Company Quick10K Filing
Quick10K
EHI Car Services
20-F 2017-12-31 Annual: 2017-12-31
20-F 2016-12-31 Annual: 2016-12-31
20-F 2015-12-31 Annual: 2015-12-31
UHAL AMERCO 6,784
NRZ New Residential Investment 5,779
HBI Hanesbrands 4,938
R Ryder System 2,594
CAR Avis Budget Group 1,828
UNIT Uniti Group 1,401
SP SP Plus 784
HYRE Hyrecar 41
HTZ Hertz Global Holdings 0
CHSCP CHS 0
EHIC 2017-12-31
Part I
Item 1.Identity of Directors, Senior Management and Advisers
Item 2.Offer Statistics and Expected Timetable
Item 3.Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6.Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-2.5 tv491131_ex2-5.htm
EX-4.24 tv491131_ex4-24.htm
EX-8.1 tv491131_ex8-1.htm
EX-12.1 tv491131_ex12-1.htm
EX-12.2 tv491131_ex12-2.htm
EX-13.1 tv491131_ex13-1.htm
EX-13.2 tv491131_ex13-2.htm
EX-15.1 tv491131_ex15-1.htm
EX-15.2 tv491131_ex15-2.htm
EX-15.3 tv491131_ex15-3.htm

EHI Car Services Earnings 2017-12-31

EHIC 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 tv491131_20f.htm 20-F

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

 

For the transition period from                       to                       .

 

Commission file number: 001-36731

 

eHi Car Services Limited

(Exact name of Registrant as specified in its charter)

 

Not applicable

(Translation of Registrant’s name into English)

 

Cayman Islands

(Jurisdiction of incorporation or organization)

 

Unit 12/F, Building No.5, Guosheng Center, 388 Daduhe Road

Shanghai, 200062

The People’s Republic of China

(Address of principal executive offices)

 

Ray Ruiping Zhang, Chief Executive Officer

Telephone: +86 21 6468 7000

Facsimile: +86 21 5489 1121

Email: ir@ehic.com.cn

Unit 12/F, Building No.5, Guosheng Center, 388 Daduhe Road

Shanghai, 200062

The People’s Republic of China

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class   Name of each exchange on which registered
American Depositary Shares, each
representing two Class A common shares,
par value $0.001 per share
  New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

    139,917,575 common shares, par value US$0.001 per share, being the sum of 74,279,018 Class A common shares (including 1,027,288 Class A common shares, represented by 513,644 American depositary shares, issued and reserved for the future exercise of options or the vesting of other awards under the 2010 Plan and the 2014 Plan) and 65,638,557 Class B common shares as of December 31, 2017

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

¨ Yes x No

 

If this report is an annual or transaction report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

¨ Yes x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer ¨
        Emerging growth company x

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. x

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP x   International Financial Reporting Standards as issued
by the International Accounting Standards Board ¨
  Other ¨

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

 

¨ Item 17 ¨ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

¨ Yes x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

¨ Yes ¨ No

 

 

 

 

 

 

   

EHI CAR SERVICES LIMITED

 

TABLE OF CONTENTS

 

  Page
INTRODUCTION 3
FORWARD-LOOKING STATEMENTS 3
     
PART I    
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
ITEM 3. KEY INFORMATION 4
ITEM 4. INFORMATION ON THE COMPANY 38
ITEM 4A. UNRESOLVED STAFF COMMENTS 63
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 63
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 83
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 94
ITEM 8. FINANCIAL INFORMATION 96
ITEM 9. THE OFFER AND LISTING 97
ITEM 10. ADDITIONAL INFORMATION 98
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 106
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 107
     
PART II    
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 108
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 108
ITEM 15. CONTROLS AND PROCEDURES 108
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 110
ITEM 16B. CODE OF ETHICS 110
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 110
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 110
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 110
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 110
ITEM 16G. CORPORATE GOVERNANCE 111
ITEM 16H. MINE SAFETY DISCLOSURE 111
     
PART III    
ITEM 17. FINANCIAL STATEMENTS 111
ITEM 18. FINANCIAL STATEMENTS 111
ITEM 19. EXHIBITS 111
     
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

 2 

 

  

INTRODUCTION

 

Except where the context otherwise requires and for purposes of this annual report on Form 20-F only, references to:

 

  · “ADSs” are to our American depositary shares, each of which represents two Class A common shares;

 

  · “ADRs” are to American depositary receipts, which, if issued, evidence our ADSs;

 

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

 

  · “China” and the “PRC” are to the People’s Republic of China, excluding, for the purpose of this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau;

 

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

 

  · “we”, “us”, “our”, “our company” and “our Group” refer to eHi Car Services Limited, its predecessor entities, subsidiaries and variable interest entities.

 

FORWARD-LOOKING STATEMENTS

 

This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward- looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “aim”, “anticipate”, “believe”, “continue”, “estimate”, “expect”, “intend”, “is/are likely to”, “is projected to”, “may”, “plan”, “potential”, “will” or other similar expressions. The forward-looking statements included in this annual report relate to, among others:

 

  · our growth strategies and initiatives and our business plans;

 

  · the anticipated growth of our business;

 

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

 

  · factors that may affect our future revenues and expenses;

 

  · the future growth of our industry as a whole;

 

  · trends and competition in our industry; and

 

  · economic, regulatory, operating conditions and demographic trends in China.

 

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

 3 

 

  

PART I

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.KEY INFORMATION

 

A.Selected Financial Data

 

The following selected consolidated statements of comprehensive income (loss) data for each of the three years ended December 31, 2015, 2016 and 2017, and the selected consolidated balance sheet data as of December 31, 2016 and 2017, 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, 2013 and 2014, and the selected consolidated balance sheet data as of December 31, 2013, 2014 and 2015 have been derived from our audited consolidated financial statements for these periods, which are not included in this annual report. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and related notes and Item 5, “Operating and Financial Review and Prospects” in this annual report. Our historical results do not necessarily indicate results expected for any future period. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

 

Selected Consolidated Statements of Comprehensive Income (Loss) Data:

 

   For the Years Ended December 31, 
   2013   2014   2015   2016   2017 
   RMB   % of Net
Revenues
   RMB   % of Net
Revenues
   RMB   % of Net
Revenues
   RMB   % of Net
Revenues
   RMB   US$   % of Net
Revenues
 
