect to the implementation of Circular 37. Under Circular 37, failure to comply
with the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of
the relevant onshore company, including restrictions on the payment of dividends and other distributions to its offshore parent
company and the capital inflow from the offshore entity, and may also subject the relevant PRC residents and onshore company to
penalties under the PRC foreign exchange administration regulations.
Regulations on cross-border direct investment in Renminbi
On
October 12, 2011, MOFCOM issued the Notice of the Ministry of Commerce on Issues concerning Cross border Direct Investment
in Renminbi which was abolished in 2013 and on December 3, 2013 the MOFCOM promulgated the Announcement on Issues relating
to Cross-border Direct Investment in RMB, effective from January 1, 2014. Under this announcement, the “cross- border
direct investment in RMB “shall refer to the direct investment activities conducted by foreign investors (including the investors
from Hong Kong, Macau and Taiwan) in China with offshore RMB funds obtained legally, including, among other things, the establishment
of new enterprises, increase of capital, shareholding or merger and acquisition of domestic enterprises. The cross-border direct
investment in RMB by a foreign investor or reinvestment by its foreign-invested enterprise shall conform to the requirements of
laws, regulations and relevant provisions on foreign investment and comply with the foreign investment industry policies of China
and the provisions on security review of foreign investment mergers and acquisitions and anti-monopoly review. No foreign-invested
enterprise is allowed to use the funds of cross-border direct investment in RMB for investment, directly or indirectly, in negotiable
securities and financial derivatives in China (except for strategic investment in listed companies) or for entrusted loans. On
October 13, 2011, the PBOC issued the Management Rules on the Settlement of Foreign Direct Invested Renminbi,
which provide that foreign invested enterprises with RMB-dominated foreign direct investment must register with the PBOC or its
local branch after obtaining the permit from MOFCOM and the business license.
Regulations on intellectual property rights
China has adopted comprehensive legislation
governing intellectual property rights, including copyright, trademark, patents and domain names.
Copyright
The Copyright Law of the PRC was adopted
in 1990 and amended in 2001 and 2010. Copyrighted software is protected under the Copyright Law and other regulations. In addition,
there is a voluntary registration system administered by the China Copyright Protection Center.
In order to strengthen the protection of
the rights and interests of computer software copyright owners, the State Council promulgated the Regulations on the Protection
of Computer Software on December 20, 2001, which became effective on January 1, 2002 and amended it in 2011 and 2013,
and the State Bureau of Copyright promulgated the Measures on the Registration of Computer Software Copyright on February 20,
2002, which was subsequently amended by the State Council in 2011. For the software copyrights of legal persons or other organizations,
the term of protection for the software copyright is 50 years, ending on December 31 of the fiftieth year after the first
publication of the software. The software copyright owner may follow registration procedures with the software registration institution
authorized by the State Bureau of Copyright and obtain a Registration Certificate of Software Copyright, which is the prima facie
proof of the registered copyright ownership. As of December 31, 2016, our PRC subsidiaries had registered the copyrights of
20 computer software in the PRC, and have obtained all Registration Certificates of Software Copyright.
Trademark
As of December 31, 2016, our PRC subsidiaries
had registered 306 trademarks, of which 287 trademarks were registered in the PRC and 19 trademarks were registered in other countries.
Registered trademarks are protected under the Trademark Law adopted on August 23, 1982 (effective on March 1, 1983) and
amended on February 22, 1993 (effective on July 1, 1993), October 27, 2001 (effective on December 1, 2001)
and August 30, 2013 (effective on May 1, 2014), the Trademark Office of the State Administration of Industry and Commerce
(or the Trademark Office) is responsible for the registration and administration of trademarks throughout China and grants a term
of ten years to registered trademarks. The Trademark Law has adopted a “first-to-file” principle with respect to trademark
registration. Where a trademark for which a registration has been made is identical or similar to another trademark that has already
been registered or been subject to a preliminary examination and approval for use on the same kind of or similar commodities or
services, the application for registration of such trademark may be rejected. Any person applying for the registration of a trademark
shall not prejudice the existing right of others obtained by priority, nor shall any person register in advance a trademark that
has already been used by another person and has already gained “sufficient degree of reputation” through that person’s
use. After receiving an application, the Trademark Office will make a public announcement if the relevant trademark passes the
preliminary examination. Within three months after such public announcement, any person may file an opposition against a trademark
that has passed a preliminary examination. The Trademark Office’s decisions on rejection, opposition or cancellation of an
application may be appealed to the Trademark Review and Adjudication Board, whose decision may be further appealed through judicial
proceedings.
If no opposition is filed within three months
after the public announcement period or if the opposition has been overruled, the Trademark Office will approve the registration,
issue a registration certificate and make an announcement, upon which the trademark is registered and will be effective for a renewable
ten-year period, unless otherwise revoked. In the case of a trademark infringement, where the actual loss suffered by the right
holder as a result of the infringement, the profits gained by the infringer from the infringement and the royalties of the registered
trademark concerned are difficult to determine, the people’s court shall render a judgment on awarding damages of up to RMB300.0
million depending on the circumstances of the infringing acts.
Patent
The
NPC adopted the Patent Law of the PRC in 1984, and amended it in 1992, 2000 and 2008. The purpose of the Patent Law is to protect
and encourage invention, foster applications of invention and promote innovations and the development of science and technology.
A patentable invention or utility model must meet three conditions: novelty, inventiveness and practical applicability.
Patents
cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat
diseases, animal and plant breeds or substances obtained by means of nuclear transformation. The Patent Office under the State
Council is responsible for receiving, examining and approving patent applications. A patent is valid for a term of 20 years in
the case of an invention and a term of ten years in the case of a utility model and design, starting from the application date.
A third-party user must obtain consent or a proper license from the patent owner to use the patent except for certain specific
circumstances provided by law. Otherwise, the use will constitute an infringement of the patent rights.
Domain name
As
of December 31, 2016, our PRC subsidiaries had registered 244 domain names, of which 107 were registered in the PRC and 137 were
registered in other countries. On November 5, 2004, the Ministry of Industry and Information Technology promulgated the Measures
for Administration of Domain Names for the Chinese Internet (or the Domain Name Measures, effective on December 20, 2004).
The Domain Name Measures regulate the registration of domain names, such as the first tier domain name “cn”. On May 29,
2012, the China Internet Network Information Center, or the CNNIC, issued the Implementing Rules for Domain Name Registration
setting forth detailed rules for registration of domain names (effective on the promulgation date). On
June 28,
2012, the CNNIC issued the Measures on Domain Name Disputes Resolution (effective on the promulgation date), pursuant to which
the CNNIC can authorize a domain name dispute resolution institution to decide disputes.
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C.
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Organizational Structure
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We commenced our business in 2006, which
was initially focused on providing car services to premium corporate clients. In 2008, we began to provide car rentals to individual
customers. Our company, eHi Car Services Limited (previously known as Prudent Choice International Limited or eHi Auto Services
Limited), was incorporated in the Cayman Islands on August 3, 2007. eHi Car Services Limited is a holding company. Currently
we operate our car rental and car services business through our PRC subsidiaries. For our car rental business, we provide vehicles
through our PRC subsidiaries eHi Rental and eHi
Jiangsu, and their subsidiaries and branches in different cities; and we provide fleet management, information technology support
and other car rental related services through eHi Management, which
is a subsidiary of eHi Rental. For our car services business, we provide vehicles through eHi Rental, eHi Jiangsu and their subsidiaries
and branches, and provide chauffeur services through our PRC subsidiary Shanghai Smart Brand, and its subsidiaries and branches.
In March 2008, eHi Rental was established
in China by two nominee shareholders designated by Mr. Ray Ruiping Zhang to engage in, among other things, car rentals. Also
in March 2008, we established our first wholly foreign owned subsidiary Shuzhi Information Technology (Shanghai) Co., Ltd.,
or Shuzhi, in China. In November 2009, Shuzhi acquired the 94.13% equity interest of eHi Rental, and two nominee shareholders
designated by Shuzhi acquired the remaining 5.87% equity interest of eHi Rental.
In September 2010, we acquired all the
shares of eHi Auto Services (Hong Kong) Holding Limited, or eHi Hong Kong, a then dormant company incorporated in Hong Kong, and
became its sole shareholder. In January 2011, Shuzhi and eHi Hong Kong completed a share transfer and capital increase of
eHi Rental, upon which eHi Hong Kong acquired the 5.87% equity interest of eHi Rental from the two nominee shareholders. As a
result, eHi Rental was converted into a Sino foreign joint venture enterprise. The registered capital of eHi Rental was increased
several times and reached US$468 million in 2015. eHi Hong Kong and Shuzhi currently hold 94.24% and 5.76% equity interests of
eHi Rental, respectively.
In December 2011, we established our second
wholly foreign owned subsidiary, eHi Jiangsu, in China. eHi Jiangsu is wholly owned by eHi Hong Kong. We have, through eHi Rental
and eHi Jiangsu, established and acquired several subsidiaries in various regions in China to expand the geographic coverage of
our business operations.
In November 2015, we, through eHi Rental,
established a wholly owned subsidiary eHi Management. eHi Management
was incorporated to operate car rental management and related software development business.
In connection with our car services business,
we provide vehicles and chauffeur services through different subsidiaries. We provide vehicles through eHi Rental and eHi Jiangsu
as well as their subsidiaries and branches, and provide chauffeur services through Shanghai Smart Brand, which was established
by Shuzhi in April 2011. Several subsidiaries and branches of Shanghai Smart Brand were also established to provide chauffeur services
in various regions in China.
Our
current major operations are not subject to the ICP license requirements. In March 2014, we entered into a series of contractual
arrangements with our PRC incorporated variable interest entity eHi Information, and its shareholders to further expand our Internet
and mobile services. Such contractual arrangements enable us to exercise effective control over the operations of eHi Information
which resulted in the consolidation of eHi Information by eHi Rental. eHi Information obtained the ICP license from the relevant
telecommunication authorities on September 24, 2014. eHi Information currently does not have any material operation. In January 2015,
we entered into a series of contractual arrangements with our PRC incorporated variable interest entity eHi Car Sharing
and its shareholders. eHi Car Sharing is currently not yet in operation.
In October 2013, we established L&L
Financial Leasing Holding Limited, or L&L, in Hong Kong through eHi Hong Kong, which is a holding company of Shanghai Taihao
Financial Leasing Co., Ltd., or Shanghai Taihao, and Shanghai Taide Financial Leasing Co., Ltd., or Shanghai Taide. Shanghai
Taide was incorporated in the Shanghai Free Trade Zone. Shanghai Taihao and Shanghai Taide are authorized to operate financial
leasing business in China.
In November 2013, we, through Shuzhi, established
a wholly owned subsidiary Shangahi Taihan Trading Co., Ltd., or Shanghai Taihan. Shanghai Taihan was incorporated in the Shanghai
Free Trade Zone to operate sales of vehicles and used vehicles business.
In April 2014, we, through our then-wholly
owned subsidiary, Elite Plus Developments Limited, or Elite Plus, invested US$25 million for a subscription in series B preferred
shares of Travice Inc., which developed and operates the Kuaidi mobile taxi and car hailing service, representing 8.4% of the then
outstanding share capital of Travice Inc. Travice Inc. also issued a warrant to Elite Plus to purchase an additional 4,684,074
series C preferred shares of Travice Inc. In January 2015, the Company waived the warrant and received US$3 million in exchange
for the waiver of the warrant. In February 2015, Travice Inc. was merged with and into Xiaoju Science and Technology Limited,
which developed and operates the Didi mobile taxi and car hailing service. After the completion of such merger, Elite Plus’s
investment in Travice Inc. was exchanged to a minority stake of the surviving company Xiaoju Kuaizhi Inc. In June 2015, we
transferred 100% of our equity interest in Elite Plus to an independent third party for gross proceeds of US$160.9 million.
In November 2014, we completed an initial
public offering of 10,000,000 ADSs at the price of US$12.00 per ADS. Each ADS represents two Class A common shares. On November 18,
2014, our ADSs were listed on the New York Stock Exchange under the symbol “EHIC”. In November 2014, we also issued
5,000,000, 1,666,666 and 1,666,666 Class A common shares to Dongfeng Asset Management Co. Ltd., China Universal Asset Management
Co., Ltd. and Ctrip, respectively, at the price of US$6.00 per share (equivalent to US$12.00 per ADS), in a private placement
concurrent with the initial public offering.
In December 2015, we completed an offering
of US$200 million in aggregate principal amount of senior unsecured notes due 2018. The 2018 Senior Notes were offered by our Cayman
holding company, and all of our offshore subsidiaries eHi Hong Kong, Brave Passion Limited and L&L jointly and severally provided
guarantees.
In
August 2016, we entered into a US$150 million in principal amount syndicated bank facility, or the 2016 Facility.
The
2016 Facility was offered by our Cayman holding company, and our existing and future-established offshore subsidiaries are
required to jointly and several guarantee the facility, subject to certain exceptions. We are also required to maintain a
certain balance of cash deposit in the interest reserve account collateralized in favor of the lenders to cover three-month
payable interests in connection with the 2016 Facility. We shall repay the 2016 Facility in full in three installments,
subject to prepayment.
The following diagram illustrates our principal
corporate structure as of the date of this Form 20-F:
(1)
eHi Information is a variable interest entity incorporated in China and is 50% owned by Mr. Hongtao Han and 50% owned by Mr. Chun
Xie. We effectively control eHi Information through contractual arrangements.
(2)
eHi Car Sharing is a variable interest entity incorporated in China and is 70% owned by Mr. Wen Zhang and 30% owned by Mr. Chengzhu
Wang. We effectively control eHi Car Sharing through contractual arrangements.
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D.
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Property, Plant and Equipment
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Our corporate headquarters are located in
Shanghai, China, where we own a gross floor area of approximately 2,240 square meters and lease an aggregate gross floor area of
approximately 975 square meters, for our general administration as well as to process reservations for our car services and maintain
our proprietary technology platform.
As of December 31, 2016, we directly
operated a total of 3,249 service locations in 216 cities across China. Our lease agreements for office space of our stores generally
have a term of one to three years. All of our service locations have a standardized design, appearance, decoration, color scheme
and display. We select locations for our stores and pick-up points based on criteria including convenient access to transportation
hubs, major office buildings, shopping centers or universities, which we believe have more potential for sustainable and increasing
demand for our services.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial
condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements
and their related notes included in this annual report on Form 20-F. This report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. For more information
regarding forward-looking statements, see “Forward-Looking Statements.” In evaluating our business, you should carefully
consider the information provided under Item 3.D, “Key Information—Risk Factors.” We caution you that our businesses
and financial performance are subject to substantial risks and uncertainties.
Overview
We provide one-stop comprehensive services
to both individual customers as well as corporate and institutional clients. This business model, together with our leading positions
in both China’s car service market and car rental market, enables us to cross-sell to different target customers and capture
complementary and evolving market opportunities.
Our one-stop comprehensive services include the following:
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Car rentals. We provide self-drive car rental services to both individual customers as well as corporate and institutional
clients to meet their travel, leisure, business and ground transportation needs. Our short-term car rentals have a term of less
than one year and are primarily provided to individual customers on an hourly, daily, weekly or monthly basis. Our long-term car
rentals have a term of one year or longer and are primarily provided to corporate and institutional clients. As of December 31,
2016, our car rental fleet included 53,658 vehicles of over 200 models primarily from major automobile manufacturers. In 2016,
we derived approximately 78.9% of our net revenues from car rentals.
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Car services. We provide chauffeured car services primarily to corporate and institutional clients, including many Fortune
500 companies in China. Our car services include routine services such as airport pickup and drop-off, inter-office transfers and
other business transportation needs, as well as event-driven activities such as conventions, promotional tours and special events.
We generally enter into long-term framework agreements with our corporate and institutional clients pursuant to which our vehicles
and chauffeur services are provided by different subsidiaries. With 3,258 vehicles and 2,735 drivers as of December 31, 2016,
our car services were offered by us and our contracted service providers in 190 cities across China, with a focus on first-tier
cities including Beijing, Shanghai, Guangzhou and Shenzhen. In 2016, we derived approximately 21.1% of our net revenues from car
services.
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Factors Affecting Our Results of Operations
We believe that the most significant macro-level factors affecting
our results of operations include:
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health of the global economy and the growth and development
of China’s economy;
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overall growth of China’s car services industry;
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automobile ownership penetration rate and the number of
driver license holders in China;
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increasing demand for leisure travel and shift in lifestyle
in China towards driving as a preferred means of travel;
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growth of transportation infrastructure in China;
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the emergence of alternative transportation service models such as car-hailing, car-sharing, ride-sharing businesses and
innovation of driver-less vehicles services; and
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governmental regulations and measures relating to vehicle
purchase, ownership and usage and tax policies.
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Our results of operations in any given period are more directly
affected by company specific factors, including:
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Fleet utilization.
Our ability to effectively utilize our fleet will have a material effect on our results of operations.
We view our entire vehicle fleet as one pool of assets that are cross-utilizable, and we re-deploy our fleet to complement different
demand cycles. Factors affecting the utilization of our fleet include, among others, our fleet size, the demand for our services,
our pricing, our customer experience, the effective management of our operations through our proprietary technology platform, and
the competitive landscape of car services market in China. In 2014, 2015 and 2016, the fleet utilization rate of our car rental
fleet was 71.8%, 71.4% and 72.4%, respectively.
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Fleet
size and geographic coverage.
Expansion of our fleet size and geographic coverage
is essential to the growth of our business. We had grown our total fleet size from 19,746
vehicles as of December 31, 2014 to 38,070 vehicles as of December 31, 2015 and
further to 56,916 vehicles as of December 31, 2016, and expanded our geographic
coverage from 99 cities as of December 31, 2014 to 151 cities as of December 31, 2015
and further to 216 cities as of December 31, 2016. We intend to continue to expand
our total fleet size, further penetrate our existing markets, and extend our services
to selected new cities which have strong growth potential and are close to our existing
markets, transportation hubs or tourist spots. Our business and results of operations
will depend significantly on our ability to expand fleet size and geographic coverage
in a timely manner.
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Pricing.
We have adopted a dynamic pricing mechanism to determine our rental rates for car
rentals. This mechanism determines a specific vehicle model’s rental rate based
on its purchase price taking into consideration other variables such as pickup/drop-off
time and location, the availability of our vehicles during such period at the location,
prevailing market prices, demand for such vehicle model and the length of rental period.
Operating expenses such as store expenses and other executory costs are not significant
considerations in determining our car rental rates. Our management reviews our rental
rates for car rentals on a regular basis.
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We determine the rates for our car
services based on a number of factors, including vehicle model, service type, the length of rental period, time and location of
pickup and drop-off, and prevailing market prices. Operating expenses such as store expenses and other executory costs are not
significant considerations in determining rates for car services. Our management reviews these rates on a regular basis. Our long-term
framework agreements with our corporate and institutional clients provide for predetermined price ranges and, as a result, our
rates for car services are generally more stable.
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Finance costs.
We use banks and third-party financing companies to finance the procurement of a portion of our fleet.
Also, in 2015 we closed a US$200 million note offering and in August 2016 entered into a US$150 million syndicated loan facility,
to fund our fleet procurement activities, refinance existing debt and provides capital for general corporate purposes. Given our
large fleet size and procurement needs, our operating results could be materially impacted by any failure to obtain proper financing
sources or to properly manage related finance costs.
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Vehicle acquisition and disposition and our ability to control operating expenses.
Vehicle purchases have historically
accounted for, and are expected to continue to account for, most of our capital expenditures. To provide our customers with vehicles
in good condition, we typically hold vehicles in our fleet for three to four years, except for program cars which typically have
a holding period of 12 to 24 months. The difference between the disposal price of a used vehicle and the residual book value of
such vehicle is recorded as a gain or loss under our depreciation expenses. Therefore, our ability to dispose of retired vehicles
at optimal prices will have a material effect on our results of operations.
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In addition, our results of operations
will be impacted by our ability to control other operating expenses, including without limitation vehicle-related depreciation,
payroll-related expenses, vehicle insurance expenses, vehicle repair and maintenance expenses fuel expenses and store expenses.
Our large fleet size provides us economies of scale, enabling us to obtain favorable prices and discounts from key players in the
vehicle supply ecosystem. We also plan to open additional in-house vehicle repair and maintenance centers in cities where our fleet
has achieved economies of scale and additional in-house repair and maintenance centers are expected to be more cost-effective compared
to third-party service providers.
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Ability
to attract and retain customers.
The success of our business hinges on our customer
satisfaction level, which in turn depends on a variety of factors. These factors include,
among others, our ability to (i) consistently provide high-quality customer experience,
(ii) continue to offer comprehensive and complementary services tailored to our
customers’ needs, (iii) maintain good vehicle condition, and (iv) provide
timely and satisfactory after-sales services.
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Seasonality.
We generally experience some effects of seasonality due to increases in leisure travel
activities and decreases in business
travel
activities during the summer season
and public holidays in the PRC such as Chinese New Year, Labor Day, and National Day.
The seasonal impacts on our car rentals and car services may, to some extent, offset
each other. In addition, we typically launch promotions for certain car rentals and car
services in selected cities after major holidays in China. Our revenues may also fluctuate
due to adverse weather conditions, such as snow or rain storms. Seasonal changes in our
revenues do not alter our depreciation and labor costs or certain other expenses, such
as rent and insurance, which are fixed in the short run.
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Key operating metrics
We utilize a set of key operating metrics
which our senior management reviews frequently. The review of these metrics facilitates timely evaluation of the performance of
our business and effective communication of results and key decisions, allowing our business to react promptly to changing customer
demands and market conditions. When evaluating business performance and profitability, the assessment is made on our entire business
as opposed to separate revenue streams. Spending, budgeting and resource allocation decisions are also made taking into account
our entire business.
The following tables set forth our key operating
metrics as of the dates and for the periods indicated:
Period-end
fleet size
(1) (2)
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As of
December 31,
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2014
(1)
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2015
(2)
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|
|
2016
(2)
|
|
Car rentals
|
|
|
18,416
|
|
|
|
35,647
|
|
|
|
53,658
|
|
Car services
|
|
|
1,330
|
|
|
|
2,423
|
|
|
|
3,258
|
|
Total
|
|
|
19,746
|
|
|
|
38,070
|
|
|
|
56,916
|
|
(1)
“Period-end
fleet size” refers to the aggregate number of vehicles in our car rentals and car services fleets as of the last day of a
given period to which we hold legal title, including vehicles that we have written off in accordance with our accounting policy
and vehicles that are currently missing but have not been written off. The period-end fleet size of 2014 included 140 vehicles,
which we had written off from our balance sheet as of December 31, 2014, in accordance with our accounting policy.
(2)
In
2015, we adopted a revised definition of “Period-end fleet size”, which refers to the aggregate number of vehicles
in our car rentals and car services fleets as of the last day of a given period which we hold legal title to and also reflect in
our balance sheet, including vehicles that are currently missing but have not been written off. The period-end fleet size as of
December 31, 2015 excluded 151 vehicles which we had written off from our balance sheet as of December 31, 2015, and
the period-end fleet size as of December 31, 2016 excluded 162 vehicles which we had written off from our balance sheet as
of December 31, 2016, in accordance with our accounting policy.
Car rentals and car services
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Average available fleet size
(1)
|
|
|
14,111
|
|
|
|
26,460
|
|
|
|
38,944
|
|
RevPAC (RMB)
(2)
|
|
|
165
|
|
|
|
150
|
|
|
|
148
|
|
Car rentals
|
|
For the Years Ended
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Average available fleet size
(1)
|
|
|
12,955
|
|
|
|
24,573
|
|
|
|
36,455
|
|
RevPAC (RMB)
(2)
|
|
|
127
|
|
|
|
123
|
|
|
|
125
|
|
Fleet utilization rate (%)
(3)
|
|
|
71.8
|
|
|
|
71.4
|
|
|
|
72.4
|
|
Car services
|
|
For the Years Ended
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Average available fleet size
(1)
|
|
|
1,156
|
|
|
|
1,887
|
|
|
|
2,489
|
|
RevPAC (RMB)
(2)
|
|
|
598
|
|
|
|
508
|
|
|
|
490
|
|
(1)
“Average available fleet size” is calculated by dividing the aggregate number of days in which our fleet was in operation
during a given period by the total number of days during the same period. In determining the size of our fleet in operation, we
include all vehicles in our car rentals and car services fleets except for vehicles that have been written off in accordance with
our accounting policy and vehicles that have not been consistently made available for rent and that we may consider to dispose
of when appropriate opportunities arise.
(2)
“RevPAC” refers to average daily net revenue per available car, which is calculated by dividing the net revenues during
a given period by the aggregate number of days in which our fleet was in operation during the same period.
(3)
“Fleet utilization rate” refers to the aggregate transaction days for our car rental fleet during a given period divided
by the aggregate days our car rental fleet are in operation during the same period. “Transaction days” refer to the
aggregate number of days on which a vehicle in our car rental or car services fleet was on rent during a given period.
There is no industry norm with respect to
the calculations of these operating metrics. As a result, our operating metrics may not be comparable to those used by other industry
participants.
Certain income statement line items
Net revenues
Our net revenues represent our gross revenues
from operations, less business tax, VAT and other related surcharges. The following table sets forth our net revenues for the periods
presented by service type. No single individual customer, corporate or institutional client accounted for more than 5% of our net
revenues in any period presented.
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
RMB
|
|
|
Revenues
|
|
|
RMB
|
|
|
Revenues
|
|
|
RMB
|
|
|
US$
|
|
|
Revenues
|
|
|
|
(in thousands, except percentages)
|
|
Car rentals
|
|
|
598,792
|
|
|
|
70.3
|
%
|
|
|
1,100,579
|
|
|
|
75.9
|
%
|
|
|
1,663,546
|
|
|
|
239,600
|
|
|
|
78.9
|
%
|
Car services
|
|
|
252,373
|
|
|
|
29.7
|
|
|
|
350,051
|
|
|
|
24.1
|
|
|
|
445,398
|
|
|
|
64,151
|
|
|
|
21.1
|
|
Total net revenues
|
|
|
851,165
|
|
|
|
100.0
|
%
|
|
|
1,450,630
|
|
|
|
100.0
|
%
|
|
|
2,108,944
|
|
|
|
303,751
|
|
|
|
100.0
|
%
|
Car rentals
We provide self-drive car rental services
to both individual customers as well as corporate and institutional clients. Our short-term car rentals have a term of less than
one year and are primarily provided to individual customers on an hourly, daily, weekly or monthly basis. A majority of our revenues
derived from short-term car rentals are from our basic car rental service package, the charges for which include an hourly or daily
rental fee, a transaction based handling fee and a basic insurance charge. We also derive a small portion of short-term car rentals
revenues from fees and charges for premium services such as increased insurance coverage, GPS-based navigation device rentals,
charges for inter-city return, and excess mileage charges. Our long-term car rentals have a term of one year or longer and are
primarily provided to corporate and institutional clients at a negotiated rental rate under long-term contracts.
Car services
We provide chauffeured car services primarily
to corporate and institutional clients. We generally enter into long-term framework agreements with our corporate and institutional
clients pursuant to which our vehicles and chauffeur services are provided by different subsidiaries. We usually charge our corporate
and institutional clients for car services a negotiated fixed service fee for a specified trip or for services in a certain period
of time, which include the provision of chauffeur services. In certain circumstances, based on demand from key corporate and institutional
clients, we also cooperate with contracted service providers to provide car services in certain cities where we currently do not
provide car services or the demand for such services exceeds our existing capacity. We recognize the revenues derived from such
contracted service providers on a gross basis and recognize the costs related to them as part of our cost of revenues.
Cost of revenues
Commencing with the fourth quarter of 2015,
we began reporting gross profit as a GAAP measure included in our results of operations in the accompanying consolidated statements
of comprehensive income (loss). This measure is defined, consistent with generally accepted accounting principles, as net
revenues reduced by cost of revenues. We previously reported the caption “vehicle operating expenses”. We have
evaluated the presentation of results of operations and have concluded all relevant costs of revenue are included in “vehicle
operating expenses”. Accordingly, “vehicle operating expenses” have been re-titled “costs of revenue”
for the current period and all historical periods, and gross profit has been presented for the current period and all historical
periods. We plan to continue to present results of operations in this fashion for future periods. We concluded, after considering
that gross profit is used internally by management as a performance measure and provides a meaningful additional performance metric
reflecting our growth, that such measure was relevant for external financial reporting purposes.
The principal components of our cost
of revenues include vehicle-related depreciation, payroll-related expenses, vehicle insurance expenses, fuel expenses, store
expenses, vehicle repair and maintenance expenses as well as car rental expenses. The following table sets forth the
components of our cost of revenues for the periods indicated:
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
US$
|
|
|
% of Net
Revenues
|
|
|
|
(in thousands, except percentages)
|
|
Net revenues
|
|
|
851,165
|
|
|
|
100.0
|
%
|
|
|
1,450,630
|
|
|
|
100.0
|
%
|
|
|
2,108,944
|
|
|
|
303,751
|
|
|
|
100.0
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle-related depreciation
|
|
|
277,336
|
|
|
|
32.6
|
|
|
|
457,479
|
|
|
|
31.5
|
|
|
|
653,347
|
|
|
|
94,102
|
|
|
|
31.0
|
|
Payroll-related expenses
|
|
|
162,965
|
|
|
|
19.1
|
|
|
|
252,015
|
|
|
|
17.4
|
|
|
|
361,630
|
|
|
|
52,085
|
|
|
|
17.1
|
|
Vehicle insurance expenses
|
|
|
72,190
|
|
|
|
8.5
|
|
|
|
116,491
|
|
|
|
8.0
|
|
|
|
113,490
|
|
|
|
16,346
|
|
|
|
5.4
|
|
Fuel expenses
|
|
|
56,236
|
|
|
|
6.6
|
|
|
|
70,019
|
|
|
|
4.8
|
|
|
|
94,508
|
|
|
|
13,612
|
|
|
|
4.5
|
|
Store expenses
|
|
|
48,135
|
|
|
|
5.7
|
|
|
|
76,041
|
|
|
|
5.2
|
|
|
|
102,330
|
|
|
|
14,739
|
|
|
|
4.9
|
|
Vehicle repair and maintenance expenses
|
|
|
45,319
|
|
|
|
5.3
|
|
|
|
64,126
|
|
|
|
4.4
|
|
|
|
77,843
|
|
|
|
11,212
|
|
|
|
3.7
|
|
Car rental expenses
|
|
|
32,237
|
|
|
|
3.8
|
|
|
|
44,274
|
|
|
|
3.1
|
|
|
|
42,405
|
|
|
|
6,107
|
|
|
|
2.0
|
|
Others
|
|
|
24,281
|
|
|
|
2.8
|
|
|
|
57,533
|
|
|
|
4.0
|
|
|
|
69,728
|
|
|
|
10,043
|
|
|
|
3.3
|
|
Total cost of revenues
|
|
|
718,699
|
|
|
|
84.4
|
%
|
|
|
1,137,978
|
|
|
|
78.4
|
%
|
|
|
1,515,281
|
|
|
|
218,246
|
|
|
|
71.9
|
%
|
Vehicle-related
depreciation.
A significant component of our cost of revenues is vehicle-related depreciation. As our fleet continues
to grow, depreciation has become, and will continue to be, a significant portion of our cost of revenues. Our depreciation expenses
are also affected by the following factors, some of which may be beyond our control: (i) our average vehicle and in-car equipment
acquisition cost, (ii) our management’s periodic review of present and estimated future market conditions and their
effect on residual values of our vehicles at the time of disposal, (iii) provision or write-off in connection with our lost
or stolen vehicles, and (iv) any gain or loss resulting from vehicle disposals. Depreciation begins when three criteria are
met: (i) the license plate for the vehicle is obtained, (ii) insurance for the vehicle becomes effective, and (iii) a
GPS-based tracking device is installed on the vehicle, which allows our proprietary technology platform to monitor the location
of the vehicle.
Payroll-related
expenses.
Our payroll-related expenses primarily consist of salaries, social insurance and welfare benefits of our
employees directly involved in vehicle operations. Our full-time employees who were directly involved in vehicle operations
and services increased from 3,901 as of December 31, 2015 to 4,858 as of December 31, 2016, including 2,735 drivers. We
expect the number of our employees to continue to increase along with the expansion of our operations. As overall wages in
China continue to increase, we expect our labor costs to continue to rise in the foreseeable future. We seek to maintain
compensation levels in accordance with prevailing trends in our industry.
Vehicle
insurance expenses.
We purchase motor vehicle damage insurance, third-party liability insurance, compulsory traffic
accident insurance, passenger injury insurance, and other insurance coverage that our management considers adequate to protect
our assets and operations under different situations. If we have a low accident rate of our fleet, we may benefit from the “no-claim
discount” and enjoy lower insurance premiums when purchasing relevant insurance for our fleet.
Fuel
expenses.
We bear the fuel expenses consumed when we provide car services to our corporate and institutional clients.
We also bear the fuel expenses for gasoline in our vehicles when we deliver our rental cars to customers and when we provide vehicle
pick-up and drop-off services to them, as well as the fuel expenses of internal fleet dispatching and repair and maintenance.
Store
expenses.
Our store expenses include rental expenses with respect to our service locations, which include our stores
and pick-up points, depreciation of store equipment and leasehold improvements, and other store related expenses. We typically
enter into lease agreements for our stores with terms of three to five years. The increase in our store expenses primarily resulted
from our continued expansion, and we expect our store expenses will continue to increase as we further expand our nationwide service
network.
Vehicle
repair and maintenance expenses.
Vehicle repair and maintenance expenses are largely a function of our fleet size. As
our fleet size increases, we expect these expenses to increase. Vehicle repair and maintenance expenses are also affected by the
age and model of vehicles. A new vehicle typically incurs less repair and maintenance expenses than an older one. We also expect
that opening more in-house vehicle repair and maintenance centers in cities where we have sizable fleets will help reduce average
repair and maintenance expenses per vehicle.
Car
rental expenses.
Our car rental expenses primarily consist of fees paid to contracted service providers for car services
provided by them to our customers in certain cities where we currently do not provide car services or the demand for such services
exceeds our existing capacity.
Other
expenses.
Other expenses include, among others, tolls, vehicle annual inspection fees and other miscellaneous expenses.
As we continue to expand the scale of our
operations, we expect to gradually benefit from economies of scale and increasing operating efficiency, thereby lowering our cost
of revenues as a percentage of our net revenues.
Selling and marketing expenses
Selling and marketing expenses
consist primarily of advertising and promotion expenses. We have historically promoted our brand and services primarily
through online channels, such as search engines, social network websites and Internet portals. We also utilize offline
advertising channels, such as outdoor advertising. Attributable to our commitment to enhanced customer experience, we have
built a broad and diverse customer base and are increasingly benefiting from word-of-mouth referrals, thereby lowering the
growth rate of our selling and marketing expenses. Selling and marketing expenses also include payroll-related expenses in
connection with our sales and marketing force as well as commission fee paid to sale channels. Other selling and marketing expenses include other miscellaneous fees related to our sales and
promotion activities.
The following table sets forth the key components
of our selling and marketing expenses for the periods indicated:
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
US$
|
|
|
% of Net
Revenues
|
|
|
|
(in thousands, except percentages)
|
|
Net revenues
|
|
|
851,165
|
|
|
|
100.0
|
%
|
|
|
1,450,630
|
|
|
|
100.0
|
%
|
|
|
2,108,944
|
|
|
|
303,751
|
|
|
|
100.0
|
%
|
Selling and marketing expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and promotion expenses
|
|
|
16,105
|
|
|
|
1.9
|
|
|
|
28,947
|
|
|
|
2.0
|
|
|
|
38,968
|
|
|
|
5,613
|
|
|
|
1.8
|
|
Payroll-related expenses
|
|
|
13,566
|
|
|
|
1.6
|
|
|
|
16,116
|
|
|
|
1.1
|
|
|
|
21,871
|
|
|
|
3,150
|
|
|
|
1.0
|
|
Commission fee
|
|
|
1,619
|
|
|
|
0.2
|
|
|
|
16,616
|
|
|
|
1.1
|
|
|
|
29,852
|
|
|
|
4,300
|
|
|
|
1.4
|
|
Others
|
|
|
4,026
|
|
|
|
0.4
|
|
|
|
3,380
|
|
|
|
0.3
|
|
|
|
6,497
|
|
|
|
935
|
|
|
|
0.3
|
|
Total selling and marketing expenses
|
|
|
35,316
|
|
|
|
4.1
|
%
|
|
|
65,059
|
|
|
|
4.5
|
%
|
|
|
97,188
|
|
|
|
13,998
|
|
|
|
4.6
|
%
|
General and administrative expenses
General and administrative expenses
consist primarily of (i) payroll-related expenses relating to our administrative and management functions,
(ii) share-based compensation expenses, (iii) professional services fees paid to external
advisers, (iv) office rental expenses for our headquarters, (v) bank charges related to service fees charged by
payment agencies and banks in connection with payments to us made by our customers, (vi) travel expenses for business
trips, (vii) depreciation expenses, and (viii) other administrative expenses.
The increases in our general and administrative
expenses from 2014 to 2016 primarily reflected our business expansion and share-based compensation charges associated with options
and restricted shares. We also recorded significant external professional services fees in 2014, 2015 and 2016 in connection with
our financing activities. We expect our general and administrative expenses to continue to increase in absolute amounts as our
business expands and as we become a public company resulting in significant reporting and compliance costs. We believe our facilities
and proprietary technology platform enable us to support a substantial further increase in net revenues without causing a proportionate
increase in our general and administrative expenses, and as a result, we expect our general and administrative expenses as a percentage
of our net revenues to decline in the long run as we grow our business.
The following table sets forth the key components
of our general and administrative expenses for the periods indicated:
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
US$
|
|
|
% of Net
Revenues
|
|
|
|
(in thousands, except percentages )
|
|
Net revenues
|
|
|
851,165
|
|
|
|
100.0
|
%
|
|
|
1,450,630
|
|
|
|
100.0
|
%
|
|
|
2,108,944
|
|
|
|
303,751
|
|
|
|
100.0
|
%
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll-related expenses
|
|
|
66,338
|
|
|
|
7.8
|
|
|
|
89,955
|
|
|
|
6.2
|
|
|
|
108,993
|
|
|
|
15,698
|
|
|
|
5.1
|
|
Share-based compensation
|
|
|
12,058
|
|
|
|
1.4
|
|
|
|
12,727
|
|
|
|
0.9
|
|
|
|
14,800
|
|
|
|
2,131
|
|
|
|
0.7
|
|
Professional fees
|
|
|
10,693
|
|
|
|
1.3
|
|
|
|
20,223
|
|
|
|
1.4
|
|
|
|
24,977
|
|
|
|
3,597
|
|
|
|
1.2
|
|
Office rental expenses
|
|
|
7,940
|
|
|
|
0.9
|
|
|
|
13,215
|
|
|
|
0.9
|
|
|
|
16,030
|
|
|
|
2,309
|
|
|
|
0.8
|
|
Bank charge
|
|
|
7,153
|
|
|
|
0.8
|
|
|
|
10,255
|
|
|
|
0.7
|
|
|
|
12,174
|
|
|
|
1,753
|
|
|
|
0.6
|
|
Travel expense
|
|
|
4,858
|
|
|
|
0.6
|
|
|
|
13,017
|
|
|
|
0.9
|
|
|
|
13,957
|
|
|
|
2,010
|
|
|
|
0.7
|
|
Depreciation expense
|
|
|
2,156
|
|
|
|
0.3
|
|
|
|
1,790
|
|
|
|
0.1
|
|
|
|
2,475
|
|
|
|
357
|
|
|
|
0.1
|
|
Others
|
|
|
20,929
|
|
|
|
2.4
|
|
|
|
22,367
|
|
|
|
1.6
|
|
|
|
58,532
|
|
|
|
8,431
|
|
|
|
2.7
|
|
Total general and administrative expenses
|
|
|
132,125
|
|
|
|
15.5
|
%
|
|
|
183,549
|
|
|
|
12.7
|
%
|
|
|
251,938
|
|
|
|
36,286
|
|
|
|
11.9
|
%
|
Other operating income
Other operating income relates primarily
to government grants and subsidies that we receive from various level of local governments, including the financial subsidies in
relation to the VAT Pilot Program. We recognize such grants and subsidies on a cash basis. Government grants and subsidies are
granted from time to time at the discretion of the relevant government authorities. These grants and subsidies are granted for
general corporate purposes and to support our ongoing operations in the region.
