ITEM 1. DESCRIPTION OF BUSINESS
Corporate History
The principal activities of the Company
are real estate development and property brokerage services, real estate marketing services, property leasing services and property
management services in the PRC.
Sunrise Real Estate Development Group,
Inc. (“CY-SRRE”) was established in the Cayman Islands on April 30, 2004 as a limited liability company. CY-SRRE was
wholly owned by Ace Develop Properties Limited, a corporation, (“Ace Develop”), of which Lin Chi-Jung, an individual,
is the principal and controlling shareholder. Shanghai Xin Ji Yang Real Estate Consultation Company Limited (“SHXJY”)
was established in the People’s Republic of China (the “PRC”) on August 14, 2001 as a limited liability company.
SHXJY was originally owned by a Taiwanese company, of which the principal and controlling shareholder was Lin Chi-Jung. On June
8, 2004, all the fully paid up capital of SHXJY was transferred to CY-SRRE. On June 25, 2004 SHXJY and two individuals established
a subsidiary, namely, Suzhou Xin Ji Yang Real Estate Consultation Company Limited (“SZXJY”) in the PRC, at which point
in time, SHXJY held a 90% equity interest in SZXJY. SRRE and its subsidiaries and branches are sometimes hereinafter collectively
referred to as “the Company.”
On August 9, 2005, SHXJY sold a 10% equity
interest in SZXJY to a company owned by a director of SZXJY, and transferred a 5% equity interest in SZXJY to CY-SRRE. Following
the disposal and the transfer, CY-SRRE effectively held an 80% equity interest in SZXJY. On November 24, 2006, CY-SRRE, SHXJY,
a director of SZXJY and a third party established a subsidiary, namely, Suzhou Shang Yang Real Estate Consultation Company Limited
(“SZSY”) in the PRC, with CY-SRRE holding a 12.5% equity interest, SHXJY holding a 26% equity interest and the director
of SZXJY holding a 12.5% equity interest in SZSY. At the date of incorporation, SRRE and the director of SZXJY entered into a voting
agreement that SRRE is entitled to exercise the voting right in respect of his 12.5% equity interest in SZSY. Following that, SRRE
effectively holds 51% equity interest in SZSY. On September 24, 2007, CY-SRRE sold a 5% equity interest in SZXJY to a company owned
by a director of SZXJY. Following the disposal, CY-SRRE effectively holds 75% equity interest in SZXJY. In January of 2012, SHXJY
invested 24% and established a company in Linyi and acquired approximately 103,385 square meters for the purpose of developing
into villa-style residential housings. In an agreement with Zhang Shu Qing, a majority shareholder of 51%, we have her 51% voting
power and thus effectively have 75% of voting power.
LIN RAY YANG Enterprise Ltd. (“LRY”)
was established in the British Virgin Islands on November 13, 2003 as a limited liability company. LRY was owned by Ace Develop,
Planet Technology Corporation (“Planet Tech”) and Systems & Technology Corporation (“Systems Tech”).
On February 5, 2004, LRY established a wholly owned subsidiary, Shanghai Shang Yang Real Estate Consultation Company Limited (“SHSY”)
in the PRC as a limited liability company. On January 10, 2005, LRY and a PRC third party established a subsidiary, Suzhou Gao
Feng Hui Property Management Company Limited (“SZGFH”), in the PRC, with LRY holding 80% of the equity interest in
SZGFH. On May 8, 2006, LRY acquired 20% of the equity interest in SZGFH from the third party. Following the acquisition, LRY effectively
holds 100% of the equity interest in SZGFH. In 2011 we established Wuhan Yuan Yu Long (WHYYL) and had a 49% ownership the purpose
of this project company was for a development project in Wuhan.
SRRE was initially incorporated in Texas
on October 10, 1996, under the name of Parallax Entertainment, Inc. (“Parallax”). On December 12, 2003, Parallax changed
its name to Sunrise Real Estate Development Group, Inc. On April 25, 2006, Sunrise Estate Development Group, Inc. filed Articles
of Amendment with the Texas Secretary of State, changing the name of Sunrise Real Estate Development Group, Inc. to Sunrise Real
Estate Group, Inc., effective from May 23, 2006.
On August 31, 2004, Sunrise Real Estate
Group, Inc. (“SRRE”), CY-SRRE and Lin Chi-Jung, an individual and agent for the beneficial shareholder of CY-SRRE,
i.e., Ace Develop, entered into an exchange agreement under which SRRE issued 5,000,000 shares of common stock to the beneficial
shareholder or its designees, in exchange for all outstanding capital stock of CY-SRRE. The transaction closed on October 5, 2004.
Lin Chi-Jung is Chairman of the Board of Directors of SRRE, the President of CY-SRRE and the principal and controlling shareholder
of Ace Develop.
Also on August 31, 2004, SRRE, LRY and
Lin Chi-Jung, an individual and agent for beneficial shareholders of LRY, i.e., Ace Develop, Planet Tech and Systems Tech, entered
into an exchange agreement under which SRRE issued 10 million shares of common stock to the beneficial shareholders, or their designees,
in exchange for all outstanding capital stock of LRY. The transaction was closed on October 5, 2004. Lin Chi-Jung is Chairman of
the Board of Directors of SRRE, the President of LRY and the principal and controlling shareholder of Ace Develop. Regarding the
10 million shares of common stock of SRRE issued in this transaction, SRRE issued 8.5 million shares to Ace Develop, 750,000 shares
to Planet Tech and 750,000 shares to Systems Tech.
As a result of the acquisition, the former
owners of CY-SRRE and LRY hold a majority interest in the combined entity. Generally accepted accounting principles require in
certain circumstances that a company whose shareholders retain the majority voting interest in the combined business be treated
as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition”
arrangement whereby CY-SRRE and LRY are deemed to have purchased SRRE. However, SRRE remains the legal entity and the Registrant
for Securities and Exchange Commission reporting purposes. All shares and per share data prior to the acquisition have been restated
to reflect the stock issuance as a recapitalization of CY-SRRE and LRY.
On January 21, 2011, we entered into a
Share Purchase Agreement with Good Speed Services Limited (“Good Speed”) to issue 2.5 million shares for US $500,000.
This agreement, subject to standard closing terms and conditions, was scheduled to close on or before March 20, 2011. On March
18
,
an extension was signed between SRRE and Good Speed to extend the closing date to on or before July 5, 2011.
On
June 24, 2011, we issued 2.5 million shares of common stock to Good Speed and received
US $500,000
.
On January 22, 2011
we
entered into a Share Purchase Agreement with Better Time International Limited (“Better Time”)
to issue 2.5
million shares for US $500,000. This agreement, subject to standard closing terms and conditions, was scheduled to close on or
before March 20, 2011. On March 16 an extension was signed between SRRE and Better Time to extend the closing date to on or before
July 1, 2011.