   (in thousands, except percentages, shares, per share and per ADS data) 
Summary consolidated statements of comprehensive income (loss) data                                                       
Net revenues   566,394    100%   851,165    100.0%   1,450,630    100.0%   2,108,944    100.0%   2,739,522    421,057    100.0%
Cost of revenues(1)(3)   (526,446)   (92.9)   (718,699)   (84.4)   (1,137,978)   (78.4)   (1,515,281)   (71.9)   (1,880,349)   (289,004)   (68.6)
Gross profit(2)   39,948    7.1    132,466    15.6    312,652    21.6    593,663    28.1    859,173    132,053    31.4 
Selling and marketing expenses:                                                       
Third party   (40,439)   (7.1)   (33,721)   (4.0)   (48,869)   (3.4)   (67,789)   (3.2)   (122,768)   (18,869)   (4.5)
Related party           (1,595)   (0.2)   (16,190)   (1.1)   (29,399)   (1.4)   (16,264)   (2,500)   (0.6)
Total selling and marketing expenses(3)   (40,439)   (7.1)   (35,316)   (4.2)   (65,059)   (4.5)   (97,188)   (4.6)   (139,032)   (21,369)   (5.1)
General and administrative expenses(3)   (112,416)   (19.8)   (132,125)   (15.5)   (183,549)   (12.7)   (251,938)   (11.9)   (270,670)   (41,601)   (9.9)
Other operating income   13,549    2.3    17,122    2.0    10,764    0.7    10,310    0.5    3,763    578    0.1 
Total operating expenses   (139,306)   (24.6)   (150,319)   (17.7)   (237,844)   (16.5)   (338,816)   (16.1)   (405,939)   (62,392)   (14.8)
Income / (loss) from operations   (99,358)   (17.5)   (17,853)   (2.1)   74,808    5.1    254,847    12.1    453,234    69,661    16.5 
Interest income   360    0.1    4,397    0.5    2,653    0.2    8,414    0.4    14,962    2,300    0.5 
Interest expense:                                                       
Third party   (50,880)   (9.0)   (76,938)   (9.0)   (109,566)   (7.6)   (206,425)   (9.8)   (273,589)   (42,050)   (10.0)
Related party                   (14,203)   (1.0)   (18,534)   (0.9)   (6,996)   (1,075)   (0.3)
Total interest expense   (50,880)   (9.0)   (76,938)   (9.0)   (123,769)   (8.6)   (224,959)   (10.7)   (280,585)   (43,125)   (10.2)
Gain from waiver of warrants                   16,870    1.2                     
Gain from sale of cost method investment                   803,060    55.4                     
Other income (expense), net   (1,108)   (0.3)   (840)   (0.1)   10,205    0.7    1,444    0.1    1,957    301    0.1 
Early extinguishment of debt costs                                   (19,977)   (3,070)   (0.7)
Income / (loss) before income taxes   (150,986)   (26.7)   (91,234)   (10.7)   783,827    54.0    39,746    1.9    169,591    26,066    6.2 
Provision for income taxes   (1,228)   (0.2)   (1,912)   (0.2)   (87,488)   (6.0)   (6,611)   (0.3)   (47,375)   (7,281)   (1.7)
Net income / (loss)   (152,214)   (26.9)   (93,145)   (10.9)   696,339    48.0    33,135    1.6    122,216    18,784    4.5 
Net income / (loss) attributable to common shareholders   (371,783)   (65.6)   (343,920)   (40.4)   696,339    48.0    33,135    1.6    122,216    18,784    4.5 
Weighted average number of common shares used in computing net income / (loss) per share                                                       
Basic   6,096,842         19,198,145         126,758,363         137,621,702         138,794,624    138,794,624      
Diluted   6,096,842         19,198,145         128,403,877         138,552,031         139,593,917    139,593,917      
Net income / (loss) per common share attributable to common shareholders                                                       
Basic   (60.98)        (17.91)        5.49         0.24         0.88    0.14      
Diluted   (60.98)        (17.91)        5.42         0.24         0.88    0.13      
Net income / (loss) per ADS*                                                       
Basic   (121.96)        (35.82)        10.99         0.48         1.76    0.27      
Diluted   (121.96)        (35.82)        10.85         0.48         1.75    0.27      

 

* Each ADS represents two Class A common shares.

 

 4 

 

 

 

(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 RMB6.2 million, RMB12.7 million, RMB14.0 million, RMB16.0 million and RMB13.6 million (US$2.1 million) in 2013, 2014, 2015,2016 and 2017, respectively, allocated as follows:

 

   For the Years Ended December 31, 
   2013   2014   2015   2016   2017 
   RMB   RMB   RMB   RMB   RMB   US$ 
   (in thousands) 
Cost of revenues   (29)   (134)   (362)   (840)   (844)   (130)
Selling and marketing expenses   (9)   (490)   (894)   (401)   (336)   (52)
General and administrative expenses   (6,168)   (12,057)   (12,727)   (14,800)   (12,409)   (1,907)
Total share-based compensation expenses   (6,206)   (12,681)   (13,983)   (16,041)   (13,589)   (2,089)

 

Selected Consolidated Balance Sheets Data:

 

    As of December 31,  
    2013     2014     2015     2016     2017  
    RMB     RMB     RMB     RMB     RMB     US$  
    (in thousands, except share data)  
Summary consolidated balance sheets data                                                
Cash and cash equivalents     630,733       926,208       2,610,088       529,519       671,350       103,185  
Restricted cash     30,247       192,758       206,944       257,059       612,122       94,081  
Total current assets     803,742       1,426,458       3,427,263       1,941,705       3,364,457       517,108  
Property and equipment, net     1,062,331       1,940,048       4,096,618       5,723,569       7,057,045       1,084,648  
Vehicle purchase deposits     119,173       174,185       216,728       420,923       367,840       56,536  
Total assets     2,026,422       3,755,640       7,800,920       8,160,959       10,928,462       1,679,674  
Accounts payable     6,554       5,487       785,899       179,878       617,870       94,965  
Short-term debt due to third parties     219,640       540,519       803,132       926,219       2,557,446       393,072  
Short-term debt due to a related party                             100,000       15,370  
Total current liabilities     333,475       676,015       1,881,994       1,396,109       3,727,594       572,921  
Long-term debt due to third parties     375,726       713,233       1,669,453       2,667,823       2,957,056       454,491  
Long-term debt due to a related party                 300,000       100,000              
Total liabilities     709,552       1,389,248       3,852,847       4,169,830       6,721,915       1,033,139  
Total shareholders’ equity (deficit)     (956,651 )     2,366,392     3,948,073       3,991,130       4,206,547       646,534  
Common share capital     40       728       867       878       879       135  
Common shares outstanding     6,096,842       114,379,243       137,133,413       138,860,287       138,890,287       138,890,287  

 

 5 

 

  

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 RMB6.5063 to US$1.00, the noon buying rate in effect as of December 29, 2017. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, 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 20, 2018, the noon buying rate was RMB6.2945 to US$1.00.

 

The following table sets forth various information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.

 

    Noon Buying Rate  
Period   Period End     Average(1)     Low     High  
    (RMB per U.S. Dollar)  
2013     6.0537       6.1412       6.2438       6.0537  
2014     6.2046       6.1704       6.2591       6.0402  
2015     6.4778       6.2827       6.4896       6.1870  
2016     6.9430       6.6549       6.9580       6.4480  
2017     6.5063       6.7350       6.9575       6.4773  
October     6.6328       6.6254       6.6533       6.5712  
November     6.6090       6.6200       6.6385       6.5967  
December     6.5063       6.5932       6.6210       6.5063  
2018                                
January     6.2841       6.4233       6.5263       6.2841  
February     6.3280       6.3183       6.3471       6.2649  
March     6.2726       6.3174       6.3565       6.2685  
April (through April 20, 2018)     6.2945       6.2859       6.3045       6.2655  

 

Source: Federal Reserve Statistic Release.

 

(1)Annual average for any given year is calculated by using the average of the exchange rates on the end of each month during such year. Monthly average for any given month is calculated by using the average of the daily rates during such month.

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.Risk Factors

 

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 RMB1,450.6 million in 2015 to RMB2,108.9 million in 2016, and further to RMB2,739.5 million (US$421.1 million) in 2017. We increased the total fleet size from 38,070 vehicles as of December 31, 2015 to 56,916 vehicles as of December 31, 2016, and further to 64,946 vehicles as of December 31, 2017, and we expanded our geographic coverage from 1,861 service locations in 151 cities as of December 31, 2015 to 3,249 service locations in 216 cities across China as of December 31, 2016, and further to 4,463 service locations in 303 cities across China as of December 31, 2017. 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.