Share-based compensation expenses
We recognize share-based compensation based
on the grant date fair value of equity awards, with compensation expense recognized over the period in which the grantee is required
to provide services to our company in exchange for the equity award. Share-based compensation expense is classified in the consolidated
statements of comprehensive income (loss) based upon the job function of the grantee. We recognized share-based compensation expenses
related to restricted shares or share options granted to certain directors, officers and employees for their services to us in
the amount of RMB12.7 million, RMB14.0 million and RMB16.0 million (US$2.3 million) in 2014, 2015 and 2016, respectively.
Taxation
Cayman Islands
We are incorporated in the Cayman Islands.
Under the current laws of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments
are not subject to withholding tax in the Cayman Islands.
Hong Kong
Our
wholly owned Hong Kong subsidiaries, eHi Hong Kong and L&L, are subject to Hong Kong profit tax on their activities
conducted
in Hong Kong. No provision for Hong Kong profits tax has been made in the consolidated financial statements as eHi Hong Kong and
L&L had no assessable income in 2014, 2015 and 2016. Dividends from our Hong Kong subsidiaries to us are exempt from withholding
tax.
PRC
Prior to the effective date of the EIT Law
on January 1, 2008, enterprises in China were generally subject to an enterprise income tax at a statutory rate of 33% unless
they qualified for certain preferential treatment. Effective as of January 1, 2008, the EIT Law applies a uniform enterprise
income tax rate of 25% to all domestic enterprises and foreign-invested enterprises and grants tax incentives for qualified enterprises.
Therefore, unless otherwise specified, all of our PRC subsidiaries transitioned from an income tax rate of 33% to 25%, effective
January 1, 2008. The EIT Law and its Implementing Rules also permit qualified small-scale enterprises with low profit
margins to enjoy a reduced 20% enterprise income tax rate. On November 29, 2011, Circular 117 further provided that if a qualified
small-scale enterprise with low profit margins has an annual taxable income of not more than RMB60,000, then 50% of its taxable
income can be exempted from enterprise income tax until December 31, 2015, further reducing the effective enterprise income
tax rate to 10% until then.
In addition, the EIT Law treats enterprises
established outside of China that have “de facto management bodies” located in China as PRC resident enterprises for
tax purposes. Under the EIT Law and its Implementing Rules, a “de facto management body” is defined as a body that
has material and overall management and control over the manufacturing and business operations, personnel and human resources,
finances and other assets of an enterprise. In addition, Circular 82 provides that certain Chinese-invested enterprises controlled
by PRC enterprises or PRC enterprise groups and established outside of China will be classified as resident enterprises only if
all the following items are located or resident in China: (i) senior management personnel and departments that are responsible
for daily production, operation and management; financial and personnel decision making bodies; (ii) key properties, accounting
books, company seal, and minutes of board meetings and shareholders’ meetings; and (iii) half or more of the senior management
or directors with voting rights. Circular 82 also clarified that dividends and other income paid by such resident enterprises will
be considered as PRC sourced income and be subject to PRC enterprise income tax. In January 2014, the SAT further issued an amendment
to Circular 82 delegating the authority to its provincial branches to determine whether a Chinese-invested established outside
China should be considered a PRC resident enterprise. We have not been informed by any PRC tax authorities that we or any of our
offshore subsidiaries are treated as a resident enterprise for PRC tax purposes as of the date of this annual report. However,
PRC tax authorities could make such a determination in the future, and if considered a resident enterprise for PRC tax purposes,
our company would be subject to the PRC enterprise income tax on our global income.
Since January 1, 2012, the MOF and
the SAT have started to implement the VAT Pilot Program, providing that companies which are classified by Shanghai’s local
tax authorities as in transportation or certain modern service sectors are required to pay VAT, instead of business tax. Since
August 1, 2012, the VAT Pilot Program has been expanded to and implemented in other regions, including Beijing, Tianjin, Jiangsu,
Zhejiang, Anhui, Fujian, Hubei and Guangdong. Since August 1, 2013, the VAT Pilot Program has been expanded nationwide. On
March 23, 2016, the Ministry of Finance and the SAT jointly issued the Notice on Comprehensive Implementation of the Pilot Program
for Imposition of Value-Added Tax to Replace Business Tax, pursuant to which the VAT was implemented comprehensively across the
country and extended to all industries, effective from May 1, 2016. As a result of the VAT, in general, we are subject
to a 17% VAT for car rental services, an 11% VAT for designated driving services and a 6% VAT for qualified management services,
respectively.
Critical accounting policies
We prepare our consolidated financial statements
in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect: (i) the reported
amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period
and (iii) the reported amounts of revenue and expenses during each reporting period. We evaluate these estimates and assumptions
based on historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the
future based on available information and reasonable assumptions, which together form a basis for making judgments about matters
not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process,
actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others
in their application. When reviewing our financial statements, you should consider (i) our selection of critical accounting
policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity
of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding
of our financial statements as their application places significant demands on the judgment of our management.
Revenue recognition
We provide car rentals and car services
to our customers. Revenues are primarily comprised of vehicle rental fees and insurance charges, which are recognized over the
rental period. Revenue from the sale of gasoline is recognized when the vehicle is returned and is based on the actual volume of
gasoline consumed or a contracted fee paid by the customer. Payments for our services from individual customers are generally collected
in advance and such amounts received are recorded as advances from customers on the consolidated balance sheets, and are recognized
as revenue when services are rendered and revenue recognition criteria are met. For corporate and institutional clients who are
on credit terms, the initial credit evaluation is conducted before trade credit is extended, and revenue is recognized when collectability
is reasonably assured, services are rendered and all other revenue recognition criteria are met.
Based on demand from our corporate and institutional
clients, we engage contracted service providers in offering car services to our customers where we currently do not provide such
services in certain cities or the demand for such services exceeds our existing capacity. The end customers sign service contracts
directly with us in such arrangements and we are the party who is responsible for customers’ acceptance for services rendered.
In case of customer disputes, we resolve customer complaints and are solely responsible for refunding customers their payments.
Therefore, we are considered the primary obligor. We also determine the service fee and bear the credit risk. As a result, we recognize
this type of revenue on a gross basis.
In the consolidated statements of comprehensive
income (loss), revenues are presented net of business tax, VAT and other related surcharges. Cost of revenues associated with car
rentals and car services have not been presented separately as we cannot reasonably and reliably estimate and allocate expenses
to each of the revenue streams.
Customer loyalty program
We established our customer loyalty program,
eHi loyalty program, in 2008. Our registered members who have used our car rental services could join this program and earn loyalty
membership points upon eligible purchases, and such points can be redeemed for free rental periods, mileage upgrades, and other
free gifts. We account for the customer loyalty program using the incremental cost method to estimate the costs associated with
the future obligation to our customers, and record such costs as selling and marketing expenses in the consolidated statements
of comprehensive income (loss). Unredeemed membership points are recorded in accrued expenses and other current liabilities in
the consolidated balance sheets. We adjust the liability associated with our customer loyalty program based on our estimate of
future redemption of membership points prior to their expiration, which is three calendar years from the day the membership points
are awarded. Our estimate of the rate of future redemptions of membership points is based primarily upon our actual historical
redemptions.
Allowance for doubtful accounts
We
perform ongoing credit evaluation, and provide for an allowance for doubtful accounts for estimated losses resulting from the inability
or unwillingness of our customers to make required payments. We review our allowance for doubtful accounts
quarterly by
assessing individual accounts receivable over a specific aging and amount. Delinquent account balances are written off when we
have determined that the likelihood of collection is remote.
Investments
For investments where we do not have a controlling
financial interest, we evaluate if they are investments in debt and equity securities and if they provide us with the ability to
exercise significant influence over the operating and financial policies of the investees. Investments in debt and equity securities
are classified into one of three categories: (i) “held to maturity” which are reported at amortized cost; (ii) “trading
securities” which are reported at fair value with unrealized holding gains and losses recorded in earnings; and (iii) “available
for sale” which are reported at fair value with changes in unrealized gains and losses recorded in other comprehensive income.
The equity method is used for investments where we do not have a controlling financial interest but has the ability to exercise
significant influence over the operating and financial policies of the investee. The cost method is used for investments where
we do not have the ability to exercise significant influence over the operating and financial policies of the investee.
Investments are evaluated for impairment
when facts or circumstances indicate that the fair value of an investment is less than its carrying value. We review several factors
to determine whether a loss is other-than-temporary including, but not limited to, (1) nature of the investment; (2) cause
and duration of the impairment; (3) extent to which fair value is less than cost; (4) current economic and market conditions;
and (5) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Property and equipment, net
Property and equipment is stated at cost,
less accumulated depreciation and impairment. Depreciation of property and equipment is recorded on a straight-line basis upon
the purchase date, which approximates the in-use date, except for vehicles and leasehold improvements, for which the in-use dates
are tracked and monitored separately.
Vehicles
The initial cost of a vehicle is comprised
of purchase price, plus any costs directly attributable to bringing the vehicle to the location and condition necessary for its
intended use. Depreciation of vehicles is recorded on a straight-line basis, after consideration of expected holding periods and
estimates of residual values. We expect to hold our vehicles generally for a period of approximately three to four years, except
for program cars which typically have a holding period of 12 to 24 months. We estimate residual value of our vehicles which are
not subject to the program car arrangements typically based on the current market price for used vehicles we obtained from used
vehicles dealers or the used car market of similar models. However, the used vehicle market in China is still relatively premature
and the price for similar vehicles could vary in different cities throughout the country depending on local market factors. We
monitor accounting estimates relating to our vehicles on a quarterly basis, including the used vehicle market as well as the selling
price of our vehicles when disposed of to assess the appropriateness of our estimated residual value. Changes made to estimates
such as the estimated useful lives or residual values are reflected in vehicle related depreciation expense on a prospective basis.
In addition, depreciation expenses associated with vehicles subject to the program car arrangements are recorded based on their
respective contractual repurchase prices and holding periods, and are adjusted if the repurchase conditions of such vehicles are
not met or we elect not to sell such vehicles as program cars. A 1% increase or decrease in the estimated residual value of vehicles
which are not subject to the program car arrangements would result in a corresponding decrease or increase in the vehicle related
depreciation expense by RMB17.5 million (US$2.5 million) for the year ended December 31, 2016. Gain or loss on disposal of
vehicles is calculated as the difference between the net sales proceeds and the carrying amount of the vehicle, and such amount
is recognized as an adjustment to the vehicle related depreciation expense as part of cost of revenues in the consolidated statements
of comprehensive income (loss).
Vehicles that are available or unavailable
for immediate rental (such as vehicles under repair and maintenance or vehicles in- transit) are subject to the same accounting
treatment including recording of depreciation expense, impairment assessments, and periodic analysis of estimated useful lives
and salvage value. We monitor activities and utilization of our vehicles on a regular basis via the installed GPS equipment. Vehicles
that cannot be tracked via the installed GPS equipment and cannot be otherwise located are considered missing and/or lost. We have
a dedicated department to locate and recover vehicles in this category and have a history of recovering a majority of such vehicles
within the first six months after the time they could not be located. We write off the net carrying value of the vehicle and record
a loss in our operating results if a vehicle cannot be tracked via the installed GPS system for more than six months and cannot
be otherwise located, as we believe that the chance of recovering a vehicle in such circumstances is remote.
Vehicles held for sale
Vehicles held for sale consist of used vehicles
subject to signed sales agreements awaiting completion of title transfer to the purchaser. When a vehicle is reclassified as held
for sale and transferred from property, plant and equipment, it is not further depreciated and is stated at lower of cost and net
realizable value. Cost is the net book value upon the reclassification of the vehicle. Net realizable value is the selling price
in accordance with the sales agreement less the estimated costs to be incurred upon the completion of title transfer.
Impairment of long-lived assets
We review our long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these
events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the estimated undiscounted
future cash flow is less than the carrying amount of the assets, we recognize an impairment loss equal to the excess of the carrying
value over the fair value of the assets. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable
for the type of asset and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from
pending offers. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates.
Our estimates of cash flow are based on the current regulatory, social and economic climates where we conduct our operations as
well as recent operating information and budgets for our business. These estimates could be negatively impacted by changes in laws
and regulations, economic downturns, or other events affecting our business. If our ongoing estimates of future cash flows are
not met, we may have to record additional impairment charges in future accounting periods.
Government grants and subsidy income
We receive government subsidies in the PRC
from various levels of local governments from time to time which are granted for general corporate purposes and to support our
ongoing operations in the region. We also received financial subsidies in relation to the VAT Pilot Program. These
government subsidies are granted at the discretion of the relevant government authorities and, therefore, such amounts are recorded
as other operating income on the consolidated statements of comprehensive income (loss) in the period when cash is received.
Share-based compensation
We
adopted the 2010 Plan in April 2010, which was amended and restated in December 2010 and August 2014. In
October 2014,
we adopted the 2014 Plan, which become effective immediately after the completion of our initial public offering in November 2014.
These performance incentive plans were adopted to help us recruit and retain key employees, directors or consultants and to motivate
such persons to exert their best efforts on behalf of our company by providing incentives through the granting of share-based awards.
The plan administrator is our board of directors or a committee appointed and determined by the board. Under the 2010 Plan, we
are authorized to issue a maximum of 6,698,470 common shares, and the awards vest upon satisfaction of continuous service, which
varies over a period of three to five years from the date of grant. Under the 2014 Plan, we are authorized to initially reserve
a maximum of 4,000,000 common shares, provided that the shares reserved shall automatically increase on January 1 of each
year during the term of the 2014 Plan, commencing on January 1, 2015, by an amount equal to the lesser of (i) one percent
(1%) of the total number of common shares issued and outstanding on December 31 of the immediately preceding calendar year,
(ii) 1,000,000 common shares or (iii) such number of common shares as may be determined by our board of directors. As
of the date of this annual report, a total of 3,369,500 options and 456,000 issued but not fully vested restricted shares granted
under the 2010 Plan and the 2014 Plan were outstanding.
We recognize share-based compensation on
a straight-line basis based on the grant date fair value of equity awards, with compensation expense recognized over the period
in which the grantee is required to provide services to us in exchange for the equity award. Share-based compensation expense is
classified in the consolidated statements of comprehensive income (loss) based upon the job function of the grantee. We account
for a cancellation or settlement of an equity settled share-based payment award as an acceleration of vesting, and recognize immediately
the amount that otherwise would have been recognized for services received over the remainder of the vesting period.
As the share-based compensation expense
recognized in the consolidated statements of comprehensive income (loss) is based on awards ultimately expected to vest, such amounts
have been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on our historical experience
and revised in subsequent periods if actual forfeitures differ from those estimates.
Results of Operations
The following table sets forth our condensed
consolidated statements of operations by amount and as a percentage of our total net revenues for 2014, 2015 and 2016:
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
% of Net
Revenues
|
|
|
RMB
|
|
|
US$
|
|
|
% of Net
Revenues
|
|
|
|
(in thousands, except percentages)
|
|
Consolidated statements of comprehensive income (loss) data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
851,165
|
|
|
|
100.0
|
%
|
|
|
1,450,630
|
|
|
|
100.0
|
%
|
|
|
2,108,944
|
|
|
|
303,751
|
|
|
|
100.0
|
%
|
Cost of revenues
(1)
|
|
|
(718,699
|
)
|
|
|
(84.4
|
)
|
|
|
(1,137,978
|
)
|
|
|
(78.4
|
)
|
|
|
(1,515,281
|
)
|
|
|
(218,246
|
)
|
|
|
(71.9
|
)
|
Gross profit
|
|
|
132,466
|
|
|
|
15.6
|
|
|
|
312,652
|
|
|
|
21.6
|
|
|
|
593,663
|
|
|
|
85,505
|
|
|
|
28.1
|
|
Selling and marketing expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party
|
|
|
(33,721
|
)
|
|
|
(4.0
|
)
|
|
|
(48,869
|
)
|
|
|
(3.4
|
)
|
|
|
(67,789
|
)
|
|
|
(9,764
|
)
|
|
|
(3.2
|
)
|
Related party
|
|
|
(1,595
|
)
|
|
|
(0.2
|
)
|
|
|
(16,190
|
)
|
|
|
(1.1
|
)
|
|
|
(29,399
|
)
|
|
|
(4,234
|
)
|
|
|
(1.4
|
)
|
Total selling and marketing expenses
(1)
|
|
|
(35,316
|
)
|
|
|
(4.2
|
)
|
|
|
(65,059
|
)
|
|
|
(4.5
|
)
|
|
|
(97,188
|
)
|
|
|
(13,998
|
)
|
|
|
(4.6
|
)
|
General and administrative expenses
(1)
|
|
|
(132,125
|
)
|
|
|
(15.5
|
)
|
|
|
(183,549
|
)
|
|
|
(12.7
|
)
|
|
|
(251,938
|
)
|
|
|
(36,286
|
)
|
|
|
(11.9
|
)
|
Other operating income
|
|
|
17,122
|
|
|
|
2.0
|
|
|
|
10,764
|
|
|
|
0.7
|
|
|
|
10,310
|
|
|
|
1,485
|
|
|
|
0.5
|
|
Total operating expenses
|
|
|
(150,319
|
)
|
|
|
(17.7
|
)
|
|
|
(237,844
|
)
|
|
|
(16.5
|
)
|
|
|
(338,816
|
)
|
|
|
(48,799
|
)
|
|
|
(16.1
|
)
|
Income (loss) from operations
|
|
|
(17,853
|
)
|
|
|
(2.1
|
)
|
|
|
74,808
|
|
|
|
5.1
|
|
|
|
254,847
|
|
|
|
36,706
|
|
|
|
12.1
|
|
Interest income
|
|
|
4,397
|
|
|
|
0.5
|
|
|
|
2,653
|
|
|
|
0.2
|
|
|
|
8,414
|
|
|
|
1,212
|
|
|
|
0.4
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party
|
|
|
(76,938
|
)
|
|
|
(9.0
|
)
|
|
|
(109,566
|
)
|
|
|
(7.6
|
)
|
|
|
(206,425
|
)
|
|
|
(29,731
|
)
|
|
|
(9.8
|
)
|
Related party
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,203
|
)
|
|
|
(1.0
|
)
|
|
|
(18,534
|
)
|
|
|
(2,670
|
)
|
|
|
(0.9
|
)
|
Total interest expense:
|
|
|
(76,938
|
)
|
|
|
(9.0
|
)
|
|
|
(123,769
|
)
|
|
|
(8.6
|
)
|
|
|
(224,959
|
)
|
|
|
(32,401
|
)
|
|
|
(10.7
|
)
|
Gain from waiver of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
16,870
|
|
|
|
1.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gain from sale of cost method investment
|
|
|
—
|
|
|
|
—
|
|
|
|
803,060
|
|
|
|
55.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other income (expense), net
|
|
|
(840
|
)
|
|
|
(0.1
|
)
|
|
|
10,205
|
|
|
|
0.7
|
|
|
|
1,444
|
|
|
|
208
|
|
|
|
0.1
|
|
Income (loss) before income taxes
|
|
|
(91,234
|
)
|
|
|
(10.7
|
)
|
|
|
783,827
|
|
|
|
54.0
|
|
|
|
39,746
|
|
|
|
5,725
|
|
|
|
1.9
|
|
Provision for income taxes
|
|
|
(1,912
|
)
|
|
|
(0.2
|
)
|
|
|
(87,488
|
)
|
|
|
(6.0
|
)
|
|
|
(6,611
|
)
|
|
|
(952
|
)
|
|
|
(0.3
|
)
|
Net income (loss)
|
|
|
(93,145
|
)
|
|
|
(10.9
|
)
|
|
|
696,339
|
|
|
|
48.0
|
|
|
|
33,135
|
|
|
|
4,773
|
|
|
|
1.6
|
|
(1)
Include share-based compensation charges of RMB12.7 million, RMB14.0 million and RMB16.0 million (US$2.3 million) in 2014,
2015 and 2016, respectively, allocated as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Cost of revenues
|
|
|
(134
|
)
|
|
|
(362
|
)
|
|
|
(840
|
)
|
|
|
(121
|
)
|
Selling and marketing expense
|
|
|
(490
|
)
|
|
|
(894
|
)
|
|
|
(401
|
)
|
|
|
(58
|
)
|
General and administrative expenses
|
|
|
(12,057
|
)
|
|
|
(12,727
|
)
|
|
|
(14,800
|
)
|
|
|
(2,131
|
)
|
Total share-based compensation expense
|
|
|
(12,681
|
)
|
|
|
(13,983
|
)
|
|
|
(16,041
|
)
|
|
|
(2,310
|
)
|
Year ended December 31, 2016 compared to year ended
December 31, 2015
Net revenues
Our total net revenues increased by
RMB658.3 million, or 45.4%, from RMB1,450.6 million in 2015 to RMB2,108.9 million (US$303.8 million) in 2016, primarily due
to our increased fleet size, geographic coverage and increased demand from new and existing customers.
Car
rentals.
Our net revenues from car rentals increased by RMB563.0 million, or 51.2%, from RMB1,100.6 million in 2015
to RMB1,663.5 million (US$239.6 million) in 2016, primarily as a result of a 48.4% increase in our growing average available fleet
size for car rentals from 24,573 vehicles in 2015 to 36,455 vehicles in 2016 in response to customer demand. RevPAC for car rentals
increased from RMB123 in 2015 to RMB125 in 2016, primarily due to the vehicle mix of our operating fleet in 2016 which consisted
of more vehicle models with higher rentals. Our fleet utilization rate increased slightly during these periods from 71.4% in 2015
to 72.4% in 2016. In 2016, our net revenues
from car rentals accounted for 78.9% of our total net revenues, representing an increase from 75.9% of our total net revenues in
2015.
Car
services.
Our net revenues from car services increased by 95.3 million, or 27.2%, from RMB350.1 million in 2015 to RMB445.4
million (US$64.2 million) in 2016, primarily as a result of an increase in our average daily rental fleet for car services from
1,887 in 2015 to 2,489 in 2016, in response to increased demands from our new and existing customers for car services. RevPAC for
car services decreased from RMB508 in 2015 to RMB490 in 2016, as we provided more car services to individual customers in 2016,
which generally used economic car models with associated lower market rates compared to car models utilized when we provide car
services to traditional corporate and institutional clients.
Cost of revenues (formerly “vehicle operating expenses”)
Commencing with the fourth quarter of 2015,
we began reporting gross profit as a GAAP measure included in our results of operations. This measure is defined, consistent
with generally accepted accounting principles, as net revenues reduced by cost of revenues. We previously reported the caption
“vehicle operating expenses”. We have evaluated our presentation of results of operations and have concluded
all relevant costs of revenue are included in “vehicle operating expenses”. Accordingly, “vehicle operating
expenses” have been re-titled “costs of revenue” for the current period and all historical periods, and gross
profit has been presented for the current period and all historical periods. We plan to continue to present our results of operations
in this fashion for future periods. We concluded, after considering that gross profit is used internally by management as a performance
measure and provides a meaningful additional performance metric reflecting our growth, that such measure was relevant for external
financial reporting purposes.
Our
cost of revenues increased by RMB377.3 million, or 33.2%, from RMB1,138.0 million in 2015 to RMB1,515.3 million (US$218.2
million)
in 2016. The increase in our cost of revenues was primarily due to (i) an increase in vehicle-related
depreciation expenses of RMB195.9 million; (ii) an increase in payroll-related expenses of RMB109.6 million, as we
increased our headcount to support our business expansion; and (iii) an increase in store expenses of RMB26.3 million,
as we expanded our services locations.
In 2016, we disposed of 4,775 used vehicles,
and signed sales contracts for 1,890 used vehicles pending title transfer. We recorded a disposal gain of RMB1.8 million (US$0.3
million) in aggregate for these 6,665 vehicles. In 2015, we disposed of 4,140 vehicles and recorded a loss of RMB5.1 million. These
amounts were included in vehicle related depreciation expenses in 2015 and 2016, respectively.
Gross profit
Our gross profit increased by RMB281.0 million,
or 89.9%, from RMB312.7 million in 2015 to RMB593.7 million (US$85.5 million) in 2016. Gross profit margin for 2016 was 28.1%,
as compared to 21.6% for 2015. The gross profit margin improvement from 2015 to 2016 was primarily attributable to a percentage decrease of vehicle insurance expenses in terms of net revenues, as a result of economies
of scale; and to a lesser extent, attributable to certain percentage decrease of car rental expenses and vehicle repair and
maintenance expenses in terms of net revenues, due to certain cost control measures to enhance our operating efficiency.
Selling and marketing expenses
Our
total selling and marketing expenses increased by RMB32.1 million, or 49.4%, from RMB65.1million in 2015 to RMB97.2 million (US$14.0
million) in 2016.
This increase was primarily due to a RMB13.2 million increase in commissions paid to sales channels and
a RMB10.0 million increase in expenses regarding our advertising and promotion activities in 2016.
Among the total selling and marketing expenses,
our related party selling and marketing expenses increased from RMB16.2 million in 2015 to RMB29.4 million (US$4.2 million) in
2016. The increase was primarily because we expanded and promoted our car services to a business-to-consumer model through
Ctrip’s channels.
General and administrative expenses
Our general and administrative expenses
increased by RMB68.4 million, or 37.3%, from RMB183.5 million in 2015 to RMB251.9 million (US$36.3 million) in 2016, primarily
due to a RMB19.0 million increase in employee-related costs such as salaries and welfare expenses as a result of increased headcount
for our expansion, as well as a foreign exchange loss in 2016 compared with a foreign exchange gain in 2015.
Other operating income
We recorded other operating income of RMB10.8
million and RMB10.3 million (US$1.5 million) in 2015 and 2016, respectively, which primarily consisted of government grants and
subsidies we received from various levels of local governments in the respective years. See “—Certain income statement
line items—Other operating income.”
Interest expense
Our total interest expense increased by
RMB101.2 million, or 81.8%, from RMB123.8 million in 2015 to RMB225.0 million (US$32.4 million) in 2016. The increase was primarily
due to a RMB106.8 million interest expense increase incurred in connection with our US$200 million senior unsecured notes issued
in December 2015.
Among the total interest expense,
our related party interest expenses increased from RMB14.2 million in 2015 to RMB18.5 million (US$2.7 million) in 2016, as
a result of a RMB300 million loan extended to us in April 2015 by our strategic partner Ctrip. In October 2016, we voluntarily repaid
RMB200 million to Ctrip before the due date, and only RMB100 million loan remained outstanding as of
December 31, 2016.
Other income (expense), net
We
recorded other income of RMB10.2 million and RMB1.4 million (US$
0.2 million) in 2015 and 2016, respectively. Our other income in
2016 primarily consisted of a RMB1.0 million (US$0.1 million) tax refund.
Provision for income taxes
We made provisions for income taxes
of RMB87.5 million and RMB6.6 million (US$1.0 million) in 2015 and 2016, respectively. Provision for income taxes made in
2016 was primarily because we recorded net income of certain PRC subsidiaries in 2016, and such provision was assessed primarily on a 25% enterprise income tax rate for our PRC operating subsidiaries. Provision for income taxes made in 2015
was primarily due to a 10% PRC tax assessed on the one-time gain from our sale of our cost method investment.
Net income
We
recorded a net income of RMB696.3 million in 2015 (including a net gain of RMB736.8 million related to sales of investment
assets after transaction costs and tax provision), and recorded a net income of RMB
33.1 million (US$4.8 million) in
2016.
Year ended December 31, 2015 compared to year ended
December 31, 2014
Net revenues
Our total net revenues increased by RMB599.4
million, or 70.4%, from RMB851.2 million in 2014 to RMB1,450.6 million (US$223.9 million) in 2015, primarily due to our increased
fleet size and increased demand from new and existing customers.
Car
rentals.
Our net revenues from car rentals increased by RMB501.8 million, or 83.8%, from RMB598.8 million in 2014 to
RMB1,100.6 million (US$169.9 million) in 2015, primarily as a result of an 89.7% increase in our average available fleet size for
car rentals from 12,955 vehicles in 2014 to 24,573 vehicles in 2015 in response to customer demand. RevPAC for car rentals decreased
from RMB127 in 2014 to RMB123 in 2015, primarily due to the rapid growth of our operating fleet size in 2015. Our fleet utilization
rate was relatively stable during these periods, being 71.8% in 2014 and 71.4% in 2015, respectively. In 2015, our net revenues from car rentals accounted for 75.9% of our total
net revenues, representing an increase from 70.3% of our total net revenues in 2014.
Car
services.
Our net revenues from car services increased by RMB97.7 million, or 38.7%, from RMB252.4 million in 2014 to
RMB350.1 million (US$54.0 million) in 2015, primarily as a result of an increase in our average daily rental fleet for car services
from 1,156 in 2014 to 1,887 in 2015, in response to increased demands from our new and existing customers for car services. RevPAC
for car services decreased from RMB598 in 2014 to RMB508 in 2015, as we started to provide car services to individual customers
in 2015, which generally had a lower market rate than the services we provided to traditional corporate and institutional clients.
Cost of revenues (formerly “vehicle operating expenses”)
Our
cost of revenues increased by RMB419.3 million, or 58.3%, from RMB718.7 million in 2014 to RMB1,138.0 million (US$175.7 million)
in 2015. The increase in our cost of revenues was primarily due to (i) an increase in vehicle-related depreciation of RMB180.1
million; (ii) an increase in payroll-related expenses of RMB89.0 million, as we increased our headcount to support our business
expansion; and (iii) an increase in vehicle insurance expenses of RMB44.3 million, which increased as our fleet grew.
In 2015, we disposed of 4,140 used vehicles,
and signed sales contracts for 907 used vehicles pending title transfer. We recorded a loss of RMB5.1 million (US$0.8 million)
in aggregate for these 5,047 vehicles. In 2014, we disposed of 2,369 vehicles and recorded a loss of RMB0.5 million. Such losses
were included in vehicle related depreciation expense in 2014 and 2015, respectively.
Gross profit
Our gross profit increased by RMB180.2 million,
or 136.0%, from RMB132.5 million in 2014 to RMB312.7 million (US$48.3 million) in 2015. Gross profit margin for 2015 was 21.6%,
as compared to 15.6% for 2014. The gross profit margin improvement from 2014 to 2015 was primarily attributable to certain percentage
decreases of payroll-related expenses and gasoline expenses in terms of net revenues, as a result of economies of scale and operating
efficiency as our fleet grew in 2015; and to a lesser extent, attributable to a percentage decrease of vehicle-related depreciation
in terms of net revenues, as the number of our program cars increased in 2015. Program cars generally have lower depreciation expense
than vehicles with the same model as they are subject to a guaranteed repurchase price.
Selling and marketing expenses
Our
total selling and marketing expenses increased by RMB29.8 million, or 84.4%, from RMB35.3 million in 2014 to RMB65.1 million (US$10.0
million) in 2015.
This increase was primarily due to a RMB15.0 million increase in commissions paid to sales channels and
a RMB12.8 million increase in expenses regarding our advertising and promotion activities.
Among the total selling and marketing expenses,
our related party selling and marketing expenses increased from RMB1.6 million in 2014 to RMB16.2 million (US$2.5 million) in 2015.
The increase was primarily because we started to expand and promote our car services to a business-to-consumer model through Ctrip’s
channels since December 2014.
General and administrative expenses
Our general and administrative expenses
increased by RMB51.4 million, or 38.9%, from RMB132.1 million in 2014 to RMB183.5 million (US$28.3 million) in 2014, primarily
due to a RMB23.6 million increase in employee-related costs such as salaries and welfare expenses, as well as a RMB10.2 million
increase in external professional services fees.
Other operating income
We recorded other operating income of RMB17.1
million and RMB10.8 million (US$1.7 million) in 2014 and 2015, respectively, which primarily consisted of government grants and
subsidies we received from various levels of local governments in the respective years. See “—Certain income statement
line items—Other operating income.”
Interest expense
Our total interest expense increased by
RMB46.9 million, or 61.0%, from RMB76.9 million in 2014 to RMB123.8 million (US$19.1 million) in 2015. The increase was primarily
due to a RMB40.0 million increase in interest expense related to loans borrowed from banks, third party financing companies and
a related party, as well as a RMB6.9 million interest expense incurred in connection with our note offering in December 2015.
Among the total interest expense, our related
party interest expenses increased from nil in 2014 to RMB14.2 million (US$2.2 million) in 2015, as a result of a loan extended
to us by our strategic partner Ctrip. In April 2015,
we borrowed RMB300 million from Ctrip via an entrusted bank loan. This loan has a term of three years and bears interest at a rate
of 6.9% per annum.
Gains from waiver of warrants and the sale of a cost method
investment
In April 2014, we acquired series B
preferred shares of Travice Inc. through our formerly wholly owned subsidiary Elite Plus Developments Limited, or Elite Plus. Travice
Inc. was a private company which developed and operates the Kuaidi mobile taxi and car hailing service. The series B preferred
shares acquired represented 8.4% of the then outstanding share capital of Travice Inc. Concurrently, Travice Inc. also issued warrants
to us to purchase an additional 4,684,074 series C preferred shares of Travice Inc. The total consideration given for series B
preferred shares and warrants was RMB154.3 million (US$23.8 million).
On January 27, 2015, we waived our
rights under the warrants and received RMB18.4 million (US$2.8 million) in exchange for the waiver of the warrants. The gain of
RMB16.9 million (US$2.6 million) arising from this transaction was recorded as a gain from waiver of warrants.
In February 2015, Travice Inc. was
merged with and into Xiaoju Science and Technology Limited, which developed and operates the Didi mobile taxi and car hailing service.
After the completion of such merger, our investment in Travice Inc. was exchanged to a minority stake in the surviving company
Xiaoju Kuaizhi Inc.
In June 2015, we entered a definitive agreement,
pursuant to which we transferred our 100% equity interest in Elite Plus to Eagle Legend Global Limited, an independent third party,
for gross proceeds of RMB983.6 million (US$151.8 million). The transaction closed on June 24, 2015. The net gain of RMB803.1
million (US$124.0 million) arising from this transaction after deducting related transaction costs was recorded as a gain from
sale of the cost method investment.
Other income (expense), net
We recorded other expense of RMB0.8 million
in 2014 and recorded other income of RMB10.2 million (US$1.6 million) in 2015. Our other income in 2015 primarily consisted of
a RMB9.9 million (US$1.6 million) reimbursement from the depositary bank for our expenses related to the maintenance of the ADR
program, including annual stock exchange listing fees, legal service fee and our expenses incurred in connection with investor
relations program.
Provision for income taxes
We made provisions for income taxes of RMB1.9
million and RMB87.5 million (US$13.5 million) in 2014 and 2015, respectively. Provision for income taxes made in 2014 was primarily
due to the fact that our operating subsidiaries, eHi Jiangsu and Shanghai Taihao, recorded taxable income in 2014 in accordance
with PRC tax regulations. The significant increase in the provision for income taxes in 2015 was primarily due to a 10% PRC tax
assessed on the one-time gain from our sale of our cost method investment, as discussed in the foregoing section.
Net income (loss)
As a result of the foregoing, we recorded
net income of RMB696.3 million (US$107.5 million) in 2015, as compared to net loss of RMB93.1 million in 2014.
|
B.
|
Liquidity and Capital Resources
|
We
incurred operating losses in 2014, and generated operating income in 2015 and 2016. Our operations and our growth have primarily
been financed by issuances of shares, bank borrowings and credit arrangements with financing entities of automobile manufacturers,
issuance of senior unsecured notes,
sale of investments and most recently our $150 million syndicated bank facility.
We expect self-financing from operating income to be an increasing source of our cash flows in future periods.
As of December 31, 2016, we had RMB786.6
million (US$113.3 million) in cash, cash equivalents and restricted cash, among which RMB196.0 million (US$28.2 million) was denominated
in RMB, RMB590.5 million (US$85.1 million) was denominated in US dollars and RMB52,932 (US$7,624) was denominated in Hong Kong
dollars. We generally transfer cash from our offshore holding companies to PRC operating subsidiaries through: (i) making shareholder
loans to PRC operating subsidiaries, (ii) making additional capital contributions to PRC operating subsidiaries; (iii) extending
domestic loans through PRC operating subsidiaries while providing security interests for such loans through offshore holding companies,
and (iv) transferring cash through cross-border “cash pooling” within our group companies. On the other side, we plan
to transfer cash from PRC operating subsidiaries back to offshore holding companies through: (i) repaying shareholder loans to
offshore holding companies, (ii) paying dividends to offshore holding companies, (iii) extending foreign loans through offshore
holding companies while providing security interests for such loans through PRC operating subsidiaries, and (iv) transferring cash
through cross border “cash pooling” within our group companies. All of such transfers shall be conducted in compliance
with PRC laws, regulations and rules. For examples, “cash pooling” was recently permitted by PRC governments for cross-border
cash transfer, subject to restrictions including (i) such transfers shall only be conducted within group companies, and one of
which shall be incorporated in a PRC free trade zone, and (ii) proceeds from loans or bonds could not be transferred by using “cash
pooling”. For more details regarding restrictions on transferring cash within our corporate structure, please see “Risk
Factors - PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from
using the proceeds from the offerings of any securities to make loans or additional capital contributions to our PRC operating
subsidiaries”, “- Limitations on the ability of our operating subsidiaries to pay dividends or other distributions
to us could have a material adverse effect on our ability to conduct our business”, and “- Government control over
currency conversion may limit our ability to issue dividends to our shareholders in foreign currencies, and may therefore adversely
affect the value of your investment.
As of December 31, 2016, we had an
aggregate of RMB3.7 billion (US$532.1 million) in total debt, including RMB926.2 million (US$133.4 million) outstanding short-term
debt and RMB2,767.8 million (US$398.6 million) outstanding long-term debt. Among the total debt of RMB3.7 billion (US$532.1 million), RMB482.0 million (US$69.4 million) were collateralized
by some of our vehicles and accounts receivable from one of the Company’s wholly-owned subsidiaries. As of December 31,
2016, RMB100.0 million (US$14.4 million) of our outstanding long-term debt represented related party debt provided by our strategic
partner Ctrip via an entrusted bank loan.
On December 8, 2015, we issued the 2018
Senior Notes with an aggregate principal amount of US$200 million, which have a trading market on the Stock Exchange of Hong Kong
Limited. The 2018 Senior Notes bear a fixed interest rate of 7.5% per annum, yielding 7.75%, with interest payable semi-annually
in arrears, and will mature on December 8, 2018 unless previously repurchased in accordance with their terms prior to such date.
The 2018 Senior Notes are general obligations of our Company and are (i) subordinated to secured obligations of our Company, (ii)
senior in right of payment to any existing and future obligations of our Company expressly subordinated in right of payment; (iii)
guaranteed by our offshore subsidiaries eHi Hong Kong, Brave Passion Limited and L&L on a senior basis, subject to certain
limitations, and (iv) effectively subordinated to all existing and future obligations of our non-guarantor subsidiaries. In addition,
under the terms of the 2018 Senior Notes, we are subject to restrictive covenants including, among others, limitations on incurring
additional indebtedness or liens, maintenance of a fixed charge coverage ratio, maintenance of our shareholding structure, limitations
on consolidation, merger and investment, and limitations on asset sales or use of proceeds. As of the date of this annual report,
we have been in continuous compliance with all restrictive covenants under the Indenture in connection with the 2018 Senior Notes.