On July 1, 2011, Sunrise and Better Time extended the closing date to on or before September
30, 2011. On September 30, 2011, we issued 2.5 million shares of common stock to Better Time and received
US $500,000
.
General Business Description
SRRE was incorporated on October 10, 1996
as a Texas corporation and was formerly known as Parallax Entertainment, Inc. SRRE has gone through a series of transactions leading
to the completion of a reverse merger on October 5, 2004. Prior to the closing of the exchange agreements described in “Corporate
History” above, SRRE was an inactive "shell" company. Following the closing, SRRE, through its two wholly owned
subsidiaries, CY-SRRE and LRY, has engaged in the property brokerage services, real estate marketing services, property leasing
services and property management services in the PRC.
The Company recognizes that in order to
differentiate itself from the market, it should avoid direct competition with large-scale property developers who have their own
marketing departments. Our objective is to develop a niche position with marketing alliances with medium size and smaller developers,
and become their outsourcing marketing and sales agents.
SRRE operates through a tier of wholly
owned subsidiaries of Sunrise Real Estate Development Group, Inc., a Cayman Islands corporation ("CY-SRRE") and LIN RAY
YANG Enterprise, Ltd., a British Virgin Islands company ("LRY"). Neither CY-SRRE nor LRY have operations but conduct
operations in Mainland China through their respective subsidiaries that are based in the PRC. CY-SRRE operates through its wholly
owned subsidiary, SHXJY. LRY operates through its two wholly owned subsidiaries, SHSY and SZGFH. SHXJY and SHSY are property agency
business earning commission revenue from marketing and sales services to developers. The main business of SZGFH is to render property
rental service, buildings management and maintenance service for office buildings. Our company organization chart is as follows:
Figure 1: Company Organization Chart
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1.
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Established Linyi Shang Yang Real Estate Development Company Limited in January, 2012.
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2.
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Beijing Xin Jin Yang Real Estate Consultation Company Limited is currently in the process of being dissolved in 2012.
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3.
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Kunshan Shang Yang Real Estate Brokerage Company Limited is currently in the process of being dissolved in 2012.
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Our major business is agency sales, whereby
our Chinese subsidiaries contracted with property developers to market and sell their newly developed property units. For these
services we earned a commission fee calculated as a percentage of the sales prices. We have focused our sales on the whole China
market, especially in secondary cities. To expand our agency business, we have established subsidiaries and branches in Shanghai,
Suzhou, Beijing, Yangzhou, Chongqing, Quanjiao ,Hainan, Shangqiu, Chengdu, Wuhan, Kunshan, and Linyi.
During 2005 and 2006, SZGFH entered into
leasing agreements with certain buyers of the Sovereign Building underwriting project to lease the properties for them. These leasing
agr
eements on these properties are for 62% of the floor space that was sold to third party buyers. In
accordance with the leasing agreements, the owners of the properties can have a rental return of 8.5% and 8.8% per annum for a
period of 5 years and 8 years, respectively. In regards to the leasing agreements, we have negotiated with the buyers and have
lowered the annual rental return rate for the remaining leasing period from 8.5% for 5 years to 5.8%, and from 8.8% for 8
years to 6%. As of December 31, 2011, 68% of the buyers agreed upon the lowered rate and 25% of the buyers agree
d to cancel
the leasing agreements. The leasing period started in the second quarter of 2006, and the Company has the right to sublease the
leased properties to cover these lease commitments in the leasing period. As of
December 31, 2011, 104
sub-leas
ing agreements have been signed and the area of these sub-leasing agreements represente
d
67%
of the total area with these lease commitments.
With a relatively short history and smaller
capital base, we recognize that in order to differentiate ourselves from the market, we need to avoid direct competition with large-scale
property developers, who have their own marketing departments. We plan to utilize our professional experience to carve a niche
and position by developing marketing alliances with medium size and smaller developers. This strategic plan is designed to expand
our activities beyond our existing revenue base, enabling us to assume higher investment risk and giving us flexibility in collaborating
with partnering developers. The plan is aimed at improving our capital structure, diversifying our revenue base, creating higher
values and equity returns.
In the past eleven years, we have established
a reputation as a sales and marketing agency for new projects. With our accumulated expertise and experience, we intend to take
a more aggressive role by participating in property investments. We plan to select property developers with outstanding qualifications
as our strategic partners, and continue to build strength in design, planning, positioning and marketing services. Beginning 2012,
we are developing our first development project in Wuhan and Linyi and have started the initial construction in the first quarter
of 2012.
Business Activities
Our main operating subsidiaries, SHXJY
and SHSY, have engaged in sales and marketing agency work for newly built property units. We also have developed a good network
of landowners and earned the trust of developers, allowing us to explore opportunities in property investments.
In order to build a cushion against the
cyclical nature of the real estate industry and have a more diversified revenue base, we established another operating subsidiary,
SZGFH, to deal with property management and rental operations.
While our main operation is in agency sales,
we are constantly seeking opportunities to branch out into real estate development. While we continue our efforts there are no
assurance we will be able to obtain any development projects.
Commission Based Services
Commission based services refer to marketing
and sales agency operations, which provide the following services:
a. Integrated Marketing Planning
b. Advertising Planning & Execution
c. Sales Planning and Execution
In this type of business, we sign a marketing
and sales agency agreement with property developers to undertake the marketing and sales activities of a specific project. The
scope of service varies according to clients' needs; it could be a full package of all the above services, a combination of any
two of the above services or any single service.
A major part of our existing revenue comes
from commission-based services. We secure these projects via bidding or direct appointments. As a result of our relationships with
existing clients and our sales track record, we have secured a number of cases from prior clients on subsequent phases of projects.
Normally, before a developer retains us,
we will evaluate and determine the Average Sales Value of a project. This value will be proposed to the developer, and the parties
will determine and agree on an Average Sales Value as the basis of our agency agreement. The actual sales price of the project
is generally priced higher than the Average Sales Value depending on market conditions. On average, we have been to sell the property
at a small premium over Average Sales Value.
Our normal commission structure is a combination
of the following:
a) Base Commission of 1.0% - 1.5% based
on the Average sales value.
b) Surplus Commission of 10% - 30% based
on the difference between Average Sales Value and actual sales price.
Our wholly owned subsidiaries, SHXJY and
SHSY, engage in this sales and marketing phase of our business.
Real Estate Development
In mid 2011, we established a project company
in Wuhan where we have 49% stake. During the fourth quarter of 2011, the project company was in the process of acquiring land and
obtaining the appropriate license and certificate for the development project. In the first quarter of 2012, we began its initial
construction. The land is approximately 27,950 square meters with an estimated development period of three years.. Proceeds from
sales will fund the constructions of subsequent phases and we are currently in the process of applying for bank loans and other
forms of funding, however, there are no assurance we will be able to obtain future financings.