 

 6 

 

  

We have a history of operating and net losses, and we may not be able to achieve or sustain profitability.

 

Historically, we had certain operating and net losses primarily due to significant upfront investments in connection with the expansion of our nationwide service network and infrastructure, which expose us to significant fixed costs and expenses. Starting from 2015, we have recorded operating income of RMB74.8 million, RMB254.8 million, and RMB453.2 (US$69.7 million) respectively, and net income of RMB696.3 million, RMB33.1 million and RMB122.2 (US$18.8 million), respectively, in 2015, 2016 and 2017. Although we generated net income in 2015, 2016 and 2017, 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 Shouqi Car Rental 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, primarily through Ctrip’s website, mobile applications and offline channels. 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), Yidao 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, which continues to grow as complementary to our car rental business. However, our car sharing business may compete with other national and regional car sharing players, such as EVCARD (operated by Shanghai International Automobile City EV Operation and Service Co., Ltd.), Car2Go (operated by Daimler Mobility Services), GoFun (operated by Shouqi) and ToGo (operated by Beijing Tuge Technology Co., Ltd.). In 2017, the revenue related to car sharing business was insignificant.

 

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.

 

 7 

 

  

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.

 

Our historical outstanding accounts receivable have been relatively high. Inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.

 

As of December 31, 2015, 2016 and 2017, our outstanding billed and unbilled accounts receivable were RMB179.6 million, RMB231.0 million and RMB362.9 million (US$55.8 million), respectively. Although we conduct credit evaluations of our customers, we generally do not require collateral or other security from our customers. In addition, we have had a relatively high customer concentration. As a result, an extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. Our inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.

 

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.

 

 8 

 

  

We carry substantial risk that the market value of a used vehicle at the time of its disposition may be less than its estimated residual value at such time. If we are unable to dispose of our used vehicles at prices that are equal to or greater than their estimated residual value, our depreciation costs will increase and we will incur losses resulting from the disposal, which may have material and adverse impact on our financial results. As our fleet size continues to grow, inability to dispose of our used vehicles at desirable prices or timing or through appropriate channels could have significant impact on our business.

 

Our limited operating history in an emerging and rapidly evolving industry may not provide an adequate basis on which to evaluate our business and future prospects.

 

We have a limited operating history. We began to provide chauffeured car services and car rental services in 2006 and 2008, respectively. We believe our future success depends on our ability to significantly increase revenues as well as maintain profitability from our operations. Our limited operating history makes it difficult to evaluate our business and future prospects. You should consider our future prospects in light of the risks and challenges encountered by a company with a limited operating history in an emerging and rapidly evolving industry. These risks and challenges include, among other things,

 

  · our ability to continue our growth as well as maintain profitability;

 

  · preservation of our competitive position in the car rental and car service industry in China;

 

  · providing consistent and high-quality services to attract and retain individual customers as well as corporate and institutional clients;

 

  · our ability to implement our strategies and make timely and effectively respond to competition and changes in customer preferences;

 

  · our ability to increase awareness of our “eHi” brand and continue to develop customer loyalty; and

 

  · recruitment, training and retaining of qualified managerial and other personnel.

 

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 RMB2,183.4 million, RMB3,687.8 million and RMB3,252.5 million (US$499.9 million) in 2015, 2016 and 2017, 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:

 

  · economic, political and other conditions in China and elsewhere;

 

  · our future results of operations, financial condition and cash flows; and

 

  · general market conditions for capital raising activities in our industry.

 

In addition, pursuant to the documents governing our US$200 million senior unsecured notes issued in 2015 and our US$400 million senior unsecured notes issued in 2017 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.

 

 9 

 

  

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:

 

  · increase our fleet size;

 

  · expand our operations in current or additional cities in China;

 

  · enhance our sales and marketing and strengthen our general and administrative teams;

 

  · continue to improve our proprietary technology platform;

 

  · acquire businesses complementary to ours;

 

  · hire, train and retain qualified employees;

 

  · develop and introduce service enhancements to our clients; or

 

  · respond to competitive pressures or unanticipated working capital requirements.

 

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:

 

  · the growth of demand for car rentals and car services in China, and the rate of any such growth;

 

  · the trust and confidence level of customers in car rentals and car services providers in China, as well as changes in customer demographics and preferences;

 

  · the selection, price and popularity of vehicles that we and our competitors offer;

 

  · the emergence of alternative transportation service models such as car-hailing, car-sharing, ride-sharing business and innovation of driver-less vehicles services;

 

  · general economic conditions, particularly economic conditions affecting discretionary consumer spending; and

 

  · the legal environment that may impact our business operations or expansions.

 

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, Nanchang, Chengdu, Hangzhou, Guiyang, Shenzhen, Chongqing and so on 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.

 

 10 

 

  

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.

 

 11 

 

  

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.

 

 12 

 

  

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 due 2018 and our US$400 million senior unsecured notes due 2022. 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.

 

 13 

 

  

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, 2017, approximately 78% of our period-end fleet size were purchased through dealers of Volkswagen, SAIC Motor, Peugeot, Hyundai 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.

 

 14 

 

  

If the average salary or statutory welfare expenses of our employees increase significantly, our profitability may be materially adversely impacted.

 

As of December 31, 2017, we had 7,195 full-time and 585 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 183 vehicles as of December 31, 2017 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.

 

 15 

 

  

Future investments and acquisitions could prove difficult to integrate or disrupt our business and 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 (which investment was profitably sold in 2015). In January 2016, through entrusted bank loan arrangements we facilitated RMB50 million in credit to a local car rentals and car services provider with an initial one-year term, which was extended to a two-year term. As of the date of this annual report, the entire principal amount of the loan has been repaid by the borrower in full. Our future strategic investments and acquisitions may expose us to potential risks, including risks associated with:

 

  · potential loss of all or a portion of our investment;

 

  · fluctuations in our future financial results, such as potential decrease in our margins and profitability;

 

  · integration of new operations, services and personnel;

 

  · exposure to unforeseen or hidden liabilities;

 

  · diversion of resources from our existing businesses and technologies;

 

  · our failure to generate sufficient revenues to offset the costs of acquisitions; and

 

  · potential loss of, or harm to, relationships with suppliers, clients or employees.

 

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.

 

 16 

 

  

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 may be subject to litigation and regulatory proceedings.

 

We may be involved in litigation in China and litigation outside China to matters in the ordinary course of our business. We are subject to laws and regulations in China and the other jurisdictions. These laws, rules and regulations may vary in their scope and impose requirements which are more stringent than, or which conflict with, those in China. As publicly-listed companies, we and certain of our subsidiaries may face additional exposure to claims and lawsuits inside and outside China.

 

On May 8, 2017, a company named Shanghai Zhongqi Anhua Car Services Co., Ltd., (“Zhongqi Anhua”), filed a tort liability suit in People’s Court of Jingan District, Shanghai (the “District Court”), against eHi Rental, and involved Shanghai Municipal Transportation Commission (“SMTC), as a third party to the suit. Zhongqi Anhua claimed in their complaint that eHi Rental shall (i) admit the tort (ii) stop using the car rental operation certificate No.3516 issued by SMTC (the “Car Rental Certificate”), alleging the Car Rental Certificate and relevant vehicle operation certificates are possessed by Zhongqi Anhua, (iii) compensate the damages suffered by Zhongqi Anhua in connection with the alleged infringement totaling RMB30 million, and (iv) apologize to Zhongqi Anhua. On July 3, 2017, the District Court rendered a judgment rejecting all the claims raised by Zhongqi Anhua for absence of proof of the claims. On July 19, 2017, Zhongqi Anhua submitted a petition for appeal to Shanghai No.2 Intermediate People’s Court (the “Appellate Court”), and the Appellate Court ruled on September 1, 2017 that the judgment rendered by the District Court be remanded for re-trial as certain facts should be further clarified by the District Court.