On August 30, 2016, we issued the 2016
Facility with an aggregate principal amount of US$150 million with a syndicate of banks. Pursuant to the 2016 Facility, 50%
of the proceeds has been used to repay our existing indebtedness, and remaining proceeds will be used for fund capital
expenditures and other general corporate purposes. The 2016 Facility was jointly and severally
guaranteed by our existing and future-established offshore subsidiaries, subject to certain exceptions according to terms
therein. The 2016 Facility bears a floating interest rate of LIBOR plus 3.50% margin per annum. We shall repay the 2016
Facility in three installments, subject to prepayment: (i) on May 31, 2018, 30% of the then outstanding principal
amount; (ii) on November 30, 2018, 30% of the then outstanding principal amount; and (iii) on August 30,
2019, 40% of the then outstanding principal amount. We are also required to maintain a certain balance of cash deposit in the
interest reserve account collateralized in favor of the lenders to cover three-month payable interests in connection with the
2016 Facility. As of December 31, 2016, US$1,547,240 of such required cash deposit was classified as restricted cash on our
consolidated balance sheet.
The following table sets forth a summary
of our net cash flows for the periods indicated:
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
|
|
42,900
|
|
|
|
296,691
|
|
|
|
420,744
|
|
|
|
60,600
|
|
Net cash used in investing activities
|
|
|
(1,561,988
|
)
|
|
|
(991,917
|
)
|
|
|
(3,381,959
|
)
|
|
|
(487,103
|
)
|
Net cash provided by financing activities
|
|
|
1,813,948
|
|
|
|
2,281,227
|
|
|
|
798,299
|
|
|
|
114,979
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
614
|
|
|
|
97,880
|
|
|
|
82,347
|
|
|
|
11,860
|
|
Net increase (decrease) in cash and cash equivalent
|
|
|
295,475
|
|
|
|
1,683,880
|
|
|
|
(2,080,569
|
)
|
|
|
(299,664
|
)
|
Cash and cash equivalents-beginning of year
|
|
|
630,733
|
|
|
|
926,208
|
|
|
|
2,610,088
|
|
|
|
375,931
|
|
Cash and cash equivalents-end of year
|
|
|
926,208
|
|
|
|
2,610,088
|
|
|
|
529,519
|
|
|
|
76,267
|
|
Operating activities
Net cash provided by operating activities
consists primarily of our net income (loss), non-cash adjustments including depreciation and amortization, share-based compensation
expenses as well as one-time gains from sale of cost method investment and waiver of warrants, and changes in operating assets
and liabilities, such as accrued expenses and other current liabilities, accounts receivable, and prepaid expenses and other current
assets.
Net cash provided by operating activities
in the year ended December 31, 2016 was RMB420.7 million (US$60.6 million), primarily attributable to (i) our net income
of RMB33.1 million (US$4.8 million) in 2016, (ii) an add-back of depreciation and amortization expenses of RMB668.0 million
(US$96.2 million), which were non-cash item and primarily related to vehicle-related depreciation, and partially offset by (i) an
increase of RMB251.6 million (US$36.2 million) in prepaid expenses and other assets, primarily related to value-added tax payments
which could be deducted as expenses in the future periods.
Net cash provided by operating activities
in the year ended December 31, 2015 was RMB296.7 million , primarily attributable to (i) our net income of RMB696.3million
in 2015, (ii) an add-back of depreciation and amortization expenses of RMB474.7 million , which were non-cash item and primarily
related to vehicle-related depreciation, and partially offset by (i) one-time gains of RMB820.0 million from sale of investment
assets and waiver of warrants, which were cash flows generated from our investing activities, and (ii) an increase of RMB166.5
million in prepaid expenses and other assets, primarily related to value-added tax payments which could be deducted as expenses
in the future periods.
Net cash provided by operating activities
in the year ended December 31, 2014 was RMB42.9 million, as compared to a net loss of RMB93.1 million. The principal items
accounting for the difference between our net cash provided by operating activities and our net loss included depreciation and
amortization expenses of RMB287.4 million and share-based compensation expenses of RMB12.7 million, partially offset by an increase
in prepaid expenses and other assets of RMB116.4 million, and an increase in accounts receivable of RMB48.9 million.
Investing activities
Our cash used in investing activities is
primarily related to investments in property and equipment, mostly vehicle purchases.
Net cash used in investing activities amounted
to RMB3,382.0 million (US$487.1 million) in the year ended December 31, 2016, primarily attributable to RMB3,687.8 million
(US$531.2 million) associated with purchases of property and equipment, mostly vehicles, as we expanded our fleet size significantly
in 2016, and RMB50.0 million (US$7.2 million) cash paid for loans to a third party, partially offset by RMB410.7 million (US$59.2
million) in proceeds from the disposal of property and equipment, mostly used vehicles.
Net cash used in investing activities amounted
to RMB991.9 million in the year ended December 31, 2015, primarily attributable to RMB2,183.4 million associated with purchases
of property and equipment, mostly vehicles, as we expanded our fleet size significantly in 2015, partially offset by (i) RMB954.4
million in proceeds from sales of investment assets (net of transaction costs), as we transferred our investment in Travice Inc.
in 2015, and (ii) RMB241.8 million in proceeds from the disposal of property and equipment, mostly used vehicles.
Net
cash used in investing activities amounted to RMB1,562.0 million in the year ended December 31, 2014, primarily attributable
to RMB1,327.7 million associated with purchases of property and equipment, mostly vehicles, cash paid for a cost method investment
of RMB153.8 million in connection with our investment in
Travice Inc. and a RMB162.5 million increase in restricted cash,
partially offset by RMB90.3 million proceeds from disposal of property and equipment, mostly used vehicles.
Financing activities
Net
cash provided by financing activities consists primarily of proceeds from note offering, equity financings, and borrowings
from
banks, third-party financing companies and our related party Ctrip. Our financing activities for the periods discussed below were
primarily to fund the expansion of our fleet and service network throughout China.
Net cash provided by financing activities
amounted to RMB798.3 million (US$115.0 million) in the year ended December 31, 2016, primarily attributable to proceeds from
borrowings from third parties of RMB2,142.4 million (US$308.6 million), partially offset by (i) repayment of borrowings from third
parties of RMB1,166.8 million (US$168.0 million) and (ii) repayment of borrowings from a related party of RMB200.0 million (US$28.8
million) during the same period.
Net cash provided by financing activities
amounted to (i) RMB2,281.2 million in the year ended December 31, 2015, primarily attributable to proceeds from issuance
of the 2018 Senior Notes (net of issuance costs) of RMB1,241.3 million, (ii) proceeds from the issuance of Class A common
shares in a private placement to Tiger Fund and SRS Funds (net of issuance costs) of RMB792.9 million, and (iii) proceeds
from borrowings of RMB704.1 million from banks and third-party financing companies and borrowings of RMB300 million from our related
party Ctrip, and partially offset by repayment of borrowings of RMB741.3 million during the same period.
Net cash provided by financing activities
amounted to RMB1,813.9 million in the year ended December 31, 2014, primarily attributable to RMB945.0 million proceeds from
borrowings, RMB644.4 million proceeds from issuance of Class A common shares in our initial public offering, RMB306.9 million
proceeds from issuance of Class A common shares in the private placement concurrently with our initial public offering and
RMB154.3 million proceeds from issuance of additional Series E preferred shares, partially offset by the repayment of borrowings
of RMB286.6 million during the same period.
Capital expenditures
Our capital expenditures are primarily used
for vehicle purchases. Our capital expenditures totaled RMB1,327.7 million, RMB2,183.4 million and RMB3,687.8 million (US$531.2
million) in 2014, 2015 and 2016, respectively. We expect the substantial majority of our capital expenditures in 2017 to relate
to the planned growth of our fleet. We intend to fund our capital expenditures with existing cash balances, cash generated from
our operating activities, and borrowings from banks and third-party financing companies.
Inflation
Inflation in China has not materially impacted
our results of operations in recent years. According to the National Bureau of Statistics of China, the year-over-year increase
in the consumer price index for 2014, 2015 and 2016 was 2.0%,1.4% and 2.0%, respectively. Although we have not been materially
affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future. If inflation
continues to rise, we may experience increases in the wages of our employees as a result of the increasing inflation levels in
China or otherwise. See “Risk Factors—Risks related to our business and industry—If the average salary or statutory
welfare expenses of our employees increase significantly, our profitability maybe materially adversely impacted.”
|
C.
|
Research and Development
|
Not applicable.
Other than as disclosed elsewhere in this
annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1,
2016 to December 31, 2016 that are reasonably likely to have a material adverse effect on our revenues, income, profitability,
liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating
results or financial conditions.
|
E.
|
Off-Balance Sheet Arrangements
|
We have not entered into any financial guarantees
or other commitments to guarantee the payment obligations of third parties. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.
We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or that engages in leasing, hedging or research and development services with us.
|
F.
|
Tabular Disclosure of Contractual Obligations
|
The following table sets forth our contractual obligations,
including interest payable, as of December 31, 2016:
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Within 1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than 5 Years
|
|
|
|
(RMB in thousands)
|
|
Short-term debt
(1)
|
|
|
624,991
|
|
|
|
624,991
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Long-term debt due to third parties
(1)
|
|
|
3,367,274
|
|
|
|
475,313
|
|
|
|
2,891,961
|
|
|
|
—
|
|
|
|
—
|
|
Long-term debt due to a related party
(1)
|
|
|
109,162
|
|
|
|
6,689
|
|
|
|
102,473
|
|
|
|
—
|
|
|
|
—
|
|
Operating leases
|
|
|
74,537
|
|
|
|
40,024
|
|
|
|
27,582
|
|
|
|
5,044
|
|
|
|
1,887
|
|
Purchase commitments
(2)
|
|
|
152,995
|
|
|
|
63,795
|
|
|
|
89,200
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
4,328,959
|
|
|
|
1,210,812
|
|
|
|
3,111,216
|
|
|
|
5,044
|
|
|
|
1,887
|
|
(1)
Amounts
include (i) principal amounts included in short-term borrowings and long-term borrowings on the consolidated balance sheets,
and (ii) estimated interest payments of RMB4.9 million and RMB341.5 million on the outstanding short-term and long-term debt,
respectively, based on the contractual borrowing terms and the respective applicable interest rates.
(2)
Purchase
commitments include vehicle purchase deposits and commitments relate to purchase of rental vehicles and marketing resources.
Our 2018 Senior Notes are in the
aggregate principal amount of US$200 million and will mature on December 8, 2018, unless previously repurchased in accordance
with their terms prior to such date. The Senior 2018 Notes bear interest at a rate of 7.5% per annum, payable semiannually in arrears
on June 8 and November 8 of each year, beginning on June 8, 2016.
Our
2016 Facility is in the aggregate principal amount of US$150 million
and shall be repaid in three installments with
the last installment due on August 30, 2019. The 2016 Facility bears a floating interest rate of LIBOR plus 3.50% margin per
annum and shall be repaid in three installments, subject to prepayment: (i) on May 31, 2018, 30% of the then
outstanding principal amount; (ii) on November 30, 2018, 30% of the then outstanding principal amount; and (iii) on August
30, 2019, 40% of the then outstanding principal amount.
While the table above indicates our contractual
obligations as of December 31, 2016, the actual amounts we are eventually required to pay may be different in the event that
any agreements are renegotiated, cancelled or terminated.
See “Forward-Looking Statements”
on page 3 of this annual report.
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors and Senior Management
|
The following table sets forth certain information
relating to our directors and executive officers as of the date of this annual report. The business address of each of our directors
and executive officers is Unit 12/F, Building No.5, Guosheng Center, 388 Daduhe Road, Shanghai, 200062, the People’s Republic
of China.
Name
|
|
Age
|
|
Position/Title
|
Ray Ruiping Zhang
|
|
53
|
|
Chairman, Chief Executive Officer
|
Greg Stubblefield
|
|
58
|
|
Director
|
James Jianzhang Liang
|
|
47
|
|
Director
|
Qian Miao
|
|
51
|
|
Independent Director
|
Andrew Xuefeng Qian
|
|
54
|
|
Independent Director
|
David Jian Sun
|
|
52
|
|
Independent Director
|
Ronald Meyers
|
|
59
|
|
Independent Director
|
Leo Lihong Cai
|
|
53
|
|
Executive Vice President of Sales and Marketing
|
Colin Chitnim Sung
|
|
51
|
|
Chief Financial Officer
|
Chun Xie
|
|
38
|
|
Chief Information Officer
|
Hongtao Han
|
|
48
|
|
Vice President of Operations
|
Nina Yan Wu
|
|
45
|
|
Director of Human Resource and Training Department
|
Jane Fengjuan Zheng
|
|
34
|
|
Director of Corporate Sales and Business Development
|
Ray
Ruiping Zhang
is our founder, chief executive officer and chairman of our board of directors. Mr. Zhang has served
as our chief executive officer and our director since our inception. Mr. Zhang has over 20 years of experience in vehicle
dispatching and fleet management system integration and implementation. Prior to establishing our company, from September 1990
to April 2002, Mr. Zhang was the co-founder and chief executive officer of Aleph, Inc., which is a leading supplier
of vehicle dispatching and scheduling systems in the United States based in Berkeley, California. Mr. Zhang received his bachelor’s
degree in computer science from Fudan University in 1985, studied in the graduate school of computer science at California State
University, Sacramento from 1985 to 1987, and received his executive MBA degree from China Europe International Business School
in 2005.
Greg
Stubblefield
has served as our director since August, 2016, who was appointed by our board of directors after Mr. William
W. Snyder’s resignation and re-elected by our shareholders at the 2016 annual general meeting of shareholders. Mr. Stubblefield
has served as executive vice president and chief strategy officer of Enterprise Holdings since 2009, during which period he led
Enterprise Holdings’ global business development as well as global sustainability strategy and initiative, including its
car-sharing program, its Alamo and National franchise locations and its marketing & communications organization. Mr. Stubblefield
joined Enterprise Holdings Inc., or Enterprise Holdings, in 1982. He was named president of Alamo and National franchises in 2007
and president of operations California and Hawaii in 2004. Mr. Stubblefield received his bachelor’s degree in social
science from University of California, Berkeley in 1982.
James
Jianzhang Liang
has served as our director since December 2013. Mr. Liang is one of the co-founders of Ctrip.
Mr. Liang is currently the executive chairman of the board of directors of Ctrip. Prior to Ctrip, Mr. Liang held a number
of positions with Oracle Corporation from 1991 to 1999 in the United States and China, including head of the enterprise resource
planning consulting division of Oracle China from 1997 to 1999. Mr. Liang also currently serves as a member of the board of
directors of Tuniu (NASDAQ: TOUR ) and MakeMyTrip (NASDAQ: MMYT).
Mr. Liang received his bachelor’s degree in computer science from Fudan University in 1989, his master’s degree
in computer sciencefrom Georgia Institute of Technology in 1991 and his Ph.D. degree in Economics from Stanford University in 2011.
Qian
Miao
has served as our independent director since April 2008. Mr. Miao is the general manager and a director
of China Network Co., Ltd. From December 1995 to December 2002, Mr. Miao served as a department manager at
Wonders Information Co., Ltd., a listed company in China. From July 1987 to December 1995, Mr. Miao was an
IT engineer and project manager at Shanghai Institute of Computer Software. Mr. Miao completed his postgraduate study in software
engineering from Fudan University in 1987 and received his bachelor’s degree in computer science from Fudan University in
1985.
Andrew
Xuefeng Qian
has served as our independent director since November 2014. Mr. Qian currently serves as the
chairman of New Access Capital, which he founded in 2003. Prior to that, Mr. Qian worked at Softbank China Venture Capital
as a vice president from 2000 to 2003. Prior to joining Softbank China Venture Capital, Mr. Qian worked as a corporate attorney
at Simpson Thacher & Bartlett LLP, Cleary Gottlieb Steen & Hamilton LLP and Cravath, Swaine & Moore
LLP. He is the guest professor of Shanghai Jiaotong University Aetna Graduate School of Business Administration and Nanjing University
School of Business Management. He received the awards of “2007 Top 10 New Financiers of China”, “2008 Top 10
Young Investors in China”, “2011 Outstanding Venture Investor” and “2013 Outstanding PE/VC Achievement
Award”. He was a former president of Yale Club of Shanghai from 2002 to 2007. He was a visiting fellow at Queen Elizabeth
House of Oxford in 1986. Mr. Qian received his juris doctor’s degree from Yale Law School in 1994, his M.A./Ph.D. qualification
in political science from University of California Los Angeles in 1991 and his LL.B. degree from Foreign Affairs College in Beijing
in 1985.
David
Jian Sun
has served as our independent director since November 2014. Mr. Sun has over ten years of experience
in consumer industry. Mr. Sun has served as an executive director and chief executive officer of Home Inns & Hotels
Management Inc. (Nasdap: HMIN), the largest budget hotel in China with 2,600 locations, since December 2004. Prior to that,
Mr. Sun served as a vice president of operations at B&Q (China) Ltd., a subsidiary of Kingfisher plc, the third largest
home improvement retail group in the world from 2003 to 2004, overseeing the operation of 15 B&Q superstores in China. From
2000 to 2003, Mr. Sun served as a vice president of marketing at B&Q (China) Ltd., and led B&Q’s market positioning
and branding efforts in China. Mr. Sun served as an independent director of Mecox Lane Limited from 2010 to 2013. Mr. Sun
has served as an independent director of E-house (China) Holdings Limited (NYSE:EJ) since March 2014 and an independent director
of Leju Holdings Limited (NYSE:LEJU) since April 2014. Mr. Sun received a bachelor’s degree from Shanghai Medical
University in China in 1987.
Ronald
Meyers
has served as our independent director since November 2014. Mr. Meyers is a certified public accountant
and has 34 years of experience in public accounting. He joined Ernst & Young LLP in 1979 and was promoted to audit partner
in 1991. In 2006, Mr. Meyers relocated to Ernst and Young’s Shanghai office as part of the Far East region management
team. He was promoted in 2009 to the role of chief operating officer of the Greater China practice. He retired from the firm in
2013. During his career in public accounting, Mr. Meyers served as audit partner for a number of publicly traded clients including
those with substantial international operations. He also held numerous other management positions while at Ernst & Young
LLP, including the managing partner of the Midwest subarea audit practice. Mr. Meyers graduated summa cum laude from Southern
Illinois University with a bachelor’s degree in economics in 1979.
Leo
Lihong Cai
has served as our vice president of sales and marketing since April 2008. Dr. Cai has over 15 years
of experience in marketing and IT industry and over six years of experience in car rental and car service industry. Prior to joining
us, Dr. Cai served as a market development director of EMC Corporation, a pre-sales director of Hewlett-Packard Company and
an enterprise solution and strategic alliances director of Mercury Interactive Corporation. Dr. Cai obtained a bachelor’s
degree in naval architecture from Shanghai Jiao Tong University in 1988, a master’s degree in mechanical engineering from
University of Missouri in 1992 and a Ph.D. degree in mechanical engineering from the University of California, Berkeley in 1996.
Colin
Chitnim Sung
has served as our chief financial officer since April 2013. Mr. Sung is currently a member of
the board of directors and chairman of the audit committee of Hollysys Automation Technologies Ltd. (NASDAQ: HOLI) since February 2008.
Prior to joining us, Mr. Sung also has served as adviser of NeWorld Education Group, Inc. since August 2012 and
served as Chief Financial Officer of NeWorld Education Group since August 2011. Mr. Sung served as the deputy Chief Executive
Officer and the Chief Financial Officer of Linktone Ltd. (NASDAQ: LTON), a wireless interactive entertainment service provider
in China, from 2008 to 2011. From 2005 to 2008, he was the Chief Financial Officer of Linktone Ltd., where he also served as the
acting Chief Executive Officer in 2006 and as its director of board from 2007 to 2008. From 2004 to 2005, Mr. Sung was the
Corporate Controller of UTI, United States, Inc., a subsidiary of International Freight Forwarder (NASDAQ: UTIW), and from
2001 to 2004, was a Vice President of finance and Corporate Controller of USF Worldwide, Inc., a subsidiary of US Freightways.
From 1997 to 2001, Mr. Sung was Vice President and Corporate Controller for US Operation of Panalpina Welttransport Holding,
(PWTN.SW). Mr. Sung received his bachelor’s degree in accounting from William Paterson University in 1992 and his MBA
degree from American InterContinental University in 2004. Mr. Sung is a Certified Public Accountant and Chartered Global Management
Accountant.
Chun
Xie
has served as our chief information officer since 2006. Prior to joining us, Mr. Xie served as a senior engineer
and an IT manager at Surrey Technology Co., Ltd. from August 2002 to February 2006. Mr. Xie also served as
a senior engineer at Chinaquest.com from August 2000 to July 2001. Mr. Xie graduated from the advanced software
engineering & project management program of National Institute Information Technology, India, and was certified as
a PMP (project management professional) by PMI (Project Management Institute, USA) in 2006 and obtained a bachelor’s degree
from Tongji University in 2000.
Hongtao
Han
has served as our vice president of operation since 2006. Prior to joining us, Mr. Han served as the finance
manager at Shanghai Kailun International Trading Co., Ltd. from January 1997 to January 2006. From July 1989
to January 1997, Mr. Han served as an accounting manager at Shanghai Kailun Paper and Printing Group Co., Ltd. Mr. Han
received his bachelor’s degree from Shanghai University of Finance and Economics in 1990.
Nina
Yan Wu
has served as our director of human resource and training department since February 2011. Prior to join
us, Ms. Wu served as an operation director at WTM Marketing Services Co., Ltd. from 2008 to 2011. From 2006 to 2008,
Ms. Wu served as a human resource director of Shanghai Unisys Technology Company. From 2002 to 2006, Ms. Wu served as
a human resource manager at Microsoft (China) Co., Ltd. Ms. Wu received her bachelor’s degree in Chinese language
and literature from Shanghai Normal University in 1994.
Jane
Fengjuan Zheng
has served as our director of corporate sales and business development since April 2011, and
has over almost ten years of experience in corporate sales and marketing management in the car rental and car service
industry. Ms. Zheng received her bachelor’s degree in business administration from Wuhan University of Technology
and has completed the EMBA program from Antai Business School of Economics and Management, Shanghai Jiaotong University.
Compensation of Directors and Executive Officers
In 2016, the aggregate cash compensation
earned by our executive officers and all of our directors was approximately RMB8.9 million (US$1.3 million). For information regarding
options granted to officers and directors, see “—Equity Incentive Plans”. We do not pay or set aside any amounts
for pensions, retirement or other benefits for our officers and directors.
Employment agreements
We have entered into employment agreements
with all of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period.
We may terminate an executive officer’s employment for cause at any time, without prior written notice, or without cause
with prior written notice, for certain acts of the employee, including but not limited to willful gross misconduct by the employee
in connection with his or her employment, or violation of our internal rules. An executive officer may, with prior written notice,
terminate his or her employment at any time without cause.
Each executive officer has agreed to hold,
both during and subsequent to the terms of his or her agreement, in confidence and not to use, except as required in the performance
of his or her duties in connection with the employment, any of our confidential information, technological secrets, commercial
secrets and know-how. Our executive officers have also agreed to disclose to us all inventions, designs and techniques resulted
from work performed by them, and to assign us all right, title and interest of such inventions, designs and techniques. Moreover,
each of our executive officers has agreed during the term of his or her employment with us and two years thereafter, (i) not
to engage in any manner in any business that may compete with our business, or own an interest in, manage, operate, join, control,
lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner,
stockholder, consultant or otherwise, any person that competes with us; (ii) not to refer or attempt to refer to any third
party any business in which we currently engage or will likely engage or participate; and (iii) not to solicit or employ any
person with whom we maintain employment or consulting relation, or otherwise direct or cause any person to terminate his employment
or consulting relationship with us.
We
have also entered into an indemnification agreement with each of our directors and executive officers. Under these agreements,
we agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such
persons
in connection with claims made by reason of their being a director or officer of our company.
Equity Incentive Plans
We
adopted the 2010 Plan in April 2010, which was amended and restated in December 2010 and August 2014. In October 2014,
we adopted the 2014 Plan, which came into effect upon completion of our initial public offering. These performance incentive plans
were adopted to help us recruit and retain key employees, directors or consultants and to motivate such persons to exert their
best efforts on behalf of our company by providing incentives through the granting of share-based awards. The plan administrator
is our board of directors or a committee appointed and determined by the board. Under the 2010 Plan, we are authorized to issue
a maximum of 6,698,470 common shares, and the awards vest upon satisfaction of continuous service, which varies over a period of
three to five years from the date of grant. Under the 2014 Plan, we are authorized to initially reserve a maximum of 4,000,000
common shares, provided that the shares reserved shall automatically increase on January 1 of each year during the term of
the 2014 Plan, commencing on January 1, 2015, by an amount equal to the lesser of (i) one percent (1%) of the total number
of common shares issued and outstanding on December 31 of the immediately preceding calendar year, (ii) 1,000,000 common
shares or (iii) such number of common shares as may be determined by our board of directors. As of the date of this annual
report, a total of
3,369,500 options and 456,000 issued but not fully vested restricted shares granted under the 2010 Plan
and the 2014 Plan were outstanding.
The following paragraphs describe the principal
terms of our 2010 Plan:
Plan
Administration.
Our 2010 Plan will be administered by our board of directors or one or more committees appointed
by our board of directors or another committee (within its delegated authority). Any such administrator is authorized and empowered
to, subject to the express provisions of the 2010 Plan, do all things necessary or desirable in connection with the authorization
of awards and the administration of the 2010 Plan.
Types
of Awards.
The types of awards that may be granted under our 2010 Plan are:
|
·
|
Share Options. A share option is the grant of a right to purchase a specified number of common shares during a specified period
as determined by the administrator. The maximum term of each option shall be ten years. The per share exercise price for each option
granted to any eligible person subject to United States income tax shall be not less than 100% of the fair market value of a common
share on the date of grant of the option.
|
|
·
|
Share Appreciation Rights. A share appreciation right, or SAR, is a right to receive a payment, in cash and/or common shares,
equal to the excess of the fair market value of a specified number of common shares on the date the SAR is exercised over the “base
price” of the award, which base price shall be set forth in the applicable award agreement and, with respect to any eligible
person subject to United States income tax, shall be not less than 100% of the fair market value of a common share on the date
of grant of the SAR. The maximum term of a SAR shall be ten years.
|
|
·
|
Other Awards. The other types of awards that may be granted under the 2010 Plan include: (i) share bonuses, restricted
shares, performance shares, share units, phantom shares, dividend equivalents, or similar rights to purchase or acquire shares,
whether at a fixed or variable price or ratio related to the common shares, upon the passage of time, the occurrence of one or
more events, or the satisfaction of performance criteria or other conditions, or any combination thereof; (ii) any similar
securities with a value derived from the value of or related to the common shares and/or returns thereon; or (iii) cash awards.
|
Acceleration
of Awards upon Certain Corporate Transactions.
Upon the occurrence of any merger, combination, consolidation or
other reorganization; any exchange of common shares or other securities of our company; a sale of all or substantially all the
business, shares or assets of our company; a dissolution of our company; or any other event in which our company does not survive
(or does not survive as a public company in respect of our common shares); or any change in control event defined in any applicable
award agreement, the administrator of the 2010 Plan may, in its discretion, provide for the accelerated vesting of any award or
awards as and to the extent determined by the administrator in the circumstances.
Amendment
and Termination of Plan.
No amendment, suspension or termination of the 2010 Plan or amendment of any outstanding
award agreement shall, without written consent of the participant, affect in any manner materially adverse to the participant any
rights or benefits of the participant or obligations of our company under any award granted under the 2010 Plan prior to the effective
date of such change. Unless earlier terminated by our board of directors, the 2010 Plan shall terminate at the close of business
on the day before the tenth anniversary of April 1, 2010. After the termination of the 2010 Plan either upon such stated expiration
date or its earlier termination by our board of directors, no additional awards may be granted under the 2010 Plan, but previously
granted awards (and the authority of the administrator with respect thereto, including the authority to amend such awards) shall
remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of the 2010 Plan.
The following paragraphs describe the principal
terms of our 2014 Plan:
Plan
Administration.
Our 2014 Plan will be administered by our board of directors or one or more committees appointed
by our board of directors or another committee (within its delegated authority). Any such administrator is authorized and empowered
to, subject to the express provisions of the 2014 Plan, do all things necessary or desirable in connection with the authorization
of awards and the administration of the 2014 Plan.
Eligibility.
The
plan administrator may select among the following eligible individuals to whom an award may be granted: (i) our officers
or employees, (ii) our directors; or (iii) consultants or advisers, who render bona fide services to us (except in
connection with the offer or sale of securities in a capital-raising transaction or which directly or indirectly promote
or maintain a market for our securities).
Award
agreements.
Each award under the 2015 Plan shall be evidenced by an award agreement or an electronic notice of award
grant.
Types
of Awards.
The types of awards that may be granted under our 2015 Plan are:
|
·
|
Share Options. A share option is the grant of a right to purchase a specified number of common shares during a specified period
as determined by the administrator. The maximum term of each option shall be ten years. The per share exercise price for each option
granted to any eligible person subject to United States income tax shall be not less than the fair market value of a common share
on the date of grant of the option.
|
|
·
|
Share Appreciation Rights. A share appreciation right, or SAR, is a right to receive a payment, in cash and/or common shares,
equal to the excess of the fair market value of a specified number of common shares on the date the SAR is exercised over the “base
price” of the award, which base price shall be determined by the administrator and set forth in the applicable award agreement.
The maximum term of a SAR shall be ten years.
|
|
·
|
Other Awards. The other types of awards that may be granted under the 2014 Plan include: (a) share bonuses, restricted
shares, performance shares, share units, phantom shares, dividend equivalents, or similar rights to purchase or acquire shares,
whether at a fixed or variable price or ratio related to the common shares, upon the passage of time, the occurrence of one or
more events, or the satisfaction of performance criteria or other conditions, or any combination thereof; (b) any similar
securities with a value derived from the value of or related to the common shares and/or returns thereon; or (c) cash awards.
|
Vesting
Schedule.
In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement.
Acceleration
of Awards upon Certain Corporate Transactions.
Upon the occurrence of any merger, combination, consolidation or
other reorganization; any exchange of common shares or other securities of our company; a sale of all or substantially all the
business, shares or assets of our company; a dissolution of our company; or any other event in which our company does not survive
(or does not survive as a public company in respect of our common shares); or any change in control event defined in any applicable
award agreement, the administrator of the 2014 Plan may, in its discretion, provide for the accelerated vesting of any award or
awards as and to the extent determined by the administrator in the circumstances.
Transfer
Restrictions.
Awards may not be transferred in any manner by the recipient other than by will or the laws of descent
and distribution, except as otherwise provided by the plan administrator.
Amendment
and Termination of Plan.
No amendment, suspension or termination of the 2014 Plan or amendment of any outstanding
award agreement shall, without written consent of the participant, affect in any manner materially adverse to the participant any
rights or benefits of the participant or obligations of our company under any award granted under the 2014 Plan prior to the effective
date of such change. Unless earlier terminated by our board of directors, the 2014 Plan shall terminate at the close of business
on the day before the tenth anniversary of the effective date. After the termination of the 2014 Plan either upon such stated expiration
date or its earlier termination by our board of directors, no additional awards may be granted under the 2014 Plan, but previously
granted awards (and the authority of the administrator with respect thereto, including the authority to amend such awards) shall
remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of the 2014 Plan.
As of the date of this annual report, outstanding
options and all issued but not fully vested restricted shares that we have granted to our directors, executive officers and other
individuals are as follows:
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
Options/
|
|
|
Price
|
|
|
|
|
|
|
|
Name
|
|
Restricted Shares
|
|
|
(US$/Share)
|
|
|
Date of Grant
|
|
|
Date of Expiration
|
|
Ray Ruiping Zhang
|
|
|
1,673,000
|
|
|
|
3.11
|
|
|
|
December 31, 2010
|
|
|
|
December 30, 201
7
|
(4)
|
|
|
|
150,000
|
(1)
|
|
|
-
|
|
|
|
August 26, 2014
|
|
|
|
N/A
|
|
James Jianzhang Liang
|
|
|
*
|
|
|
|
5.35
|
|
|
|
May 15, 2015
|
|
|
|
May 14, 2025
|
|
Qian Miao
|
|
|
*
|
|
|
|
5.35
|
|
|
|
May 15, 2015
|
|
|
|
May 14, 2025
|
|
Andrew Xuefeng Qian
|
|
|
*
|
|
|
|
5.35
|
|
|
|
May 15, 2015
|
|
|
|
May 14, 2025
|
|
David Jian Sun
|
|
|
*
|
|
|
|
5.35
|
|
|
|
May 15, 2015
|
|
|
|
May 14, 2025
|
|
Ronald Meyers
|
|
|
*
|
|
|
|
5.35
|
|
|
|
May 15, 2015
|
|
|
|
May 14, 2025
|
|
Leo Lihong Cai
|
|
|
*
|
|
|
|
7.00
|
|
|
|
August 26, 2014
|
|
|
|
August 25, 2019
|
|
|
|
|
*
|
(1)
|
|
|
-
|
|
|
|
August 26, 2014
|
|
|
|
N/A
|
|
Colin Chitnim Sung
|
|
|
*
|
|
|
|
3.11
|
|
|
|
April 1, 2013
|
|
|
|
March 31, 2018
|
|
|
|
|
*
|
|
|
|
7.00
|
|
|
|
August 26, 2014
|
|
|
|
August 25, 2019
|
|
|
|
|
*
|
(1)
|
|
|
-
|
|
|
|
August 26, 2014
|
|
|
|
N/A
|
|
Chun Xie
|
|
|
*
|
|
|
|
7.00
|
|
|
|
August 26, 2014
|
|
|
|
August 25, 2019
|
|
Hongtao Han
|
|
|
*
|
|
|
|
7.00
|
|
|
|
August 26, 2014
|
|
|
|
August 25, 2019
|
|
|
|
|
*
|
|
|
|
5.35
|
|
|
|
May 15, 2015
|
|
|
|
May 14, 2025
|
|
Nina Yan Wu
|
|
|
*
|
|
|
|
7.00
|
|
|
|
August 26, 2014
|
|
|
|
August 25, 2019
|
|
Jane Fengjuan Zheng
|
|
|
*
|
|
|
|
7.00
|
|
|
|
August 26, 2014
|
|
|
|
August 25, 2019
|
|
Other individuals as a group
|
|
|
*
|
(2)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Total
|
|
|
3,825,500
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
*The aggregate beneficial ownership
of our company held by the grantee is less than 1% of our total outstanding common shares.
(1) Represents restricted shares. As of the date of this
annual report, all restricted shares had been issued, including unvested restricted shares.
(2) Includes options and restricted shares. As of the date
of this annual report, all restricted shares had been issued, including unvested restricted shares.
(3) We granted share options to other individuals on the
following dates and at the following exercise prices: (i) on August 26, 2014 with an exercise price of US$7.00 per share,
which will expire on August 25, 2019; and (ii) on May 15, 2015 with an exercise price of US$5.35 per share, which will
expire on May 14, 2025. On March 24, 2017, we granted restricted shares to certain employee.
(4) In
2015, our Board approved and extended the expiration dates of options from December 30, 2015 to December 30, 201
6.
In 2016, our Board further approved and extended the expiration date of options from December 30, 2016 to December 30, 2017.
Practices Duties of Directors
Under Cayman Islands law, our directors
have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise
the skills they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances.
In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as
amended and restated from time to time. Our company has the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors
include, among other things:
|
·
|
convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
|
|
·
|
issuing authorized but unissued shares and redeeming or purchasing outstanding shares of our company;
|
|
·
|
declaring dividends and other distributions;
|
|
·
|
appointing officers and determining the term of office of officers;
|
|
·
|
exercising the borrowing powers of our company and mortgaging the property of our company; and
|
|
·
|
approving the transfer of shares of our company, including the registering of such shares in our share register.
|
Terms of Directors and Executive Officers
Our executive officers are elected by and
serve at the discretion of the board of directors. Our directors are not subject to a term of office and hold office until such
time as they resign or are removed from office by special resolution passed at a meeting of shareholders. A director will be removed
from office automatically if, among other things, the director: (i) becomes bankrupt or makes any arrangement or composition
with his creditors; or (ii) dies or becomes of unsound mind.
Board Committees
We have established three committees under
the board of directors: the audit committee, the compensation committee and the corporate governance and nominating committee.
Audit Committee
Our audit committee consists of Messrs. Ronald
Meyers, Andrew Xuefeng Qian and Qian Miao. Mr. Ronald Meyers is the chairman of our audit committee and meets the criteria
of an audit committee financial expert as set forth under the applicable rules of the SEC. Our board of directors has determined
that each member of the audit committee is an “independent director” within the meaning of Section 303A of the
NYSE Listed Company Manual, or the NYSE Manual, and meets the criteria for independence set forth in Rule 10A-3 of the U.S.
Securities Exchange Act of 1934, as amended, or the Exchange Act. The audit committee oversees our accounting and financial reporting
processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
|
·
|
selecting our independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted
to be performed by our independent registered public accounting firm;
|
|
·
|
reviewing the performance of and evaluating the independence of our independent registered public accounting firm;
|
|
·
|
reviewing with our independent registered public accounting firm any audit issues or difficulties and management’s response;
|
|
·
|
reviewing and discussing the audited financial statements and interim financial statements (if any) with management and our
independent registered public accounting firm;
|
|
·
|
reviewing major issues as to the adequacy and effectiveness of our internal controls and any special audit steps adopted in
light of significant control deficiencies;
|
|
·
|
reviewing with the chief executive officer, chief financial officer and our independent registered public accounting firms
any significant deficiencies and material weakness in the design or operation of internal control over financial reporting and
any fraud, if any, that involves management or other significant employees;
|
|
·
|
reviewing and approving all proposed related-party transactions;
|
|
·
|
discussing guidelines and policies governing the process of risk assessment and management; and
|
|
·
|
such other matters that are specifically delegated to our audit committee by our board of directors from time to time.
|
Compensation Committee
Our compensation committee consists of Messrs. Greg
Stubblefield, James Jianzhang Liang and David Jian Sun. Mr. Greg Stubblefield is the chairman of our compensation committee.
Our board of directors has determined that Mr. David Jian Sun is an “independent director” within the meaning
of Section 303A of the NYSE Manual. Pursuant to Section 303A.05 of the NYSE Listed Company Manual, listed companies must
have a compensation committee composed entirely of independent directors. However, the laws of Cayman Islands do not require the
compensation committee of our company to be composed entirely of independent directors. Since we are qualified as a foreign private
issuer, Section 303A.00 of the NYSE Listed Company Manual permits us to follow home country practice and be exempted from
the requirements under Section 303A.05 of the NYSE Listed Company Manual.
Our compensation committee assists the board
in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation
to be provided to our directors and executive officers and overseeing other compensation and employee benefit plans and practices,
including incentive-compensation and equity-based plans. Members of the compensation committee are not prohibited from direct involvement
in determining their own compensation. Our chief executive officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee is responsible for, among other things:
|
·
|
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating
our chief executive officer’s performance in light of those goals and objectives, and determining or recommending to the
board for its approval our chief executive officer’s compensation level based on this evaluation;
|
|
·
|
reviewing and approving or making recommendations to the board for its approval with respect to the compensation level of our
other executive officers;
|
|
·
|
reviewing and making recommendations to the board with respect to our compensation policies and the compensation of our directors;
and
|
|
·
|
reviewing and making recommendations to the board with respect to all incentive-compensation and equity-based plans.
|
Corporate Governance
and Nominating Committee
Our corporate governance and nominating
committee consists of Messrs. Ray Ruiping Zhang, Greg Stubblefield and James Jianzhang Liang. Mr. Ray Ruiping Zhang is
the chairman of our nominating and corporate governance committee. Pursuant to Section 303A.04 of the NYSE Listed Company
Manual, listed companies must have a nominating and corporate governance committee composed entirely of independent directors.