In January 2012, we established Linyi Shang
Yang Real Estate Development (“LYSY”) with 24% stake in the company. During the first quarter of 2012, we acquired
approximately 103,385 square meters for the purpose of developing villa-style residential housing. Proceeds from sales will fund
the constructions of subsequent phases and we are currently in the process of applying for bank loans and other forms of funding,
however, there are no assurances we will be able to obtain future financings.
Mainland China's Property Sector
The industry's macro environment is opening
up, and the property sector is gradually developing to be a more regulated market. Stable economic growth provides a solid and
secure base for investment returns in the property sector.
GDP Growth of PRC for the period of 2007
through 2011
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GDP GROWTH
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2007
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|
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11.4
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%
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2008
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9.0
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%
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2009
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8.7
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%
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2010
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10.3
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%
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2011
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9.2
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%
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Source: National Bureau
of Statistics of China
Government regulation
On November 5, 2008, the State Council
announced a two-year economic stimulus plan involving a total investment of RMB 4 trillion. The stimulus plan, which the State
Council announced at a general meeting, is called the Ten Measures to Further Expand Domestic Demand and Promote Steady Economic
Development (the Ten Measures). In the first measure, the government affirms its commitment to subsidizing low-rent housing, renovating
poor and imperiled housing in rural areas, and providing housing for nomads. The National Development and Reform Commission (NDRC)
announced on December 18, 2008, that the central government has distributed RMB10 billion for the construction of affordable housing.
The State Taxation Administration issued
the Regulation of Land Value-added Tax Clearing and Administrating in May 2009, effective on June 1, 2009. It requires the developers
to clear the land value-added tax, which have completed development projects and have finished sale, or have sold development projects
under constructed, or have transferred the land use right to others.
On May 27 2009, the Chinese government
issued the policy “Notice of the Fix Asset Investment Ratio” stating that economical housings and residential housing’s
must provide at least 20% of the purchase price before bank loans. Other real estate project’s minimum payment, not including
bank loans, shall be 30%. This is a decrease from the 35% minimum required since 2004 and a drop in level back in 1996. This policy
signifies the government loosening of the real estate sector.
The Ministry of Finance, Ministry of Land
and Resources, Ministry of Supervision, the Central Government, and five other agencies announced in “Notice Regarding to
Improve Upon Land Sale and Receivable Management,” to increase the initial payment of land purchases to 50% of the purchase
price and the entire purchase price must be paid in full within the year in Dec 2009. Prior to the increase, the increase, the
initial payment was around 20% to 30%.
On January 1, 2010, the Ministry of
Finance and the State Administration of Taxation re-imposed the business tax on total proceeds from the resale of certain residential
properties held for less than five years. The China Banking Regulatory Authority withdrew its earlier policy and emphasized the
minimum 40% down payment requirement for mortgages for second properties. On March 8, 2010, the Ministry of Land and Resources
issued a circular to further strengthen the supervision on land supply, requiring a real estate developer to pay at least 50% of
the land premium within one month and 100% within one year after the land use right contract is executed. On April 17, 2010,
the State Council issued the Circular on Firmly Restraining Soaring Housing Prices in Certain Cities. According to this circular,
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•
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A Down payment must be no less than 30% of the purchase price for first self-use housing unit purchases
by a family with a gross construction area of more than 90 square meters.;
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•
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The minimum down payment for the second housing unit purchased by a family is increased from 40%
to 50% and the loan interest rate must be no less than 110% of benchmark lending interest rate;
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•
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Down payment for the third or more housing unit purchased by any family and the loan interest rate
must be further increased significantly based on the rate for the first and second housing units, as determined by commercial banks
based on their assessment of the risks;
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•
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Commercial banks may suspend extending loans to families for their purchases of the third or more
housing units in regions where commercial housing unit prices are too high or have risen too fast or supply of housing units is
insufficient. The banks may also suspend extending loans to individuals for their purchase of housing units outside of their registered
residence if they cannot furnish evidence of their tax or social insurance premium payment for at least one year locally in the
region where the subject housing units are located; and
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•
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Local governments are allowed to limit the total number of housing units one can purchase in certain
period in light of the local situation.
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On January 10
th
, 2010, the government
established a notice of 11 measures to strengthen management of the real estate market
to address the rising real estate prices. The measures call for an increasing supply of low-cost houses for low-income families
and common residential houses, encouraging reasonably priced house buying while limiting purchases for speculation and investment,
strengthening real estate project loan risk management and market supervision, speeding up construction of residential housing
projects for low-income households, and specifying responsibilities of local governments.
Such efforts by the government to slow
down property price appreciation may reduce the activities in the real estate market and decrease real estate transaction volume,
and prevent developers from raising capital they need or increase their costs to start new projects. There are no assurances that
the PRC government will not adopt new measures in the future that may result in lower growth rates in the real estate industry.
Frequent changes in government policies may also create uncertainty that could discourage investment in real estate. Our business
may be materially and adversely affected as a result of decreased transaction volumes or real estate prices that may result from
government policies.
In January 2011, the State Council released
eight new measures to put downward pressure on property prices by:
1) Requiring local governments
to set housing price targets in proportion with local income levels for 2011;
2) Requiring a business tax for
housing sales within 5 years of purchase must be levied on total sales value; properties;
3) Strengthening the management
of land supply for housing
4) Imposing purchase restrictions
in all large- & medium-sized cities. Families already owning a residential property are restricted to buy only one more, while
those already owning two or more properties are prohibited to purchase additional properties;
5) Accelerating the construction
of social security residential housings;
6) Providing that the down payment
ratio for second-home purchases must not be less than 60%, up from 50%, with an interest rate at least 1.1 times of the benchmark
rate;
7) Improving guidance for media's
housing market coverage;
8) Providing for implementation
& accountability for local governments over the housing price control targets.
In May 2011, the National Development and
Reform Commission (“NDRC”) began the “one house, one price” policy which requires developers to enhance
its disclosure of the residential properties’ offering prices and available supply volume. This policy is designed to prevent
developers from posting false supply volume and prices to fuel speculative price volatility.
In July 2011, the China’s State Council
declared that it will continue to implement tightening policies and expand the housing purchase restrictions to second and third-tier
cities.
Environmental matters
There is a growing concern in regards to
the global warming issues affecting the world today. The changing weather patterns and abnormal conditions may affect the construction
and logistics of developers and this may indirectly cause inverse effect to our operation. Extreme weather conditions may delay
in construction of properties; this then may delay the sale of these properties and therefore delaying our future revenue stream.