 

As of the date of this annual report, the above lawsuit is still pending for judgement, and the Company is actively defending the case. Considering the facts that eHi Rental obtained the Car Rental Certificate through regulated procedures set forth by SMTC, which consists of no infringement behavior by eHi Rental, and that eHi Rental has been compliant with all relevant SMTC annual inspection/certificate renewal requirement, the Company believes such claims are without merit.

 

On April 13, 2018, Ctrip Investment Holding Ltd. (“Ctrip”), one of our registered shareholders, filed a petition in the Grand Court of The Cayman Islands (the “Court”) seeking alternative relief, including, among other things, requesting that the Court to enjoin the Company from relying upon the board resolutions adopted on April 6, 2018 and April 10, 2018, respectively, in connection with the Merger and requesting that the board and the special committee of the Company review the preliminary non-binding offer from Ocean Link Partners Limited for the purchase of all of the outstanding Shares (including Shares represented by ADSs) for US$14.50 in cash per ADS, or US$7.25 in cash per Share, subject to due diligence and negotiation of the definitive agreement. The Company believes Ctrip’s allegations and the basis for which it is seeking relief in its petition are without merit and intends to vigorously refute the petition.

 

The existence of litigation, claims, investigations and proceedings may harm our reputation and adversely affect the trading price of our ADSs. The outcome of any claims, investigations and proceedings is inherently uncertain, and in any event defending against these claims could be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. An adverse determination in any litigation, investigation or proceeding could cause us to pay damages as well as legal and other costs, limit our ability to conduct business or require us to change the manner in which we operate.

 

We have granted, and may continue to grant, employee share options, restricted shares, restricted share units 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, restricted share units 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 3,192,000 options and 1,500 unvested restricted share units granted under the 2010 Plan and the 2014 Plan were outstanding. If we grant more options, restricted shares, restricted share units 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. Any 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.

 

 17 

 

  

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 through Ctrip’s website, mobile applications and offline channels. 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 to remediate our material weaknesses over financial reporting, 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, 2017, our management identified three material weaknesses and other control deficiencies in our internal control over financial reporting, and determined that as of December 31, 2017, 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, 2017, 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, 2017. 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.

 

 18 

 

  

The material weaknesses identified related to (i) insufficient accounting resources and expertise necessary to comply with U.S. GAAP, (ii) lack of sufficient and documented financial closing policies and procedures, specifically those related to period end cut-off, accounts classification and presentation, and (iii) lack of effective risk assessment on acceptance of new type of corporate customers, and lack of effective control over approval and monitoring of credit limit and credit term granted to these corporate customers and collectability assessment on their receivable balances. 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.

 

Registered public accounting firms in China, including our independent registered public accounting firm, are not inspected by the U.S. Public Company Accounting Oversight Board, which deprives us and our investors of the benefits of such inspection.

 

Auditors of companies whose shares are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards applicable to auditors. Our independent registered public accounting firm is located in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB, notwithstanding the requirements of U.S. law, is currently unable to conduct inspections without the approval of the Chinese authorities. In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the MOF, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the MOF in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the MOF to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

 

This lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ADSs are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information 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 work papers 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 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. While we cannot predict if the SEC will further review the Big Four PRC-based accounting firms’ compliance with specified criteria or if the results of such a review would result in the SEC imposing penalties such as suspensions or restarting the administrative proceedings, 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.

 

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We are an “emerging growth company” within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

 

We are 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.

 

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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.

 

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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, MOT, 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 and many other cities 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 compliance costs.

 

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. Our PRC subsidiaries in China generally pay the dividends or other distributions to us through following methods: (i) repaying shareholder loans to offshore holding companies, (ii) paying dividends to offshore holding companies, (iii) extending foreign loans through offshore holding companies while providing security interests for such loans through PRC operating subsidiaries, and (iv) transferring cash through cross-border “cash pooling”, a permitted method for cross-border cash transfer upon certain conditions within our group companies. 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 equivalent to more than US$50,000 for a domestic institution shall, under the principle of true transactions, review the resolution of the board of directors on distribution of profits (or resolution of partners on distribution of profits), original tax recordation form, and audited financial statements, relating to the outward remittance, and stamp and endorse the relevant original tax recordation form with the actual remittance amount and remittance date of the profits. 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.

 

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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. 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 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.

 

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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.

 

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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. On February 3, 2018, the SAT issued the Announcement of Relevant Issues on “Beneficial Owner” under Tax Treaties, or Announcement 9, which replaced Circular 601 and Announcement 30. Announcement 9 further clarified certain standards for the determination of “Beneficial Owner” mainly relating to the factors that whether an entity has business substance and meanwhile Announcement 9 continuously adopted part of rules under Circular 601 and Announcement 30, such as that a comprehensive analysis should still be made when determining the beneficial owner status based on various factors that are supported by various types of documents. 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 have been in general 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 have the effect of reducing our net revenues. With the nationwide implementation of VAT in May 2016, we may be required to pay more taxes on our revenues. In addition, despite our decrease in net revenues resulted from the implementation of VAT, we were able to benefit from certain financial subsidies provided by local government authorities to offset the increased tax payments. However, such financial subsidies ceased to apply after the nationwide implementation of VAT. 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.

 

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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. On October 17, 2017, the State Administration of Taxation, or the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax. Pursuant to Circular 7 and SAT Bulletin 37, both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

As Circular 7 and SAT Bulletin 37 were newly implemented, there might be limited precedents regarding the application and enforcement of Circular 7 and SAT Bulletin 37 and it remains uncertain whether such exemptions or relevant provisions of Circular 7 and SAT Bulletin 37 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 and SAT Bulletin 37 or to establish that we or our non-PRC resident shareholders should not be taxed under Circular 7 and SAT Bulletin 37, 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.

 

 26 

 

 

Our PRC subsidiaries in China generally pay the dividends or other distributions to us through following methods: (i) repaying shareholder loans to offshore holding companies, (ii) paying dividends to offshore holding companies, (iii) extending foreign loans through offshore holding companies while providing security interests for such loans through PRC operating subsidiaries, and (iv) transferring cash through cross-border “cash pooling”, a permitted method for cross-border cash transfer upon certain conditions within our group companies. 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 and a bank that handles outward remittance of profits equivalent to more than US$50,000 for a domestic institution shall, under the principle of true transactions, review the resolution of the board of directors on distribution of profits (or resolution of partners on distribution of profits), original tax recordation form, and audited financial statements, relating to the outward remittance, and stamp and endorse the relevant original tax recordation form with the actual remittance amount and remittance date of the profits. 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.

 

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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, 2016 and 2017, 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$400 million in aggregate principal amount from issuing senior unsecured notes due 2022. 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.

 

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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, amended in 2008 and 2016 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.

 

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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.

 

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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.

 

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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.

 

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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 statutory 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%. Twelve of our PRC subsidiaries, Jiangyin eHi Car Rental Co., Ltd., Dali eHi Car Rental Co., Ltd. and so on were eligible for this tax incentive and paid enterprise income tax at a reduced rate of 10% for the taxable year of 2017.