However, the laws of Cayman Islands do not require the nominating and corporate governance committee of our company to be composed
entirely of independent directors. Since, we are qualified as a foreign private issuer, Section 303A.00 of the NYSE Listed
Company Manual permits us to follow home country practice and be exempted from the requirements under Section 303A.04 of the
NYSE Listed Company Manual.
Our nominating and corporate
governance committee assists the board in selecting individuals qualified to become our directors and in determining the composition
of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:
|
·
|
identifying and recommending nominees to the board for election or re-election to the board, or for appointment to fill any
vacancy on the board;
|
|
·
|
selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation
committee, as well as of the corporate governance and nominating committee itself;
|
|
·
|
developing and reviewing the corporate governance principles adopted by the board and advising the board with respect to significant
developments in the law and practice of corporate governance and our compliance with such laws and practices;
|
|
·
|
evaluating the performance and effectiveness of the board as a whole; and
|
|
·
|
evaluating the performance and effectiveness of the committee itself with the board.
|
Corporate Governance
Our board of directors has adopted a code
of business conduct and ethics, which is applicable to our directors and senior executive and financial officers. Our code of business
conduct and ethics is publicly available on our website at
http://www.1hai.cn
.
In addition, our board of directors will
adopt a set of corporate governance guidelines. The guidelines will reflect certain guiding principles with respect to the structure
of our board of directors, procedures and committees. These guidelines are not intended to change or interpret any law, or our
memorandum and articles of association, as amended or restated from time to time.
Remuneration and Borrowing
The directors may determine remuneration
to be paid to the directors. The compensation committee assists the directors in reviewing and approving the compensation structure
for the directors. The directors may exercise all the powers of the company to raise or borrow money and to mortgage or charge
all or any part of its undertaking, property and assets (present and future) and uncalled capital, and to issue debentures, bonds
and other securities whether outright or as security for any debt obligations of our company or of any third party.
Qualification
There is no shareholding qualification for
directors.
Summary of Corporate Governance Differences
As a foreign private issuer with shares
listed on the NYSE, we are required by Section 303A.11 of the NYSE’s Listed Company Manual to disclose any significant
ways in which our corporate governance practices differ from those followed by U.S. domestic companies under NYSE listing standards.
A summary of the differences between our current corporate governance practices and the NYSE corporate governance requirements
applicable to domestic U.S. companies can be found on our website at www.1hai.cn. Please refer to Item 16.G., “Corporate
Governance” for further details.
As of December 31, 2016, we had 6,134
full-time employees. We also had 737 part-time employees as of December 31, 2016, who were primarily engaged in direct services,
such as the delivery and pick-up of rental vehicles.
We primarily engaged Qian Jin, an independent
third-party human resources company, to provide human resources services which include, among other things, managing payrolls,
social welfare and benefits contributions and local residency permits of our dispatch employees.
The table below sets forth the number of
our full-time employees in each of our areas of operations and as a percentage of our total full-time workforce as of December 31,
2016.
|
|
As of December 31, 2016
|
|
|
|
Number of
employees
|
|
|
Percentage of all
employees
|
|
Direct vehicle and operation services
|
|
|
4,858
|
|
|
|
79.2
|
%
|
Fleet management and support
|
|
|
806
|
|
|
|
13.1
|
|
General administration
|
|
|
291
|
|
|
|
4.8
|
|
Sales and marketing
|
|
|
179
|
|
|
|
2.9
|
|
Total
|
|
|
6,134
|
|
|
|
100
|
%
|
We believe that recruiting, retaining and
motivating qualified personnel is crucial to our success. We have standardized our human resources policies and procedures in a
detailed employee manual that all employees are required to adhere to and we have designed and implemented in-house training programs
tailored to each job function and responsibilities to maintain and improve our employees’ performance. Specific training
is provided to new drivers at orientation to help them familiarize with our working standards and operating requirements.
We participate in various employee social
security plans that are required by municipal and provincial governments, including pension, unemployment insurance, work-related
injury insurance and medical insurance. We are required by PRC laws to make contributions to employee social security plans at
specified percentages of the salaries, bonuses and certain allowances of our employees.
The following table sets forth information
with respect to the beneficial ownership of our common shares, as of March 31, 2017, by:
|
·
|
each of our directors and executive officers; and
|
|
·
|
each person known to us to own beneficially more than 5% of our common shares.
|
Beneficial ownership is determined in accordance
with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, we have included shares that the person has the right to acquire within 60 days of the dates of this
annual report, including through the exercise of any option, warrant or other right or the conversion of any other security. These
shares, however, are not included in the computation of the percentage ownership of any other person.
The calculations in the table below assume that there are 139,917,575
common shares outstanding as of March 31, 2017, comprising of 68,605,209 Class A common shares (including 1,057,288 Class A
common shares, represented by 528,644 American depositary shares, issued and reserved for the future exercise of options or the
vesting of other awards under the 2010 Plan and the 2014 Plan), and 71,312,366 Class B common shares.
|
|
Class A
Common
Shares
|
|
|
Class B
Common
Shares
|
|
|
Total Common
Shares on an
As-converted
Basis
|
|
|
% of
Beneficial
Ownership
|
|
|
% of Aggregate
Voting Power
(1)
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ray Ruiping Zhang and his family trust
(2)
|
|
|
—
|
|
|
|
8,815,432
|
|
|
|
8,815,432
|
|
|
|
6.2
|
%
|
|
|
11.0
|
%
|
Greg Stubblefield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
James Jianzhang Liang
(3)
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Qian Miao
(3)
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Andrew Xuefeng Qian
(3)
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
David Jian Sun
(3)
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Ronald Meyers
(3)
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Leo Lihong Cai
(3)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Colin Chitnim Sung
(3)
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Chun Xie
(3)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Hongtao Han
(3)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Nina Yan Wu
(3)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Jane Fengjuan Zheng
(3)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
All Directors and Executive Officers as a group
(3)
|
|
|
530,498
|
|
|
|
9,695,432
|
|
|
|
10,225,930
|
|
|
|
7.2
|
%
|
|
|
12.1
|
%
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ctrip
(4)
|
|
|
4,300,000
|
|
|
|
15,168,193
|
|
|
|
19,468,193
|
|
|
|
13.9
|
%
|
|
|
20.0
|
%
|
Crawford
(5)
|
|
|
—
|
|
|
|
18,694,003
|
|
|
|
18,694,003
|
|
|
|
13.4
|
%
|
|
|
23.9
|
%
|
Tiger Fund
(6)
|
|
|
16,669,726
|
|
|
|
—
|
|
|
|
16,669,726
|
|
|
|
11.9
|
%
|
|
|
2.1
|
%
|
CDH
(7)
|
|
|
1,300,000
|
|
|
|
8,599,211
|
|
|
|
9,899,211
|
|
|
|
7.1
|
%
|
|
|
11.2
|
%
|
GS Group
(8)
|
|
|
127,712
|
|
|
|
9,081,665
|
|
|
|
9,209,377
|
|
|
|
6.6
|
%
|
|
|
11.6
|
%
|
Ray Ruiping Zhang and his family trust
(2)
|
|
|
—
|
|
|
|
8,
815,432
|
|
|
|
8,
815,432
|
|
|
|
6.2
|
%
|
|
|
11.0
|
%
|
SRS Funds
(9)
|
|
|
8,334,864
|
|
|
|
—
|
|
|
|
8,334,864
|
|
|
|
6.0
|
%
|
|
|
1.1
|
%
|
Ignition Group
(10)
|
|
|
1,153,271
|
|
|
|
6,187,197
|
|
|
|
7,340,468
|
|
|
|
5.2
|
%
|
|
|
8.1
|
%
|
Qiming Group
(11)
|
|
|
1,286,326
|
|
|
|
5,673,809
|
|
|
|
6,960,135
|
|
|
|
5.0
|
%
|
|
|
7.4
|
%
|
*Less than 1% of our total outstanding
common shares.
(1) For each person and group included in this column, percentage
of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all
of our Class A and Class B common shares as a single class. Each holder of Class A common shares is entitled to
one vote per share and each holder of our Class B common shares is entitled to ten votes per share on all matters submitted
to them for a vote. Our Class B common shares are convertible at any time by the holder thereof into Class A common shares
on a one-for-one basis.
(2) Represents (i) 2,000,000
Class B common shares held by Ruiping Zhang 2016 Descendants Trust, of which Mr. Ray Ruiping Zhang is the trustee and (ii)
5,142,432 Class B common shares held by Mr. Zhang (including 150,000 issued but not fully vested restricted shares
pursuant to the 2010 Plan) and 1,673,000 Class B common shares issuable upon the exercise of 1,673,000 options within 60
days from the date of this annual report. The business address of Mr. Zhang is Unit 12/F, Building No.5, Guosheng
Center, 388 Daduhe Road, Shanghai, 200062, PRC.
(3) Certain directors and executive officers have been granted
options and restricted shares pursuant to the 2010 Plan and the 2014 Plan.
(4) Represents 4,300,000 Class A common shares and 15,168,193
Class B common shares held by Ctrip Investment Holding Ltd., a company which is 100% owned by C-Travel International Limited,
a company which is 100% owned by Ctrip.com International, Ltd., a company listed on the NASDAQ Global Select Market. The registered
address of Ctrip is Ugland House, P.O. Box 309, Grand Cayman KY1-1104, Cayman Islands.
(5) Represents 18,694,003 Class B common shares, held
by Crawford, a Missouri corporation. The voting and investment power of shares held by Crawford is shared by Andrew C. Taylor,
Jo Ann Kindle, Christine B. Taylor and Carolyn Kindle, as voting trustees under the Jack Taylor Family Voting Trust U/A/D 4/14/99.
The business address of Crawford and such individuals is 600 Corporate Park Drive, St. Louis, Missouri 63015.
(6) Represents 16,669,726 Class A common shares (in
the form of 8,334,863 ADSs) held by Tiger Global Mauritius Fund, or Tiger Fund, a Mauritius private company which is 100% owned
by Tiger Global Investments, L.P., a Cayman Islands limited partnership. Tiger Global Management, LLC, a Delaware limited liability
company, acts as the management company for Tiger Global Investments, L.P. The registered address of Tiger Fund is 27 Cybercity,
Ebene, Mauritius.
(7) Represents 1,300,000 Class A common shares (including
1,200,000 Class A common shares in the form of 600,000 ADSs) and 8,599,211 Class B common shares, held by CDH Car
Rental Service Limited, or CDH, a British Virgin Islands business company. CDH Venture Partners II, L.P., an exempted limited liability
partnership incorporated in the Cayman Islands is the sole shareholder of CDH. The general partner of CDH Venture Partners II,
L.P. is CDH Venture GP II Company Limited, an exempted limited liability company incorporated in the Cayman Islands. The voting
and investment power of shares held by CDH is exercised by the investment committee of CDH Venture GP II Company Limited, which
consists of Yan Huang, William Hsu, Shuge Jiao and Shangzhi Wu. Each of Yan Huang, William Hsu, Shuge Jiao and Shangzhi Wu disclaims
beneficial ownership of the shares held by CDH except to the extent of their pecuniary interests therein. The registered address
of CDH is Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands.
(8) Represents (i)127,712 Class A common shares (in
the form of 63,856 ADSs) as of December 31, 2016, according to the 13G/A filing dated February 14, 2017; (ii) 7,915,951 Class B
common shares held by GS Car Rental HK Limited; and (iii) 1,165,714 Class B common shares held by GS Car Rental HK Parallel
Limited. Both of GS Car Rental HK Limited and GS Car Rental HK Parallel Limited are HK companies. We refer to these entities collectively
as the GS Entities. GS Car Rental HK Limited is wholly owned by GS Car Rental Lux II Sarl, which is indirectly owned by GS Capital
Partners VI Fund, L.P., GS Capital Partners VI Offshore Fund, L.P. and GS Capital Partners VI GmbH & Co. KG. GS Capital
Partners VI Fund, L.P. is a Delaware limited partnership, whose general partner is GSCP VI Advisors, L.L.C., a Delaware limited
liability company. GS Capital Partners VI Offshore Fund, L.P. is a Cayman limited partnership, whose general partner is GSCP VI
Offshore Advisors L.L.C. GS Capital Partners VI GmbH & Co. KG, is a German limited partnership, whose general partner
is Goldman, Sachs Management GP GmbH, a German company. GS Car Rental HK Parallel Limited is wholly owned by GS Car Rental Lux
Parallel II Sarl, which is indirectly owned by GS Capital Partners VI Parallel, L.P. GS Capital Partners VI Parallel, L.P. is a
Delaware limited partnership, whose general partner is GS Advisors VI, L.L.C., a Delaware limited liability company. The voting
and investment power of shares held by GS Entities is exercised by the corporate investment committee of the merchant banking division
of Goldman, Sachs & Co., which consists of Rich Friedman, Beth Cogan, Tom Connolly, Brad Gross, Adrian Jones, Mike Koester,
Scott Lebovitz, Sanjeev Mehra, Eric Muller, Ken Pontarelli, Sumit Rajpal, Oliver Thym, Joe DiSabato, Matthias Hieber, Martin Hintze,
James Reynolds, Stephanie Hui, Ankur Sahu, Andrew Wolff, David Thomas, Alex Golten, Yael Levy, Mike Simpson and Mitch Weiss. .
Each of the corporate investment committee members disclaims beneficial ownership of the shares owned by GS Entities except to
the extent of their pecuniary interests therein. The registered address of the GS Entities is Level 54, Hopewell Centre, 183 Queen’s
Road East, Hong Kong.
(9) Represents 8,334,864 Class A common shares (in the
form of 4,167,432 ADSs) as of December 31, 2016, held by SRS Partners I Mauritius Limited and SRS Partners II Mauritius Limited,
according to the 13G/A filing dated February 14, 2017. The Class A common shares reported as beneficially owned by SRS Investment
Management, LLC, a Delaware limited liability company, or the Investment Manager, are held for the accounts of a wholly owned subsidiary
of SRS Partners Master Fund LP and a wholly owned subsidiary of SRS Partners US, LP. The Investment Manager serves as investment
manager to SRS Partners Master Fund LP and SRS Partners US, LP. Karthik R. Sarma is the managing member and sole control person
over the Investment Manager. In such capacities, Mr. Sarma and the Investment Manager may be deemed to have voting and dispositive
power with respect to the Class A common shares held for SRS Partners Master Fund LP and SRS Partners US, LP. The principal
business office of each of the Investment Manager and Mr. Sarma is 1 Bryant Park, 39th Floor, New York, NY 10036.
(10) Represents (i) 6,122,993 Class B common shares
and 1,141,305 Class A common shares (including 1,104,194 Class A common shares in the form of 552,097 ADSs,), held by Ignition
Growth Capital I, L.P.; and (ii) 64,204 Class B common shares and 11,966 Class A common shares (including 11,576
Class A common shares in the form of 5,788 ADSs), held by and Ignition Growth Capital Managing Directors Fund I, LLC. Both of Ignition
Growth Capital I, L.P. and Ignition Growth Capital Managing Directors Fund I, LLC. are U.S. limited partnerships. We refer to these
entities collectively as Ignition Group. Ignition Growth Capital I, L.P.’s general partner is Ignition Growth GP, L.L.C,
a Delaware limited liability company. The voting and investment power of shares held by Ignition Growth Capital I, L.P. is exercised
by the board of managing directors of Ignition Growth GP, LLC, which consists of Jon Anderson and John Zagula. Each of Mr. Anderson
and Mr. Zagula disclaims beneficial ownership of the shares owned by Ignition Growth Capita I, L.P. except to the extent of
their pecuniary interests therein. The registered address of Ignition Growth Capital I, L.P. is 3500 South DuPont Highway, City
of Dover, County of Kent, Delaware 19901, U.S.A. Ignition Growth Capital Managing Directors Fund I, LLC is controlled by a board
of managing directors comprised of Jon Anderson and John Zagula. The registered address of Ignition Growth Capital Managing Directors
Fund I, LLC is located at Corporation Trust Center, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801, U.S.A.
(11) Represents (i) 5,147,831 Class B common shares,
and 1,167,436 Class A common shares (in the form of 583,718 ADSs), held by Qiming Venture Partners II, L.P.; (ii) 450,897
Class B common shares, and 101,868 Class A common shares (in the form of 50,934 ADSs), held by Qiming Venture Partners
II-C, L.P.; and (iii) 75,081 Class B common shares, and 17,022 Class A common shares (in the form of 8,511 ADSs),
held by Qiming Managing Directors Fund II, L.P. We refer to Qiming Venture Partners II, L.P., Qiming Venture Partners II-C, L.P.
and Qiming Managing Directors Fund II, L.P. collectively as Qiming Group. The general partner of Qiming Venture Partners II, L.P.
and Qiming Venture Partners II-C, L.P. is Qiming GP II, L.P., a Cayman Islands exempted limited partnership, whose general partner
is Qiming Corporate GP II, Ltd., a Cayman Islands limited company which is also the general partner of Qiming Managing Directors
Fund II, L.P. The voting and investment power of shares held by Qiming Group is exercised by the investment committee of Qiming
Corporate GP II, Ltd., which consists of Duane Kuang, Gary Rieschel, JP Gan and Robert Headley. Each of Mr. Kuang, Mr. Rieschel,
Mr. Gan and Mr. Headley disclaims beneficial ownership of the shares owned by Qiming Group except to the extent of their
pecuniary interests therein. The registered address of Qiming Group is M&C Corporate Services Limited, P.O. Box 309GT,
Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands.
According to our register of members for
our common shares, as of March 31, 2017, there is one record holder of Class A common shares, which is the depositary
of our ADS program, and seven record holders of Class B common shares in the United States. The number of beneficial owners
of our ADSs in the United States is likely to be much larger than the number of record holders of our common shares in the United
States. To our knowledge, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government
or by any other natural or legal persons, severally or jointly. We are not aware of any arrangement which may at a later date result
in a change of control of our company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Please refer to Item 6.E, “Directors, Senior
Management and Employees—Share Ownership”.
|
B.
|
Related Party Transactions
|
Ctrip
Under
the Additional Series E Preferred Share Purchase Agreement, or the Series E
+
SPA, entered into between our Company, Crawford, Ctrip and certain other shareholders on April 16, 2014, Ctrip purchased 2,368,193
Series E preferred shares of our Company for a consideration of US$13,025,062. In addition, pursuant to a covenant in the
Series E
+
SPA, upon our written request in connection with an initial public offering,
Ctrip was obligated to subscribe for our common shares (i) in an exempt private placement or (ii) in an exempt Regulation
S offering. Ctrip and we agreed that the purchase price of the common shares in connection with such subscription was the initial
public offering price, and such subscription was to be consummated concurrently with the closing of the initial public offering.
As a result, we entered into a subscription agreement with Ctrip on October 14, 2014, pursuant to which Ctrip purchased from
us 1,666,666 Class A common shares at US$6.00 per Class A common share upon the closing of our initial public offering.
In April 2015, eHi Rental entered into
a framework loan facility agreement with Ctrip, pursuant to which Ctrip extended, through entrusted bank loans, a RMB300 million loan facility to eHi Rental which has been drawn down in full. The purpose
of the loan is to further expand our fleet size and operations. The loan facility has a term of three years and bears an interest
rate of 6.9% per annum, payable on a quarterly basis. As current PRC government regulations restrict direct lending between companies,
such loans are typically implemented through a loan entrustment agreement where a bank is used as an intermediary agent. Pursuant
to the framework loan facility agreement, eHi Rental, Ctrip and the Agricultural Bank of China entered into
a separate entrusted bank loan agreement to set forth the detailed terms of such loan facility, and several of our PRC subsidiaries
provided guarantees. In October 2016, we voluntarily repaid RMB200 million to Ctrip before the due date, and
only RMB100 million loan remained outstanding as of December 31, 2016. Our related party interest expenses were RMB14.2 million
in 2015 to RMB18.5 million (US$2.7 million) in 2016, respectively, as a result of this entrusted loan.
We maintain business cooperation with Ctrip
in various aspects. We are the designated and preferred business partner of Ctrip in providing car rental services. Ctrip has integrated
access to our car rental reservation system on its website since May 2012 and in its mobile applications since June 2014,
and we pay a percentage of rental rates as commissions for successful car rental referrals. In addition, in December 2014,
we started to expand and promote our chauffeured car services to a business-to-consumer model through Ctrip’s platform. Our related party selling and marketing
expenses were RMB16.2 million in 2015 and RMB29.4 million (US$4.2 million) in 2016, respectively, as a result of these arrangements
with Ctrip.
Crawford/Enterprise
Under the Series D Preferred Share
Purchase Agreement entered into between Crawford and us on March 26, 2012, we issued, and Crawford was granted, certain warrants
to subscribe for and purchase common shares from the Company. On October 31, 2014, Crawford exercised all its 1,500,000 outstanding
warrants to purchase 1,500,000 common shares of our Company at a per share purchase price of US$5.50 for a total consideration
of US$8,249,993.
In
addition, under the Series E
+
SPA entered into between our Company, Crawford,
Ctrip and certain other shareholders of our Company on April 16, 2014, Crawford Group Inc. purchased 1,764,055 Series E
preferred shares of our Company for a consideration of US$9,702,299.
In connection with the Series D Preferred
Share Purchase Agreement, we entered into a global affiliation agreement with Enterprise in March 2012, pursuant to which we and
Enterprise could refer customers to each other and charge certain referral fees. In 2016, the referral fees we received from or
paid to Enterprise were both immaterial.
Contractual Arrangements among Our Wholly-foreign Owned Enterprises,
Variable Interest Entities and the Variable Interest Entity Equity Holders
Due
to PRC legal
restrictions
on foreign ownership and investment in,
among other areas, value-added telecommunications services, which include the
commercial
operations
of Internet content
services
, we
entered into a series of contractual
arrangements with our PRC incorporated variable interest entity eHi Information, and its shareholders in March 2014. eHi Information
obtained the ICP license from the relevant telecommunication authorities on September 24, 2014. In January 2015, we entered
into a series of contractual arrangements with our PRC incorporated variable interest entity eHi Car Sharing and its shareholders.
The contractual arrangements collectively enable us to exercise effective
control over the variable interest entities and realize substantially all of the economic risks and benefits arising from, the
variable interest entities. As a result, we include the financial results of each of the variable interest entities in our consolidated
financial statements in accordance with U.S. GAAP as if they were our wholly-owned subsidiaries.
Private Placement and Registration Rights Agreement
On
May 22, 2015, we entered into definitive securities purchase agreements with Tiger Fund and SRS Funds pursuant to which we
agreed to issue a total of 22,337,924 of our Class A common shares to the buyers at a price of US$6.00 per Class A common
share (equivalent to US$12.00 per ADS). We raised gross proceeds of approximately US$134.0 million from this private placement
transaction. In addition, two of our shareholders, Ctrip and Crawford, also entered into definitive agreements with the buyers
for the sale of an aggregate of 2,666,666 Class A common shares (including certain shares represented by ADSs) at a price per
Class A common share of US$6.00 (equivalent to US$12.00 per ADS).
On June 30, 2015, in connection with the
private placement, we also entered into a registration rights agreement with Tiger Fund and SRS Funds, pursuant to which, at any
time after the later of (i) November 22, 2015 and (ii) we have become eligible to register the purchased securities for resale
on Form F-3, the holders of at least a majority of the purchased securities may request us to file no more than two registration
statements in any 12-month period to register the purchased securities and their relevant equity rights. The registration rights
set forth therein shall terminate on November 18, 2017.
Investors’ Rights Agreements and Registration Rights
Pursuant to third Amended and Restated
Investors’ Rights Agreement dated December 11, 2013 among us and our pre-IPO shareholders, or the Investors’ Rights
Agreement, major pre-IPO shareholders are entitled to certain registration rights, including demand registration, Form F-3
registration and piggyback registration rights, which shall expire on November 18, 2017.
Employment Agreements
See Item 6.B, “Directors, Senior Management
and Employee—Compensation—Employment Agreements”.
Share Options and Restricted Shares Grants
See Item 6.B, “Directors, Senior Management
and Employee—Compensation—Equity Incentive Plans”.
C. Interests of Experts
and Counsel
Not applicable.
ITEM 8.FINANCIAL INFORMATION
|
A.
|
Consolidated statements and other financial information.
|
See Item 18, “Financial Statements”.
Legal Proceedings
We are currently not a party
to, and are not aware of any threat of, any legal, arbitration or administrative proceedings that, in the opinion of our board
of directors, are likely to have a material and adverse effect on our business, financial condition or results of operations. From
time to time, we have become, and may in the future become, a party to various legal or administrative proceedings or claims arising
in the ordinary course of our business. Regardless of the outcome, legal or administrative proceedings or claims may have an adverse
impact on us because of defense and settlement costs, diversion of management attention, and other factors.
Dividend Policy
We have not previously declared
or paid cash dividends and we have no plan to declare or pay any dividends in the near future on our shares or ADSs. We currently
intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Our board of directors has complete
discretion as to whether to declare and pay dividends. Even if our board of directors decides to pay dividends, the form, frequency
and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors that the board of directors may deem relevant.
We are a holding company incorporated in
the Cayman Islands. In order to pay dividends, if any, to our shareholders, we will rely on dividends from our subsidiaries in
China. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In addition, each of our subsidiaries in China is required to set
aside a certain amount of its accumulated after-tax profits each year, if any, to fund certain statutory reserves. These reserves
may not be distributed as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf, the instruments
governing the debt may restrict their ability to pay dividends or make other payments to us.
If we pay dividends, the depositary
will pay you the dividends it receives on our Class A common shares, after deducting any withholding taxes and its fees and
expenses. Cash dividends on our common shares, if any, will be paid in U.S. dollars.
Except as disclosed elsewhere in
this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements
included in this annual report.
ITEM 9.THE OFFER AND LISTING
|
A.
|
Offering and listing details Price Range of Our ADSs
|
Our ADSs are listed for trading
on the New York Stock Exchange under the symbol “EHIC”, and have been listed since November 18, 2014. The following
table sets forth the high and low daily closing trading prices of our ADSs on the New York Stock Exchange for the periods indicated:
|
|
Price per ADS (US$)
|
|
|
|
High
|
|
|
Low
|
|
Annual:
|
|
|
|
|
|
|
|
|
2014
|
|
|
12.00
|
|
|
|
7.97
|
|
2015
|
|
|
18.18
|
|
|
|
8.37
|
|
2016
|
|
|
13.70
|
|
|
|
8.32
|
|
Quarterly:
|
|
|
|
|
|
|
|
|
First Quarter, 2015
|
|
|
10.70
|
|
|
|
8.37
|
|
Second Quarter, 2015
|
|
|
18.18
|
|
|
|
9.44
|
|
Third Quarter, 2015
|
|
|
14.68
|
|
|
|
8.51
|
|
Fourth Quarter, 2015
|
|
|
14.56
|
|
|
|
11.07
|
|
First Quarter, 2016
|
|
|
13.70
|
|
|
|
10.30
|
|
Second Quarter, 2016
|
|
|
12.00
|
|
|
|
9.47
|
|
Third Quarter, 2016
|
|
|
11.72
|
|
|
|
9.83
|
|
Fourth Quarter, 2016
|
|
|
11.35
|
|
|
|
8.32
|
|
First Quarter, 2017
|
|
|
10.78
|
|
|
|
9.48
|
|
Monthly
|
|
|
|
|
|
|
|
|
October 2016
|
|
|
10.88
|
|
|
|
10.00
|
|
November 2016
|
|
|
11.35
|
|
|
|
10.00
|
|
December 2016
|
|
|
10.29
|
|
|
|
8.32
|
|
January 2017
|
|
|
10.26
|
|
|
|
9.48
|
|
February 2017
|
|
|
10.55
|
|
|
|
9.95
|
|
March 2017
|
|
|
10.78
|
|
|
|
9.85
|
|
April 2017 (through April 26, 2017)
|
|
|
10.29
|
|
|
|
9.95
|
|
Not applicable.
See Item 9.A above.
Not applicable.
Not applicable.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
Not applicable.
|
B.
|
Memorandum and Articles of Association
|
We incorporate by reference into
this annual report the description of our ninth amended and restated memorandum and articles of association contained in our registration
statement on Form F-1 (File No. 333-199150), as amended, originally filed with the Securities and Exchange Commission
on October 3, 2014.
At our annual general meeting
of shareholders held on December 28, 2015, our shareholders approved, among other things, the amendments to Article 6(c) and
Article 7 of our ninth amended and restated articles of association. Please refer to Exhibit 1.1 to this annual report
and following summaries of material provisions for the amended articles.
Registered Office and Objects
Our registered office in the Cayman
Islands is located at the offices of Offshore Incorporations (Cayman) Limited, Floor 4, Willow House, Cricket Square, P O Box 2804,
Grand Cayman KY1-1112, Cayman Islands, or at such other place as our directors may from time to time decide. The objects for which
our company is established are unrestricted and we have full power and authority to carry out any object not prohibited by the
Companies Law or any other law of the Cayman Islands.
Board of Directors
See “Item 6.C. C. Board
- Practices Duties of Directors.”
Common Shares
General
.
All of our outstanding common shares are fully paid and non-assessable. Our common shares are issued in registered form, and are
issued when entered in our register of members. Our shareholders who are nonresidents of the Cayman Islands may freely hold and
vote their common shares.
Common
Shares
. Our common shares are divided into Class A common shares and Class B common shares. Holders of our
Class A common shares and Class B common shares will have the same rights except for voting and conversion rights. Our
common shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote
their shares.
Conversion
.
Each Class B common share is convertible into one Class A common share at any time by the holder thereof. In addition, (i) if at
any time the total number of the issued and outstanding Class B common shares is less than 5% of the total number of the issued
and outstanding common shares, each Class B common share shall automatically and immediately be converted into one Class A common
share; (ii) if at any time, Mr. Ray Ruiping Zhang, Mr. Leo Lihong Cai or Mr. Colin Chitnim Sung ceases to be an employee, officer
or director of our company, each Class B common share held by such person or his affiliate (as defined in our ninth amended and
restated memorandum and articles of association) shall be automatically and immediately converted into one Class A common share;
and (iii) upon any sale, transfer, assignment or disposition of Class B common shares by a holder thereof to any person or entity
which is not an affiliate (as defined in our ninth amended and restated memorandum and articles of association) of such holder,
such Class B common shares shall be automatically and immediately converted into an equal number of Class A common shares. Class
A common shares are not convertible into Class B common shares under any circumstances.
Dividends
.
The holders of our common share are entitled to such dividends as may be declared by our board of directors subject to the Companies
Law.
Voting
Rights
. Our Class A common shares and Class B common shares vote together as a single class on all
matters submitted to a vote of our shareholders, except as may otherwise be required by law or provided for in our ninth
amended and restated memorandum and articles of association. In respect of matters requiring shareholders' vote, each Class A
common share is entitled to one vote, and each Class B common share is entitled to ten votes. In addition, the following
matters are subject to the approval at a general meeting or through written consents executed by the holders representing a
majority of the aggregate voting power of our company and also by the holders of a majority of total outstanding Class A
common shares: (i) a change of control event (as defined in our ninth amended and restated memorandum and articles of
association), (ii) issuance of that number of common shares, or of securities convertible into or exercisable for that number
of common shares, equal to
or
in excess of 20% of the number of all common shares outstanding immediately prior to the
issuance of such shares or securities on an as-converted basis, if (x) such common shares are sold at a per share price less
than the per share book or market value of the common shares or (y) such securities convertible into or exercisable for the
common shares have a per share conversion or exercise price which is less than the per share book or market value of the
common share; and (iii) issuance of common shares or of securities convertible into or exercisable for common shares to a
director, officer or substantial security holder of our company on an individual basis exceeding either 1% of the total
outstanding common shares on an as-converted basis or 1% of the aggregate voting power outstanding before such issuance.
Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman
of our board of directors or by any one or more shareholders present in person or by proxy entitled to vote.
An ordinary resolution to be passed
by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the common shares cast by the
shareholders who are present in person or by proxy at a general meeting, while a special resolution requires the affirmative vote
of no less than two-thirds of the votes attaching to the common shares cast by the shareholders who are present in person or by
proxy at a general meeting. A special resolution will be required for important matters such as a change of name or making changes
to our memorandum and articles of association. Both ordinary resolutions and special resolutions may also be passed by a unanimous
written resolution signed by all the shareholders of our company, as permitted by the Companies Law and our ninth amended and restated
memorandum and articles of association.
Liquidation
.
On a return of capital on liquidation, dissolution or winding up (other than on conversion, redemption or purchase of common shares),
assets available for distribution among the holders of common shares shall be distributed among the holders of the common shares
on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets
will be distributed so that the losses are borne by our shareholders proportionately.
Calls
on Shares and Forfeiture of Shares
. Our board of directors may from time to time make calls upon shareholders for any
amounts unpaid on their common shares in a notice served to such shareholders at least 14 days prior to the specified time of payment.
The common shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption,
Repurchase and Surrender of Shares
. We may issue shares on terms that such shares are subject to redemption, at our
option or at the option of the holders, on such terms and in such manner as may be determined by the board of directors before
the issue of such shares. Our company may also repurchase any of our shares (including any redeemable shares) in such manner and
on such other terms as our directors may agree with the holder of such shares. Our company may make a payment in respect of the
redemption or purchase of its own shares in any manner permitted by the Companies Law, including out of capital. In addition, our
company may accept the surrender of any fully paid share for no consideration. Any share redeemed, repurchased or surrendered may
be cancelled or held as a treasury share.
Variations
of Rights of Shares
. All or any of the special rights attached to any class of shares may be varied either with the
written consent of the holders of a majority of the issued shares of that class or with the sanction of a special resolution passed
at a general meeting of the holders of the shares of that class. Consequently, the rights of any class of shares cannot be detrimentally
altered without a majority vote of all of the shares in that class. The rights conferred upon the holders of the shares of any
class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares
of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of
shares. The rights of holders of common shares shall not be deemed to be varied by the creation or issue of shares with preferred
or other rights which may be affected by the directors as provided in the articles of association without any vote or consent of
the holders of common shares.
We have not entered into any
material contracts other than in the ordinary course of business and other than those described in Item 4, “Information on
the Company” or elsewhere in this annual report on Form 20-F.
Foreign exchange in China is primarily regulated
by:
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the Foreign Currency Administration Rules (1996), as amended in 2008; and
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the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
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Under the Foreign Currency Administration
Rules, Renminbi is convertible for current account items, including the distribution of dividends, interest payments, and trade
and service-related foreign exchange transactions. Conversion of Renminbi into foreign currency for capital account items, such
as direct investment, loans, investment in securities, and repatriation of funds, however, is still subject to the approval of
SAFE.
Under the Administration Rules, foreign-invested
enterprises may only buy, sell, and remit foreign currencies at banks authorized to conduct foreign exchange transactions after
providing valid commercial documents and, in the case of capital account item transactions, only after obtaining approval from
SAFE.
Capital investments directed outside of
China by foreign-invested enterprises are also subject to restrictions, which include approvals by SAFE, and the State Reform and
Development Commission.
We receive our revenue in Renminbi, which
is currently not a freely convertible currency. Under our current structure, our income will be primarily derived from dividend
payments from our subsidiaries in China.
The value of the Renminbi against the U.S.
dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic
conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s
Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar.
Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies.
This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S. dollar.
There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy,
which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar.
Regulation of Foreign Exchange in Certain Onshore
and Offshore Transactions
On July 4, 2014, the SAFE issued the
Notice on Issues Relating to the Administration of Foreign Exchange for Overseas Investment and Financing and Reverse Investment
by Domestic Residents via Special Purpose Vehicles, or Circular 37, which replaced the Notice on Issues Relating to the Administration
of Foreign Exchange for the Financing and Reverse Investment by Domestic Residents via Offshore Special Purpose Vehicles issued
by SAFE in October 2005, or Circular 75. Pursuant to Circular 37, any PRC residents, including both PRC institutions and individual
residents, are required to register with the local SAFE branch before making contribution to a company set up or controlled by
the PRC residents outside of the PRC for the purpose of overseas investment or financing with their legally owned domestic or offshore
assets or interests, referred to in this circular as a “special purpose vehicle.” Under Circular 37, the term “PRC
institutions” refers to entities with legal person status or other economic organizations established within the territory
of the PRC. The term “PRC individual residents” includes all PRC citizens (also including PRC citizens abroad) and
foreigners who habitually reside in the PRC for economic benefits. A registered special purpose vehicle is required to amend its
SAFE registration in the event of any change of basic information including PRC individual resident shareholder, name, term of
operation, or PRC individual resident’s increase or decrease of capital, transfer or exchange of shares, merger, division
or other material changes. In addition, if a non-listed special purpose vehicle grants any equity incentives to directors, supervisors
or employees of domestic companies under its direct or indirect control, the relevant PRC individual residents could register with
the local SAFE branch before exercising such options. The SAFE simultaneously issued a series of guidances to its local branches
with respect to the implementation of Circular 37. Circular 37 modified certain defined terms under Circular 75 to clarify the
SAFE registration scope. For example, Circular 37 broadened the definition of special purpose vehicle to offshore entities that
were (i) established for the purpose of overseas investments by PRC residents (in addition to for the purpose of financing as defined
under Circular 75) and (ii) established by PRC residents with their legally owned offshore assets or interests (in addition
to domestic assets or interests as defined under Circular 75); and it also broadened the definition of reverse investment to include
establishing new foreign invested entities or projects as a way of domestic direct investment by PRC residents, directly or indirectly,
through special purpose vehicle, which was excluded by Circular 75. Furthermore, Circular 37 modified certain SAFE registration
procedures and requirements for special purpose vehicles and clarified the SAFE registration procedures for equity incentive awards
granted by non- listed special purpose vehicles to directors, supervisors or employees of their controlled domestic companies.
The failure of these shareholders and/or beneficial owners to timely register or amend their SAFE registrations pursuant to the
SAFE notice or the failure of future shareholders and/or beneficial owners of our company who are PRC residents to comply with
the registration procedures set forth in the SAFE notice may subject such shareholders, beneficial owners and/or our PRC subsidiaries
to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our
PRC subsidiaries’ ability to distribute dividends to our company or otherwise adversely affect our business.
The Operating Rules for Foreign Exchange
Issues with Regard to Direct Investment under Capital Account, or the Operating Rules, an appendix to the Notice on Further Improving
and Adjusting Foreign Exchange Administration Policies on Direct Investment promulgated by SAFE on November 19, 2012 provides
in detail the procedures, required documents and review standard of foreign exchange registration regarding financing and round-trip
investment by domestic residents through offshore special- purpose companies.
On February 28, 2015, SAFE promulgated a
Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or Notice 13, which became
effective on June 1, 2015. In accordance with Notice 13, entities and individuals are required to apply for foreign exchange registration
of foreign direct investment and overseas direct investment, including those required under the Circular No. 37, with qualified
banks, instead of SAFE. The qualified banks, under the supervision of SAFE, shall directly examine the applications from applicants
and handle the registration.
As a result of the uncertainties relating
to Notice 37, Operating Rules and Notice 13, we cannot predict how these regulations will affect our business operations or strategies.