Employees
As of December 31, 2011, we had the following
number of employees:
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Employees
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|
SRRE
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|
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Administration Dept.
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|
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1
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Accounting Dept.
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|
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2
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Investor Relations Dept.
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2
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SHXJY
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Administration Dept.
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17
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Accounting Dept.
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2
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|
Research & Development Dept.
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5
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Marketing Dept.
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12
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Chongqing Branch of SHXJY
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|
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|
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Accounting Dept.
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1
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|
Marketing Dept.
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4
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|
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SZXJY
|
|
|
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Administration Dept.
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11
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|
Accounting Dept.
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3
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|
Research & Development Dept.
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9
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|
Advertising & Communication Planning Dept.
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5
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Marketing Dept.
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48
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|
|
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SZSY
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|
|
|
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Marketing Dept.
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28
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|
|
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|
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SZXJYB
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|
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Marketing Dept.
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7
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|
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SHSY
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Administration Dept.
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9
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|
Accounting Dept.
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3
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|
Marketing Dept.
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1
|
|
|
|
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SYSY
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|
|
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Marketing Dept.
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14
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|
|
|
|
|
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SZGFH
|
|
|
|
|
Administration Dept.
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|
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2
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|
Accounting Dept.
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3
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|
Marketing Dept.
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|
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4
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SQSY
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|
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Marketing Dept.
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7
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WHGFH
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Marketing Dept.
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1
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|
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SHRJ
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|
|
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Administration Dept.
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1
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|
Design Dept.
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9
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Total
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211
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None of
our employees are represented by a labor union or bound by a collective bargaining unit. We believe that our relationship with
its employees is satisfactory.
ITEM 1A. RISK FACTORS
RISK FACTORS
SRRE has identified a number of risk factors
faced by the Company. These factors, among others, may cause actual results, events or performance to differ materially from those
expressed in this 10-K or in press releases or other public disclosures. You should be aware of the existence of these factors.
RISKS RELATING TO THE GROUP
SRRE is a holding company and depends
on its subsidiaries’ cash flows to meet its obligations.
SRRE is a holding company, and it conducts
all of its operations through its subsidiaries. As a result, its ability to meet any obligations depends upon its subsidiaries’
cash flows and payment of funds as dividends, loans, advances or other payments. In addition, the payment of dividends or the making
of loans, advances or other payments to SRRE may be subject to regulatory or contractual restrictions.
Our invoicing for commissions may be
delayed.
Generally, we recognize our commission
revenues after the contracts signed with developers are completed and confirmations are received from the developers. However,
sometimes we do not recognize income even when we have rendered our services for any of the following reasons:
|
a.
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The developers have not received payments from potential purchasers who have promised to pay the outstanding
sum by cash;
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b.
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The purchasers, who need to obtain mortgage financing to pay the outstanding balance due, are unable
to obtain the necessary financing from their banks;
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c.
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Banks are sometimes unwilling to grant the necessary bridge loan to the developers in time due to
the developers’ relatively low credit rating;
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d.
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The developers tend to be in arrears with sales commissions; therefore, do not grant confirmation
to us to be able to invoice them accordingly.
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Development of new business may stretch
our cash flow and strain our operation efficiency.
Business expansion and the need to integrate
operations arising from the expansion may place a significant strain on our managerial, operational and financial resources, and
will further contribute to a need to increase in our financial needs.
Risks associated with a Guaranteed Rental
Return Promotion.
During the year of 2005 and 2006, SZGFH
entered into leasing agreements with certain buyers of the Sovereign Building underwriting project to lease the properties for
them. These leasing agreements on these properties are for 62% of the floor space that was sold to third party buyers. In accordance
with the leasing agreements, the owners of the properties can have a rental return of 8.5% and 8.8% per annum for a period of 5
years and 8 years, respectively. In regards to the leasing agreements, we have negotiated with the buyers and have lowered the
annual rental return rate for the remaining leasing period from 8.5% for 5 years to 5.8%, and from 8.8% for 8 years
to 6%. As of December 31, 2011, 68% of the buyers agreed upon the lowered rate,
7% of the buyers did
not agreed to a lowered rate
and 25% of the buyers agreed to cancel the leasing agreements. The leasing period started in
the second quarter, 2006, and the Company has the right to sublease the leased properties to cover these lease commitments in the
leasing period.
We are continuing to promote this package.
The return is guaranteed by SZGFH, whereby SZGFH’s principal activities are real estate leasing and property management services.
However, we may not successfully sublease the targeted properties at prices higher than what we committed in the promotional package.
Our failure to do so could adversely affect our financial condition.
Our acquisition of new property may
involve risks.
These acquisitions involve several risks
including, but not limited to, the following:
|
a.
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The acquired properties may not perform as well as we expected or ever become profitable.
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b.
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Improvements to the properties may ultimately cost significantly more than we had originally estimated.
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Additional acquisitions might harm our
business.
As part of our business strategy, we may
seek to acquire or invest in additional businesses, products, services or technologies that we think could complement or expand
our business. If we identify an appropriate acquisition opportunity, we might be unable to negotiate the terms of that acquisition
successfully, finance it, or integrate it into our existing business and operations. We may also be unable to select, manage or
absorb any future acquisitions successfully. Furthermore, the negotiation of potential acquisitions, as well as the integration
of an acquired business, would divert management time and other resources. We may have to use a substantial portion of our available
cash to consummate an acquisition. If we complete acquisitions through exchange of our securities, our shareholders could suffer
significant dilution. In addition, we cannot assure you that any particular acquisition, even if successfully completed, will ultimately
benefit our business.
Our real estate investments are subject
to numerous risks.
We are subject to risks that generally
relate to investments in real estate. The investment returns available from equity investments in real estate depend in large part
on the amount of income earned and capital appreciation generated by the related properties, as well as the expenses incurred.
In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations,
insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing
real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovate
properties. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and
real property values may decrease as the number of potential buyers decrease. Similarly, as financing becomes less available, it
becomes more difficult both to acquire and to sell real property. Finally, governments can, under eminent domain laws, take real
property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could
have a material adverse impact on results of our operations or financial condition. In addition, equity real estate investments,
such as the investments we hold and any additional properties that we may acquire, are relatively difficult to sell quickly. If
our properties do not generate sufficient revenue to meet operating expenses, including debt servicing and capital expenditures,
our income will be reduced.
Competition, economic conditions and
similar factors affecting us, and the real estate industry in general, could affect our performance.
Our properties and business are subject
to all operating risks common to the real estate industry. These risks include:
a. Adverse effects of general and local
economic conditions;
b. Increases in operating costs attributable
to inflation and other factors; and
c. Overbuilding in certain property sectors.
These factors could adversely affect our
revenues, profitability and results of operations.