 

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 and VAT paid by eHi Rental and Shanghai Smart Brand based on their revenues. In 2015, 2016 and 2017, eHi Rental received government subsidies of RMB4.4 million, RMB8.4 million and RMB5.5 million (US$0.8 million), and Shanghai Smart Brand received government subsidies of RMB0.9 million, RMB1.8 million and RMB1.9 million (US$0.3 million), respectively. In 2015 and 2016, Shanghai Taihao Financial Leasing Co., Ltd., or Shanghai Taihao, received government subsidies of RMB2.6 million, and RMB1.8 million respectively.

 

Furthermore, the PRC government recently adopted the Business Tax to VAT Transformation 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.

 

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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, 2017, 231 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. 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, 2017, 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

 

There can be no assurance that the agreement and plan of merger entered into with various parties on April 6, 2018 and the going private transaction contemplated thereby will be approved by our shareholders or successfully consummated. Potential uncertainty involving the going private transaction may adversely affect our business and the market price of our ADSs.

 

On April 6, 2018, we entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Teamsport Parent Limited (“Parent”) and Teamsport Bidco Limited (“Merger Sub”), a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, Parent will acquire our company for cash consideration equal to US$6.75 per common share of our company or US$13.50 in cash per ADS, each of which represents two Class A common shares of our company, other than Rollover Shares (as defined below) and ADSs representing Rollover Shares, as applicable. Immediately following the consummation of the transactions contemplated under the Merger Agreement, Parent will be beneficially owned by a consortium (the “Consortium”) comprising new investors, including certain affiliates of MBK Partners Fund IV, L.P., Baring Private Equity Asia Limited and Redstone Capital Management (Cayman) Limited, and certain existing shareholders of the Company, including L&L Horizon, LLC, an affiliate of Mr. Zhang, The Crawford Group, Inc. (“Crawford”) and Dongfeng Asset Management Co. Ltd. (collectively, the “Rollover Shareholders”). Upon the terms and subject to the conditions of the Merger Agreement, at the effective time of the merger, Merger Sub will merge with and into the Company, with the Company surviving the merger as the surviving company (the “Surviving Company”) under Cayman Islands law (the “Merger”).

 

On April 16, 2018, the Company and one of its shareholders commenced proceedings in the High Court of Hong Kong against CDH Car Rental Service Limited (“CDH Car”), another shareholder of the Company, to enforce the terms of the Company’s Third Amended and Restated Investor Rights Agreement dated December 11, 2013 (the “IRA”) with certain of its shareholders. The proceedings are to seek interim relief, including an order that CDH Car not dispose of, deal with or otherwise encumber its shareholding in the Company and an order that it not take any step to vote its shares in the Company, pending the resolution of claims under the IRA.

 

Our company’s board of directors, acting upon the unanimous recommendation of the special committee formed by the board of directors (the “Special Committee”), approved the Merger Agreement and the transactions contemplated by the Merger Agreement (the “Transactions”), including the Merger, and resolved to recommend that our company’s shareholders authorize and approve the Merger Agreement and the Transactions, including the Merger. The Special Committee, which is comprised solely of independent directors of our company who are unaffiliated with Parent, Merger Sub or any member of the Consortium or management of our company, exclusively negotiated the terms of the Merger Agreement with the Consortium with the assistance of its independent financial and legal advisors.

 

The closing of the Merger is currently expected to occur during the second or third quarter of 2018, and is subject to the satisfaction or waiver of the closing conditions set forth in the Merger Agreement, including the requisite approval of the shareholders of our company and the consent of requisite holders of the senior unsecured notes issued by our company in 2015 and 2017, if applicable, as well as certain other customary closing conditions. The Merger Agreement and the Merger must be authorized and approved by (i) a shareholders’ special resolution passed by the affirmative vote of holders of Shares representing at least two-thirds of the voting power of the Shares present and voting in person or by proxy as a single class at an extraordinary general meeting of our company’s shareholders, (ii) a shareholders’ resolution passed by the affirmative vote of holders of Shares representing a majority of the aggregate voting power of the Shares and (iii) a shareholders’ resolution passed by the affirmative vote of holders of a majority of the total outstanding Class A common shares of our company.

 

The Merger, whether or not consummated, presents a risk of diverting management focus, employee attention and resources from other strategic opportunities and from operational matters. In addition, we are subject to various restrictions under the Merger Agreement on the conduct of our business prior to the completion of the Merger, which may delay or prevent us from undertaking business opportunities that may arise pending completion of the Merger. Also, any development of the transaction, such as entering into or termination of any definitive agreement, may increase volatility of the trading price of our ADSs. In addition, the Merger Agreement restricts our ability, until the effective time of the Merger or, if earlier, the termination of the Merger Agreement, to solicit or, subject to certain exceptions, engage in discussions or negotiations with third parties regarding certain competing proposals or transactions as described in the Merger Agreement. If the Merger Agreement is terminated under the following circumstances: (i) if the Company accepts a competing proposal within 12 months after the termination, (ii) if our Board or Special Committee changes its recommendation in favor of the Merger, (iii) if there is a material breach of our representations, warranties and covenants under the Merger Agreement or (iv) if we enter into an agreement with respect to a superior proposal, we may be required to pay Parent a termination fee of $14,062,642.

 

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On April 26, 2018, we filed a going private transaction statement on Schedule 13E-3 which attaches as an exhibit a preliminary proxy statement that, subject to completion, will be used in connection with the extraordinary general meeting of our shareholders. Please refer to the preliminary proxy statement for more information about the Merger including the effects of the Merger on our company and the effects on our company if the Merger is not completed.

 

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 2017, the trading price of our ADSs ranged from US$8.91 to US$12.20 per ADS, and the last reported trading price on April 27, 2018 was US$13.05 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, 2017, we had an aggregate of 139,917,575 common shares issued and outstanding based on our Cayman Islands registrar, of which 74,279,018 Class A common shares were represented by 37,139,509 ADSs (including 513,644 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.

 

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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, 2017, represented 46.9% of our total issued and outstanding shares and 90.0% 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.

 

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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 (2018 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.

 

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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, 2017. 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 2018 or any future taxable year. If we are a PFIC for any taxable year during which a U.S. investor holds our common shares or ADSs, certain adverse U.S. federal income tax consequences would apply to the U.S. investor. For details, please refer to Item 10.E, “Additional Information — Taxation.”

 

We are exempt from certain corporate governance requirements of the NYSE. This may afford less protection to the holders of our ADSs.

 

We are exempt from certain corporate governance requirements of the NYSE by virtue of being a foreign private issuer. As a foreign private issuer, we are permitted to, and plan to, follow home country practice in lieu of certain corporate governance requirements of the NYSE. We are required to provide a brief description of the significant differences between the corporate governance practices of our home country, the Cayman Islands and the corporate governance practices required to be followed by

U.S. domestic companies under the NYSE rules. The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. The significantly different standards applicable to us do not require us to:

 

  · have a majority of the board be independent (other than due to the requirements for the audit committee under the Exchange Act);

 

  · have a minimum of three members on our audit committee;

 

  · have a compensation committee, a nominating or corporate governance committee;

 

  · provide annual certification by our chief executive officer that he or she is not aware of any noncompliance with any corporate governance rules of the NYSE;

 

  · have regularly scheduled executive sessions with only non-management directors;

 

  · have at least one executive session of solely independent directors each year;

 

  · seek shareholder approval for (i) the implementation and material revisions of the terms of share incentive plans, (ii) the issuance of more than 1% of our outstanding common shares or 1% of the voting power outstanding to a related party, (iii) the issuance of more than 20% of our outstanding common shares, and (iv) an issuance that would result in a change of control;

 

  · adopt and disclose corporate governance guidelines; or

 

  · adopt and disclose a code of business conduct and ethics for directors, officers and employees.