For example, our present or future PRC subsidiaries’ ability to conduct foreign exchange activities, such as remittance of
dividends and foreign-currency-denominated borrowings, may be subject to compliance with such SAFE registration requirements by
relevant PRC residents, over whom we have no control. In addition, we cannot assure you that any such PRC residents will be able
to complete the necessary approval and registration procedures required by the SAFE regulations. We require all shareholders in
our Company who are PRC residents to comply with any SAFE registration requirements and we understand that the relevant shareholders
have registered their offshore investment in us with Shanghai SAFE, but we have no control over either our shareholders or the
outcome of such registration procedures. Such uncertainties may restrict our ability to implement our acquisition strategy and
adversely affect our business and prospects.
Dividend Distributions
Pursuant to the Foreign Currency Administration
Rules promulgated in 1996 and amended in 1997 and 2008, and various regulations issued by SAFE and other relevant PRC government
authorities, the PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the
remittance of currency out of China.
The principal regulations governing the
distribution of dividends paid by wholly foreign-owned enterprises and Sino-foreign joint equity enterprise enterprises include:
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the Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000 and 2016;
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the Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended in 2001 and 2014;
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the Sino-foreign Joint Equity Enterprise Law (1979), as amended in 2001 and 2016;
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the Sino-foreign Joint Equity Enterprise Law Implementing Rules (1983), as amended in 2001 and 2014; and
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Company Law of the PRC (2005), as amended in 2013.
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Under these regulations, foreign-invested
enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least a certain percentage
of its after-tax profit based on PRC accounting standards each year to its general reserves. These reserves are not distributable
as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax
profits to employee welfare and bonus funds. These funds, however, may not be distributed to equity owners except in the event
of liquidation.
The following is a summary of the material
Cayman Islands, People’s Republic of China and U.S. federal income tax consequences relevant to an investment in our ADSs
and common shares. The summary is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective
purchaser. The summary is based on laws and relevant interpretations thereof in effect as of the date of this annual report, all
of which are subject to change or different interpretations, possibly with retroactive effect. The summary does not address United
States state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, People’s Republic of China and
the United States. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of
Maples and Calder (Hong Kong) LLP, special Cayman Islands counsel to us. You should consult your own tax advisors with respect
to the consequences of acquisition, ownership and disposition of our ADSs and common shares.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes
on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance
tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and common shares. There are no other taxes
likely to be material to us levied by the Government of the Cayman Islands except for stamp duties, which may be applicable on
instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in
the Cayman Islands on transfers of shares of Cayman Islands companies, except those which hold interests in land in the Cayman
Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions
in the Cayman Islands.
Pursuant to Section 6 of the Tax Concessions
Law (2011 Revision) of the Cayman Islands, we may obtain an undertaking from the Governor-in-Council:
(1)that no law which is enacted
in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations;
and
(2)that the aforesaid tax
or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other obligations.
People’s Republic of China Taxation
Under the New EIT Law, enterprises organized
under the laws of jurisdictions outside China with “de facto management bodies” located within China may be considered
PRC tax resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The
implementation regulations of the New EIT Law define the term “de facto management body” as a management body that
exercises full or substantial control and management authority over the production, operation, personnel, accounts and properties
of an enterprise. In addition, Circular 82 provides that certain Chinese-invested enterprises controlled by PRC enterprises or
PRC enterprise groups and established outside of China will be classified as resident enterprises only if all the following items
are located or resident in China: (i) senior management personnel and departments that are responsible for daily production, operation
and management; financial and personnel decision making bodies; (ii) key properties, accounting books, company seal, and minutes
of board meetings and shareholders’ meetings; and (iii) half or more of the senior management or directors with voting rights.
Circular 82 also clarified that dividends and other income paid by such resident enterprises will be considered as PRC sourced
income and be subject to PRC enterprise income tax. In January 2014, the SAT further issued an amendment to Circular 82 delegating
the authority to its provincial branches to determine whether a Chinese-invested established outside China should be considered
a PRC resident enterprise. While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident
enterprise, there is a risk that the PRC tax authorities may deem our company or any of our overseas subsidiaries as a PRC resident
enterprise, in which case we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income. If we
are deemed to be a PRC tax resident enterprise, any dividends that we pay to our non-PRC enterprise shareholders or ADS holders,
as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs, may be regarded as PRC-sourced
income and as a result become subject to PRC withholding tax at a rate of 10%. See “Risk Factors—Risks relating to
Doing Business in China—We may be classified as a “resident enterprise” for PRC enterprise income tax purposes;
such classification could result in unfavorable tax consequences to us and our non-PRC shareholders .
U.S. Federal Income Taxation
This discussion describes certain material
U.S. federal income tax consequences to U.S. Holders (as defined below) relating to the purchase, ownership and disposition of
our ADSs and common shares. This discussion does not address any aspect of U.S. federal gift or estate tax, the Medicare tax or
the state, local or non-U.S. tax consequences of an investment in our ADSs and common shares. This discussion does not apply to
U.S. Holders who are a member of a class of holders subject to special rules, such as:
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dealers in securities or currencies;
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traders in securities who elect to use a mark-to-market method of accounting for securities holdings;
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banks or other financial institutions;
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tax-exempt organizations;
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partnerships and other entities treated as partnerships or other pass through entities for U.S. federal income tax purposes
or persons holding ADSs and common shares through any such entities;
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regulated investments companies or real estate investment trusts;
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persons that hold ADSs and common shares as part of a hedge, straddle, constructive sale, conversion transaction or other integrated
investment;
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persons whose functional currency for tax purposes is not the U.S. dollar;
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persons liable for alternative minimum tax; or
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persons who actually or constructively own 10% or more of the total combined voting power of all classes of our shares (including
ADSs and common shares) entitled to vote.
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This discussion is based on the U.S. Internal
Revenue Code of 1986, as amended, which we refer to in this discussion as the Code, its legislative history, existing and proposed
regulations promulgated thereunder, published rulings and court decisions, all as of the date hereof. These laws are subject to
change, possibly on a retroactive basis. In addition, this discussion relies on our assumptions regarding the value of our ADSs
and common shares and the nature of our business over time.
Prospective purchasers and U.S. Holders
of our ADSs and common shares are urged to consult their own tax advisor concerning the particular U.S. federal income tax consequences
to them relating to the purchase, ownership and disposition of our ADSs and common shares, as well as the consequences to them
arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income
tax discussion below, you are a “U.S. Holder” if you beneficially own our ADSs or common shares as capital assets for
U.S. federal income tax purposes and are:
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an individual citizen or resident of the United States for U.S. federal income tax purposes;
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a corporation, or other entity taxable as a corporation, that was created or organized in or under the laws of the United States
or any state thereof or the District of Columbia;
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an estate the income of which is subject to U.S. federal income tax regardless of its source; or
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a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one
or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election
in effect to be treated as a U.S. person.
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For U.S. federal income tax purposes, income
earned through a non-U.S. or U.S. partnership or other flow-through entity is attributed to its owners. Accordingly, if a partnership
or other flow-through entity holds ADSs or common shares, the tax treatment of the holder will generally depend on the status of
the partner or other owner and the activities of the partnership or other flow-through entity.
The discussion below assumes that the representations
contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be
complied with in accordance with their terms. If you hold ADSs, for U.S. federal income tax purposes, you generally will be treated
as the owner of the underlying common shares represented by such ADSs.
Accordingly, the conversion of ADSs into common shares will
not be subject to U.S. federal income tax.
Dividends on ADSs and common shares
We do not anticipate paying dividends on
our ADSs and common shares in the foreseeable future. See Item 8.A, “Financial Information—Consolidated statements
and other financial information—Dividend policy”.
Subject to the “Passive Foreign Investment
Company” discussion below, if we do make distributions and you are a U.S. Holder, the gross amount of any distributions with
respect to your ADSs and common shares (including the amount of any taxes withheld therefrom) will generally be includible in your
gross income on the day you actually or constructively receive such income as dividend income if the distributions are made from
our current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. To the extent, if
any, that the amount of any distribution by us on ADSs and common shares exceeds our current and accumulated earnings and profits
as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of the U.S. Holder’s
adjusted tax basis in the ADSs and common shares and thereafter as capital gain. However, we do not intend to calculate our earnings
and profits according to U.S. federal income tax principles. Accordingly, distributions on our ADSs and common shares, if any,
will generally be reported to you as dividend distributions for U.S. federal income tax purposes. Corporations will not be entitled
to claim a dividends-received deduction with respect to distributions made by us. Dividends generally will constitute foreign source
passive income for purposes of the U.S. foreign tax credit rules. You should consult your own advisor as to your ability, and the
various limitations on your ability, to claim foreign tax credits in connection with the receipt of dividends.
Under current law and with respect to non-corporate
U.S. Holders, including individual U.S. Holders, dividends may be “qualified dividend income” that is taxed at a reduced
capital gains rate, provided that certain conditions are satisfied, including: (1) the ADSs or common shares are readily tradable
on an established securities market in the United States, (2) we are not a PFIC for both our taxable year in which the dividend
is paid and the preceding taxable year, and (3) certain holding period requirements are met. The Internal Revenue Service
authority has indicated that common or ordinary stock, or an ADR in respect of such stock, is considered for purposes of clause
(1) above to be readily tradable on an established securities market in the United States when it is listed on the New York
Stock Exchange. There is no assurance, however, that any dividends paid on our ADSs or common shares will be eligible for the reduced
capital gains tax rate. Any dividends paid by us that are not eligible for the preferential rate will be taxed as ordinary income
to a non-corporate U.S. Holder. You should consult your tax advisors regarding the availability of the qualified dividend income
rate with respect to our ADSs or common shares, including the effects of any change in law after the date of this annual report.
Sales and Other Dispositions of ADSs
or Common shares
Subject to the “Passive Foreign Investment
Company” discussion below, when you sell or otherwise dispose of ADSs or common shares, you will generally recognize capital
gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted
tax basis in the ADSs or common shares. Your adjusted tax basis will generally equal the amount you paid for the ADSs or common
shares. Any gain or loss you recognize will be long-term capital gain or loss if your holding period in our ADSs or common shares
is more than one year at the time of disposition. If you are a non-corporate U.S. Holder, including an individual, any such long-term
capital gain will be taxed at preferential rates. Your ability to deduct capital losses will be subject to various limitations.
U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign withholding tax is imposed on
a disposition of our ADSs or common shares, including the availability of the foreign tax credit under their particular circumstances.
Passive Foreign Investment Company
We believe that we were not a “passive
foreign investment company,” or PFIC, for our taxable year ended December 31, 2016. However, we cannot be assure you
that we will not be a PFIC in 2017 or any future taxable year.
In general, we will be classified as a passive
foreign investment company, or the PFIC, in any taxable year if either: (a) the average quarterly value of our gross assets
that produce passive income or are held for the production of passive income is at least 50% of the average quarterly value of
our total gross assets, or the Asset Test or (b) 75% or more of our gross income for the taxable year is passive income (such
as certain dividends, interest or royalties). For purposes of the above tests, we will be treated as owning our proportionate share
of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly,
at least 25% (by value) of the stock. For purposes of the first Asset Test, any cash and cash invested in short-term, interest
bearing, debt instruments, or bank deposits that are readily convertible into cash will generally count as producing passive income
or held for the production of passive income.
We must make a separate determination each
year as to whether we are a PFIC. As a result, it is possible that our PFIC status will change. In particular, in determining the
average percentage value of our gross assets, the aggregate value of our assets will generally be deemed to be equal to our market
capitalization (determined by the sum of the aggregate value of our outstanding equity) plus our liabilities. Therefore, a drop
in the market price of our ADSs or common shares would cause a reduction in the value of our non-passive assets for purposes of
the Asset Test. Accordingly, we would likely become a PFIC if our market capitalization were to decrease significantly while we
hold substantial cash.
Based on the market price of our ADSs and
common shares, the value of our assets, and the composition of our assets and income, we believe that we were not a “passive
foreign investment company,” or PFIC, for our taxable year ended December 31, 2016, and we do not expect to be a PFIC
for our taxable year ending December 31, 2017 or for the foreseeable future.
If we were a PFIC for any taxable year during
which you held our ADSs or common shares, certain adverse U.S. federal income tax rules would apply. You would generally be
subject to additional taxes and interest charges on certain “excess distributions” we make and on any gain realized
on the disposition or deemed disposition of your ADSs or common shares, regardless of whether we continue to be a PFIC in the year
in which you receive an “excess distribution” or dispose of or are deemed to dispose of your ADSs or common shares.
Distributions in respect of your ADSs or common shares during a taxable year would generally constitute “excess distributions”
if, in the aggregate, they exceed 125% of the average amount of distributions with respect to your ADSs or common shares over the
three preceding taxable years or, if shorter, the portion of your holding period before such taxable year.
To compute the tax on “excess distributions”
or any gain, (a) the “excess distribution” or the gain would be allocated ratably to each day in your holding
period, (b) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which
we were a PFIC would be taxed as ordinary income in the current year, (c) the amount allocated to other taxable years would
be taxable at the highest applicable marginal rate in effect for that year, and (d) an interest charge at the rate for underpayment
of taxes for any period described under (c) above would be imposed on the resulting taxability on the portion of the “excess
distribution” or gain that is allocated to such period.
If we were a PFIC in any taxable year during
which your held our ADSs or common shares, under certain attribution rules, you will be deemed to own your proportionate share
of lower-tier PFICs, and will be subject to U.S. federal income tax on (a) a distribution on the shares of a lower-tier PFIC
and (b) a disposition of shares of a lower-tier PFIC, both as if you directly held the shares of such lower-tier PFIC. In
addition, no distribution that you receive from us would qualify for taxation at the reduced rate of taxation discussed in the
“—Dividends on ADSs and common shares” section above.
You would generally be able to avoid
the “excess distribution” rules described above by making a timely so-called “mark-to- market” election
with respect to your ADSs provided our ADSs are “marketable”. Our ADSs will be “marketable” as long as
they remain regularly traded on a national securities exchange, such as the New York Stock Exchange. If you make a mark-to-market
election for the ADSs, you will include in income for each year that we are a PFIC an amount equal to the excess, if any, of the
fair market value of the ADSs as of the close of your taxable year over your adjusted basis in such ADSs. Any ordinary income resulting
from this election would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of tax applicable
to qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously included income
as a result of the mark-to-market election, if any. Your basis in the ADSs would be adjusted to reflect any such income or loss.
You should consult your own tax advisor regarding potential advantages and disadvantages to you of making a “mark-to- market”
election with respect to your ADSs. The mark-to-market election will not be available for any lower tier PFIC that is deemed owned
pursuant to the attribution rules discussed above.
Alternatively, you can make a qualified
electing fund or QEF election to include annually your pro rata share of our earnings and net capital gains currently in income
each year, regardless of whether or not dividend distributions are actually distributed. However, you may make a qualified electing
fund election with respect to our company only if we agree to furnish you annually with certain tax information, and we do not
presently intend to prepare or provide such information.
You are urged to consult your own tax
advisor concerning the making of such a QEF election and in particular with regard to the application of the “excess distribution”
rules to you on any gain realized on the disposition or deemed disposition of your ADSs or common shares, regardless of whether
we continue to be a PFIC in the year in which you receive an “excess distribution” or dispose of or are deemed to dispose
of your ADSs or common shares should you not make the QEF election with respect to the 2016 taxable year.
If we were a PFIC for any taxable year during
which you held our ADSs or common shares, you must file IRS Form 8621 for each taxable year in which you recognize any gain
on the sale or other disposition of your ADS or common shares, receive deemed or actual distributions from us, or make certain
elections (including a QEF and mark-to-market election) with respect to your ADSs or common shares. In addition, unless otherwise
provided by the U.S. Treasury, each U.S. Holder of a PFIC is required to file an annual report containing such information as the
U.S. Treasury may require. You should consult your own tax advisor as to the application of any information reporting requirements
to you resulting from our status as a PFIC.
U.S. Information Reporting and Backup
Withholding Rules
In general, dividend payments with respect
to the ADSs and common shares and the proceeds received on the sale or other disposition of ADSs and common shares may be subject
to information reporting to the IRS and to backup withholding. Backup withholding will not apply, however, if you provide a taxpayer
identification number, certify as to no loss of exemption from backup withholding and otherwise comply with the applicable backup
withholding rules. To establish your status as an exempt person, you will generally be required to provide certification on IRS
Form W-9. Any amounts withheld from payments to you under the backup withholding rules that exceed your U.S. federal
income tax liability will be allowed as a refund or a credit against your U.S. federal income tax liability, provided that you
timely furnish the required information to the IRS. Certain individuals holding common shares or ADSs other than in an account
at a U.S. financial institution may be subject to additional information reporting requirements.
PROSPECTIVE PURCHASERS OF OUR ADSS AND COMMON
SHARES SHOULD CONSULT THEIR OWN TAX ADVISOR REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS
AS WELL AS ANY OTHER TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF OUR ADSS AND COMMON SHARES, INCLUDING
THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR NON-US JURISDICTION AND INCLUDING ESTATE, GIFT AND INHERITANCE
LAWS.
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Dividends and Paying Agents
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Not applicable.
Not applicable.
We previously filed with the Securities
and Exchange Commission our registration statement on Form F-1 (File No. 333- 199150), as amended.
We have filed this annual report on Form 20-F
with the Securities and Exchange Commission under the Exchange Act.
Statements made in this annual report as
to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit
to this annual report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
We are subject to the informational requirements
of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information
which the Company filed with the Securities and Exchange Commission, including this annual report on Form 20-F, may be inspected
and copied at the public reference room of the Securities and Exchange Commission at 100 F Street, N.E., Washington D.C., 20549.
You can also obtain copies of this annual
report on Form 20-F by mail from the Public Reference Section of the Securities and Exchange Commission, 100 F Street,
N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and
Exchange Commission’s Internet site at
http://www.sec.gov
. The Commission’s telephone number is 1-800-SEC-0330.
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Subsidiaries Information
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Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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Quantitative and Qualitative Disclosures about Market Risk
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Foreign Exchange Risk
The conversion of Renminbi is highly regulated.
In addition, the value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other
things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including
U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005, the PRC government changed its policy of pegging
the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band
against a basket of certain foreign currencies. There remains significant international pressure on the PRC government to adopt
a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the
value of the Renminbi against the U.S. dollar.
The Renminbi is the reporting currency
for our consolidated financial statements. Since we conduct our operations through our PRC subsidiaries and affiliated companies,
the functional currency of our PRC subsidiaries and affiliated entities is Renminbi. Transactions in other currencies are recorded
in Renminbi at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other
currencies are re-measured into Renminbi at rates of exchange in effect at the balance sheet dates.
Substantially
all our revenue and related expenses, including cost of revenues and advertising expenses, are denominated and paid in Renminbi,
while a portion of our cash and cash equivalents, long-term loans payable and notes payable are denominated in U.S. dollars.
Our exposure to foreign exchange risk primarily relates to those financial assets and financial liabilities denominated in U.S. dollars.
Any significant revaluation of RMB against the U.S. dollar may materially affect our earnings and financial position, and
the value of, and any dividends payable on, our ADS in U.S. dollars. See “Item 3.D. Key Information—Risk
Factors—Risks Related to Doing Business in China—Fluctuations in exchange rate may have a material adverse effect on
our results of operations and the value of your investment.” We have not hedged exposures denominated in foreign currencies
using any derivative financial instruments.
The RMB depreciated by 6.70% against the
U.S. dollar in 2016. A hypothetical 10% increase in the exchange rate of the U.S. dollar against the RMB would have
resulted in an increase of RMB236.7 million (US$34.1 million) in the value of our U.S. dollar-denominated long-term debts
as of December 31, 2016.
Interest Rate Risk
Our main interest rate exposure relates
to bank borrowings. In addition, our US$150 million syndicated loan bears interest at an applicable LIBOR plus a margin of 3.5%
per annum. We also have interest-bearing assets, including cash and cash equivalents and restricted cash. We have not used any
derivative financial instruments to hedge interest rate risk. As of December 31, 2016, our outstanding borrowing balance was RMB3,694.0
million, of which approximately 56% was at fixed rates, and the remaining 44% was at floating rates. As of December 31, 2016,
if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount outstanding
as of December 31, 2016 that bear floating interest was outstanding for the entire fiscal year, our interest expenses would increase/decrease
by RMB16.2 million for the year ended December 31, 2016.
Inflation
Inflation in China has not materially impacted
our results of operations in recent years. According to the National Bureau of Statistics of China, the change of consumer price
index in China was 2.0%, 1.4% and 2.0% in 2014, 2015 and 2016, respectively.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
Not applicable.
Not applicable.
|
D.
|
American Depositary Shares
|
Fees Payable by ADS Holders
JPMorgan
Chase Bank, N.A., the depositary of our ADS program, collects its fees for delivery and surrender of ADSs directly from investors
depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them.
Depositary
fees payable in connection with distributions of cash or securities to ADS holders and the depositary service fee are charged by
the depositary to the holders of record of ADSs as of the applicable ADS record date. In the case of cash distributions, the depositary
fees are generally deducted from the cash being distributed. In the case of distributions other than cash (e.g., stock dividends,
rights, etc.), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution.
In the case of ADSs registered in the name of the investor (whether certificated or in DRS), the depositary sends invoices to the
applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary generally
collects its fees through the settlement systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC)
from the brokers and custodians holding ADSs in their DTC accounts.
In the event of refusal to pay the depositary
fees the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may
set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Persons depositing or withdrawing shares must pay:
|
|
For:
|
Up to $5.00 per 100 ADSs (or fraction thereof).
|
|
Issuance of ADSs.
|
|
|
Cancellation of ADSs.
|
|
|
Distribution of cash dividends or other cash distributions.
|
|
|
Distribution of ADSs pursuant to share dividends or other free share distributions or exercise of rights.
|
|
|
Depositary Service Fee
|
|
|
Distribution of securities other than ADSs or rights to purchase additional ADSs.
|
$1.50 per certificate presented for transfer.
|
|
Transfer of ADRs.
|
|
|
|
Taxes and other governmental charges the depositary or the custodian has to pay on any ADS or common share.
|
|
As necessary.
|
|
|
|
Registration or transfer fees.
|
|
Transfer and registration of common shares on the share register to or from the name of the custodian or depositary in connection with the deposit or withdraw of common shares.
|
|
|
|
Expenses of the depositary.
|
|
Cable, telex, fax transmissions and delivery expenses.
|
|
|
Converting foreign currency to U.S. dollars
|
|
|
|
Any charges incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to the shares, deposited securities, ADSs and ADRs.
|
|
As necessary.
|
|
|
|
Any charges incurred by the depositary for servicing or delivering the common shares on deposit.
|
|
As necessary.
|
Fees Payable by the Depositary to Us
For the year ended December 31, 2016, we
did not receive any reimbursement fee from the depositary.
The accompanying notes are an integral part of the consolidated
financial statements.
The accompanying notes are an integral part of the consolidated
financial statements.
The accompanying notes are an integral part of the consolidated
financial statements.
The accompanying notes are an integral part of the consolidated
financial statements.
The accompanying notes are an integral part of the consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
On August 3, 2007,
eHi Car Services Limited (the “Company”), formerly known as Prudent Choice Limited or eHi Auto Services Limited, was
incorporated in the Cayman Islands by Ray Ruiping Zhang (the “Founder”). The Company, through its subsidiaries, provides
car rentals and car services to corporate and individual customers in the People’s Republic of China (“PRC”).
The Company and its subsidiaries began offering services in 2006 through Shanghai eHi Business Co., Ltd. (“eHi Business”),
which was incorporated on January 11, 2006. The Company’s business initially focused on providing car services to premium
corporate and institutional clients. In May 2008, the Company began to provide car rentals to individual customers.
To further expand
the Company’s internet and mobile services, the Company entered into a series of contractual arrangements in March 2014 with
its PRC-incorporated variable interest entity (“VIE”) Shanghai eHi Information Technology Service Co., Ltd. (“eHi
Information”) and its shareholders. eHi Information obtained a telecommunication business operating license (“ICP license”)
from the relevant telecommunication authorities on September 24, 2014. eHi Information currently does not have any material operations.
In January 2015, the
Company entered into a series of contractual arrangements with its PRC-incorporated VIE Shanghai eHi Car Sharing Information Technology
Co., Ltd. (“eHi Car Sharing”) and its shareholders. eHi Car Sharing is currently testing its new business initiative
as an online platform for peer-to-peer car rental between private vehicle owners and individual customers. eHi Car Sharing is currently
not yet in operation and the Company does not expect it to contribute a material portion of its net revenues and operations in
the foreseeable future.
As of December 31,
2016, the Company and its principal subsidiaries and VIEs are as follows:
|
|
Percentage of
ownership or indirect
economic ownership
|
|
|
Date of
incorporation/
acquisition
|
|
Place of
incorporation
|
Parent company and offshore holding companies
|
|
|
|
|
|
|
|
|
eHi Car Services Limited (“Company”)
|
|
|
Parent
|
|
|
August 3, 2007
|
|
Caymans
|
eHi Auto Services (Hong Kong) Holding Limited (“eHi Hong Kong”)
|
|
|
100
|
%
|
|
September 24, 2010
|
|
Hong Kong
|
L&L Financial Leasing Holding Limited
|
|
|
100
|
%
|
|
October 17, 2013
|
|
Hong Kong
|
Brave Passion Limited (“Brave Passion”)
|
|
|
100
|
%
|
|
May 26, 2015
|
|
British Virgin Islands
|
Wholly owned subsidiaries
|
|
|
|
|
|
|
|
|
Shuzhi Information Technology (Shanghai) Co., Ltd. (“Shuzhi”)
|
|
|
100
|
%
|
|
March 21, 2008
|
|
PRC
|
Shanghai eHi Car Rental Co., Ltd (“eHi Rental”)
|
|
|
100
|
%
|
|
March 10, 2008
|
|
PRC
|
Beijing eHi Car Rental Co., Ltd. (subsidiary of eHi Rental)
|
|
|
100
|
%
|
|
August 20, 2008
|
|
PRC
|
Chongqing eHi Car Rental Co., Ltd. (subsidiary of eHi Rental)
|
|
|
100
|
%
|
|
December 5, 2009
|
|
PRC
|
Shanghai Smart Brand Auto Driving Services Co., Ltd (“Shanghai Smart Brand,” subsidiary of Shuzhi)
|
|
|
100
|
%
|
|
April 13, 2011
|
|
PRC
|
eHi Auto Services (Jiangsu) Co., Ltd. (subsidiary of eHi Hong Kong)
|
|
|
100
|
%
|
|
December 23, 2011
|
|
PRC
|
Shanghai eHi Chengshan Car Rental Co., Ltd. (subsidiary of eHi Rental)
|
|
|
100
|
%
|
|
August 16, 2012
|
|
PRC
|
Shanghai Taihan Trading Co., Ltd
|
|
|
100
|
%
|
|
November 10, 2013
|
|
PRC
|
Shanghai Taihao Financial Leasing Co.,Ltd
|
|
|
100
|
%
|
|
January 7, 2014
|
|
PRC
|
Shanghai Taide Financial Leasing Co., Ltd
|
|
|
100
|
%
|
|
June 23, 2014
|
|
PRC
|
eHi Car Rental Management Services (Shanghai) Co., Ltd (subsidiary of eHi Rental)
|
|
|
100
|
%
|
|
November 10, 2015
|
|
PRC
|
Consolidated variable interest entities (“VIEs”)
|
|
|
|
|
|
|
|
|
Shanghai eHi Information Technology Service Co., Ltd. (“eHi Information”)
|
|
|
100
|
%
|
|
March 13, 2014
|
|
PRC
|
Shanghai eHi Car Sharing Information Technology Co., Ltd. (“eHi Car Sharing”)
|
|
|
100
|
%
|
|
January 12, 2015
|
|
PRC
|
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued)
On November 18, 2014,
the Company completed its initial public offering (“IPO”) and became listed on the New York Stock Exchange by issuing
10,000,000 American Depositary Shares (“ADSs”) at the price of US$12.00 per ADS for total gross proceeds of US$120
million. Each ADS represents two Class A common shares. The Company issued an additional 8,333,332 Class A common shares in a private
placement concurrent with the IPO, at the price of $6.00 per Class A common share for total proceeds of US$50 million. Upon the
completion of the IPO, all of the Company’s 77,999,069 then-outstanding preferred shares and 6,096,842 then-outstanding common
shares were immediately converted into and/or re-designated as Class B common shares.
On May 22, 2015, the
Company entered into definitive securities purchase agreements with Tiger Fund and SRS Funds pursuant to which the Company agreed
to issue a total of 22,337,924 of the Company’s Class A common shares at a price of US$6.00 per Class A common share (equivalent
to US$12.00 per ADS). The Company raised gross proceeds of approximately US$134.0 million on the transaction date and incurred
transaction costs of approximately US$4.3 million from this private placement transaction which were recorded as a reduction to
the equity contribution.
Commencing with the
fourth quarter of 2015, the Company began reporting gross profit as a GAAP measure included in its results of operations. For
further description, refer to Note 2(ac).
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a)
Basis
of presentation
The consolidated financial
statements of the Company, its subsidiaries and the VIEs are prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
(b)
Principles
of consolidation
The consolidated financial
statements include the financial statements of the Company, its subsidiaries, and the VIEs for which the Company is the ultimate
primary beneficiary. Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half
of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the
members of the board of directors, or to cast a majority of votes at the meeting of directors.
A VIE is an entity
in which the Company, or its subsidiary, through contractual arrangements, bears the risks of, and enjoys the rewards normally
associated with, ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
The VIEs for which the Company is the ultimate primary beneficiary, eHi Information and eHi Car Sharing, have insignificant operations;
related balances and transactions are immaterial for all periods presented.
All transactions and
balances among the Company, its subsidiaries, and the VIEs have been eliminated in consolidation.
(c)
Use
of estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from such
estimates. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance
for doubtful accounts, costs related to customer loyalty programs, useful lives of vehicles and other tangible or intangible assets,
residual values of vehicles, impairment of intangibles and long-lived assets, certain accruals or contingent liabilities, valuation
allowances for deferred tax assets, provisions for uncertain tax positions, and valuation of share-based awards and forfeiture
rates.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(d)
Foreign
currency and foreign currency translation
The Company uses Renminbi
(“RMB”) as its reporting currency. The functional currency of the Company and its subsidiaries incorporated outside
of the PRC is the United States dollar (“US$”), while the functional currency of the PRC entities is RMB as determined
based on the criteria of ASC 830, Foreign Currency Matters.
Transactions denominated
in other than the functional currencies are re-measured into the functional currency of the entity at the exchange rates prevailing
on the transaction dates. Foreign currency denominated financial assets and liabilities are re-measured at the balance sheet date
exchange rate. The resulting exchange differences are included in the consolidated statements of comprehensive income (loss) as
general and administrative expenses. Transaction gains and losses resulting from intercompany foreign currency transactions that
are of a long-term investment nature are treated in the same manner as translation adjustments and included in cumulative translation
adjustments, which is a separate component of shareholders’ equity in the consolidated financial statements.
Assets and liabilities
of the Company and its subsidiaries incorporated outside of the PRC are translated into RMB at year-end exchange rates. Income
and expense items are translated at average exchange rates prevailing during the year. Translation adjustments are reported as
foreign currency translation adjustments and are shown as a component of other comprehensive income or loss in the consolidated
statements of changes in shareholders’ equity (deficit). The rates of exchange for the U.S. dollar used for translation purposes
were RMB6.4936 on December 31, 2015 and RMB6.9370 on December 31, 2016. The average rates of exchange for the U.S. dollar used
for translation purposes were RMB6.1428, RMB6.2284, and RMB6.6401 for 2014, 2015, and 2016, respectively.
The unaudited United States
dollar (“US$”) amounts disclosed in the accompanying financial statements are presented solely for the convenience
of the reader. Unless the amounts were from transactions originally denominated in U.S. dollars or otherwise noted, all translations
from RMB into U.S. dollars and from U.S. dollars to RMB for the convenience of the reader were calculated at the rate of US$1.00 =
RMB6.9430 on December 31, 2016, representing the noon buying rate in The City of New York for cable transfers
of RMB as certified for customs purposes by the Federal Reserve Board. No representation is made that the RMB amounts could have
been, or could be, converted into US$ at such rate.
(e)
Concentration
of credit risk
Financial instruments
that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable.
The Company deposits
its cash and cash equivalents with financial institutions located in jurisdictions where the subsidiaries are located. The Company
believes that no significant credit risk exists as these banks are major financial institutions with high credit quality.
When providing services,
the Company generally requires individual customers to make advance payments, or a deposit from the corporate and institutional
clients before services are rendered. Accounts receivable primarily represents those receivables derived in the ordinary course
of business in relation to corporate and institutional clients. The Company offers payment terms in the range of 45 — 60
days to all corporate and institutional clients. Substantially all revenue was derived from customers located in China.
No single customer
accounted for more than 10% of the Company’s consolidated accounts receivable as of December 31, 2015 and 2016, or for
more than 10% of the Company’s consolidated net revenues in any of the periods presented.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(f)
Cash
and cash equivalents
Cash and cash equivalents
consist of cash in banks, which are unrestricted as to withdrawal or use.
(g)
Restricted
cash
Restricted cash includes
cash and cash equivalents that are not readily available for the Company’s normal disbursements. Restricted cash and cash
equivalents are primarily related to cash deposits with banks and financial institutions required as part of the Company’s short-term
borrowing arrangements (Note 9) and syndicated loan (Note 10).
(h)
Investments
For investments where
the Company does not have a controlling financial interest, the Company evaluates if they are investments in debt and equity securities
and if they provide the Company with the ability to exercise significant influence over the operating and financial policies of
the investees. Investments in debt and equity securities are classified into one of three categories: (i) ‘‘held
to maturity’’ which are reported at amortized cost; (ii) ‘‘trading securities’’ which
are reported at fair value with unrealized holding gains and losses recorded in earnings; and (iii) ‘‘available
for sale’’ which are reported at fair value with changes in unrealized gains and losses recorded in other comprehensive
income. The equity method is used for investments where the Company does not have a controlling financial interest but has the
ability to exercise significant influence over the operating and financial policies of the investee. The cost method is used for
investments where the Company does not have the ability to exercise significant influence over the operating and financial policies
of the investee.
Investments are evaluated
for impairment when facts or circumstances indicate that the fair value of an investment is less than its carrying value. The Company
reviews several factors to determine whether a loss is other-than-temporary including, but not limited to, (1) nature of the investment;
(2) cause and duration of the impairment; (3) extent to which fair value is less than cost; (4) current economic
and market conditions; and (5) ability to hold the security for a period of time sufficient to allow for any anticipated recovery
in fair value.
(i)
Accounts
receivable, net of allowance for doubtful accounts
Accounts receivable
mainly consist of amounts due from the Company’s corporate and institutional clients, which are recognized and carried at
the original invoice amount less an allowance for doubtful accounts. The Company performs ongoing credit evaluation of its customers,
and assesses the allowance for doubtful accounts based upon expected collection ability based on the age of the receivables and
factors surrounding the credit risk of specific customers.
(j)
Short
term loan receivable
Short-term loan receivables
consist of loans extended to third-parties and are recorded at amortized cost. The Company records interest on an accrual basis
and recognizes it in "Interest income" as earned in accordance with the contractual terms of the loan agreement, to the
extent that such amounts are expected to be collected.
(k)
Vehicles
held for sale
Vehicles held for
sale consist of used vehicles subject to signed sales agreements awaiting completion of title transfer. When a vehicle is reclassified
as held for sale and transferred from property, plant and equipment, it is not further depreciated and is stated at lower of cost
and net realizable value. Cost is the net book value upon the reclassification of the vehicle. Net realizable value is the selling
price in accordance with the sales agreement less the estimated costs to be incurred upon the completion of title transfer. As
of December 31, 2016, the vehicles reclassified as held for sale are expected to complete title transfer within one year.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(l)
Property
and equipment, net
Property and equipment
is stated at cost, less accumulated depreciation and impairment. Initial cost is comprised of the purchase price, plus any costs
directly attributable to bringing the property and equipment to the location and condition necessary for its intended use. Depreciation
of property and equipment is
calculated
on a straight-line basis, after consideration of expected
useful lives and estimates of residual values. The Company begins depreciating vehicles when they are ready for their intended
use. The estimated useful lives of these assets are generally as follows:
Category
|
|
Estimated useful lives
|
Vehicles
|
|
3-4 years
|
In-car equipment
|
|
3 years
|
Office furniture and equipment
|
|
5 years
|
Software
|
|
3 - 5 years
|
Building
|
|
39 years
|
Leasehold improvements
|
|
Over the shorter of the lease term or the estimated useful life - 1-5 years
|
Construction in progress
represents offices under construction and newly acquired vehicles which are not yet been placed in service. Construction in progress
is
transferred
to property and equipment and depreciation commences when an asset is ready
for its intended use.
Vehicles
A vehicle is considered
ready for its intended use generally when the license plate for the vehicle is obtained, the vehicle is insured, and when a GPS
tracking
device
is installed. Expenditures for repairs and maintenance of vehicles are expensed
as incurred. The Company expects to hold its vehicles generally for a period of approximately three to four years before their
disposal, except for vehicles subject to repurchase programs, which have a holding period that typically ranges from 12 to 24 months.
The estimated residual value of vehicles which are not subject to the repurchase programs are typically based on the current market
price for used vehicles obtained from used vehicle dealers or the used car market for similar models.
The Company monitors
accounting estimates relating to vehicles on a quarterly basis, including the depreciation rates and estimated residual values.
Changes made to estimates are reflected in vehicle-related depreciation expense on a prospective basis. In addition, depreciation
expense associated with vehicles subject to repurchase programs is recorded based on the contractual repurchase prices and holding
periods, and is adjusted if the repurchase conditions are not met. When a vehicle is reclassified as held for sale, it is not further
depreciated and is accounted for as held for sale. Gain or loss on disposed vehicles or vehicles held for sale is recognized as
an adjustment to depreciation expense as part of cost of revenues. The Company recorded losses of RMB516,550 , RMB5,055,620 and
a gain of RMB1,848,313 on disposals of vehicles or held-for-sale reclassifications for the years ended December 31, 2014,
2015 and 2016, respectively. The Company fully writes off the net carrying value of a vehicle if the vehicle cannot be tracked
via the installed GPS system for more than six months and cannot be otherwise located, as the Company believes that the chance
of recovering the vehicle in such circumstances is remote, such losses are recorded as part of cost of revenues.
(m)
Intangible
assets
Intangible assets
are substantially comprised of car rental operating licenses and vehicle license plates acquired from third parties and local
administration
authorities. Gross carrying value totaled RMB45,367,164 and RMB64,101,470 as of December 31, 2015 and 2016, respectively.
The car rental operating licenses are originally assigned a
fixed operating period, which can be extended upon expiration without significant additional cost. The Company also believes that
there is no significant risk involved in the car rental operating license renewal process. Further, there are no legal, regulatory,
or contractual provisions of which the Company is aware that may limit the useful life of such licenses. As such, the Company considers
such car rental operating licenses to be indefinite-lived and carries them at cost less any subsequent impairment losses. Vehicle
license plates do not expire and require no renewal. Therefore, they are similarly
considered
to be indefinite-lived and are carried at cost less any subsequent accumulated impairment losses.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(n)
Impairment
of intangible assets and long-lived assets
The Company evaluates
intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the assets might
be impaired. For long-lived assets, when these events occur, the Company evaluates impairment by comparing the
carrying
value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their
eventual disposition. For indefinite lived assets, the impairment test consists of a comparison of the fair value with carrying
value. If the carrying value of an intangible asset exceeds its fair value, which is generally determined using the income approach,
market approach, or a combination thereof, an impairment loss is recognized. No impairment charges were recognized for the years
ended December 31, 2014, 2015, and 2016.