Our business is susceptible to fluctuations
in the real estate market of China, especially in certain areas of eastern China where a significant portion of our operations
are concentrated, which may adversely affect our revenues and results of operations.
We conduct our real estate services business
primarily in China. Our business depends substantially on the conditions of the PRC real estate market. Demand for private residential
real estate in China has grown rapidly in the recent decade but such growth is often coupled with volatility in market conditions
and fluctuation in real estate prices. Fluctuations of supply and demand in China’s real estate market are caused by economic,
social, political and other factors. To the extent fluctuations in the real estate market adversely affect real estate transaction
volumes or prices, our financial condition and results of operations may be materially and adversely affected.
As a significant portion of our operations
is concentrated in Shanghai and Jiangsu Province, any decrease in demand or real estate prices or any other adverse developments
in these regions may materially and adversely affect our total real estate transaction volumes and average selling prices, which
may in turn adversely affect our revenues and results of operations. These economic uncertainties involve, among other things,
conditions of supply and demand in local markets and changes in consumer confidence and income, employment levels, increase
in mortgage interest rates and government regulations. These risks and uncertainties could periodically have an adverse effect
on consumer demand for and the pricing of our homes, which could cause our operating revenues to decline. In addition, builders
are subject to various risks, many of them outside the control of the homebuilder including competitive overbuilding, availability
and cost of building lots, materials and labor, adverse weather conditions, cost overruns, changes in government regulations, and
increases in real estate taxes and other local government fees. A reduction in our revenues could in turn negatively affect the
market price of our securities.
Our business may be materially and adversely
affected by government measures aimed at China’s real estate industry.
The real estate industry in China is subject
to government regulations. Until 2009, the real estate markets in a number of major cities in China had experienced rapid and significant
growth. Before the global economic crisis hit all the major economies worldwide in 2009, the PRC government had adopted a series
of measures to restrain what it perceived as unsustainable growth in the real estate market. From 2003 to 2011, the PRC government
introduced a series of specific administrative and credit-control measures including, but not limited to, setting minimum down
payment requirements for residential and commercial real estate transactions, limiting availability of mortgage loans, and tightening
governmental approval process for certain real estate transactions.
In cities such as Beijing and Shanghai,
we have seen the effects of such policies and regulatory measures. The sales volumes for real properties in Beijing and Shanghai
decreased significantly after the policy change. The sale prices for certain properties in such cities also weakened. The PRC government’s
policy and regulatory measures on the PRC real estate sector could adversely affect the property purchasers’ ability to obtain
mortgage financing or significantly increase the cost of mortgage financing and reduce market demand for properties. These factors
may materially and adversely affect our business, financial condition, results of operations and prospects.
Despite the recent government measures
aimed at maintaining the long-term stability of the real estate market, we cannot assure you that the PRC government will not continue
to adopt new measures in the future that may result in short-term downward adjustments and uncertainty in the real estate market.
Our business may be
materially and adversely affected as a result of decreased transaction volumes or real estate prices that may follow these adjustments
or market uncertainty.
We operate in a highly competitive environment.
Our competitors may be able to adapt more
quickly to changes in customer needs or to devote greater resources than we can to developing and expanding our services. Such
competitors could also attempt to increase their presence in our markets by forming strategic alliances with other competitors,
by offering new or improved services or by increasing their efforts to gain and retain market share through competitive pricing.
As the market for our services matures, price competition and penetration into the market will intensify. Such competition may
adversely affect our gross profits, margins and results of operations. There can be no assurance that we will be able to compete
successfully with existing or new competitors.
We may be unable to effectively manage
our growth.
We will need to manage our growth effectively,
which may entail devising and effectively implementing business and integration plans, training and managing our growing workforce,
managing our costs, and implementing adequate control and reporting systems in a timely manner. We may not be able to successfully
manage our growth or to integrate and assimilate any acquired business operations. Our failure to do so could affect our success
in executing our business plan and adversely affect our revenues, profitability and results of operations.
If we fail to successfully manage our
planned expansion of operations, our growth prospects will be diminished and our operating expenses could exceed budgeted amounts.
Our ability to offer our services in an
evolving market requires an effective planning and management process. We have expanded our operations rapidly since inception,
and we intend to continue to expand them in the foreseeable future. This rapid growth places significant demand on our managerial
and operational resources and our internal training capabilities. In addition, we have hired a significant number of employees
and plan to further increase our total work force. This growth will continue to substantially burden our management team. To manage
growth effectively, we must:
a. Implement and improve our
operational, financial and other systems, procedures and controls on a timely basis.
b. Expand, train and manage our
workforce, particularly our sales and marketing and support organizations.
We cannot be certain that our systems,
procedures and controls will be adequate to support our current or future operations or that our management will be able to handle
such expansion and still achieve the execution necessary to meet our growth expectations. Failure to manage our growth effectively
could diminish our growth prospects and could result in lost opportunities as well as operating expenses exceeding the amount budgeted.
We may be unable to maintain internal
funds or obtain financing or renew credit facilities in the future.
Adequate financing is one of the major
factors, which can affect our ability to execute our business plan in this regard. We finance our business mainly through internal
funds, bank loans or raising equity funds. There is no guarantee that we will always have internal funds available for future developments
or we will not experience difficulties in obtaining financing and renewing credit facilities granted by financial institutions
in the future. In addition, there may be a delay in equity fundraising activities. Although in 2011 we issued a total of 5,000,000
shares for an aggregate of $1,000,000 to two investors, our access to obtain debt or equity financing depends on the banks' willingness
to lend and on conditions in the capital markets, and we may not be able to secure additional sources of financing on commercially
acceptable terms, if at all.
We may need to raise additional capital
that may not be available on terms favorable to us, if at all.
We may need to raise additional capital
in the future, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we
cannot raise additional capital on acceptable terms, we may not be able to develop or enhance our services, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements. To fully realize our business objectives and potential,
we may require additional financing. We cannot be sure that we will be able to secure the financing we will require, or that it
will be available on favorable terms. If we are unable to obtain any necessary additional financing, we will be required to substantially
curtail our approach to implementing our business objectives. Additional financing may be debt, equity or a combination of debt
and equity. If equity is used, it could result in significant dilution to our shareholders.
Our operations and growth prospects
may be significantly impeded if we are unable to retain our key personnel or attract additional key personnel, particularly since
experienced personnel and new skilled personnel are in short supply.
Competition for key personnel is intense.
As a small company, our success depends on the service of our executive officers, and other skilled managerial and technical personnel,
and our ability to attract, hire, train and retain personnel. There is always the possibility that certain of our key personnel
may terminate their employment with us to work for one of our competitors at any time for any reason. There can be no assurance
that we will be successful in attracting and retaining key personnel. The loss of services of one or more key personnel could have
a material adverse effect on us and would materially impede the operation and growth of our business.