 

We intend to rely on all such exemptions provided by the NYSE to a foreign private issuer, except that we have a compensation committee and a corporate governance and nominating committee, an audit committee consisting of three members, and we have adopted and disclosed corporate governance guidelines and a code of business conduct and ethics for directors, officers and employees. As a result, you may not be provided with the benefits of certain corporate governance requirements of the NYSE.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A.History and Development of the Company

 

We commenced our business in 2006, which was initially focused on providing car services to premium corporate clients. In 2008, we began to provide car rentals to individual customers. Our company, eHi Car Services Limited (previously known as Prudent Choice International Limited or eHi Auto Services Limited), was incorporated in the Cayman Islands on August 3, 2007. eHi Car Services Limited is a holding company. Currently we operate our car rental and car services business through our PRC subsidiaries.

 

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For our car rental business, we provide vehicles through our PRC subsidiaries Shanghai eHi Car Rental Co., Ltd., or eHi Rental, and eHi Auto Services (Jiangsu) Co., Ltd., or eHi Jiangsu, and their subsidiaries and branches in different cities; and we provide fleet management, information technology support and other car rental related services through eHi Car Rental Management Services (Shanghai) Co. Ltd., or eHi Management, which is a subsidiary of eHi Rental.

 

For our car services business, we provide vehicles through eHi Rental, eHi Jiangsu and their subsidiaries and branches, and provide chauffeur services through our PRC subsidiary Shanghai Smart Brand Auto Driving Services Co., Ltd., or Shanghai Smart Brand, and its subsidiaries and branches.

 

Our current major operations are not subject to the ICP license requirements. To further expand our Internet and mobile services, in March 2014, we entered into a series of contractual arrangements with our PRC incorporated variable interest entity Shanghai eHi Information Technology Service Co., Ltd., or eHi Information, and its shareholders. eHi Information obtained an ICP license from the relevant telecommunication authorities on September 24, 2014. eHi Information currently does not have any material operation. In January 2015, we entered into a series of contractual arrangements with our PRC incorporated variable interest entity Shanghai eHi Car Sharing Information Technology Co., Ltd., or eHi Car Sharing, and its shareholders. eHi Car Sharing is currently not yet in operation. For additional information on our organizational structure, see Item 4.C, “Information on the Company— Organizational Structure”.

 

In November 2014, we completed an initial public offering of 10,000,000 ADSs at the price of US$12.00 per ADS. Each ADS represents two Class A common shares. On November 18, 2014, our ADSs were listed on the New York Stock Exchange under the symbol “EHIC”. In November 2014 we also issued 5,000,000, 1,666,666 and 1,666,666 Class A common shares to Dongfeng Asset Management Co. Ltd., China Universal Asset Management Co., Ltd. and Ctrip, respectively, at the price of US$6.00 per share (equivalent to US$12.00 per ADS), in a private placement concurrent with the initial public offering.

 

In May, 2015, we entered into definitive securities purchase agreements with Tiger Global Mauritius Fund, or Tiger Fund, and SRS Partners I Mauritius Limited and SRS Partners II Mauritius Limited, or collectively SRS Funds, pursuant to which we agreed to issue a total of 22,337,924 of our Class A common shares to the buyers at a price of US$6.00 per Class A common share (equivalent to US$12.00 per ADS). We raised gross proceeds of approximately US$134.0 million from this private placement transaction. In addition, two of our shareholders, Ctrip and Crawford, also entered into definitive agreements with the buyers for the sale of an aggregate of 2,666,666 Class A common shares (including certain shares represented by ADSs) at a price of US$6.00 per Class A common share (equivalent to US$12.00 per ADS). On June 30, 2015, in connection with the private placement, we also entered into a registration rights agreement with Tiger Fund and SRS Funds, or the Registration Rights Agreement, pursuant to which, at any time after the later of (i) November 22, 2015 and (ii) we have become eligible to register the Purchased Securities for resale on Form F-3, the holders of at least a majority of the Purchased Securities may request us to file no more than two shelf registration statements in any 12 month period to register the Purchased Securities and their relevant equity rights. The Registration Rights Agreement also contains obligations, indemnities, contribution, assignment and amendment that are customary for private placements by public companies, and the registration rights set forth therein shall terminate on November 18, 2017.

 

In December 2015, we completed an offering of US$200 million in aggregate principal amount of senior unsecured notes due 2018, or the 2018 Senior Notes. The 2018 Senior Notes were offered by our Cayman holding company, and all of our offshore subsidiaries jointly and severally provided guarantees. The 2018 Senior Notes were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and certain non-U.S. persons in compliance with Regulation S under the Securities Act. The 2018 Senior Notes bear a fixed interest rate at 7.5% per annum, payable semiannually in arrears, and will mature on December 8, 2018, unless previously repurchased in accordance with their terms prior to such date.

 

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In August, 2016, we entered into a facility agreement of US$150 million in principal amount with a syndicate of banks, or the 2016 Facility. Pursuant to the 2016 Facility, 50% of the proceeds has been used to repay our existing indebtedness, and remaining proceeds will be used for fund capital expenditures and other general corporate purposes. The 2016 Facility is jointly and severally guaranteed by our existing and future-established offshore subsidiaries, subject to certain exceptions according to terms therein. The 2016 Facility bears a floating interest rate of LIBOR plus 3.50% margin per annum. The 2016 Facility was repaid in full in August 2017.

 

In August 2017, we completed an offering of US$400 million in aggregate principal amount of senior unsecured notes due 2022, or the 2022 Senior Notes. The 2022 Senior Notes were offered by our Cayman holding company, and all of our offshore subsidiaries jointly and severally provided guarantees. The 2022 Senior Notes were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and certain non-U.S. persons in compliance with Regulation S under the Securities Act. The 2022 Senior Notes bear a fixed interest rate at 5.875% per annum, payable semiannually in arrears, and will mature on August 14, 2022, unless previously repurchased in accordance with their terms prior to such date.

 

On April 6, 2018, we entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Teamsport Parent Limited (“Parent”) and Teamsport Bidco Limited (“Merger Sub”), a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, Parent will acquire our company for cash consideration equal to US$6.75 per common share of our company or US$13.50 in cash per ADS, each of which represents two Class A common shares of our company, other than Rollover Shares (as defined below) and ADSs representing Rollover Shares, as applicable. Immediately following the consummation of the transactions contemplated under the Merger Agreement, Parent will be beneficially owned by a consortium (the “Consortium”) comprising new investors, including certain affiliates of MBK Partners Fund IV, L.P., Baring Private Equity Asia Limited and Redstone Capital Management (Cayman) Limited, and certain existing shareholders of the Company, including L&L Horizon, LLC, an affiliate of Mr. Zhang, The Crawford Group, Inc. (“Crawford”) and Dongfeng Asset Management Co. Ltd. (collectively, the “Rollover Shareholders”). Upon the terms and subject to the conditions of the Merger Agreement, at the effective time of the merger, Merger Sub will merge with and into the Company, with the Company surviving the merger as the surviving company (the “Surviving Company”) under Cayman Islands law (the “Merger”).