(o)
Deposits
and advances from customers
Customer deposits:
The Company collects
deposits from corporate and institutional clients upon entering into negotiated contracts, and such amount is refundable at the
end of the contract period provided no contract violations are noted. For individual customers, the Company collects additional
amounts from them upon return of the rental vehicle based on the estimated repair and other relevant costs. In situations where
the contract is violated or damage is caused to the vehicle, customer deposits received are used to offset expenses incurred in
the period such incidents occur, and the excess amount is returned to customers. The customer deposits are classified as accrued
expenses and other current liabilities on the consolidated balance sheets. The Company records a loss in the consolidated statements
of comprehensive income (loss) if expenses incurred for repair exceed customer deposit amounts.
Advances from customers:
Individual customers
pay in advance prior to the rental vehicle pick-up. Payments received from customers are initially recorded as advances from customers
and are recognized as revenues when revenue recognition criteria are met.
(p)
Revenue
recognition
Revenue from car rentals
and car services are generally recognized over the rental period. Revenue from the sale of gasoline is recognized when the vehicle
is returned and is based on the actual volume of gasoline consumed or a contracted fee paid by the customer. For car rentals, payments
are
generally
collected from customers in advance, and are recorded as advances from customers
in the consolidated balance sheets until the revenue recognition criteria are met. Customers who purchase car services are generally
on credit terms, and the initial credit evaluation is conducted before credit is extended. Revenue is recognized when collectability
is reasonably assured and all other revenue recognition criteria are met.
Occasionally, the
Company engages contracted service providers in offering car services to its customers where the Company currently does not provide
such services in certain cities or such services exceed the Company’s existing capacity. The end customers sign service contracts
directly with the
Company
in such arrangements and the Company is the party responsible for
customers’ acceptance for services rendered. In case of customer disputes, the Company resolves customer complaints and is
solely responsible for refunding customers their payments. Therefore, the Company is considered the primary obligor in transactions
involving the use of contracted service providers. The Company also determines the service fee and bears the credit risk. As a
result, the Company recognizes revenue under contracted service provider arrangements on a gross basis.
In the accompanying
consolidated
statements
of comprehensive income (loss), revenue is presented net of business
tax, VAT and other related surcharges. Costs of revenue associated with car rentals and car services have not been presented separately
as the Company cannot reasonably and reliably estimate and allocate expenses to each of the revenue streams.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(q)
Lease
Obligations
In accordance with
ASC 840, Leases, leases for a lessee are classified at the inception date as either a capital lease or an operating lease. The
Company assesses a lease to be a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee
by the end of the lease
term
, b) there is a bargain purchase option, c) the lease term is
at least 75% of the property's estimated remaining economic life or d) the present value of the minimum lease payments at the beginning
of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease
is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. The
capitalized lease obligation reflects the present value of future rental payments, discounted at the appropriate interest rates.
The cost of the asset is amortized over the lease term. However, if ownership is transferred at the end of the lease term, the
cost of the asset is amortized as set out under the property and equipment section of this note.
Operating lease expenses
are recognized on a straight-line basis over the applicable lease term.
(r)
Net
investment in direct financing leases
For leases where the
Company is the lessor, a transaction is accounted for as a direct financing lease if the transaction satisfies one of the four
capital lease conditions as discussed under the capital lease obligations section of this note, the collectability of the minimum
lease
payments
is reasonably predictable, and there are no important uncertainties surrounding
the amount of unreimbursable costs yet to be incurred by the Company under the lease.
The net investment
in the direct financing leases consists of the minimum lease payments, net of executory costs and profits thereon, unguaranteed
residual value, accruing to the benefit of the company and initial direct costs less unearned income. Over the period of a lease,
each lease payment received is allocated between the repayment of the net investment in the lease and financing lease income based
on the effective interest method so as to produce a constant rate of return on the balance of the net investment in the lease.
The net investment in the direct financing leases is classified as current or non-current assets in the balance sheets based on
the duration of the remaining lease terms.
The Company records
revenue attributable to direct financing leases so as to produce a constant rate of return on the balance of the net investment
in the lease. Total direct financing leases revenues were RMB 1,167,659, RMB7,197,316 and RMB10,140,216 for the years ended December
31, 2014, 2015
and
2016, respectively, and were recorded in car rental revenues in the consolidated
statements of comprehensive income (loss).
(s)
Customer
loyalty program
The Company has a
customer loyalty program where registered members earn points upon eligible purchases and such points can be redeemed for
free
rental periods, mileage upgrades, and other free gifts. The Company estimates the incremental costs associated with the Company’s
future obligation to its customers, and records them as selling and marketing expense in the consolidated statements of comprehensive
income (loss). Unredeemed membership points are recorded in accrued expenses and other current liabilities in the consolidated
balance sheets. The Company adjusts the liability associated with the customer loyalty program based on the Company’s
estimate of future redemption of membership points prior to their expiration, which is three calendar years from the day the membership
points are awarded. As of December 31, 2015 and 2016, the accrued liabilities associated with the customer loyalty program
were RMB4,412,036 and RMB7,185,774, respectively.
(t)
Advertising
costs
The Company expenses
advertising costs as incurred. Total advertising expenses were RMB16,104,661, RMB28,946,698 and RMB38,968,240 for the years ended
December 31, 2014, 2015 and 2016, respectively, and were recorded in selling and marketing expenses in the
consolidated
statements of comprehensive income (loss).
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(u)
Taxation
Deferred income taxes
are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated
financial statements, net operating loss carry forwards and tax credits, if any. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Current income taxes are provided in accordance with the laws of the relevant taxing authorities. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in which temporary differences
are expected to be received or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized
in the statement of operations in the period of the enactment of the change. The components of deferred tax assets and liabilities
are individually classified as current and non-current based on the characteristics of the underlying assets and liabilities, or
the expected timing of their use when they do not relate to a specific asset or liability.
The Company considers
positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be
realized. This
assessment
considers, among other matters, the nature, frequency and severity
of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience
with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent
upon its ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and
during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets,
the Company has considered possible sources of taxable income including (i) future reversals of existing taxable temporary
differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future
taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be
reflected for a company operating in the car rental industry.
The Company recognizes
a tax benefit associated with an uncertain tax position when, in its judgment, it is more likely than not that the position will
be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold,
the Company initially and subsequently measures the tax benefit as the largest amount that the Company judges to have a greater
than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The Company’s liability associated
with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case
law developments and new or emerging
legislation
. Such adjustments are recognized entirely
in the period in which they are identified. The Company’s effective tax rate includes the net impact of changes in the liability
for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The Company classify interest
and penalties recognized on the liability for unrecognized tax benefits as income tax expense.
(v)
Government
grants and subsidy income
The Company receives
government grants and subsidies in the PRC from various levels of local governments from time to time which are granted for general
corporate purposes
and
to support its ongoing operations in the regions. The Company is also
entitled to receive financial subsidies in relation to the VAT Pilot Program as discussed in Note 13. These government subsidies
are recorded as other operating income in the consolidated statement of comprehensive income (loss) in the period cash is received.
For government grants that contain certain operating conditions, the amounts are recorded as liabilities when received, and are
recognized in the consolidated statements of comprehensive income (loss) as a reduction of the related costs for which the grants
are intended to compensate when the conditions are met. Government grants relating to property, plant and equipment are included
in non-current liabilities as deferred government grants and are credited to the consolidated statements of comprehensive income
(loss) as reductions to depreciation expense on a straight-line basis over the expected lives of the related assets.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(w)
Fair
value measurements
Fair value is the
price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the
measurement
date. When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and it considers assumptions that market participants would use when pricing the asset or liability.
The established fair
value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when
measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level
of input that is significant to the fair value measurement.
The three levels of
inputs that may be used to measure fair value include:
Level 1:
Quoted
prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Observable
,
market-based inputs, other than quoted prices, in active markets for identical assets or liabilities.
Level 3:
Unobservable
inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts
receivable, short-term loans receivable, accounts payable, advances from customers, certain accrued expenses and other current
liabilities, and short-term and long-term debt. The carrying amounts of short-term financial instruments, excluding short-term
debt, approximate their fair values due to the short-term maturity of these instruments. The carrying amounts of short-term debt
as of December 31, 2015 and December 31, 2016 approximate their fair values as the interest rates they bear reflected
the current quoted market yield for comparable debt (Level 2 inputs). The fair value of long-term borrowings is estimated based
on quoted market rates as well as borrowing rates currently available for borrowings with a similar term, and the fair value of
2018 Senior Notes is estimated based on the average of the bid and ask price as of December 31, 2015 and December 31, 2016 (Level 2
inputs).
The fair value of long-term debts including
long-term borrowings and 2018 Senior Notes were RMB2,506,136,601 and RMB3,214,860,166 as of December 31, 2015 and 2016, as follows:
|
|
As of December 31, 2015
|
|
|
As of December 31, 2016
|
|
|
|
Nominal Unpaid
Principal Balance
|
|
|
Aggregate Fair Value
|
|
|
Nominal Unpaid
Principal Balance
|
|
|
Aggregate Fair Value
|
|
Long-term borrowings, including current portion
|
|
|
1,166,594,365
|
|
|
|
1,217,498,714
|
|
|
|
1,747,583,173
|
|
|
|
1,755,993,820
|
|
2018 Senior Notes
|
|
|
1,298,720,000
|
|
|
|
1,288,637,887
|
|
|
|
1,387,400,000
|
|
|
|
1,458,866,346
|
|
Total long-term debt
|
|
|
2,465,314,365
|
|
|
|
2,506,136,601
|
|
|
|
3,134,983,173
|
|
|
|
3,214,860,166
|
|
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(x)
Vehicle
purchase deposits
The Company purchases
vehicles through car dealers and makes advance payments in the ordinary course of business before title of vehicles are
physically
transferred to the Company. As the advance payments will be converted into property and equipment, which is a non-current asset,
vehicle purchase deposits are accordingly classified as non-current assets on the consolidated balance sheets.
(y)
Share-based
compensation
The Company recognizes
share-based compensation based on the grant date fair value of equity awards, with compensation expense, net of a forfeiture rate,
recognized over the period in which the grantee is required to provide services to the Company in exchange for the equity award.
Share-based compensation expense is recognized
(i) i
mmediately
at the grant date for awards with no vesting conditions or (ii)
using the straight-line method for awards with graded vesting
features and service conditions only. Share-based compensation expense is classified in the consolidated statements of comprehensive
income (loss) based upon the job function of the grantee. For the years
ended
December 31,
2014, 2015 and 2016, the Company recognized share-based compensation expense of RMB12,681,141, RMB13,983,246 and RMB16,040,947,
respectively, as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Cost of revenues
|
|
|
133,801
|
|
|
|
361,951
|
|
|
|
839,543
|
|
Selling and marketing expenses
|
|
|
489,831
|
|
|
|
894,680
|
|
|
|
401,498
|
|
General and administrative expenses
|
|
|
12,057,509
|
|
|
|
12,726,615
|
|
|
|
14,799,906
|
|
Total
|
|
|
12,681,141
|
|
|
|
13,983,246
|
|
|
|
16,040,947
|
|
(z)
Debt
issuance costs and debt discounts
The Company incurs
costs in connection with debt issuance, such as legal and accounting fees. Debt issuance costs and debt discounts are initially
recorded as
direct
deduction from the associated debt liability, and are amortized to interest
expense over the term of the respective debt using the effective interest method.
(aa)
Earnings
(loss) per share
Basic earnings (loss)
per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common
shares
outstanding
during the period using the two-class method. Under the two-class method,
net income is allocated between common shares and other participating securities based on their participating rights. Net loss
is not allocated to other participating securities if based on their contractual terms they are not obligated to share in the losses.
Diluted earnings (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted
average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist
of shares issuable upon the exercise of share options using the treasury stock method. Common equivalent shares are not included
in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
Basic and diluted
earnings (loss) per share are not reported separately for Class A or Class B common shares as each class of shares has the same
rights to
undistributed
and distributed earnings.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(ab)
Segment
reporting
In accordance with
ASC 280, Segment Reporting, the Company’s chief operating decision maker, the Chief Executive Officer, reviews the consolidated
results when making decisions about allocating resources and assessing performance of the Company as a whole and hence, the Company
has only one reportable segment. The Company does not distinguish between markets or segments for the purpose of internal reporting.
The Company’s long-lived assets are substantially all located in the PRC and substantially all of the Company’s revenues
are derived from within the PRC. Therefore, no geographical segments are presented.
(ac)
Presentation
of results of operations
Commencing with the
fourth quarter of 2015, the Company began reporting gross profit as a GAAP measure included in its results of operations in the
accompanying consolidated statements of comprehensive income (loss). This measure is defined, consistent with generally accepted
accounting principles, as net revenues reduced by cost of revenues. The Company previously reported the caption “vehicle
operating expenses”. The Company has evaluated its presentation of results of operations and has concluded all relevant
costs of revenue are included in “vehicle operating expenses”. Accordingly, “vehicle operating expenses”
have been re-titled “
costs
of revenue” for the current period and all historical
periods, and gross profit has been presented for the current period and all historical periods. The Company will continue to present
its results of operations in this fashion for future periods. The Company’s management concluded, after considering that
gross profit is used internally by management as a performance measure and provides a meaningful additional performance metric
reflecting the Company’s growth, that such measure was relevant for external financial reporting purposes.
(ad)
Business Combinations
In accordance with
ASC 805, Business Combinations, in business combinations not involving entities or businesses under common control, the Company
measured the cost of an acquisition as the aggregate of the fair values at the date of exchange of the assets given, liabilities
incurred and equity instruments issued. The transaction costs directly attributable to the acquisition are expensed as incurred.
Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as
of the
acquisition
date, irrespective of the extent of any non-controlling interests. The
excess of the (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value
of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree
is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the
difference is recognized directly in the consolidated statements of comprehensive income (loss).
The determination
and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation
methodologies requiring considerable management judgment. The most significant variables in these valuations are discount
rates
,
the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to forecast the future
cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s
current business model and industry comparisons. Although management believes that the assumptions applied in the determination
are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts
and the difference could be material.
A non-controlling
interest is recognized to reflect the portion of a subsidiary’s equity which is not attributable, directly or indirectly,
to the
Company
. Consolidated net income (loss) on the consolidated statements of comprehensive
income (loss) includes the net income (loss) attributable to non-controlling interests when applicable. The cumulative results
of operations attributable to non-controlling interests are also recorded as non-controlling interests in the Company’s consolidated
balance sheets. Cash flows related to transactions with non-controlling interests are presented under financing activities in the
consolidated statements of cash flows when applicable.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(ae)
Recently
issued accounting standards
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
"Revenue
from Contracts with Customers,"
or ASU 2014-09. This update contains new accounting literature relating to how and when
a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue
when
it
transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to
be entitled in exchange for those goods and services. ASU 2014-09 is effective for the Company’s fiscal year beginning January
1, 2018, which reflects a one year deferral approved by the FASB in July 2015, with early application permitted provided that the
effective date is not earlier than the original effective date (which would be the Company’s fiscal year beginning January
1, 2017). In March 2016, the FASB issued an amendment (ASU 2016-08) to the new revenue recognition guidance clarifying how to determine
if an entity is a principal or agent in a transaction. In April (ASU 2016-10), May (ASU 2016-12), and December (ASU 2016-20) of
2016, the FASB further amended the guidance to include performance obligation identification, licensing implementation, collectability
assessment and other presentation and transition clarifications. The effective date and transition requirements for the amendments
in this ASU are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09).
The company has not early adopted ASU 2014-09 and it will become effective for the Company on January 1, 2018. The Company is currently
in the process of analyzing each of its revenue streams to determine the impact the adoption of ASU 2014-09 will have on its financial
statements and related disclosures. The standard permits the use of either the full retrospective or modified retrospective transition
method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial
reporting. The Company is currently evaluating the potential impact to their contracts and revenue recognition. The Company will
continue the evaluation, analysis, and documentation of its adoption of ASU 2014-09 (including those subsequently issued updates
that clarify ASU 2014-09’s provisions) throughout 2017 as the Company works toward the implementation and finalizes its determination
of the impact that the adoption will have on the consolidated financial statements.
In November 2015,
the FASB issued ASU 2015-17,
"Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,"
or ASU
2015-17. This guidance was issued to simplify the presentation of
deferred
income taxes. The
amendments in ASU 2015-17 require deferred tax assets and liabilities to be classified as noncurrent in a classified statement
of financial position. ASU 2015-17 is effective for annual and interim periods beginning after December 15, 2016, and should be
applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. We have not early
adopted this update. The Company has completed its evaluation of the impact of the updated guidance and has concluded that it the
impact on the consolidated financial statements will be limited to reclassification of deferred tax assets and liabilities, which
presently are insignificant amounts on a net basis, to noncurrent captions.
In February 2016,
the FASB issued ASU 2016-02, “
Leases”
. Under the new guidance, lessees will be required to recognize a lease
liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on the balance sheet.
The updated guidance also expands the required quantitative and qualitative disclosures surrounding leases. Additionally, ASU 2016-02
aligns key aspects of lessor accounting with the new revenue recognition guidance in ASU 2014-09, “Revenue from Contracts
with Customers” (see above). Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. This guidance also expands the requirements for lessees to record leases
embedded in other arrangements and the required quantitative and qualitative disclosures surrounding leases. For lessors, the guidance
modifies classification criteria and accounting for sales-type and direct financing leases and requires a lessor to derecognize
the carrying value of the leased asset that is considered to have been transferred to a lessee and record a lease receivable and
residual asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal
years, with earlier application permitted; hence, it applies to the Company beginning with calendar 2019. A modified retrospective
transition approach is required for both lessees and lessors for existing leases at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is
still in the process of evaluating the impact of the adoption of this update on its consolidated financial statements and related
disclosures.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(ae)
Recently
issued accounting standards (Continued)
In March 2016, the
FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This guidance affects entities
that issue share-based payment awards to their employees. ASU 2016-09 is designed to simplify several aspects of accounting for
share-based payment award transactions that include the income tax consequences, classification of awards as either equity or liabilities,
classification on the statement of cash flows, and forfeiture rate calculations. ASU 2016-09 will become effective for annual and
interim periods beginning after December 15, 2016, and early adoption is permitted in any interim or annual period. The Company
is in the process of evaluating the impact of the adoption of this update on its consolidated financial statements.
In August 2016, the
FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash
Payments”. The standard is intended to eliminate diversity in practice in how certain cash receipts and cash payments
are presented and classified in the statement of cash flows. ASU 2016-15 will be effective for fiscal years beginning after
December 15, 2017. Early adoption is permitted for all entities. The Company is in the process of evaluating the impact of this
guidance on its consolidated financial statements.
In November 2016,
the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash”. The standard addresses the diversity
in practice that exists in the classification and presentation of changes in restricted cash and requires that a statement of cash
flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted
cash or restricted cash equivalents. ASU 2016-18 is effective retrospectively for fiscal years and interim periods within those
years beginning after December 15, 2017. The Company is in the process of evaluating the impact of this guidance on its consolidated
financial statements.
3. BUSINESS COMBINATIONS
Hangzhou Deyu Car
Dealing Services Co., Ltd
In March 2016, to
expand its operations, the Company acquired 100% of the equity interests in Hangzhou Deyu Car Dealing Services Co., Ltd (“Deyu”),
holding a number of vehicles plates in Hangzhou, where the local government had promulgated policies controlling the number of
new local vehicle plates issued. The total purchase price for the transaction was RMB3,229,998 and was funded from the Company’s
existing cash resources, which the Company fully paid in March 2016. Beginning March 31, 2016, the date of acquisition, Deyu has
been fully consolidated into the Company’s financial statements. The allocation of the purchase price at the date of acquisition
is summarized as follows:
|
|
RMB
|
|
Net assets
|
|
|
45,374
|
|
Identifiable intangible assets —vehicles plates
|
|
|
4,246,166
|
|
Deferred tax liabilities
|
|
|
(1,061,542
|
)
|
Total
|
|
|
3,229,998
|
|
The intangible assets
acquired through the Company's acquisition of Deyu are considered to be indefinite-lived and are therefore not subject to amortization.
The Company's business
combination completed during the year ended December 31, 2016 did not have a material impact on the Company’s consolidated
statements of operations and therefore pro forma disclosures have not been presented.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
An analysis of
the
allowance for doubtful accounts receivable for the years ended December 31, 2015 and 2016 is as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Balance, beginning of the year
|
|
|
5,041,727
|
|
|
|
5,969,648
|
|
|
|
7,611,244
|
|
Provision for doubtful accounts
|
|
|
927,921
|
|
|
|
1,641,596
|
|
|
|
1,548,077
|
|
Balance, end of the year
|
|
|
5,969,648
|
|
|
|
7,611,244
|
|
|
|
9,159,321
|
|
5. SHORT-TERM LOAN RECEIVABLE
In January 2016, the
Company entered into agreements with Shanghai Chenghuan Car Rental Company Limited (“Shanghai Chenghuan”), pursuant
to which the Company agreed to extend, through entrusted bank loans, an aggregate amount of RMB50,000,000 to Shanghai Chenghuan.
Shanghai Chenghuan is a middle-to-high-end car rentals and car services provider in the local market, and is an independent third
party. The loans have a term of one year and bear an interest rate of 7.75% per annum. The loan receivable is fully collateralized
with 100% Shanghai Chenghuan’s shares. After one year, the Company has the option to convert its creditor rights into equity
interests in Shanghai Chenghuan at a pre-determined valuation. The Company concluded that the loan should be accounted for as short-term
loan receivable in its entirety and compounded accrued interest, as the conversion option is not a derivative and there should
be no separate bifurcation of derivative accounting for conversion option. In January 2017, the company extended the RMB18 million loan agreement for one year, which will be due in
January 2018 after extension.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets
consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Prepaid insurance expense
|
|
|
65,753,529
|
|
|
|
115,498,191
|
|
Staff advances
|
|
|
9,984,229
|
|
|
|
18,060,202
|
|
Rental deposits
|
|
|
7,638,632
|
|
|
|
11,137,408
|
|
Prepaid gasoline and repair supplies
|
|
|
14,081,872
|
|
|
|
17,481,886
|
|
Receivables from disposal of vehicles
|
|
|
20,366,352
|
|
|
|
127,915,314
|
|
Value-added taxes deductible
|
|
|
166,328,043
|
|
|
|
311,501,214
|
|
Prepaid rental expenses
|
|
|
8,479,708
|
|
|
|
13,964,546
|
|
Net investment in direct financing leases, current portion
|
|
|
63,927,894
|
|
|
|
63,999,571
|
|
Others
|
|
|
21,284,711
|
|
|
|
48,229,013
|
|
Total
|
|
|
377,844,970
|
|
|
|
727,787,345
|
|
7. INVESTMENTS
In April 2014, the
Company acquired series B preferred shares of Travice Inc. through its formerly wholly owned subsidiary Elite Plus Developments
Limited (“Elite Plus”). Travice Inc. was a private company which developed and operates the Kuaidi mobile taxi and
car calling service. The series B preferred shares acquired
represented
8.4% of the then outstanding
share capital of Travice Inc. Concurrently, Travice Inc. also issued warrants to the Company to purchase additional 4,684,074 series
C preferred shares of Travice Inc. The total consideration given for series B preferred shares and warrants was RMB154,251,500
(US$25,000,000). The series B preferred shares are not in substance common stock. The cost method was applied to account for the
investment as the equity securities received were not considered as debt or equity securities that have readily determinable fair
values. Furthermore, the warrants to purchase series C preferred shares do not meet the definition of a derivative as the contractual
terms do not provide for net settlement and the underlying shares are an investment in a private company.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
7. INVESTMENTS (Continued)
On January 27, 2015,
the Company waived its rights under the warrants to purchase 4,684,074 series C preferred shares of Travice Inc. and received RMB18,409,199
(US$3,000,000) in exchange for the waiver of the warrants. The gain of RMB16,869,935 (US$2,749,158) arising from this transaction
was recorded as a gain from waiver of warrants
in
the condensed consolidated statement of
comprehensive income for the year ended December 31, 2015. The cost basis of the warrant was correspondingly eliminated from the
carrying value of investments.
In February 2015,
Travice Inc. was merged with and into Xiaoju Science and Technology Limited, which developed and operates the Didi mobile taxi
and car hailing service. After the completion of such merger, the Company’s investment in Travice Inc. was exchanged to a
minority stake in the surviving company Xiaoju Kuaizhi Inc.
On June 2, 2015, the
Company entered a definitive agreement, pursuant to which the Company transferred its 100% equity interest in Elite Plus to Eagle
Legend Global Limited, an independent third party, for gross proceeds of RMB983,621,925 (US$160,875,000). The transaction was closed
on June 24, 2015. The gain of RMB803,059,728 (US$131,352,744) arising from this transaction after
deducting
related transaction costs of RMB29,193,869 (US$4,773,098) was recorded as a gain from sale of cost method investment within non-operating
income.
The transactions
were
originally denominated in U.S dollars and therefore, translations from U.S. dollar to RMB were calculated at the exchange rates
prevailing on the transaction dates.
8. PROPERTY AND EQUIPMENT, NET
Property and
equipment
,
net consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Vehicles
|
|
|
4,182,308,204
|
|
|
|
5,926,576,864
|
|
In-car equipment
|
|
|
26,640,939
|
|
|
|
37,670,565
|
|
Building
|
|
|
—
|
|
|
|
55,587,304
|
|
Leasehold improvements
|
|
|
25,545,379
|
|
|
|
32,752,237
|
|
Software
|
|
|
11,835,395
|
|
|
|
12,211,763
|
|
Office furniture and equipment
|
|
|
27,302,112
|
|
|
|
33,463,933
|
|
|
|
|
|
|
|
|
|
|
Property and equipment subject to depreciation
|
|
|
4,273,632,029
|
|
|
|
6,098,262,666
|
|
Less: accumulated depreciation
|
|
|
(712,036,846
|
)
|
|
|
(1,127,934,340
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,561,595,183
|
|
|
|
4,970,328,326
|
|
Construction in progress
|
|
|
535,022,537
|
|
|
|
753,240,849
|
|
Property and equipment, net
|
|
|
4,096,617,720
|
|
|
|
5,723,569,175
|
|
The Company entered
into capital lease arrangements in the year ended December 31, 2015 for the use of certain vehicles. The gross amount of these
vehicles were RMB9,584,628 (US$1,479,612) as of December 31, 2015. These vehicles are included as “vehicles” in property
and equipment, net on the consolidated balance sheets. There are no future minimum lease payments as of December 31, 2015 as all
payments under the capital lease arrangement have been fully prepaid; accordingly, no lease obligation disclosures are presented.
The Company recorded
depreciation expense relating to vehicles and in-car equipment of RMB277,336,281, RMB457,478,811and RMB654,654,545 for the years
ended December 31, 2014, 2015 and 2016, respectively, as costs of revenue in the consolidated
statements
of comprehensive income (loss).
8. PROPERTY AND EQUIPMENT, NET (Continued)
Depreciation expense
of other property and equipment totaled RMB10,106,785, RMB17,242,676 and RMB13,363,708 for the years ended
December
31,
2014, 2015 and 2016, respectively, and was recorded in the consolidated statements of comprehensive income (loss) as cost of revenue
and operating expenses.
As of December 31,
2015 and 2016, vehicles and in-car equipment with a total initial cost of RMB797,852,647 and RMB 465,073,020, respectively, were
used as collateral in relation to certain long-term borrowing arrangements as disclosed in Note 10.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
9. SHORT-TERM DEBT
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Short-term borrowings
|
|
|
350,000,000
|
|
|
|
620,105,995
|
|
Long-term borrowings, current portion (Note 10)
|
|
|
453,131,683
|
|
|
|
306,113,338
|
|
Total
|
|
|
803,131,683
|
|
|
|
926,219,333
|
|
Short-term borrowings
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Notes payable
|
|
|
-
|
|
|
|
363,983,800
|
|
Short-term bank borrowings guaranteed by the Founder and his spouse
|
|
|
100,000,000
|
|
|
|
75,000,000
|
|
Short-term bank borrowings
|
|
|
250,000,000
|
|
|
|
181,122,195
|
|
Total short-term bank borrowings
|
|
|
350,000,000
|
|
|
|
620,105,995
|
|
Notes payable
The Company is required
to maintain a certain balance of cash deposit in designated bank accounts for the notes payable outstanding as of December 31,
2016. Such required cash deposit of RMB246,326,100 was classified as restricted cash on the consolidated balance sheet.
Short-term bank borrowings guaranteed
by the Founder and his spouse
In
January 2015, the Company entered into a short-term loan facility agreement with a bank for which a total loan facility up
to RMB100,000,000 was made available to the Company. As of December 31,
2015
,
the principal amount outstanding under this agreement was RMB50,000,000, bearing an
interest
rate of 4.75% per
annum
. This
short-term borrowing was guaranteed by the Founder of the Company, Ray Ruiping Zhang, and his spouse, Suping Han.
This
short-term borrowing was fully repaid during the year ended December 31, 2016.
In
October 2015, the Company entered into a short-term loan facility agreement with a bank for which a total loan facility up to RMB50,000,000
was made available to the Company. As of December 31, 2015, the principal amount outstanding under this agreement was RMB50,000,000,
bearing an interest rate of 4.35% per annum. This short-term borrowing was guaranteed by the Founder of the Company, Ray Ruiping
Zhang, and his spouse, Suping Han.
It was fully repaid during the year ended December 31, 2016. In October 2016, the
Company entered into another short-term loan
agreements
with the same bank for aggregate principal
amounts of RMB50,000,000.
The borrowing bear interest rates of 4.35 %
per annum. This short-term borrowing was guaranteed by the Founder of the Company, Ray Ruiping Zhang, and his spouse, Suping Han.
In
February 2016, the Company entered into a short-term loan facility agreement with a bank for which a total loan facility up to
RMB25,000,000 was made available to the Company. As of December 31, 2016, the principal amount outstanding under this agreement
was RMB25,000,000, bearing an interest rate of 4.
698
%
per annum. This short-term borrowing was guaranteed by the Founder of the Company, Ray Ruiping Zhang, and his spouse, Suping Han.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
9. SHORT-TERM DEBT (Continued)
Short-term borrowings
(Continued)
Short-term bank
borrowings
In December 2014
and August 2015, the Company entered into two short-term loan facility agreements with a bank for which a total loan facility up
to RMB400,000,000 was made available to the Company. As of December 31, 2015, the principal amounts outstanding under the
agreement
were RMB200,000,000, bearing interest rates of 2.42% per annum. In conjunction with
the loan facility agreements, the Company is also required to maintain a certain balance of cash deposited in designated bank accounts
for the period the bank borrowings are outstanding. Such required cash deposits of RMB206,944,000 were classified as restricted
cash on the consolidated balance sheets as of December 31, 2015. This short-term borrowing was fully repaid during the year
ended December 31, 2016 and the pledged cash deposits of RMB206,944,000 were released along with the repayment.
In August 2015, the
Company entered into three short-term loan agreements with a bank for aggregate principal amounts of RMB50,000,000. As of
December
31,
2015, the principal amount outstanding under these agreements were RMB10,000,000, RMB10,000,000 and RMB30,000,000, respectively,
bearing interest rates of
4.876%, 4.876% and 4.611%
per annum.
These borrowings were fully repaid during the year ended December 31, 2016. During 2016, the Company entered into four other short-term
loan agreements with the same bank for aggregate principal amounts of RMB100,000,000. As of December 31, 2016, the principal
amount outstanding under these agreements were RMB50,000,000, RMB10,000,000, RMB10,000,000 and RMB30,000,000, respectively, bearing
same interest rates of
4.35%
per annum.
In April 2016,
the Company entered into a short-term borrowing agreements with a bank for an aggregate principal amount of RMB30,000,000. As of
December
31, 2016, the principal amount outstanding under this agreement was RMB30,000,000,
bearing an interest rate of 4.1325% per annum.
In
August 2016, the Company entered into a short-term loan facility agreement with a bank for which a total loan facility up
to RMB25,000,000 was made
available
to the Company. As of December 31, 2016, the principal amount outstanding under this agreement was RMB25,000,000, bearing an interest
rate of 4.35% per annum.
In 2016, in connection
with the purchase of vehicles, the Company entered into short-term borrowing agreements with a third-party financing company
for
an aggregate principal amount of RMB30,000,000. Principal and interest are payable monthly and the borrowings bear interest at
4.82% per annum. As of December 31, 2016, total principal amounts outstanding under these agreements were RMB26,122,195.
The weighted average
interest
rate on short-term bank borrowings was 3.76% and 3.66% for the years ended December 31,
2015 and December 31, 2016, respectively.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
10. LONG-TERM DEBT
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Long-term bank borrowing guaranteed by a guarantee agent
|
|
|
32,000,000
|
|
|
|
-
|
|
Long-term borrowings collateralized by vehicles
|
|
|
530,173,126
|
|
|
|
292,605,866
|
|
Long-term bank borrowings collateralized by receivables
|
|
|
304,421,239
|
|
|
|
189,427,307
|
|
Entrusted long-term borrowing from a related party
|
|
|
300,000,000
|
|
|
|
100,000,000
|
|
2018 Senior Notes
|
|
|
1,255,989,958
|
|
|
|
1,356,213,357
|
|
Syndicated loan
|
|
|
-
|
|
|
|
1,010,689,797
|
|
Long-term bank borrowings
|
|
|
-
|
|
|
|
125,000,000
|
|
Subtotal
|
|
|
2,422,584,323
|
|
|
|
3,073,936,327
|
|
Less: Current portion of long-term debt
|
|
|
(453,131,683
|
)
|
|
|
(306,113,338
|
)
|
Total long-term debt
|
|
|
1,969,452,640
|
|
|
|
2,767,822,989
|
|
Long-term bank
borrowing guaranteed by a guarantee agent
In 2013, the Company
entered into a long-term loan facility agreement with a bank for which a total loan facility up to RMB80,000,000 was made available
to the Company. As of December 31, 2015, the principal amounts outstanding under this agreement were RMB32,000,000, with interest
rate of 5.775% per annum. The principal and interest are payable quarterly over three years. The loan was guaranteed by a third-party
guarantee agent, and the
Company
pledged 5.76% of a consolidated subsidiary’s equity
interest to the third-party guarantee agent as collateral of the long-term bank borrowing arrangement as of December 31, 2015.
Equity interests pledged represented 3.68% of the Company’s consolidated net assets as of December 31, 2015. The Company
fully repaid
this long-term borrowing during the year ended December 31,
2016. The pledged
equity interests were released along with the repayment.
Long-term borrowings
collateralized by vehicles
In connection with
the purchase of vehicles, the Company entered into borrowing agreements from 2013 to 2016 with several third-party financing companies
for an aggregate principal amount of RMB687,048,883 as of December 31, 2016. Principal and interest are payable monthly over three
years. As of December 31, 2015, and 2016, the borrowings bear interest at 8.5%-13% and 5.2%-9.12% per annum, respectively.
These borrowings were collateralized by
vehicles
and in-car equipment with an aggregate initial
cost of RMB508,966,714, and RMB328,782,218 as of December 31, 2015 and 2016 respectively. During 2016, the Company early repaid
part of these borrowings. Due to the early repayment, as of December 31, 2015 and 2016, total principal amounts outstanding
under these agreements were RMB243,199,004, and RMB74,605,866, respectively.
In 2013 and 2014,
the Company entered into two long-term borrowing agreements with a third party financing company for purchase of certain vehicles.
Principal amounts are payable at the end of the borrowing terms, which were three years from the contract date, and interest amounts
are payable quarterly over the terms of the borrowing arrangements. These loans were collateralized by vehicles with an aggregate
initial cost of RMB288,885,933 as of December 31, 2015. Additionally, the Company pledged 100% of a consolidated subsidiary’s
equity interest to the third-party financing company. As of December 31, 2015, total principal amounts outstanding under these
agreements were RMB286,974,122, with an interest rate of 11% per annum. Equity interests pledged represented 0% of the Company’s
consolidated net assets as of December 31, 2015.
In September 2016,
the Company early repaid the entire amount of the lo
an and the collateralized vehicles and pledged equity interest were
released.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
10. LONG-TERM DEBT (Continued)
Long-term borrowings
collateralized by vehicles (Continued)
In July 2015, the
Company entered into a five-year framework agreement with China Development Bank, which includes various
financing products for an aggregate amount of RMB1.5 billion. In January 2016, in connection with purchase of vehicles, the Company
drew down an aggregate amount of RMB220 million in bank loans under this framework agreement. The loan bears an initial interest
rate of 5.225% per annum and the interest rate is adjusted annually based on the published People’s Bank of China interest
rate with equivalent term. The principal and interest are payable over three years from the borrowing commencement date.
The
borrowing was collateralized by vehicles with an aggregate initial cost of RMB136,290,802 as of December 31, 2016. As of December 31,
2016, total principal amounts outstanding under these agreements were RMB 218,000,000, bearing interest at 5.225% per annum.
Long-term bank
borrowings collateralized by receivables
In 2014 and 2015,
in connection with the purchase of vehicles, the Company entered into eight long-term loan agreements with a bank. As of December 31,
2015 and 2016, the principal amounts outstanding under these agreements were RMB198,933,369 and RMB121,330,685, respectively. As
of December 31, 2015 and 2016, the loans bear interest rates at 5.225% per annum. The interest rates are adjusted annually
based on the published People’s Bank of China interest rate with equivalent terms. The principal and interest are payable
monthly over three years. This long-term bank borrowing is pledged with receivables due from the Company’s wholly-owned subsidiary.
In September 2014,
in connection with the purchase of vehicles, the Company entered into a long-term loan facility agreement with a bank for which
up to RMB155,000,000 was made available to the Company with a floating interest rate. As of December 31, 2015, and 2016, the
principal amounts outstanding
under
this agreement were RMB105,487,870 and RMB68,096,622,
respectively with interest rate of 4.9875% per annum. The principal and interest are payable monthly over three years. This long-term
bank borrowing is pledged with receivables due from the Company’s wholly-owned subsidiary.
Entrusted long-term
borrowing from a related party
In
April 2015, in connection with the purchase of vehicles, the Company entered into a entrusted long-term loan agreement with
related party Ctrip for which a total loan facility up to RMB300,000,000
was made available to the Company. In October 2016, the Company repaid RMB200,000,000 originally due in 2018. Due to early repayment,
the principal amounts outstanding under this agreement were RMB
300,000,000
and RMB
100,000,000
as of December 31, 2015 and 2016, respectively
with interest rate of 6.90% per annum.
The remaining principal is payable
at the end of the borrowing term, which was three years from the contract date, and interest amounts are payable quarterly over
the term of the borrowing arrangement.
With respect to all
aforementioned arrangements, the undrawn loan facilities available to the Company totaled RMB49,512,130 and RMB63,358,721 as of
December 31,
2015
and 2016, respectively.
The Company’s
short-term and long-term borrowing arrangements include certain restrictive covenants that, among other things, limit the Company’s
ability to incur additional indebtedness or create new mortgages or charges, request the Company to maintain its shareholding structure
and make timely reports. Certain borrowing covenants also post restrictions on the use of proceeds and asset sales, and require
the Company to provide notice or obtain
consent
for significant corporate events. As a result
of these restrictions, although the Company’s overall liquidity may be sufficient to satisfy the Company’s obligations,
the Company may be limited by covenants in some of the Company’s borrowing agreements from transferring cash to other subsidiaries
that might require funds. In addition, cross default provisions in the Company’s other indebtedness may be triggered if the
Company defaults on any of these debt agreements. The Company did not violate any financial covenants during the years ended December 31,
2015 and 2016.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
10. LONG-TERM DEBT
(Continued)
2018 Senior Notes:
On December 8, 2015,
the Company issued senior unsecured notes with an aggregate principal amount of RMB1,281,560,000 (US$200,000,000) which will mature
on December 8, 2018 (the “
Notes
”). The issuance price of the Notes was 99.342%
of par value. The Notes bear a fixed interest rate of 7.5% per annum, yielding 7.75%, with interest payable semi-annually in arrears.