If our partnering developers experience
financial or other difficulties, our business and revenues could be adversely affected.
As a service-based company, we greatly
depend on the working relationships and agency contracts with its partnering developers. We are exposed to the risks that our partnering
developers may experience financial or other difficulties, which may affect their ability or will to carry out any existing development
projects or resell contracts, thus delaying or canceling the fulfillment of their agency contracts with us. Any of these factors
could adversely affect our revenues, profitability and results of operations.
Our partnering developers are subject to
extensive government regulation which could make it difficult for them to obtain adequate funding or additional funding. Various
PRC regulations restrict developers’ ability to raise capital through external financings and other methods, including, but
not limited to, the following:
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developers cannot pre-sell uncompleted residential units in a project prior to achieving certain development
milestones specified in related regulations;
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PRC banks are prohibited from extending loans to real estate companies to fund the purchase of land
use rights;
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developers cannot borrow from a PRC bank for a particular project unless we fund at least 35% of the
total investment amount of that project using our own capital;
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developers cannot borrow from a PRC bank for a particular project if we do not obtain the land use
right certificate for that project;
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property developers are strictly prohibited from using the proceeds from a loan obtained from a local
bank to fund property developments outside of the region where the bank is located; and
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PRC banks are prohibited from accepting properties that have been vacant for more than three years
as collateral for a loan.
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If we fail to establish and maintain
strategic relationships, the market acceptance of our services, and our profitability, may suffer.
To offer services to a larger customer
base, our direct sales force depends on strategic partnerships, marketing alliances, and partnering developers to obtain customer
leads and referrals. If we are unable to maintain our existing strategic relationships or fail to enter into additional strategic
relationships, we will have to devote substantially more resources to the marketing of our services. We would also lose anticipated
customer introductions and co-marketing benefits. Our success depends in part on the success of our strategic partners and their
ability to market our services successfully. In addition, our strategic partners may not regard us as significant for their own
businesses. Therefore, they could reduce their commitment to us or terminate their respective relationships with us, pursue other
partnerships or relationships, or attempt to develop or acquire services that compete with our services. Even if we succeed in
establishing these relationships, they may not result in additional customers or revenues.
We are subject to the risks associated
with projects operated through joint ventures.
Some of our projects are operated through
joint ventures in which we have controlling interests. We may enter into similar joint ventures in the future. Any joint venture
investment involves risks such as the possibility that the joint venture partner may seek relief under Chinese insolvency laws,
or have economic or business interests or goals that are inconsistent with our business interests or goals. While the bankruptcy
or insolvency of our joint venture partner generally should not disrupt the operations of the joint venture, we could be forced
to purchase the partner’s interest in the joint venture, or the interest could be sold to a third party. Additionally, we
may enter into joint ventures in the future in which we have non-controlling interests. If we do not have control over a joint
venture, the value of our investment may be affected adversely by a third party that may have different goals and capabilities
than ours. It may also be difficult for us to exit a joint venture that we do not control after an impasse. In addition, a joint
venture partner may be unable to meet its economic or other obligations, and we may be required to fulfill those obligations.
We are subject to the risks associated
with projects operated through joint ventures.
Some of our projects are operated through
joint ventures in which we have controlling interests. We may enter into similar joint ventures in the future. Any joint venture
investment involves risks such as the possibility that the joint venture partner may seek relief under federal or state insolvency
laws, or have economic or business interests or goals that are inconsistent with our business interests or goals. While the bankruptcy
or insolvency of our joint venture partner generally should not disrupt the operations of the joint venture, we could be forced
to purchase the partner’s interest in the joint venture, or the interest could be sold to a third party. Additionally, we
may enter into joint ventures in the future in which we have non-controlling interests. If we do not have control over a joint
venture, the value of our investment may be affected adversely by a third party that may have different goals and capabilities
than ours. It may also be difficult for us to exit a joint venture that we do not control after an impasse. In addition, a joint
venture partner may be unable to meet its economic or other obligations, and we may be required to fulfill those obligations.
We are subject to risks relating to
acts of God, terrorist activity and war.
Our operating income may be reduced by
acts of God, such as natural disasters or acts of terror, in locations where we own and/or operate significant properties and areas
from which we draw customers and partnering developers. Some types of losses, such as from earthquake, hurricane, terrorism and
environmental hazards, may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss
in excess of insured limits occur, we could lose all or a portion of the capital we have invested in any particular property, as
well as any anticipated future revenue from such property. In that event, we might nevertheless remain obligated for any mortgage
debt or other financial obligations related to the property. Similarly, wars (including the potential for war), terrorist activity
(including threats of terrorist activity), political unrest and other forms of civil strife as well as geopolitical uncertainty
have caused in the past, and may cause in the future, our results to differ materially from anticipated results.
We have limited business insurance
coverage in China.
The insurance industry in China is still
at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not
have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or
natural disaster might result in substantial costs and diversion of resources.
We may be affected by global climate
change or by legal, regulatory, or market responses to such change.
There is a growing concern in regards to
the global warming issues affecting the world today. The changing weather patterns and abnormal conditions may affect the construction
and logistics of developers and this may indirectly cause inverse effect to our operation. Extreme weather conditions may delay
in construction of properties; this then may delay the sale of these properties and therefore delaying our future revenue stream.
There may be regulations in manufacturing materials for property construction and new building codes in response to global warming
that may delay construction and/or create further expenses to the developers. These possible changes may indirectly affect our
business.
Our real estate development operating
results may not achieve our goals.
As there are many variables to developing
a real estate project, we face the risk of running out of funds mid construction and may have to delay or be unable to continue
developing the project. We may also run into market downturn and not be able to sell any of the housings we’ve developed.
If any of the above happens, we may face an extreme cash shortage and will directly affect our business.
RISKS RELATING TO OUR SECURITIES
Our controlling shareholders could take
actions that are not in the public shareholders’ best interests.
As of March 31
,
2012, Ace Develop directly controls 15.7% of our outstanding common stock and Lin Chi-Jung, our Chairman, is the principal and
controlling shareholder of Ace Develop. As of March 31, 2012, Robert Lin Investments directly controls 15.72% of our outstanding
common stock and Lin Chao Chun, one of our directors, is the principal and controlling shareholder of Robert Lin Investments. Accordingly,
pursuant to our Articles of Incorporation and bylaws, Ace Develop and Lin Chi-Jung, and Robert Lin Investments and Lin Chao Chun,
by virtue of their controlling ownership of share interests, will be able to exercise substantial influence over our business by
directly or indirectly voting at either shareholders meetings or the board of directors meetings in matters of significance to
us and our public shareholders, including matters relating to:
a. Election of directors and officers;
b. The amount and timing of dividends and
other distributions;
c. Acquisition of or merger with another
company; and
d. Any proposed amendments to our Articles
of Incorporation.
