EHIC Ehi Car Services Limited American Depositary Shares

ITEM 3.KEY INFORMATION

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.

* 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:

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.

Source: Federal Reserve Statistic Release.

Not applicable.

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 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:

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:

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:

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:

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:

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.