The Notes were issued as unregistered securities to qualified institutional buyers and offshore investors under provisions granting
relief from registration under the Securities Act of 1933. The Notes have a trading market on the Stock Exchange of Hong Kong Limited.
The Notes are general
obligations of the Company and are (i) subordinated to secured obligations of the Company, (ii) senior in right of payment to any
existing and future obligations of the
Company
expressly subordinated in right of payment;
(iii) guaranteed by certain subsidiary guarantors on a senior basis, subject to certain limitations, and (iv) effectively subordinated
to all existing and future obligations of the non-guarantor subsidiaries. The Notes have been guaranteed as to payment by the Company’s
offshore subsidiaries eHi Hong Kong, L&L Financial Leasing Holding Limited, and Brave Passion Limited.
Redemption
As described below,
the Notes may be repurchased prior to the maturity date at the option of the Company. The holders of the Notes may not redeem the
Notes prior to the maturity date, except in the case of a change in control.
Contingent redemption
option available to holders
If a change of control
triggering event, generally defined as a merger or acquisition or other fundamental corporate event, were to occur, the holders
have the option to require the Company to purchase all outstanding Notes at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to (but not including) the date of repurchase.
Repurchase options
available to the Company
The Company may redeem
the Notes, in whole but not in part, at any time at a redemption price equal to 100% of the principal amount of the Notes redeemed
plus the greater of (1) 1.00% of the principal amount, or (2) the excess, if any, of (i) the present value at such redemption date
of the redemption price of such Note on December 8, 2018, plus all required remaining scheduled interest payments due on such Notes
(but excluding accrued and unpaid interest to the redemption date) through December 8, 2018, computed using a discount rate equal
to a defined US Treasury security rate plus 100 basis points, over (ii) the principal amount of such Notes on such redemption date,
and accrued and unpaid interest, if any, to (but not including) the redemption date.
The Company may redeem
up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of one or more sales of common stock of the
Company in an equity offering at a redemption price of 107.50% of the principal amount of the Notes redeemed, plus accrued and
unpaid interest, if any, to (but not including) the redemption date; provided that at least 65% of the aggregate principal amount
of the Notes remains outstanding after each such redemption and any such redemption takes place within 60 days after the closing
of the related equity offering.
The Company evaluated
the redemption features and
concluded
that such features did not need to be separated from
the Notes and separately accounted for as derivatives.
The Notes contain
restrictive covenants including, among others, limitations on liens, consolidation, investment, merger and sale of the Company's
assets, maintenance of a fixed charge coverage ratio, and limitations on asset sales or use of proceeds.
The debt issuance costs
of RMB34,538,769 and debt discount of RMB8,432,665 associated with the Notes, reflected as a reduction to the face value of the
Notes, are being amortized over the three-year contractual life of the Notes under the effective interest method, as the Company
concluded that redemption prior to
the
contractual maturity is not probable.
The
effective interest rate of the Notes is 8.99%, including the interest charged on the Notes as well as amortization of the
debt issuance costs and debt discount. The Senior Notes proceeds were received by the Company’s offshore subsidiary eHi
Hong Kong.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
10. LONG-TERM DEBT (Continued)
Syndicated loan
In August 2016,
the Company signed a three-year syndicated loan agreement (the “Facility Agreement”) with a syndicate of lead arrangers,
which provided for a US$110 million facility (the "Initial Facility") and a US$40 million greenshoe facility (the "Greenshoe").
In September 2016, the Company drew down the entire US$150 million including the greenshoe facility under the facility
agreement. As of December 31, 2016, the principal amounts outstanding under these agreements were US$150,000,000. The proceeds
of the loan are used to (1) refinance existing indebtedness; (2) capital expenditure; (3) to fund interest reserve account; (4)
to pay all transaction-related fees; and (5) general corporate purposes. The loan bears a floating interest rate of LIBOR + 3.50%
margin per annum. The loan was guaranteed by the Company’s offshore subsidiaries. The Company is required to
maintain
a certain balance of cash deposit in the interest reserve account collateralized in favor of the lenders in connection with these
facilities. Such required balance needs to cover the interest payable in 3 month time. As of December 31, 2016, such required
cash deposit of US$1,547,240 was classified as restricted cash on the consolidated balance sheet. The loan agreement contains financial
covenants requiring the Company to maintain a certain leverage ratio. The Company is compliant with these covenants as of December
31, 2016.
Long-term bank
borrowings
In
December 2016, the Company entered into a long-term loan agreement with a bank which a total loan facility up to RMB150,000,000
was made
available
to the
Company. A
s of December 31, 2016, the principal amounts outstanding under this agreement were RMB
125,000,000
with interest rate of 4.9875% per annum.
The principal and interest
are payable quarterly over three years
.
Future
principal
maturities of long-term debt as of December 31, 2016 are as follows:
Years Ended December 31,
|
|
Amount (RMB)
|
|
2017
|
|
|
306,113,338
|
|
2018
|
|
|
2,293,893,014
|
|
2019
|
|
|
534,976,821
|
|
Total
|
|
|
3,134,983,173
|
|
11. ACCOUNTS PAYABLE
Accounts
payable
consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Payables for purchase of property and equipment
|
|
|
777,961,654
|
|
|
|
163,190,564
|
|
Others
|
|
|
7,936,959
|
|
|
|
16,687,283
|
|
Total
|
|
|
785,898,613
|
|
|
|
179,877,847
|
|
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and
other current liabilities consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Customer deposits
|
|
|
46,930,870
|
|
|
|
55,991,264
|
|
Advance from customers
|
|
|
50,048,183
|
|
|
|
68,397,492
|
|
Accrued employee payroll and welfare
|
|
|
46,181,537
|
|
|
|
57,367,892
|
|
Accrued advertising and promotion expense
|
|
|
6,600,440
|
|
|
|
17,306,922
|
|
Accrued interest payable
|
|
|
9,192,322
|
|
|
|
8,530,203
|
|
Accrued professional service fees
|
|
|
3,520,035
|
|
|
|
4,316,185
|
|
Accrued liability related to customer loyalty program
|
|
|
4,412,036
|
|
|
|
7,185,774
|
|
Tax payable
|
|
|
2,409,341
|
|
|
|
15,471,552
|
|
Property related purchase payable
|
|
|
-
|
|
|
|
11,354,874
|
|
Others
|
|
|
23,694,200
|
|
|
|
22,569,229
|
|
Total
|
|
|
192,988,964
|
|
|
|
268,491,387
|
|
13. TAXATION
(a) Transition from PRC business
tax to PRC VAT
The VAT Pilot Program
for transition from business tax to VAT for certain service revenues was launched in Shanghai on January 1, 2012. Since August 1,
2012, the VAT Pilot Program was expanded to and completed in other regions, including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui,
Fujian, Hubei, Guangdong, Xiamen and Shenzhen, and the VAT Pilot Program was further expanded to nationwide as of August 1,
2013. Prior to the VAT Pilot Program, the Company and its subsidiaries were subject to 5% business tax for revenues from car rental
services and designated driving services. After the launch of the VAT Pilot Program, the Company is subject to 17% VAT for revenues
from car rental services, 11% VAT for the revenues from designated driving services and 6% VAT for qualified management services,
respectively. Furthermore, a 3% simplified VAT rate is applied for car rental services in Shanghai and Beijing if the rental car
was purchased and registered with local tax authorities in Shanghai before January 1, 2012 and in Beijing before September 1,
2012.
The qualified VAT
input credits generated from purchases of
vehicles
and other property and equipment can be
deducted against VAT payable relating to taxable revenues.
(b) Income
Taxes
Cayman Islands
Under the current
laws of the Cayman Islands, the Company is not subject to tax on income or capital gains in
Cayman
Islands. Additionally, upon payments of dividends to shareholders, no Cayman Islands withholding tax will be imposed.
Hong Kong
Entities incorporated
in Hong Kong are subject to Hong Kong profits tax at a rate of 16.5% since January 1, 2010. Operations in Hong Kong have incurred
net accumulated operating losses for income tax purposes and no income tax provisions are
recorded
for the periods presented.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
13. TAXATION (Continued)
(b) Income
Taxes (Continued)
PRC
On March 16,
2007, the National People’s Congress of the PRC enacted an Enterprise Income Tax Law (“EIT Law”), under which
Foreign
Investment
Enterprises (“FlEs”) and domestic companies would be subject
to EIT at a uniform rate of 25%. The EIT law became effective on January 1, 2008.
The EIT Law also provides
that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is
located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at
the rate of 25% for its global income. The Implementing Rules of the EIT Law merely define the location of the “de facto
management body” as “the place where the exercising, in substance, of the overall management and control of the production
and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” Based on a review
of surrounding facts and circumstances, the Company does not believe that it is likely that its entities registered outside of
the PRC should be considered as resident enterprises for PRC tax purposes.
The EIT Law also imposes
a withholding income tax of 10% on dividends distributed by a FIE to its immediate holding company outside of China, if such immediate
holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends
have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding
company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
The Cayman Islands, where the Company is incorporated, does not have such tax treaty with China. According
to
the arrangement between the mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and
Prevention of Fiscal Evasion in August 2006, dividends paid by an FIE in China to its immediate holding company in Hong Kong
will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares
of the FIE).
All FIEs are subject
to the withholding tax from January 1, 2008. Under U.S. GAAP, undistributed earnings are presumed to be transferred to the
parent company and are subject to the withholding taxes. The presumption may be overcome if the Company has sufficient evidence
to demonstrate that the undistributed dividends will be re-invested and the remittance of the dividends will be postponed indefinitely.
The Company did not record any dividend withholding taxes, and the company has not provided any other taxes in relation to outside
basis differences, as it has no retained earnings for any of the periods presented.
In accordance with
PRC tax regulations, the Company provided RMB83,103,026 (US$13,587,500) of income tax expense for the gain realized from the disposal
of a cost method investment in 2015. The gain (Note 7) arose from the indirect sale of an investment in Xiaoju Kuaizhi Inc., a
PRC tax resident enterprise when Eagle Legend Global Limited transferred equity of its wholly-owned subsidiary, Elite Plus. According
to Circular 7 issued by the State Administration of Taxation of the PRC on February 3, 2015, if a non-PRC resident enterprise (such
as the Company) indirectly transfers PRC taxable properties without a reasonable business purpose, including equity investments
in a PRC tax resident enterprise, by disposing of an equity interest held in an overseas holding company, which is the means through
which the Company’s transaction was implemented, such indirect transfer should be deemed as a direct transfer of PRC taxable
properties and gains derived from such indirect transfer may be subject to the PRC withholding tax at a rate of up to 10%. As Circular
7 was promulgated recently, it is not clear how it will be implemented; however, the Company’s disposal transaction appears
to qualify as a taxable event under the circular. In light of this uncertainty, the Company accrued for withholding tax at the
statutory rate of 10% on the realized gain. In 2016, the Company provided remaining income taxes of RMB1,881,456 (US$ 270,986)
as a true up for the gain realized from the disposal of the cost method according to PRC tax regulation.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
13. TAXATION (Continued)
(b) Income
Taxes (Continued)
Pre-tax income
(loss)
The following table
sets forth the components of pre-tax income (loss):
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Pre-tax income (loss) from domestic (PRC) entities
|
|
|
(75,910,255
|
)
|
|
|
5,669,944
|
|
|
|
248,923,620
|
|
Pre-tax income (loss) from foreign (non-PRC) entities
|
|
|
(15,323,525
|
)
|
|
|
778,156,851
|
|
|
|
(209,177,533
|
)
|
Total pre-tax income (loss)
|
|
|
(91,233,780
|
)
|
|
|
783,826,795
|
|
|
|
39,746,087
|
|
During the year ended
December 31, 2015, the Company’s pre-tax income attributable to non-PRC entities increased as a result of the sale of its
investment in Xiaoju Kuaizhi Inc., which was held in an offshore subsidiary, as discussed in the foregoing paragraph.
During the year ended
December 31, 2016, the Company’s pre-tax loss attributable to non-PRC entities are primarily related to interest expense
of US$ 150 million syndicated loan, 2018 senior notes, share-based compensation and foreign exchange loss.
The current and deferred
portions of income tax expense included in the consolidated statements of operations and comprehensive income (loss) during the
years ended December 31, 2014, 2015 and 2016 are as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Current income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (PRC) entities
|
|
|
1,911,657
|
|
|
|
1,408,703
|
|
|
|
3,049,504
|
|
Foreign (non-PRC) entities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
1,911,657
|
|
|
|
1,408,703
|
|
|
|
3,049,504
|
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (PRC) entities
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,489,648
|
)
|
Foreign (non-PRC) entities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,489,648
|
)
|
Income tax expense (excluding withholding tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (PRC) entities
|
|
|
1,911,657
|
|
|
|
1,408,703
|
|
|
|
559,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Withholding tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign (non-PRC) entities
|
|
|
-
|
|
|
|
86,079,287
|
|
|
|
6,051,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
|
1,911,657
|
|
|
|
87,487,990
|
|
|
|
6,610,971
|
|
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
13. TAXATION (Continued)
(b) Income
Taxes (Continued)
Reconciliation
of the differences between statutory tax rate and the effective tax rate
The following table
sets forth a reconciliation between the statutory PRC EIT rate of 25% and the effective tax rate:
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Statutory income tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Different tax rates in other jurisdictions
|
|
|
(4.0
|
)%
|
|
|
(26.0
|
)%
|
|
|
90.8
|
%
|
Withholding tax on sale of cost method investment
|
|
|
—
|
|
|
|
10.6
|
%
|
|
|
15.2
|
%
|
Permanent differences
|
|
|
1.9
|
%
|
|
|
0.1
|
%
|
|
|
(17.1
|
%)
|
Change in valuation allowance
|
|
|
(25.0
|
)%
|
|
|
1.1
|
%
|
|
|
(97.5
|
%)
|
Tax holiday
|
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
%
|
Other
|
|
|
—
|
|
|
|
0.4
|
%
|
|
|
—
|
|
Effective tax rate
|
|
|
(2.1
|
)%
|
|
|
11.2
|
%
|
|
|
16.6
|
%
|
The change in the
Group’s effective tax rates from year over year is primarily attributable to the different tax rates from the statutory rate
applicable to certain subsidiaries with preferential tax rates. For the year ended December 31, 2015, the Company provided RMB83,103,026
(US$13,587,500) of income tax expense for the gain realized from the disposal of a cost method investment, which led to the decrease
in effective tax rate of 22%. For the year ended December 31, 2016, the impact of different tax rates in other jurisdictions are
primarily attributable to the interest expenses of the US$ 150 million syndicated loan, 2018 senior notes and foreign exchange
loss recorded on certain subsidiaries with preferential tax rates, which led to the increase in effective tax rate of 116.8%.
The Company was
granted a tax holiday in certain entities effective through December 31, 2016, and may be extended if certain additional
requirements are satisfied. The EIT Law and its Implementing Rules also permit qualified small-scaled enterprises with
low profit margins to enjoy a reduced 20% enterprise income tax rate. On April 8, 2014, March 13, 2015, and September 2,
2015, the SAT and the MOF jointly issued three circulars, which further provided that, during the period between January 1,
2014 and December 31, 2016, between January 1, 2015 and December 31, 2017, and between October 1,2015 and December 31, 2017
respectively, if a qualified small-scaled enterprise with low profit margins has an annual taxable income of not more than
RMB100,000, RMB200,000 and RMB300,000, respectively, then 50% of its taxable income can be exempted from enterprise income
tax, reducing the effective enterprise income tax rate to 10%. The impact of this tax holiday increased tax savings by RMB
79, 675 for 2016. Tax holiday increased in the rate reconciliation due to the fact that the tax holiday is on certain loss
making entities. The tax holidays have no material impact on net income per share for 2016.
13. TAXATION (Continued)
(b) Income
Taxes (Continued)
Deferred tax assets
and deferred tax liabilities
The following table
sets forth the significant components of the deferred tax assets and deferred tax liabilities:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued payroll and other expenses
|
|
|
—
|
|
|
|
598,246
|
|
Allowance for doubtful accounts
|
|
|
1,902,811
|
|
|
|
2,289,830
|
|
Deferred government grant income
|
|
|
—
|
|
|
|
2,151,411
|
|
Others
|
|
|
19,857
|
|
|
|
11,950
|
|
Less: valuation allowance
|
|
|
(1,922,668
|
)
|
|
|
(3,211,464
|
)
|
Total current deferred tax assets, net
|
|
|
—
|
|
|
|
1,839,973
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
80,068,514
|
|
|
|
55,724,899
|
|
Temporary difference on property and equipment
|
|
|
7,747,308
|
|
|
|
—
|
|
Amount offset by non-current deferred tax liabilities on property
and equipment
|
|
|
—
|
|
|
|
(19,111,955
|
)
|
Less: valuation allowance
|
|
|
(87,815,822
|
)
|
|
|
(35,963,269
|
)
|
Total non-current deferred tax assets, net
|
|
|
—
|
|
|
|
649,675
|
|
Total deferred tax assets, net
|
|
|
—
|
|
|
|
2,489,648
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, non-current:
|
|
|
|
|
|
|
|
|
Recognition of intangible assets arisen from business combination
|
|
|
—
|
|
|
|
(1,061,542
|
)
|
Total deferred tax liabilities
|
|
|
—
|
|
|
|
(1,061,542
|
)
|
All deferred tax assets
and liabilities within a single tax jurisdiction are offset and presented as a single amount in accordance with ASC 740-10-45-6
“Income Taxes — Overall — Other Presentation Matters.”
At December 31,
2016, all of the Company’s non-current deferred tax liabilities are associated with intangible assets which have indefinite
reversal patterns.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
13. TAXATION (Continued)
(b) Income
Taxes (Continued)
Movement of valuation
allowance
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
|
13,814,868
|
|
|
|
14,696,517
|
|
|
|
1,922,668
|
|
Additions in current year
|
|
|
881,649
|
|
|
|
430,256
|
|
|
|
3,128,771
|
|
Reversals in current year
|
|
|
—
|
|
|
|
(13,204,105
|
)
|
|
|
(1,839,975
|
)
|
Balance at the end of the year
|
|
|
14,696,517
|
|
|
|
1,922,668
|
|
|
|
3,211,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
|
52,333,898
|
|
|
|
75,000,610
|
|
|
|
87,815,822
|
|
Additions in current year
|
|
|
22,666,712
|
|
|
|
24,944,528
|
|
|
|
-
|
|
Reversals in current year
|
|
|
-
|
|
|
|
(12,006,661
|
)
|
|
|
(51,852,063
|
)
|
Expirations in current year
|
|
|
|
|
|
|
(122,655
|
)
|
|
|
(490
|
)
|
Balance at the end of the year
|
|
|
75,000,610
|
|
|
|
87,815,822
|
|
|
|
35,963,269
|
|
As of December 31,
2016, the Company had net operating loss carry forwards of approximately RMB341,922,125, of which substantially all arose from
its PRC subsidiaries. The carry forward period for net operating losses under the EIT law is five years for the PRC subsidiaries.
The net operating loss carry forwards will expire in varying amounts between 2017 and 2021 if not utilized. Other than the expiration,
there are no other limitations or restrictions upon the Company’s ability to use these operating loss carry forwards.
A valuation allowance
is provided against deferred tax assets when the Company determines that it is more likely than not that the deferred tax assets
will not be utilized in the future or before their expiration.
Establishment
and removal of a valuation allowance requires management to consider all positive and negative evidence and to make a judgmental
decision regarding the amount of valuation allowance required as of a reporting date. The weight given to the evidence is commensurate
with the extent to which it can be objectively verified. In the evaluations as of December 31, 2016 and 2015, management has considered
all available evidence, both positive and negative, including but not limited to the following:
|
·
|
Positive results from continuing operations
before income taxes for the year ended December 31, 2016 and going forward;
|
|
·
|
The Company’s recent history of
generating taxable income which has allowed for the utilization of tax credit carryforwards;
|
|
·
|
Certain subsidiaries of the Company are
in a three-year cumulative income position as of December 31, 2016 and forecast to be profitable going forward;
|
|
·
|
Certain subsidiaries of the Company are
in a three-year comprehensive cumulative loss position as of December 31, 2016.
|
13. TAXATION (Continued)
(b) Income
Taxes (Continued)
As of December 31,
2015 and 2016, valuation allowances were provided on the deferred tax assets to the extent that management believed it was more
likely than not that such deferred tax assets would not be realized in the foreseeable future. Valuation allowances were also provided
because it was more likely than not that the Company will not be able to utilize certain tax loss carryforwards generated by certain
subsidiaries or VIEs. As those entities continue to generate tax losses and tax planning strategies are not available to utilize
those tax losses in other group companies, management believes it is more likely than not that such losses will not be utilized
before they expire. A valuation allowance was booked to reduce net deferred tax assets and the balance of such valuation allowance
was RMB 39,174,734 as of December 31, 2016. However, certain valuation allowance was reversed in 2016 when certain entities generated
sufficient taxable income to achieve three years of cumulative pre-tax income and are forecasted to continue to be profitable,
which management determined provided sufficient positive evidence as of December 31, 2016 to utilize the deferred tax assets. If
events occur in the future that prevent these entities from realizing some or all of its deferred tax assets, an adjustment to
the valuation allowances will be recognized when such events occur. Management will continue to evaluate the ability to realize
the Company’s net deferred tax assets and the remaining valuation allowance.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
Uncertain tax positions
The Company evaluates
the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on
the technical merits, and measures the unrecognized benefits associated with the tax positions. As of December 31, 2015 and
2016, the Company did not have any significant uncertain tax positions leading to liabilities for unrecognized tax benefits. Interest
and penalties related to uncertain tax positions, if any, are included in provision for income taxes.
As of December 31,
2016, the Company’s PRC entities’ tax returns generally remain open to examination for periods from 2011 forward. During
the periods presented, there were no tax authority examinations resulting in significant changes to the Company’s tax returns
or tax positions.
14. CONVERTIBLE BONDS
On June 10, 2011, the Company issued
RMB227,155,436 (US$35,000,000) in convertible bonds (“CB”) due in June 2013 for cash of RMB181,603,636 (US$28,000,000)
and the conversion of previously issued 2011 Notes to both existing shareholders and new investors. The CBs were guaranteed by
the Founder, Ray Ruiping Zhang, and bore cash interest at 8% per annum payable annually.
Modification of CB
The Company’s
CB with a total principal amount of US$35,000,000 matured on June 10, 2013. On that day, the Company repaid US$17,000,000
of CB in cash based on the proportionate Redemption Amount under the original terms of the CB. The holders of remaining US$18,000,000
CB, all of which were also holders of the Series A through Series C Preferred Shares, agreed to extend the maturity date
of the CB to July 10, 2013 with no interest charged during the extension period. On July 10, 2013, the Company and the
CB holders agreed to extend the maturity of the US$18,000,000 CB for an additional month and granted the Company the option to
repay the CB in cash or through issuance of common shares at a per share price of US$3.89. Subsequently, the parties then agreed
to extend the maturity date until ongoing negotiations were completed amongst investors of 2013 Notes, CB and Preferred Shares
(see Note 15). Those ongoing negotiations were completed on October 9, 2013 when the Company modified the CB conversion clause
such that the CB was convertible into Class A shares (see Note 15). On the same day, immediately after the conversion clause
modification, the CB (including principal and unpaid accrued interest), along with 2013 Notes, was converted to 10,427,373 shares
of Class A shares in total as agreed by the holders of outstanding CB and 2013 Notes. Additionally, on the same day, all of
the CB holders also agreed to extend the redemption date of their Preferred Shares.
The Company assessed
the accounting impact of each amendment resulting from the broader negotiations between the Company and the Preferred Shareholders
who were also holders of the CB. The Company first accounted for the extension of maturity for one month as a debt modification
given the immaterial change in the timing of cash flows (without the impact of the conversion option) and in the fair value of
the embedded conversion option due to the one-month extension. The Company then evaluated the second amendment in July 2013
and concluded that the second amendment should be treated as an extinguishment of the CB due to the substantive conversion feature
added. Given that all of the CB holders were also existing preferred shareholders, the modification of the CB was accounted for
as a capital transaction and the Company recognized a deemed contribution from the CB holders of RMB16,750,848 (US$2,717,000).
Lastly, when the Company finalized its negotiations with the CB, 2013 Notes and Preferred Shareholders, the Company agreed to modify
the conversion clause in order for the CB to become convertible into Class A shares in October 2013, such conversion
option was exercised on the same day and the issuance of Class A shares was a legal extinguishment of the CB. Since the last
negotiation was merely a continuation of the prior negotiations and all of the CB holders were also holders of Preferred Shares
that were modified concurrently as part of a broader equity restructuring, the Company recorded a deemed distribution to the CB
holders of RMB21,124,835 (US$3,448,215) in connection with the amendment of the conversion clause.
15. CONVERTIBLE REDEEMABLE PREFERRED
SHARES
Similar to the modifications
of CB, the modifications of the 2013 Notes were also part of the ongoing negotiation between the Company and Preferred Shareholders.
The 2013 Notes were modified in July 2013 to extend the maturity to August 10, 2013 and further extended as agreed upon
until negotiation with the 2013 Notes holder was completed. The Company accounted for the extension of maturity date as a debt
modification given the immaterial change in timing of cash flow (without the impact of the conversion option) and in fair value
of the embedded conversion option due to the extension of one month. On October 9, 2013, the Company and the 2013 Notes holder
agreed to modify the embedded conversion options such that the 2013 Notes were convertible into Class A preferred shares as
opposed to common shares of the Company. The conversion option into Class A preferred shares was exercised on the same day;
the CB and 2013 Notes together were converted to 10,427,373 shares of Class A preferred shares. The Company accounted for
the conversion into Class A as an extinguishment of the 2013 Notes. Since the holder of the 2013 Notes is also the sole investor
of Series D Shares and the Series D shares were also concurrently modified as part of the broader equity restructuring,
the modification of the 2013 Notes was considered a capital transaction and the Company recorded deemed dividends to the 2013 Notes
holders of RMB23,038,805 (US$3,746,653) in connection with the amendment of the conversion clause.
In March and
April of 2008, the Company issued convertible promissory notes of US$2,500,000 in aggregate. On May 23, 2008, the Company
issued 5,000,000 shares of Series A convertible redeemable preferred shares (the “Series A Shares”) for RMB6.83
(US$1.00) per share for cash of RMB17,086,003 (US$2,500,000) and the conversion of promissory notes previously issued in March and
April of 2008. In conjunction with the offering of the Series A Shares, the Company incurred issuance costs of RMB1,078,762
(US$157,843).
The Company subsequently
issued convertible promissory notes of US$5,000,000 in September 2008. On July 28, 2009, the Company issued 8,030,303
shares of Series B convertible redeemable preferred shares (the “Series B Shares”) for RMB13.67 (US$2.00)
per share for cash of RMB68,251,500 (US$10,000,000), and the conversion of US$5,000,000 promissory notes previously issued in September 2008.
In conjunction with the offering of the Series B Shares, the Company incurred issuance costs of RMB1,459,640 (US$213,862).
The Company issued a second tranche of Series B Shares on January 27, 2010 at RMB15.02 (US$2.20) per share for total
consideration of RMB25,253,055 (US$3,700,000).
In April 2010,
the Company again issued convertible promissory notes of US$5,000,000. On September 2, 2010, the Company issued 15,679,743
shares of Series C convertible redeemable preferred shares (the “Series C Shares”) for RMB21.18 (US$3.11)
per share for cash of RMB297,020,653 (US$43,598,722) and the conversion of the promissory notes issued in April 2010 and accrued
interest with a carrying value of RMB35,188,971 (US$5,165,278). In connection with the issue of the Series C Shares,
a total of 5,452,752 warrants were issued to purchase Series B and C Shares. The Company incurred issuance costs of RMB2,043,780
(US$300,000) in connection with the offering of Series C Shares.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
15. CONVERTIBLE REDEEMABLE PREFERRED
SHARES (Continued)
On March 28,
2012, the Company issued 10,000,000 shares of Series D convertible redeemable preferred shares (the “Series D Shares”)
for RMB29.88 (US$4.75) per share for cash of RMB298,832,000 (US$47,500,000) and incurred issuance costs of RMB19,216,005
(US$3,054,426). In connection with the Series D Shares issuance, the Company also issued 3,000,000 warrants to purchase its
common shares.
On October 9,
2013, the Company issued 10,427,373 shares of Class A Convertible Preferred Shares (the “Class A Shares”)
upon the conversion of the 2013 Notes and CB at a per share conversion price of US$3.89. The Class A Shares were subordinate
to Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares and Series D Preferred Shares.
On December 2,
2013, the Company issued 18,554,545 shares of Series E convertible redeemable preferred shares (the “Series E Shares”)
for RMB33.66 (US$5.50) per share for cash of RMB624,546,000 (US$102,050,000) and incurred issuance costs of RMB1,435,201 (US$234,510).
On April 16,
2014, the Company issued 4,545,455 additional shares of Series E convertible redeemable preferred shares (the “Series E
Shares”) for RMB33.95 (US$5.50) per share for cash of RMB154,338,750 (US$25,000,000) and incurred issuance costs of RMB342,570
(US$55,490).
The Series A,
B, C, D and E shares and the Class A shares are collectively referred to as the Preferred Shares.
Conversion
Each Preferred Share
may be converted at any time into common shares at the then applicable conversion price. The initial conversion ratio is 1:1, subject
to adjustment in the event of (i) share splits, share combinations, share dividends or distribution, other dividends, recapitalizations
and similar events, or (ii) issuance of common shares at a price per share less than the conversion price in effect on the
date of or immediately prior to such issuance. In that case, the conversion price shall be reduced concurrently to the subscription
price of such issuance.
The Preferred Shares
shall be automatically converted into common shares immediately prior to the consummation of a public offering of the Company’s
shares wherein gross proceeds are at least US$60,000,000, and the market capitalization of the Company is no less than US$600,000,000
immediately following the public offering (the “Qualifying IPO”).
The conversion option
can only be settled by issuance of common shares except that fractional shares may be settled in cash.
The Company determined
that there were no beneficial conversion features identified for any of the Preferred Shares during any of the periods. In making
this determination, the Company compared the fair value of the common shares into which the Preferred Shares are convertible with
the respective effective conversion price at the issuance date. When the Company issued multiple instruments (e.g., freestanding
warrants and Preferred Shares) in a bundled transaction, the Company determined the effective conversion price for the Preferred
Shares (e.g., the Series D Shares) by first assessing the classification of the freestanding warrants issued concurrently
and computing the fair value of the warrants. Since the warrants are equity classified, such as those issued concurrently with
Series D Shares, the Company allocated the amount of proceeds to the D Shares and warrants using the relative fair value method.
The amount allocated to the D Shares was then divided by the number of common shares into which the Series D Shares were convertible
on the commitment date to determine the effective conversion price per share for each investor. In all instances, the effective
conversion price was greater than the fair value of the common shares. To the extent a conversion price adjustment occurs, as described
above, the Company will reevaluate whether or not a beneficial conversion feature should be recognized.
Upon the completion
of the IPO on November 18, 2014, each Preferred Share was automatically converted into one Class B common share. As a
result, 77,999,069 Class B common shares were issued, and the balance of Preferred Shares was transferred to common shares
and additional paid-in capital on the same day.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
15. CONVERTIBLE REDEEMABLE PREFERRED
SHARES (Continued)
Dividends
The Preferred Shares
participated in dividends on an as-converted basis and were to be paid prior to any payment on common shares. Upon conversion,
any declared or accrued but unpaid dividends would be converted into common shares at the same applicable conversion price.
Redemption
At any time on or
after June 30, 2016, for Class A, Series A, B, C, D and E Shares, if requested by a specified percentage (namely
at least 51%, 51%, 45%, 50%, 50% and 45% for Class A, Series A, B, C, D and E Shares, respectively) of the holders of
the respective class or series of Preferred Shares then outstanding (“Redemption Date”), the Company shall have redeemed
all of the respective outstanding Preferred Shares in that class or series. Additionally, upon the occurrence of Series C,
D and E redemption event, a specified percentage of the holders of Series C, D, and E Shares then outstanding (specifically,
at least 50%, 50% and 45% for Series C, D and E Shares, respectively) may also require the Company to have redeemed all of
the respective outstanding Preferred Shares. Series C, D and E redemption events include certain events that have a material
adverse effect on the Company’s operations, breach of representation or warranty, failure to comply with certain transfer
restrictions, breach of certain provisions in the related investors’ rights and share purchase agreements. Series C
and D redemption events also included the Company’s failure to complete a Qualified IPO by June 30, 2016.
The redemption price
of Series A and B Shares was equal to 200% of the original issuance price plus all declared but unpaid dividends. The redemption
price of the Class A, Series C, D and E Shares is equal to the sum of (a) 100% of the issuance price, (b) 15%
compounded annual rate of return and (c) all declared but unpaid dividends. The full amount of the redemption price due but
not paid shall have accrued interest daily at a rate of 20% per annum from the applicable Redemption Date.
Voting
Each Preferred Share
had voting rights equivalent to the number of common shares to which it was convertible at the record date. The holders of Preferred
Shares shall vote together with the common shareholders, and not as a separate class or series, on all matters put before the shareholders.
Liquidation
A liquidation event
includes, unless waived by the Preferred Shareholders, (i) any liquidation, winding-up, or dissolution of any member of the
Company, (ii) any merger or consolidation of the Company or any other transactions as a result of which shareholders of the
Company immediately prior to such transaction will cease to own a majority of the equity securities or voting power of the surviving
entity immediately following, (iii) sale of all or substantially all of the assets of the Company to or from an unaffiliated
third party, (iv) exclusive licensing of all or substantially all of the intellectual property of the Company to an unaffiliated
third party, or (v) transfer in which a majority of the outstanding voting power of the Company is transferred.
The holders of Preferred
Shares had preference over holders of common shares with respect to payment of dividends and distribution of assets upon voluntary
or involuntary liquidation of the Company. Upon liquidation, Series E Shares shall rank senior to other series of Preferred
Shares and common shares, Series D Shares shall rank senior to Series C Shares, Series C Shares shall rank senior
to Series B, Series B Shares shall rank senior to Series A Shares, Series A Shares shall rank senior to Class A
Shares, and all Preferred Shares rank senior to common shares.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
15. CONVERTIBLE REDEEMABLE PREFERRED
SHARES (Continued)
Liquidation (Continued)
The holders of Class A,
Series A and Series B Shares were entitled to receive 100% of the original issue price plus a 6% compounded annual rate
of return, and all declared or accrued but unpaid dividends (“Liquidation Preference Amount”) before any distribution
or payment to common shareholders.
Series C Shareholders
shall receive the sum of (a) 100% of the issuance price, (b) 6% compounded annual rate of return and (c) all declared
but unpaid dividends, before any distribution to holders of Series B, Series A, Class A and common shares. In the
event that the liquidation event has been initiated by a demand by a holder of Series C Shares, the liquidation amount is
then the sum of (a) 100% of the issuance price, (b) 15% compounded annual rate of return and (c) all declared but
unpaid dividends prior to any other shareholders.
Series D Shareholders
shall receive the sum of (a) 100% of the issuance price, (b) 6% compounded annual rate of return and (c) all declared
but unpaid dividends, before any distribution to holders of Series C, Series B, Series A, Class A and common
shares. In the event that the liquidation event has been initiated by a demand by a holder of Series D Shares, the liquidation
amount is then the sum of (a) 100% of the issuance price, (b) 15% compounded annual rate of return and (c) all declared
but unpaid dividends prior to any other shareholders.
Series E Shareholders
shall receive the sum of (a) 100% of the issuance price, (b) 6% compounded annual rate of return and (c) all declared
but unpaid dividends, before any distribution to holders of other series or class of Preferred Shares and common shares. In the
event that the liquidation event has been initiated by a demand by a holder of Series E shares, the liquidation amount is
then the sum of (a) 100% of the issuance price, (b) 15% compounded annual rate of return and (c) all declared but
unpaid dividends prior to any other shareholders.
Transfer restrictions
The holders of Preferred
Shares were prohibited from transferring any equity securities of the Company in a private sale to (i) any specified global
competitor of the Company at any time, (ii) any other global competitors not specified within 18 months following the Series D
issuance, or (iii) any other global competitor at any time after 18 months following the Series D issuance, unless as
a result of such sale and related purchases, the purchaser will acquire at least 51% of the total outstanding share capital of
the Company (including without limitation, pursuant to a change of control event). In addition, the shareholders agreement granted
the Company and its preferred shareholders certain rights of first refusal with respect to any proposed share transfers by certain
shareholders of the Company and the preferred shareholders.
Accounting of Preferred
Shares
The Company classified
the Preferred Shares in the mezzanine section of the consolidated balance sheets because they were redeemable at the holders’
option any time after a certain date and were contingently redeemable upon the occurrence of certain liquidation events outside
of the Company’s control. The Preferred Shares were recorded initially at fair value, net of issuance costs.
Since the Preferred
Shares became redeemable at the option of the holder at any time after a specified date, the Company recorded accretion on the
Preferred Shares to the redemption value (e.g., 200% of the issuance price of Series A and Series B) using the effective
interest rate method from the issuance dates to the earliest redemption dates as set forth in the original issuance agreements.
While all Preferred Shares were automatically converted upon a Qualified IPO, the effectiveness of a Qualified IPO was not within
the control of the Company and was not deemed probable to occur for accounting purposes until the effective date of the Qualified
IPO. As such, the Company continued to recognize accretion of the Preferred Shares during 2014. The accretion of Preferred Shares
was RMB250,774,772 (US$39,468,120) for the year ended December 31, 2014.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
15. CONVERTIBLE REDEEMABLE PREFERRED
SHARES (Continued)
Modification of
Preferred Shares
The Company assesses
whether an amendment to the terms of its convertible redeemable preferred shares is an extinguishment or a modification based on
a qualitative evaluation of the amendment. If the amendment adds, removes, significantly changes to a substantive contractual
term or to the nature of the overall instrument, the amendment results in an extinguishment of the preferred shares. The
Company also assesses if the change in terms results in value transfer between preferred shareholders or between preferred shareholders
and common shareholders.
When convertible redeemable
preferred shares are extinguished, the difference between the fair value of the consideration transferred to the convertible redeemable
preferred shareholders and the carrying amount of such preferred shares (net of issuance costs) is treated as a deemed dividend
to the preferred shareholders. When convertible redeemable preferred shares are modified and such modification results in value
transfer between preferred shareholders and common shareholders, the change in fair value resulting from the amendment is treated
as a deemed dividend to or from the preferred shareholders.
The Preferred Shares
(excluding Series E Shares) were modified in May and October 2013 as a result of the Company’s negotiations
with holders of Preferred Shares, CB and 2013 Notes. Prior to the modifications, at any time on or after May 31, 2013, for
Series A Shares, or December 31, 2013, for Series B, C and D Shares, if requested by at least 50% of the holders
of the respective class of Preferred Shares then outstanding (“Redemption Date”), the Company shall have redeemed all
of the respective outstanding Preferred Shares at the redemption price defined in the Article of Association. On May 9,
2013, the holders of Series A Preferred Shares first agreed to extend the redemption commencement date of Series A Preferred
Shares from May 31, 2013 to December 31, 2013 in order to facilitate the negotiation with the Series D investors
for the 2013 Notes, which was issued in June 2013. Subsequently, on October 9, 2013, the holders of Series A Shares,
Series B Shares, Series C Shares and Series D Shares agreed to modify the optional redemption commencement date
of the preferred shares from December 31, 2013 to June 30, 2016. The second modification enabled the Company to offer
holders for 2011 CB and 2013 Notes (who were also existing preferred shareholders) in the negotiation of modifying the conversion
feature to become convertible into Class A shares.