Future sales of our common stock could
adversely affect our stock price.
If our shareholders sell substantial amounts
of our common stock in the public market, the market price of our common stock could be adversely affected. In a
ddition,
the sale of these shares could impair our ability to raise capital through the sale of additional equity securities.
We are listed on the OTCQB, which can
be a volatile market.
Our common stock is quoted on the OTCQB,
a quotation system for equity securities. It is a more limited trading market than the Nasdaq Capital Market, and timely and accurate
quotations of the price of our common stock may not always be available. Investors may expect trading volume to be low in such
a market. Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.
We may be subject to exchange rate fluctuations.
A majority of our revenues are received,
and a majority of our operating costs are incurred, in Renminbi. Because our financial statements are presented in U.S. Dollars,
any significant fluctuation in the currency exchange rates between the Renminbi and the U.S. Dollar will affect our reported results
of operations. We do not currently engage in currency-hedging transactions.
Trading of our common stock is limited,
which may make it difficult for investors to sell their shares at times and prices that investors feel are appropriate.
Trading of our common stock has been extremely
limited. This adversely effects the liquidity of our common stock, not only in terms of the number of shares that can be bought
and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and
the media’s coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could
also result in a larger spread between the bid and asked prices for our common stock.
There is a limited market for our common
stock and an active trading market for our common stock may never develop.
Trading in our common stock has been limited
and has been characterized by wide fluctuations in trading prices, due to many factors that may have little to do with a company’s
operations or business prospects.
Because it may be a “penny stock,”
it will be more difficult for shareholders to sell shares of our common stock.
In addition, our common stock may be considered
a “penny stock” under SEC rules because it has been trading on the OTC Bulletin Board at prices lower than $1.00. Broker-dealers
who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC.
This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock
market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and
salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain
the purchaser’s written agreement for the purchaser. Broker-dealers also must provide customers that hold penny stocks in
their accounts with such broker-dealers a monthly statement containing price and market information relating to the penny stock.
If a penny stock is sold to investors in violation of the penny stock rules, investors may be able to cancel the purchase and get
the money back. The penny stock rules may make it difficult for investors to sell their shares of our stock, and because of these
rules, there is less trading in penny stocks. Moreover, many brokers simply choose not to participate in penny-stock transactions.
Accordingly, investors may not always be able to resell shares of our common stock publicly at times and at prices that investors
feel are appropriate.
Our stock price is, and we expect it
to remain, volatile, which could limit investors’ ability to sell stock at a profit.
Since the completion of the SRRE /CY-SRRE/LRY
share exchange transactions the market price of our common stock has ranged from a high of $0.51 per share to a low of $0.01 per
share in 2011. The volatile price of our stock makes it difficult for investors to predict the value of our investment, to sell
shares at a profit at any given time, or to plan purchases and sales in advance. A variety of factors may affect the market price
of our common stock. These include, but are not limited to:
a. Announcements of new technological innovations
or new commercial services by our competitors or us;
b. Developments concerning proprietary
rights;
c. Regulatory developments in Mainland
China and foreign countries;
d. Period-to-period fluctuations in our
revenues and other results of operations;
e. Economic or other crises and other external
factors;
f. Changes in financial estimates by securities
analysts; and
g. Sales of our common stock.
We will not be able to control many
of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative
of our future performance.
The stock market in general has experienced
extreme price and volume fluctuations that may have been unrelated and disproportionate to the operating performance of individual
companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating
performance.
Because we have not paid and do not
plan to pay cash dividends, investors will not realize any income from an investment in our common stock unless and until investors
sell their shares at profit.
We did not pay cash dividends on our common
stock in 2011, and we do not anticipate paying any cash dividends in the near future. Investors should not rely on an investment
in our stock if they require dividend income. Further, investors will only realize income on an investment in our stock in the
event they sell or otherwise dispose of their shares at a price higher than the price they paid for their shares. Such a gain would
result only from an increase in the market price of our common stock, which is uncertain and unpredictable.
We intend to retain all of our earnings
for use in our business and do not anticipate paying any cash dividends in the near future.
The payment of any future dividends will
be at the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, the success
of our business activities, general financial condition, future prospects, general business conditions and such other factors as
our Board of Directors may deem relevant.
RISKS RELATING TO THE REAL ESTATE
INDUSTRY IN YANGTZE DELTA AND OTHER AREAS OF THE PRC
The real estate market in Yangtze
Delta and other areas of the PRC is at an early stage of development.
We are subject to real estate market conditions
in the PRC generally and Yangtze Delta in particular. Private ownership of property in the PRC is still at an early stage of development.
Although there is a perception that economic growth in the PRC and the higher standard of living resulting from such growth will
lead to a greater demand for private properties in the PRC, it is not possible to predict with certainty that such a correlation
exists as many social, political, economic, legal and other factors may affect the development of the property market.The level
of uncertainty is increased by the limited availability of accurate financial and market information as well as the overall low
level of transparency in the PRC.
The PRC property market, including the
Yangtze Delta property market, is volatile and may experience oversupply and property price fluctuations. The central and local
governments frequently adjust monetary and other economic policies to prevent and curtail the overheating of the PRC and local
economies, and such economic adjustments may affect the real estate market in Yangtze Delta and other parts of China. Furthermore,
the central and local governments from time to time make policy adjustments and adopt new regulatory measures in a direct effort
to control the over development of the real estate market in China, including Yangtze Delta. Such policies may lead to changes
in market conditions, including price instability and an imbalance of supply and demand of residential properties, which may materially
adversely affect our business and financial conditions. Also, there is no assurance that there will not be over development in
the property sector in Yangtze Delta and other parts of China in the future. Any future over development in the property sector
in Yangtze Delta and other parts of China may result in an oversupply of properties and a fall of property prices in Yangtze Delta
or any of our other markets, which could adversely affect our business and financial condition. The lack of a liquid secondary
market for residential property may discourage investors from acquiring new properties. The limited amount of property mortgage
financing available to PRC individuals may further inhibit demand for residential developments.
Local government may issue further
restrictive measures in the future.
In January, 2011, the Shanghai municipal
government put forward a local restrictive policy. The policy prohibits residential housing purchases for 1) non-local residents,
who are not able to provide a local tax payment or social security payment certificate over one year within the most recent two
years, 2) local resident, who is already in possession of two residential units. The policy also limits residential housing purchases
for 1) non-local residents, who are able to provide local tax payment certificate over one year, to only one unit, 2) local residents,
who are already in possession of only one residential unit, to one additional residential unit.