 

On April 16, 2018, the Company and one of its shareholders commenced proceedings in the High Court of Hong Kong against CDH Car Rental Service Limited (“CDH Car”), another shareholder of the Company, to enforce the terms of the Company’s Third Amended and Restated Investor Rights Agreement dated December 11, 2013 (the “IRA”) with certain of its shareholders. The proceedings are to seek interim relief, including an order that CDH Car not dispose of, deal with or otherwise encumber its shareholding in the Company and an order that it not take any step to vote its shares in the Company, pending the resolution of claims under the IRA.

 

Our company’s board of directors, acting upon the unanimous recommendation of the special committee formed by the board of directors (the “Special Committee”), approved the Merger Agreement and the transactions contemplated by the Merger Agreement (the “Transactions”), including the Merger, and resolved to recommend that our company’s shareholders authorize and approve the Merger Agreement and the Transactions, including the Merger. The Special Committee, which is comprised solely of independent directors of our company who are unaffiliated with Parent, Merger Sub or any member of the Consortium or management of our company, exclusively negotiated the terms of the Merger Agreement with the Consortium with the assistance of its independent financial and legal advisors.

 

The closing of the Merger is currently expected to occur during the second or third quarter of 2018, and is subject to the satisfaction or waiver of the closing conditions set forth in the Merger Agreement, including the requisite approval of the shareholders of our company and the consent of requisite holders of the senior unsecured notes issued by our company in 2015 and 2017, if applicable, as well as certain other customary closing conditions. The Merger Agreement and the Merger must be authorized and approved by (i) a shareholders’ special resolution passed by the affirmative vote of holders of Shares representing at least two-thirds of the voting power of the Shares present and voting in person or by proxy as a single class at an extraordinary general meeting of our company’s shareholders, (ii) a shareholders’ resolution passed by the affirmative vote of holders of Shares representing a majority of the aggregate voting power of the Shares and (iii) a shareholders’ resolution passed by the affirmative vote of holders of a majority of the total outstanding Class A common shares of our company.

 

On April 26, 2018, we filed a going private transaction statement on Schedule 13E-3 which attaches as an exhibit a preliminary proxy statement that, subject to completion, will be used in connection with the extraordinary general meeting of our shareholders. Please refer to the preliminary proxy statement for more information about the Merger including the effects of the Merger on our company and the effects on our company if the Merger is not completed.

 

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Our principal executive offices are located at Unit 12/F, Building No.5, Guosheng Center, 388 Daduhe Road, Shanghai, 200062, the People’s Republic of China, and our telephone number is +86-21-6468-7000. Our principal website address is http:// www.1hai.cn. The information on our website does not form a part of this annual report. Our agent for service of process in the United States is Law Debenture Corporate Services Inc. located at 400 Madison Avenue, 4th Floor, New York, New York 10017.

 

B.Business Overview

 

We provide car rentals and car services to both individual customers as well as corporate and institutional clients. Since our establishment, we have focused on investing in our infrastructure and technology, which enables us to benefit from increasing economies of scale.

 

Our services

 

Car rentals

 

We provide self-drive car rental services to both individual customers as well as corporate and institutional clients to meet their travel, leisure, business and ground transportation needs. Our short-term car rentals have a term of less than one year and are primarily provided to individual customers on an hourly, daily, weekly or monthly basis. Our long-term car rentals have a term of one year or longer and are primarily provided to corporate and institutional clients. In 2017, we derived approximately 80.2% of our net revenues from car rentals.

 

As of December 31, 2017, our car rentals were offered in 303 cities, 415 train stations and 119 airports across China through our extensive service network of 4,463 directly operated service locations. Our extensive service network enables our customers to pick up and return cars at any of our service locations. To better serve our customers, we also provide vehicle delivery and pickup services to customer-designated locations. To ensure the consistency of our service quality and customer experience, we directly operate all of our service locations rather than franchising or outsourcing them to third parties. In addition to our service network in China, we cooperate with Enterprise and provide our customers access to Enterprise’s car rental services outside China.

 

As of December 31, 2017, our car rental fleet included 62,101 vehicles of over 300 models primarily from major automobile manufacturers such as Volkswagen, SAIC Motor, Peugeot, Hyundai and General Motors. Based on our operating experience, we observe that Chinese customers are generally more sensitive to rental vehicle models than western customers. The variety of our car classes and models enables our customers to choose the vehicles they prefer to. In the event that the vehicle model requested by a customer is not available, our proprietary technology platform will automatically advise the customer when such particular model will become available or if similar models are available at the selected time. The customer also has an option to choose to be put on a waiting list for the particular model requested. Through our user interface, our technology platform also provides information to customers about discounts, special offers and other promotions to encourage them to rent for a longer period or upgrade to a more premium vehicle model.

 

We provide convenient and efficient reservation channels to our customers, which primarily include our user-friendly website and dedicated mobile applications. We believe we were the first car services provider in China to introduce mobile applications for customers to make reservations. In 2017, approximately 13% and 81% of our car rentals were derived from reservations made through website and mobile applications, respectively. The remainder were derived from reservations made through offline channels such as our call center or walk-in customers. As social media gain popularity, we are also exploring ways for our customers to make car rental reservation though social networking platforms such as Tencent WeChat.

 

First-time users of our car rental services are required to register as members before making a reservation. After a customer chooses the start and end dates of the rental period, the type and model of vehicle and the location of vehicle pickup or delivery, our technology platform confirms the reservation on a real-time basis and sends an email and/or text message to the customer. Before handing over the vehicle to the customer, we perform checks on the customer’s driver’s license, identity card and credit card information. We only accept credit card payments for our car rental services and can trace the credit records of our car rental customers for risk management purposes. As of December 31, 2017, over 2.2 million registered members had used our car rental services. Approximately 68%, 66% and 66% of our short-term car rental transactions in 2015, 2016 and 2017, respectively, were generated from customers that used our services more than once.

 

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A majority of our revenues derived from short-term car rental services are from our basic car rental service package, the charges for which include an hourly or daily rental fee, a transaction-based handling fee and a basic insurance charge. We also provide value-added services for customers to choose, such as increased insurance coverage. We have adopted a dynamic pricing mechanism to determine our rental rates. This mechanism determines a specific vehicle model’s rental rate based on its purchase price taking into consideration other variables such as pickup/drop-off time and location, the availability of our vehicles during such period at the location, prevailing prices, demand for such vehicle model and the length of rental period. Our management reviews the dynamic pricing system on a regular basis. Our customers typically bear the cost of gasoline consumed during the rental period.

 

For long-term car rentals, we typically enter into individually negotiated contracts with our corporate and institutional clients to address the specific needs and requirements of such clients, and the rental rate is typically negotiated in such contracts. In addition, vehicles deployed for our long-term car rentals are supported by all our service locations across China, thereby ensuring our vehicles are in good condition. We regularly provide repair and maintenance services to long-term car rental clients and provide free substitute vehicles during the repair and maintenance period.

 

In April 2017, we launched car sharing business initiative in Shanghai and Guangzhou. Car sharing business provides time sharing car rentals, with free floating to customers and a fully automated rental and payment process. Car sharing fee is calculated based on both rental time and driving distance by customers. Our car sharing business is currently at a very early and small-scale stage and only complementary to our car rental business.