The Company evaluated
both modifications in accordance with its accounting policy and concluded that they are modifications, rather than extinguishments,
of Preferred Shares, which resulted in transfers of value amongst preferred shareholders. The Company assessed the impact on the
fair value of Preferred Shares and common shares, which also supported the assessment that the modification resulted in value transfers
amongst preferred shareholders. As such, the Company did not recognize any deemed dividends related to the modifications in 2013.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
15. CONVERTIBLE REDEEMABLE PREFERRED SHARES (Continued)
The Company’s convertible redeemable
preferred shares activity for the years ended December 31, 2014 is summarized below:
|
|
Series A Shares
|
|
|
Series B Shares
|
|
|
Series C Shares
|
|
|
Series D Shares
|
|
|
Series E Shares
|
|
|
Class A Shares
|
|
|
|
Number
of
shares
|
|
|
Amount
RMB
|
|
|
Number
of
shares
|
|
|
Amount
RMB
|
|
|
Number
of
shares
|
|
|
Amount
RMB
|
|
|
Number
of
shares
|
|
|
Amount
RMB
|
|
|
Number
of
shares
|
|
|
Amount
RMB
|
|
|
Number
of
shares
|
|
|
Amount
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2013
|
|
|
5,000,000
|
|
|
|
68,146,852
|
|
|
|
12,123,314
|
|
|
|
327,058,282
|
|
|
|
17,348,382
|
|
|
|
575,422,644
|
|
|
|
10,000,000
|
|
|
|
377,488,481
|
|
|
|
18,554,545
|
|
|
|
630,205,581
|
|
|
|
10,427,373
|
|
|
|
295,199,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series E Shares, net of issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,545,455
|
|
|
|
153,996,180
|
|
|
|
—
|
|
|
|
|
|
Accretion
on convertible redeemable preferred shares to redemption value
|
|
|
—
|
|
|
|
69,598
|
|
|
|
—
|
|
|
|
3,451,997
|
|
|
|
—
|
|
|
|
75,476,317
|
|
|
|
—
|
|
|
|
51,479,102
|
|
|
|
—
|
|
|
|
97,696,064
|
|
|
|
—
|
|
|
|
22,601,694
|
|
Conversion
of convertible redeemable preferred shares to Class B common shares upon completion of the initial public offering
|
|
|
(5,000,000
|
)
|
|
|
(68,216,450
|
)
|
|
|
(12,123,314
|
)
|
|
|
(330,510,279
|
)
|
|
|
(17,348,382
|
)
|
|
|
(650,898,961
|
)
|
|
|
(10,000,000
|
)
|
|
|
(428,967,583
|
)
|
|
|
(23,100,000
|
)
|
|
|
(881,897,825
|
)
|
|
|
(10,427,373
|
)
|
|
|
(317,801,190
|
)
|
Balance
as of December 31, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Upon the completion of the Company's
IPO on November 18, 2014, each then-outstanding Preferred Share was automatically converted into one Class B common share.
Therefore, there were no convertible
redeemable preferred shares activities for the year ended December 31, 2015 and
2016.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
16. COMMON SHARES
As of December 31,
2016, the Company had an aggregate of 138,860,287 common shares issued and outstanding. These outstanding shares consist of (1)
67,547,921 Class A ordinary shares and (2) 71,312,366 Class B common shares. The terms of Class A ordinary shares and Class B ordinary
shares are similar, except that holders of Class A common shares are entitled to one vote per share, while holders of Class B common
shares are entitled to ten votes per share. In addition, certain matters including those related to the change of control of the
Company require an additional approval by the holders of a majority of Class A common shares voting as a separate class. Each Class
B common share is convertible into one Class A common share at any time by the holder thereof. Class A common shares are not convertible
into Class B common shares under any circumstances. Class B common shares will be automatically converted into the same number
of Class A common shares under certain circumstances, including any transfer of Class B common shares by a holder thereof to any
person or entity which is not an affiliate of such holder. On November 25, 2016, 1,697,422 Class B common shares were converted
to Class A ordinary shares.
17. FAIR VALUE MEASUREMENTS
The
Company’s recurring fair value measurements for financial assets and liabilities are limited to cash and cash
equivalents as of December 31, 2015 and 2016. Cash and cash equivalents are classified within Level 1 of the fair value
hierarchy because they are valued based on quoted market prices in an active market.
The Company did not
have Level 2 or Level 3 categorized assets or liabilities as of December 31, 2015 and 2016, respectively.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
18. OTHER INCOME (EXPENSE), NET
Other income (expense),
net consists of the following:
|
|
For the years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
American Depositary Receipt reimbursement
|
|
|
9,917,716
|
|
|
|
-
|
|
Tax refund
|
|
|
-
|
|
|
|
979,794
|
|
Others
|
|
|
287,559
|
|
|
|
464,335
|
|
Total
|
|
|
10,205,275
|
|
|
|
1,444,129
|
|
In November 2014,
the Company entered into an agreement with a depository bank, which agreed to reimburse the Company certain expenses in connection
with the advancement of the Company’s ADS and investor relations programs for a period of five and half years. The Company
recognizes income on a straight-line basis over each twelve-month contract year of the contract period, commencing on November
of each year. During year 2015, the Company recorded RMB9,917,716 as other income. During year 2016, the Company did not receive
any reimbursement and recorded no such amount to other income.
19. SHARE-BASED COMPENSATION
2010 Performance
Incentive Plan
On April 1, 2010,
the Company adopted the 2010 Performance Incentive Plan (“2010 Plan”) under which the Company reserved 2,627,730 options
to purchase common shares for the issuance of incentive awards to employees. On December 21, 2010, the Company increased the
maximum number of options available to 4,300,730. All of the Company’s outstanding options are granted to employees and are
equity-classified. These options vest over three to five years of an employee’s continuous service starting from the grant
date and have a contractual term of five years.
The Company granted
300,000 options on April 1, 2013 under the 2010 Plan with an exercise price of US$3.11. On August 26, 2014, the Company
amended and restated the 2010 Plan whereby the maximum aggregate number of shares issuable under the 2010 Plan increased from 4,300,730
shares to 6,698,470 shares. On the same day, the Company granted 450,000 restricted shares to employees, of which one-quarter vested
immediately, and the remaining vest over a period of three years from the date of grant. Additionally, the Company also granted 1,300,000
options to employees with an exercise price of US$7.00, which vest over a period of four years from the date of the grant. No options
and restricted shares were granted under the 2010 Plan in the years ended December 31, 2014, 2015 and 2016.
On August 28, 2015,
the directors of the Company’s Compensation Committee approved an option modification to extend the contractual term of all
outstanding share options granted to employees and a director (excluding the Company’s Founder) under the 2010 Plan on August
31, 2010 by one year. The modified options, totally amounting to 1,588,648 options, are all vested. Other terms of the option grants
remain unchanged. The modification resulted in total incremental compensation cost of RMB76,552, all of which was recorded in the
consolidated statements of comprehensive income (loss) for the year ended December 31, 2015.
On December 26, 2015,
the directors of the Company’s Compensation Committee approved an option modification to extend the contractual term of all
outstanding share options granted to an employee, the Founder, under the 2010 Plan on December 31, 2010 by one year. The modified
options, totally amounting to 1,673,000 options, are all vested. Other terms of the option grants remain unchanged. On November
14, 2016, these options were modified to extend another one year under the approval of the directors of the Company’s Compensation
Committee. Other terms of the option grants remain unchanged. The modification resulted in total incremental compensation cost
of RMB831,958 and RMB1,502,987, all of which was recorded in the consolidated statements of comprehensive income (loss) for the
years ended December 31, 2015 and 2016, respectively.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
19. SHARE-BASED COMPENSATION (Continued)
2010 Performance
Incentive Plan (Continued)
Share options
The following table
summarizes the Company’s option activities under the 2010 Plan for the years ended December 31, 2014, 2015 and 2016:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price (US$)
|
|
|
Weighted
Average
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value (US$)
|
|
|
Weighted
Average
Grant-date Fair
Value (US$)
|
|
Options outstanding at January 1, 2014
|
|
|
3,962,650
|
|
|
|
2.66
|
|
|
|
2.19
|
|
|
|
4,564,417
|
|
|
|
|
|
Granted
|
|
|
1,300,000
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
3.26
|
|
Cancelled and forfeited
|
|
|
(125,750
|
)
|
|
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2014
|
|
|
5,136,900
|
|
|
|
3.76
|
|
|
|
1.95
|
|
|
|
5,425,522
|
|
|
|
|
|
Exercised
|
|
|
(138,700
|
)
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled and forfeited
|
|
|
(98,200
|
)
|
|
|
6.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2015
|
|
|
4,900,000
|
|
|
|
3.74
|
|
|
|
1.59
|
|
|
|
13,356,070
|
|
|
|
|
|
Exercised
|
|
|
(1,726,874
|
)
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled and forfeited
|
|
|
(17,626
|
)
|
|
|
6.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
|
|
3,155,500
|
|
|
|
4.57
|
|
|
|
1.64
|
|
|
|
2,801,660
|
|
|
|
|
|
Vested and expected to vest at December 31, 2016
|
|
|
3,123,478
|
|
|
|
4.54
|
|
|
|
1.63
|
|
|
|
2,801,660
|
|
|
|
|
|
Vested and exercisable December 31, 2016
|
|
|
2,465,000
|
|
|
|
4.04
|
|
|
|
1.42
|
|
|
|
2,659,660
|
|
|
|
|
|
The aggregate intrinsic
value is calculated as the difference between the exercise price of the underlying awards and the market value of the underlying
stock at each balance sheet date. As no market value of underlying stock was available before the Company’s IPO, the aggregate
intrinsic value prior to the IPO was calculated as the difference between the exercise price of the underlying awards and the estimated
fair value of the underlying stock. The total intrinsic value of options exercised at exercise date during the years ended December
31, 2015 and 2016 was RMB2,577,855 and RMB 38,265,778, respectively.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
19. SHARE-BASED COMPENSATION (Continued)
2010 Performance
Incentive Plan (Continued)
Share options (Continued)
The grant date fair
value of each option is calculated using a binomial option pricing model by the Company. The fair value of each option grant under
the 2010 Plan was estimated on the date of grant with the following assumptions:
|
|
For the Year ended
December 31
2014
|
|
Risk-free rate
|
|
|
2.39
|
%
|
Option term
|
|
|
5 years
|
|
Volatility
|
|
|
44
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Exercise multiple
|
|
|
2/2.5
|
|
Expected forfeiture rate (post-vesting)
|
|
|
0%/10
|
%*
|
*0%/10% post-vesting
forfeiture rate of which the executive level is 0% and the non-executive level is 10% was applied in the valuation model due to
the executive position held by the grantee and represents the Company’s estimate of the grantees’ forfeiture patterns.
The Company estimated
the expected volatility based on the annualized standard deviation of the daily return embedded in historical share prices of the
comparable companies. Risk free interest rate was estimated based on the yield to maturity of US treasury bonds denominated in
US$ for a period comparable to the expected term. The exercise multiple is estimated as the ratio of fair value of underlying
shares over the exercise price as at the time the option is exercised, based on a consideration of research study regarding exercise
pattern based on empirical studies on the actual exercise behavior of employees. The Company has never declared or paid any cash
dividends on its capital stock, and the Company does not anticipate any dividend payments on its common shares in the foreseeable
future. Estimated forfeiture rates are determined based on historical employee turnover rates.
Share-based compensation
expense is recorded on a straight-line basis over the requisite service period, which is generally three to five years from the
date of grant. The Company recognized share-based compensation expenses of RMB6,162,573, RMB7,666,182 and RMB8,489,631 for share
options granted under the 2010 Plan in the consolidated statements of comprehensive income (loss) for the years ended December
31, 2014, 2015 and 2016, respectively. The expenses of 2015 and 2016 include the impacts of the aforementioned option term modifications
in August and December 2015 and December 2016.
As of December 31,
2016, there was RMB 11,203,023 in total unrecognized compensation expense, adjusted for estimated forfeitures, related
to unvested share options, which is expected to be recognized over a weighted-average period of 1.63 years. The unrecognized compensation
expense may be adjusted for future changes in estimated forfeitures.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
19. SHARE-BASED COMPENSATION (Continued)
Restricted shares
A summary of the restricted
shares activities under the 2010 Plan for the years ended December 31, 2015 and 2016 is presented below:
Unvested Restricted Shares
|
|
Number of Restricted Shares
|
|
|
Weighted Average Grant-date
Fair
Value (US$)
|
|
Unvested at January 1, 2014
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
450,000
|
|
|
|
6.99
|
|
Vested
|
|
|
(112,500
|
)
|
|
|
6.99
|
|
Unvested at December 31, 2014
|
|
|
337,500
|
|
|
|
6.99
|
|
Vested
|
|
|
(112,500
|
)
|
|
|
6.99
|
|
Unvested at December 31, 2015
|
|
|
225,000
|
|
|
|
6.99
|
|
Vested
|
|
|
(112,500
|
)
|
|
|
6.99
|
|
Unvested at December 31, 2016
|
|
|
112,500
|
|
|
|
6.99
|
|
Expected to vest at December 31, 2016
|
|
|
112,500
|
|
|
|
6.99
|
|
The total fair value
of restricted shares vested at vesting date during the years ended December 31, 2014, 2015 and 2016 was US$ 786,375, US$537,750
and US$590,625, respectively.
Share-based compensation
expense for restricted shares is recorded on a straight-line basis over the requisite service period, which is three years from
the date of the grant. The Company recognized share-based compensation expense for restricted shares of RMB6,518,568, RMB4,894,683
and RMB5,222,062 in the consolidated statements of comprehensive income (loss) for the years ended December 31, 2014, 2015
and 2016, respectively.
As of December 31,
2016, there was RMB3,557,013 in total unrecognized compensation expense, adjusted for estimated forfeitures, related to unvested
restricted shares, which is expected to be recognized over a weighted-average period of 0.66 years. The unrecognized compensation expense may be adjusted for future changes in estimated forfeitures.
2014 Performance
Incentive Plan
In October 2014,
the Company adopted the 2014 Performance Incentive Plan (“2014 Plan”), which became effective immediately after the
completion of the Company’s initial public offering in November 2014. Under the 2014 Plan, the Company is authorized
to initially reserve a maximum of 4,000,000 common shares, provided that the shares reserved shall automatically increase on January 1
of each year during the term of the 2014 Plan, commencing on January 1, 2015, by an amount equal to the lesser of (i) one
percent (1%) of the total number of common shares issued and outstanding on December 31 of the immediately preceding calendar
year, (ii) 1,000,000 common shares or (iii) such number of common shares as may be determined by the Company’s
board of directors.
There were no option
grants in 2014 and 2016. On May 15, 2015, the Company granted 525,000 share options to the Company's employees and directors at
an exercise price of US $5.35 per share with contractual term of 10 years from the grant date and a graded vesting period of four
years. 25% of the granted options vest on each of the first, second, third and fourth anniversaries of the grant date.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
19. SHARE-BASED COMPENSATION (Continued)
2014 Performance
Incentive Plan (Continued)
A roll-forward of
activity in the 2014 Plan follows.
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
Remaining
|
|
|
Aggregate
|
|
|
Weighted
Average
Grant-date
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Fair value
|
|
|
|
Options
|
|
|
(US$)
|
|
|
Term
|
|
|
Value (US$)
|
|
|
(US$)
|
|
Options outstanding at January 1, 2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Granted
|
|
|
525,000
|
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
2.86
|
|
Cancelled and forfeited
|
|
|
(16,000
|
)
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2015
|
|
|
509,000
|
|
|
|
5.35
|
|
|
|
9.38
|
|
|
|
481,005
|
|
|
|
|
|
Cancelled and forfeited
|
|
|
(8,000
|
)
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
|
|
501,000
|
|
|
|
5.35
|
|
|
|
8.38
|
|
|
|
—
|
|
|
|
|
|
Vested and expected to vest at December 31, 2016
|
|
|
474,914
|
|
|
|
5.35
|
|
|
|
8.38
|
|
|
|
—
|
|
|
|
|
|
Vested and exercisable December 31, 2016
|
|
|
125,250
|
|
|
|
5.35
|
|
|
|
8.38
|
|
|
|
—
|
|
|
|
|
|
The grant date fair
value of each option is calculated using a binomial option pricing model by the Company. The fair value of each option grant under
the 2014 Plan was estimated on the date of grant with the following assumptions:
|
|
For the Year Ended
December 31, 2015
|
|
Risk-free rate
|
|
|
2.14
|
%
|
Option term
|
|
|
10 years
|
|
Volatility
|
|
|
55
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Exercise multiple
|
|
|
2/2.5
|
|
Expected forfeiture rate (post-vesting)
|
|
|
0%/10
|
%*
|
*0%/10% post-vesting
forfeiture rate of which the executive level is 0% and the non-executive level is 10% was applied in the valuation model due to
the executive position held by the grantee and represents the Company’s estimate of the grantees’ forfeiture pattern.
The Company estimated
the expected volatility based on the weighted-average annualized standard deviation of the daily return embedded in historical
share prices, considering share prices of the Company and comparable companies. Risk free interest rate was estimated based on
the yield to maturity of US treasury bonds denominated in US$. The exercise multiple is estimated as the ratio of fair value of
underlying shares over the exercise price as at the time the option is exercised, based on a consideration of research study regarding
exercise pattern based on empirical studies on the actual exercise behavior of employees. The Company has never declared or paid
any cash dividends on its capital stock, and the Company does not anticipate any dividend payments on its common shares in the
foreseeable future. Estimated forfeiture rates are determined based on historical employee turnover rates.
Share-based compensation
expense for options is recorded on a straight-line basis over the requisite service period, which is four years from the date of
grant. The Company recognized share-based compensation expense of RMB1,422,381 and RMB2,329,254 in the consolidated statement of
comprehensive income (loss) for the years ended December 31, 2015 and 2016.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
19. SHARE-BASED COMPENSATION (Continued)
As of December 31,
2016, there was RMB5,477,953 in total unrecognized compensation expense related to share options, which is expected to be recognized
over a weighted-average period of 2.37 years.
20. INCOME (LOSS) PER SHARE
Basic and diluted
net income (loss) per share for each of the years presented are calculated as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
(93,145,437
|
)
|
|
|
696,338,805
|
|
|
|
33,135,116
|
|
Accretion on convertible redeemable preferred shares to redemption value
|
|
|
(250,774,772
|
)
|
|
|
—
|
|
|
|
—
|
|
Numerator for basic and diluted net income (loss) per share
|
|
|
(343,920,209
|
)
|
|
|
696,338,805
|
|
|
|
33,135,116
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic calculation-weighted average number of common shares outstanding
|
|
|
19,198,145
|
|
|
|
126,758,363
|
|
|
|
137,621,702
|
|
Dilutive effect of share options
|
|
|
—
|
|
|
|
1,593,216
|
|
|
|
897,122
|
|
Dilutive effect of restricted shares
|
|
|
—
|
|
|
|
52,298
|
|
|
|
33,207
|
|
Denominator for diluted income (loss) per share calculation
|
|
|
19,198,145
|
|
|
|
128,403,877
|
|
|
|
138,552,031
|
|
Basic net income (loss) per share attributable to the Company’s common shareholders
|
|
|
(17.91
|
)
|
|
|
5.49
|
|
|
|
0.24
|
|
Diluted net income (loss) per share attributable to the Company’s common shareholders
|
|
|
(17.91
|
)
|
|
|
5.42
|
|
|
|
0.24
|
|
Basic net income (loss) per ADS*
|
|
|
(35.82
|
)
|
|
|
10.99
|
|
|
|
0.48
|
|
Diluted net income (loss) per ADS*
|
|
|
(35.82
|
)
|
|
|
10.85
|
|
|
|
0.48
|
|
* The Company completed
its IPO on November 18, 2014 and issued a total of 10,000,000 ADSs at a price of US$12.00 per ADS. Each ADS represents two
Class A common shares. The net loss per ADS for the year ended December 31, 2014 was calculated using the same conversion
ratio assuming the ADSs had been in existence during these periods.
Basic net income (loss)
per share is computed using the weighted average number of common shares outstanding during the period. Diluted net earnings (loss)
per share is computed using the weighted average number of common shares and dilutive common share equivalents outstanding during
the period. For the year end December 31, 2014, Class A, Series A, Series B, Series C, Series D,
and Series E Preferred Shares totaling 67,288,845, on a weighted average basis were anti-dilutive and excluded from the calculation
of diluted net loss per share. The effects of all outstanding share options and restricted shares of RMB4,443,455 shares on a weighted
average basis were anti-dilutive and were excluded from the computation of diluted loss per share for the years ended December 31,
2014.
The effects of outstanding share options and restricted shares of
2,828,588 and 2,753,664 shares on a weighted average basis were anti-dilutive and excluded from the computation of diluted net
income per share for the years ended December 31, 2015 and 2016, respectively.
The Company's convertible
redeemable preferred shares, which were issued and converted into common shares before and upon the completion of the IPO, were
participating securities because they had contractual rights to share in the profits but not losses of the Company. For the year
ended December 31, 2014, the two-class method was not used in computing basic and diluted net loss per share as the Company was
in a net loss position. The Company does not distinguish between Class A and Class B common shares for purposes of presenting
basic or diluted earnings per share as each share class has identical privileges with respect to undistributed and distributed
earnings
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
21. COMMITMENTS AND CONTINGENCIES
(a)
Operating
leases
The Company and its
subsidiaries have entered into non-cancelable operating leases covering various facilities. Future minimum lease payments under
these non-cancellable leases as of December 31, 2016 are as follows:
Year ending December 31,
|
|
(RMB)
|
|
2017
|
|
|
40,023,724
|
|
2018
|
|
|
18,953,553
|
|
2019
|
|
|
8,628,680
|
|
2020
|
|
|
3,205,572
|
|
2021
|
|
|
1,838,927
|
|
Thereafter
|
|
|
1,887,014
|
|
|
|
|
74,537,470
|
|
The Company recorded
rental expense of RMB36,017,540, RMB50,738,573 and RMB57,538,983 in the consolidated statements of comprehensive income (loss)
during the years ended December 31, 2014, 2015 and 2016, respectively.
(b)
Purchase
commitments
In addition
to vehicle purchase deposits reflected in the consolidated balance sheet, the Company’s purchase commitments relate
to purchase of rental vehicles and marketing resources. Total purchase commitments contracted but not yet reflected in the
consolidated financial statements amounted to RMB152,994,615 as of December 31, 2016, of which RMB63,794,623 will be
fulfilled in 2017, and RMB89,199,992 will be fulfilled in 2018 and 2019.
Other than those disclosed
above, the Company did not have other significant capital and other commitments, long-term obligations, or guarantees as of December 31,
2016.
(c)
Contingencies
The Company is subject
to periodic legal or administrative proceedings in the ordinary course of its business. The Company does not believe that any currently
pending legal or administrative proceeding to which the Company is a party will have individually or in the aggregate have a material
adverse effect on the results of operations or financial condition.
22. RELATED PARTY TRANSACTIONS
Crawford/Enterprise
In March 2012,
the Company entered into a global affiliation agreement with Enterprise Holdings (China) LLC (“Enterprise China”).
Enterprise China is an affiliate of Enterprise Holdings, Inc., a subsidiary of Crawford Group, Inc. (“Crawford”).
Crawford was a holder of the Company’s Class A, Series D and Series E Shares and is currently a holder of
the Company’s Class B common shares. Pursuant to the global affiliation agreement, the Company and Enterprise China are to
direct certain rental referrals to each other via their respective websites, and for each referral received, the Company is liable
for a contractually specified amount of referral fees payable to Enterprise China, and vice versa. The Company records referral
fees payable to Enterprise China as sales and marketing expenses, and referral fees received as other operating income. Transactions
incurred under this arrangement were immaterial for the periods presented.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
22. RELATED PARTY TRANSACTIONS (Continued)
Crawford/Enterprise
(Continued)
Under the Additional
Series E Preferred Share purchase agreement dated April 16, 2014, Crawford Group Inc. purchased 1,764,055 Series E
Preferred Shares for US$9,702,299.
On October 31,
2014, Crawford Group, Inc. (“Crawford”), a parent company of Enterprise Holdings, Inc., exercised all of
the 1,500,000 warrants to purchase 1,500,000 Class B common shares at a per share purchase price of US$5.50 for a total consideration
of US$8,249,993 (RMB50,705,282).
As of December 31,
2016, Crawford holds 18,694,003 Class B common shares.
Ctrip
Under the Additional
Series E Preferred Share purchase agreement dated April 16, 2014, Ctrip Investment Holding Ltd. (‘‘Ctrip’’)
purchased 2,368,193 Series E Preferred Shares for US$13,025,062. As part of the Additional Series E share purchase agreement,
upon the Company’s written request in connection with a proposed initial public offering, Ctrip shall be obligated to subscribe
for the Company’s common shares (i) in an exempt private placement or (ii) in an exempt Regulation S offering.
Each of Ctrip and the Company agreed that the purchase price of the common shares in connection with such investments shall be
the initial public offering price, and such subscription shall be consummated concurrently with the closing of the initial public
offering.
Since 2014, the Company
also entered into certain service agreements with Ctrip for car rental and car services referrals. Pursuant to these service agreements,
the Company pays a fixed percentage or a fixed minimum commission fee of car rental or car services rates from successful car referrals
as commissions to Ctrip (resulting in related party payables), and Ctrip collects car rental and car services fees from individual
customers on behalf of the Company (resulting in related party receivables).
Transactions
incurred under these service agreements were RMB1,594,814, RMB16,190,063 and RMB29,399,234 for the years ended December 31,
2014, 2015 and December 31, 2016, respectively.
On
October 14, 2014, the Company entered into a subscription agreement with Ctrip, pursuant to which Ctrip purchased from the
Company 1,
666
,666 Class A common shares at US$6.00 per Class A
common share in a private placement concurrent with the closing of the Company’s initial public offering.
In
the end
of April 2015, Ctrip extended an entrusted bank loan of RMB300,000,000 to the Company which has been drawn down in full (Note 10). The loan has a term
of three years with an interest rate of 6.9% per annum and some of the Company's PRC subsidiaries provided guarantees. In October
2016, the Company repaid RMB200,000,000 originally due in 2018. Interests incurred under this loan agreement was RMB18,534,167
for the year ended December 31, 2016.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
22. RELATED PARTY TRANSACTIONS (Continued)
Private Placement
On
May 22, 2015, the Company entered into definitive securities purchase agreements with Tiger Fund and SRS Funds (the “Buyers”’)
pursuant to which the Company agreed to issue, and issued, a total of 22,337,924 of its Class A common shares to the Buyers at
a price of US$6.00 per Class A common share (equivalent to US$12.00 per ADS), resulting in gross proceeds of approximately US$134
million from the private
placement
transaction. Under the terms
of the securities purchase agreements, the Class A common shares were issued in two tranches: (a) a first tranche of 11,437,924
Class A common shares, which were issued on May 22, 2015, and (b) a second tranche of 10,900,000 Class A common shares, which were
issued on June 30, 2015. In addition, Ctrip and Crawford also entered into definitive agreements with the Buyers for the sale of
2,666,666 Class A common shares (including certain shares represented by ADSs) to the Buyers at a price per Class A common share
of US$6.00 (equivalent to US$12.00 per ADS).
As of December 31,
2015 and 2016, significant balances with related parties were as follows:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Due from a related party, current:
|
|
|
|
|
|
|
|
|
Receivables due from Ctrip
|
|
|
7,367,255
|
|
|
|
1,755,889
|
|
|
|
|
|
|
|
|
|
|
Due to a related party, current:
|
|
|
|
|
|
|
|
|
Payables due to Ctrip
|
|
|
10,753,914
|
|
|
|
16,083,610
|
|
|
|
|
|
|
|
|
|
|
Due to a related party, non-current:
|
|
|
|
|
|
|
|
|
Long-term borrowing due to Ctrip
|
|
|
300,000,000
|
|
|
|
100,000,000
|
|
23. SUBSEQUENT EVENTS
In January 2017, the
Company entered into a short-term loan facility agreement with a bank for which a total loan facility up to RMB30,000,000 was made
available to the Company. The loan bears a fixed interest rate of 4.35% per annum.
In January 2017, the
Company repaid a short-term borrowing of RMB8,000,000 from a bank when due.
In January
2017, the company extended the RMB18,000,000 loan agreement with Shanghai Chenghuan Car Rental Company Limited, or Shanghai
Chenghuan (Note 5), for one year, which will be due in January 2018 after extension. Other terms in the previous loan
agreements remain unchanged.
In February 2017,
the Company repaid a short-term borrowing of RMB25,000,000 from a bank when due.
In March 2017, the
Company entered into a long-term loan agreement of RMB25,000,000 with a bank under an existing facility agreement of RMB150,000,000.
The loan bears an interest rate of 4.9875% per annum.
In April 2017, the Company repaid short-term
borrowings of RMB100,000,000 from banks when due. In April 2017, the Company renewed a short-term loan agreement of RMB50,000,000
with a bank bearing an interest rate of 4.35% per annum.
In March 2017, the Company repaid three notes payable amounting to RMB218,983,800, and the pledged cash
deposits of RMB202,826,100 were released along with the repayment. In February March and April, in connection with the purchase
of vehicles, the Company entered into several notes payable amounting to RMB376,765,700, for which the Company pledged cash deposits
of USD62,400,000 in the designated bank account as collateral.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
In March 2017, the
Company repaid notes payable of RMB218,983,800 when due according to the contract.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
24. RESTRICTED NET ASSETS
Pursuant to laws applicable
to entities incorporated in the PRC, the Company’s subsidiaries and VIEs in the PRC are required to make appropriations from
after-tax profit to non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general
reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits,
the general reserve fund requires an annual appropriation of 10% of after tax profit (as determined under accounting principles
generally accepted in the PRC at each year-end) until the accumulated amount of such reserve fund reaches 50% of a company’s
registered capital; the other fund appropriations are at the subsidiaries’ discretion. These reserve funds can only be used
for specific purposes of enterprise expansion and staff bonus and welfare and are not distributable as cash dividends.
As the Company’s
PRC subsidiaries and VIEs have accumulative losses, they have not started to contribute to the staff welfare and bonus funds. In
addition, due to restrictions on the distribution of share capital from the Company’s PRC subsidiaries, up to the amount
of net assets held in each subsidiary and VIE, and also as a result of these entities’ unreserved accumulated losses. Total
restricted net assets of the Company were RMB3,011,907,627 or 75.5% of the Company’s total consolidated net assets as of
December 31, 2016.
25. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
The Company performed
a test on the restricted net assets of consolidated subsidiaries in accordance with Securities and Exchange Commission Regulation
S-X Rule 4-08 (e) (3), “General Notes to Financial Statements” and concluded that it was applicable for the
Company to disclose the financial statements for the parent company.
The subsidiaries did
not pay any dividends to the Company for the years presented. For the purpose of presenting parent company only financial information,
the Company records its investments in its subsidiaries under the equity method of accounting. Such investments are presented on
the separate condensed balance sheets of the Company as “Investments (deficit) in subsidiaries and VIEs” and the loss
or income of the subsidiaries and VIEs is presented as “share of income (loss) of subsidiaries and VIEs”. Certain information
and footnote disclosures generally included in financial statements prepared in accordance with U.S. GAAP have been condensed and
omitted. The footnote disclosures contain supplemental information relating to the operations of the Company, as such, these statements
should be read in conjunction with the notes to the consolidated financial statements of the Company.
The Company did not
have significant capital and other commitments, long-term obligations except for the 2018 Senior Notes and US$150 million syndicated
loan (Note 10), other long-term debt, or guarantees as of December 31, 2015 and 2016.
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
25. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
(Continued)
BALANCE SHEETS
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$ (Note 2(d))
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,998
|
|
|
|
4,271
|
|
|
|
615
|
|
Restricted cash
|
|
|
—
|
|
|
|
10,733,202
|
|
|
|
1,545,903
|
|
Amounts due from subsidiaries
|
|
|
5,497,613,545
|
|
|
|
6,717,714,285
|
|
|
|
967,552,108
|
|
Prepaid expenses and other current assets
|
|
|
327,688
|
|
|
|
4,208,266
|
|
|
|
606,116
|
|
Total current assets
|
|
|
5,497,945,231
|
|
|
|
6,732,660,024
|
|
|
|
969,704,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
5,497,945,231
|
|
|
|
6,732,660,024
|
|
|
|
969,704,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
9,761,003
|
|
|
|
8,678,123
|
|
|
|
1,249,909
|
|
Income tax payable
|
|
|
88,231,790
|
|
|
|
4,169,661
|
|
|
|
600,556
|
|
Total current liabilities
|
|
|
97,992,793
|
|
|
|
12,847,784
|
|
|
|
1,850,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,255,989,958
|
|
|
|
2,366,903,154
|
|
|
|
340,904,962
|
|
Deficits in subsidiaries and VIEs
|
|
|
195,889,202
|
|
|
|
361,779,545
|
|
|
|
52,107,094
|
|
Total liabilities
|
|
|
1,549,871,953
|
|
|
|
2,741,530,483
|
|
|
|
394,862,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares, US$0.001 par value, 500,000,000 and 500,000,000 (including 407,328,619 Class A and 92,671,381 Class B) shares authorized, 137,133,413 (including 64,123,625 Class A and 73,009,788 Class B) and 138,860,287 (including 67,547,921 Class A and 71,312,366 Class B) shares issued and outstanding as of December 31, 2015 and December 31, 2016, respectively
|
|
|
867,001
|
|
|
|
878,463
|
|
|
|
126,525
|
|
Additional paid-in capital
|
|
|
4,433,439,156
|
|
|
|
4,474,702,198
|
|
|
|
644,491,171
|
|
Accumulated other comprehensive income
|
|
|
74,554,822
|
|
|
|
43,201,465
|
|
|
|
6,222,305
|
|
Accumulated deficit
|
|
|
(560,787,701
|
)
|
|
|
(527,652,585
|
)
|
|
|
(75,997,780
|
)
|
Total shareholders’ equity
|
|
|
3,948,073,278
|
|
|
|
3,991,129,541
|
|
|
|
574,842,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
5,497,945,231
|
|
|
|
6,732,660,024
|
|
|
|
969,704,742
|
|
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
25. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
(Continued)
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$ (Note 2(d))
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(12,681,141
|
)
|
|
|
(21,426,624
|
)
|
|
|
(25,424,596
|
)
|
|
|
(3,661,903
|
)
|
Loss from operations
|
|
|
(12,681,141
|
)
|
|
|
(21,426,624
|
)
|
|
|
(25,424,596
|
)
|
|
|
(3,661,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party
|
|
|
—
|
|
|
|
—
|
|
|
|
3,537,155
|
|
|
|
509,456
|
|
Subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
41,696,607
|
|
|
|
6,005,561
|
|
Total interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
45,233,762
|
|
|
|
6,515,017
|
|
Interest expense
|
|
|
—
|
|
|
|
(6,905,640
|
)
|
|
|
(128,065,737
|
)
|
|
|
(18,445,303
|
)
|
Gain from sale of cost method investment
|
|
|
—
|
|
|
|
803,059,728
|
|
|
|
—
|
|
|
|
—
|
|
Share of gain (loss) of subsidiaries and VIEs
|
|
|
(80,464,296
|
)
|
|
|
(2,227,088
|
)
|
|
|
147,442,803
|
|
|
|
21,236,180
|
|
Other income
|
|
|
—
|
|
|
|
9,917,716
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) before income taxes
|
|
|
(93,145,437
|
)
|
|
|
782,418,092
|
|
|
|
39,186,232
|
|
|
|
5,643,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
(86,079,287
|
)
|
|
|
(6,051,116
|
)
|
|
|
(871,542
|
)
|
Net income (loss)
|
|
|
(93,145,437
|
)
|
|
|
696,338,805
|
|
|
|
33,135,116
|
|
|
|
4,772,449
|
|
Accretion on Series A convertible redeemable preferred shares to redemption value
|
|
|
(69,598
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accretion on Series B convertible redeemable preferred shares to redemption value
|
|
|
(3,451,997
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accretion on Series C convertible redeemable preferred shares to redemption value
|
|
|
(75,476,317
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accretion on Series D convertible redeemable preferred shares to redemption value
|
|
|
(51,479,102
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accretion on Series E convertible redeemable preferred shares to redemption value
|
|
|
(97,696,064
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accretion on Class A convertible redeemable preferred shares to redemption value
|
|
|
(22,601,694
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) attributable to common shareholders
|
|
|
(343,920,209
|
)
|
|
|
696,338,805
|
|
|
|
33,135,116
|
|
|
|
4,772,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(93,145,437
|
)
|
|
|
696,338,805
|
|
|
|
33,135,116
|
|
|
|
4,772,449
|
|
Changes in cumulative foreign currency translation adjustment, net of tax of nil
|
|
|
(5,437,415
|
)
|
|
|
73,410,193
|
|
|
|
(31,353,357
|
)
|
|
|
(4,515,823
|
)
|
Comprehensive income (loss)
|
|
|
(98,582,852
|
)
|
|
|
769,748,998
|
|
|
|
1,781,759
|
|
|
|
256,626
|
|
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
25. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
(Continued)
STATEMENTS OF CASH FLOWS
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$(Note 2(d))
|
|
Net cash provided by operating activities
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
—
|
|
|
|
230
|
|
|
|
273
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
14
|
|
|
|
230
|
|
|
|
273
|
|
|
|
39
|
|
Cash and cash equivalents-beginning of year
|
|
|
3,754
|
|
|
|
3,768
|
|
|
|
3,998
|
|
|
|
576
|
|
Cash and cash equivalents-end of year
|
|
|
3,768
|
|
|
|
3,998
|
|
|
|
4,271
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure for cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cash paid for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
EHI CAR SERVICES LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(all amounts in RMB, except share and
per share data, unless otherwise stated)
25. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
(Continued)
STATEMENTS OF CASH FLOWS (Continued)
|
|
For the Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$ (Note 2(d))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible redeemable preferred shares (cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
154,338,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payment of convertible redeemable preferred shares issuance costs (cash paid by a subsidiary of the Company on behalf of the Company)
|
|
|
(859,771
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from exercise of warrants(cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
50,705,282
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from issuance of Class A common shares in IPO, net of issuance costs (cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
644,443,313
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from issuance of Class A common shares in private placement concurrent with IPO net of issuance costs (cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
306,934,945
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payment for IPO issuance costs (cash paid by a subsidiary of the Company on behalf of the Company)
|
|
|
—
|
|
|
|
(20,656,597
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds from issuance of Class A common shares in private placement, net of issuance costs (cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
—
|
|
|
|
792,860,341
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from exercise of share options (cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
—
|
|
|
|
4,891,204
|
|
|
|
25,431,373
|
|
|
|
3,662,880
|
|
Proceeds of issuance of Senior Notes, net of issuance costs (cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
—
|
|
|
|
1,241,289,905
|
|
|
|
—
|
|
|
|
—
|
|
Payment for Senior Notes issuance costs (cash paid by a subsidiary of the Company on behalf of the Company)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,740,945
|
)
|
|
|
(394,778
|
)
|
Proceeds of US$150 million syndicated loan, net of issuance costs (cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
—
|
|
|
|
—
|
|
|
|
957,158,701
|
|
|
|
137,859,528
|
|
Proceeds from sale of cost method investment, net of related transaction costs (cash received by a subsidiary of the Company on behalf of the Company)
|
|
|
—
|
|
|
|
954,428,056
|
|
|
|
—
|
|
|
|
—
|
|
Conversion of convertible redeemable preferred shares to Class B common shares
|
|
|
2,678,292,288
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Accrued listing expenses
|
|
|
20,656,597
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Accrued professional fees for issuance of Senior Notes
|
|
|
—
|
|
|
|
2,740,945
|
|
|
|
—
|
|
|
|
—
|
|
Subscription receivables related to share option exercise
|
|
|
—
|
|
|
|
197,816
|
|
|
|
—
|
|
|
|
—
|
|