We cannot assure you that the local government
in Shanghai or Jiangsu Province will not issue further restrictive measures in the future. The local government’s restrictive
regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our access to
capital resources or even restrict our business operations, which could further adversely affect our business and prospects.
We face increasing competition, which
may adversely affect our revenues, profitability and results of operations.
In recent years, a large number of property
companies have begun undertaking property sales and investment projects in Yangtze Delta and elsewhere in the PRC. Some of these
property companies may have better track records and greater financial and other resources than we do. The intensity of the competition
may adversely affect our business and financial position. In addition, the real estate market in Yangtze Delta and elsewhere in
the PRC is rapidly changing. If we cannot respond to the changes in the market conditions more swiftly or effectively than our
competitors do, our business and financial position will be adversely affected.
If the availability or attractiveness of
mortgage financing were significantly limited, many of our prospective customers would not be able to purchase the properties,
thus adversely affecting our business and financial position.
Mortgages are becoming increasingly popular
as a means of financing property purchases in the PRC. An increase in interest rates may significantly increase the cost of mortgage
financing, thus reducing the affordability of mortgages as a source of financing for residential property purchases. The PRC government
has increased the down payment requirements and imposed certain other conditions that make mortgage financing unavailable or unattractive
for some potential property purchasers. There is no assurance that the down payment requirements and other conditions will not
be further revised. If the availability or attractiveness of mortgage financing is further significantly limited, many of our prospective
customers would not be able to purchase the properties and, as a result, our business and future prospects would be adversely affected.
Our future prospects are heavily dependent
on the performance of property sectors in specific geographical areas.
The properties we resell and intend to
invest in are mainly based in Yangtze Delta. Our future prospects are, therefore, heavily dependent on the continued growth of
the property sector around Yangtze Delta, and our business may be affected by any adverse developments in the supply and demand
or housing prices in the property sector around Yangtze Delta.
The current level of property development
and investment activity in Yangtze Delta and other markets is substantial. However, there is no assurance that such property resale
and investment activity in Yangtze Delta or any of our other markets will continue at this level in the future or that we will
be able to benefit from the future growth of these property markets.
Our revenues and operating income
could be reduced by adverse conditions specific to our property locations.
The properties we resell and intend to
invest in are concentrated geographically and are located predominately in Yangtze Delta. As a result, our business and our financial
operating results may be materially affected by adverse economic, weather or business conditions in this area. Adverse conditions
that affect these areas such as economic recession, changes in extreme weather conditions and natural disasters, may have an adverse
impact on our operations.
RISKS RELATING TO THE PEOPLES REPUBLIC
OF CHINA
All of our current prospects and deals
are generated in Mainland China; thus all of our revenues are derived from our operations in the PRC. Accordingly, our business,
financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal
developments in the PRC.
PRC economic, political policies and
social conditions could adversely affect our business.
The economy of PRC differs from the economies
of most developed countries in a number of respects, including the amount of government involvement, level of development, growth
rate and control of foreign exchange and allocation of resources.
The PRC Government has been reforming the
PRC economic system from planned economy to market oriented economy for more than 20 years, and has also begun reforming the government
structure in recent years. These reforms have resulted in significant economic growth and social progress. Although we believe
these reforms will have a positive effect on our overall and long-term development, we cannot predict whether any future changes
in PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current
or future business, results of operations or financial condition.
Changes in foreign exchange regulations
may adversely affect our ability to pay dividends and could adversely affect our results of operations and financial condition.
Substantially all of our revenues and operating
expenses are denominated in Renminbi. Conversion of Renminbi is under strict government regulation in the PRC. The Renminbi is
currently freely convertible under the "current account", including trade and service related foreign exchange transactions
and payment of dividends, but not under the "capital account", which includes foreign direct investment and loans. Under
the existing foreign exchange regulations in the PRC, we will be able to pay dividends in foreign currencies without prior approval
from the State Administration for Foreign Exchange by complying with certain procedural requirements. However, there is no assurance
that the above foreign policies regarding payment of dividends in foreign currencies will continue in the future.
Fluctuation of the Renminbi could materially
affect the value of, and dividends payable on, the common stock.
The value of the Renminbi is subject to
changes in the PRC Government’s policies and depends to a large extent on China’s domestic and international economic
and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion
of Renminbi to U.S. Dollars has generally been stable, and in 2005 the official exchange rate between U.S. Dollars and Renminbi
had a little fluctuation. However, we cannot give any assurance that the value of the Renminbi will continue to remain stable against
the U.S. Dollar or any other foreign currency. Since our income and profit are denominated in Renminbi, any devaluation of the
Renminbi would adversely affect the value of, and dividends, if any, payable on, our shares in foreign currency terms.
Our operations could be adversely affected
by changes in the political and economic conditions in the PRC. The PRC is our main market and accounted for all of our revenue.
Therefore, we face risks related to conducting business in the PRC. Changes in the social, economic and political conditions of
the PRC may adversely affect our business. Unfavorable changes in government policies, political unrest and economic developments
may also have a negative impact on our operations.
Since the adoption of the “open door
policy” in 1978 and the “socialist market economy” in 1993, the PRC government has been reforming and is expected
to continue to reform its economic and political systems. Any changes in the political and economic policies of the PRC government
may lead to changes in the laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations,
taxation and import and export restrictions, which may, in turn, adversely affect our financial performance. While the current
policy of the PRC government seems to be one of imposing economic reform policies to encourage foreign investments and greater
economic decentralization, we cannot assure that such a policy will continue to prevail in the future.
The PRC Legal System Embodies Uncertainties
The PRC legal system is a civil law system
based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little value as precedents.
In 1979, the PRC Government began to promulgate a comprehensive system of laws and regulations governing economic matters in general.
The overall effect of legislation over the past 28 years has significantly enhanced the protections afforded to various forms of
foreign investment in Mainland China. Our PRC operating subsidiaries, wholly foreign-owned enterprises (“WFOEs”), are
subject to laws and regulations applicable to foreign investment in the PRC in general and laws and regulations applicable to WFOEs
in particular. However, these laws, regulations and legal requirements are constantly changing, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors. In addition,
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 pre-emption of local regulations by national laws.
Our shareholders may not be able to
enforce U.S. civil liabilities claims.
Our assets are located outside the United
States and are held through subsidiaries incorporated under the laws of the Cayman Islands, British Virgin Islands and the PRC.
Our current operations are conducted in the PRC. In addition, our directors and officers are residents of the PRC. As a result,
it may be difficult for shareholders to implement service of process on these individuals. In addition, there is uncertainty as
to whether the courts of China would recognize or enforce judgments of United States courts obtained against the Company or such
persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be
competent to hear original actions brought in these countries against us or such persons predicated upon the securities laws of
the United States or any state thereof.