 

Car services

 

We provide chauffeured car services primarily to corporate and institutional clients. Our car services include routine services such as airport pickup and drop-off, inter-office transfers and other business transportation needs, as well as event-driven activities such as conventions, promotional tours and special events. We generally enter into long-term framework agreements with our corporate and institutional clients pursuant to which our vehicles and chauffeur services are provided by different subsidiaries. In 2017, we derived approximately 19.8% of net revenues from our car services operations.

 

As of December 31, 2017, car services were offered by us and our contracted service providers in 200 cities across China, with a focus on first-tier cities including Beijing, Shanghai, Guangzhou and Shenzhen. To accommodate occasional demands from some corporate and institutional clients, we retain contracted service providers to provide car services to our clients in cities where we currently do not provide such services or the demand for such services exceeds our existing capacity. During the peak time of our car services, we also deploy vehicles from our car rental fleet for cross-usage to meet the needs of our corporate and institutional clients.

 

As of December 31, 2017, our car services fleet consisted of 2,845 vehicles, which included a higher percentage of premium vehicle models compared to our car rental fleet, and we had 3,211well-trained drivers. Our sizable car services fleet and our flexibility to cross-use our car rental fleet for car services enable us to serve the diverse needs of corporate and institutional clients for a large number of chauffeured vehicles. Leveraging our established service network, infrastructure and technology platform, we believe we are well- positioned to capture and address the evolving demands for car services.

 

We systematically screen and assess each driver on a regular basis to ensure they meet our standards of safety, courtesy and experience. We generally require our drivers to have at least five years of driving experience. The compensation of our drivers includes a base salary and a performance based compensation, which incentivizes our drivers to provide quality services. We constantly seek to improve the service quality of our drivers by strengthening our screening procedures, conducting background checks and offering training programs, such as regular safety trainings. Our car services clients can place or modify their orders and locate the vehicles and drivers they book on a real-time basis via our proprietary mobile application and fleet management system.

 

Our sizable fleet, broad geographic coverage and well-trained drivers enable us to provide tailored services to meet our corporate and institutional clients’ needs. As of December 31, 2017, we had over 41,000 corporate and institutional clients that used our car services. Our corporate accounts include many Global Fortune 500 companies in China. No single corporate or institutional client accounted for more than 5% of our net revenues in 2015, 2016 or 2017, respectively.

 

We determine the rates for our car services based on a number of factors, including vehicle model, service type, length of rental period, time and location of pickup and drop-off, and prevailing prices. Our management reviews these rates on a regular basis. Our framework agreements with our corporate and institutional clients provide for predetermined price ranges and, as a result, our rates for car services are generally more stable.

 

In December 2014, we started to expand our car services to business-to-consumer model through Ctrip’s website, mobile applications and offline channels, which is expected to complement our existing business-to-business car services. In July 2015, we began to cooperate with certain mobile car hailing service providers and increased our transaction volume through Ctrip platform to provide car services to individual customers.

 

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Our nationwide service network

 

Customers of our car rental services can pick up cars at any of our service locations in China after they make reservations through our website, mobile application or other channels. As of December 31, 2017, our car rental services were offered in 303 cities, 415 train stations and 119 airports in China through an extensive network of 4,463directly operated service locations, which included 449 stores and 4,014pick-up points. As of December 31, 2017, car services were offered by us and our contracted service providers in 200 cities across China, with a focus on first-tier cities including Beijing, Shanghai, Guangzhou and Shenzhen. Our extensive network enables us to consistently provide quality service nationwide and offer flexibility and convenience to our customers.

 

The following map and table set forth the geographic locations where we operated our car rentals and car services as of December 31, 2017:

 

 

 

 

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    Car rentals     Car services  
Cities or provinces   Cities     Stores     Pick-up points     Cities (1)  
Key cities and provinces                                
Shanghai     1       47       237       1  
Jiangsu     19       43       507       20  
Guangdong (excluding Guangzhou and Shenzhen)     22       43       258       17  
Shenzhen     1       29       85       1  
Guangzhou     1       28       230       1  
Zhejiang     13       28       117       11  
Beijing     1       16       104       1  
Other cities and provinces                                
Sichuan     23       18       489       8  
Shandong     17       17       217       14  
Hunan     16       13       182       14  
Fujian     11       12       41       5  
Hubei     15       12       109       16  
Liaoning     11       11       118       4  
Hebei     9       11       88       7  
Anhui     13       10       39       7  
Henan     14       10       41       13  
Yunnan     14       10       42       3  
Chongqing     1       9       126       1  
Guangxi     12       8       74       6  
Hainan     13       8       108       5  
Tianjin     1       8       62       1  
Jiangxi     12       7       191       9  
Shaanxi     9       7       58       8  
Shanxi     9       7       57       5  
Gansu     6       6       31       2  
Heilongjiang     7       6       101       3  
Inner Mongolia     9       6       24       4  
Guizhou     8       5       25       4  
Jilin     6       5       77       2  
Ningxia     1       3       26       2  
Qinghai     2       3       135       2  
Xinjiang     4       2       14       2  
Xizang     2       1       1       1  
              47                  
Total     303       449       4,014       200  

 

(1) Include cities where car services are provided by our contracted service providers.

 

Marketing and promotion

 

We believe that our leading position is in large part due to our strong brand recognition. We position our brand to be associated with convenience, reliability, innovation and satisfaction. We promote our business primarily through our principal website, www.1hai.cn. Furthermore, we believe we were the first car services provider in China to introduce mobile applications to make reservations in 2011. In addition to our website and mobile applications, our sales and marketing strategies utilize many other channels, such as third party websites and mobile applications, word-of-mouth referrals, keyword search, outdoor advertising, local sponsorships, public relations and digital and social media. As of December 31, 2017, our marketing staff consisted of 35 employees, primarily based in our Shanghai headquarters.

 

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Car rentals

 

As of December 31, 2017, we had over 2.2 million registered members that used our car rental services. As mobile social media applications gain popularity, we shifted the focus of our marketing activities from traditional ways to social networking platforms such as Tencent WeChat, a popular mobile instant messaging application, and Weibo, a popular microblog platform website similar to Twitter. Our employees regularly follow the messages on these social media platforms to gain customer insights to improve the quality of our services. Our website also offers a customer sharing and discussion platform. “eHi Club”, our online club where our registered customers, mostly driving and travel enthusiasts, can organize group excursions, has been very helpful in increasing the stickiness of our existing customers.

 

In 2017, approximately 13% and 81% of our car rentals were derived from reservations made through website and mobile applications, respectively. In particular, the total number of our mobile application downloads increased from over 3.2 million in 2015 to over 18.4 million in 2016 and further to over 31.7 million in 2017. Aside from the social networking platforms and mobile applications, our quality of service also played an important role in our brand promotion. Based on our internal survey and feedbacks from our car rental service customers, word-of-mouth referrals have become important channels for attracting new customers. In addition, to fully utilize our cross-selling opportunities, we have entered into promotion contracts with some of our corporate and institutional clients, pursuant to which we provide discounts on car rentals, test drive of specified car models or other add-on services and benefits to their employees or designated participants, which incentivizes them to use our services and further expands our customer base.

 

We established our eHi loyalty program in 2008 which allows our customers to earn loyalty membership points by using our services or through promotional activities we offer from time to time. The loyalty membership points can be redeemed for numerous types of rewards, such as free GPS-based navigation device rental, waiver of additional mileage charges or free car rentals. We believe that our eHi loyalty program enhances customer loyalty, expands our brand recognition through member referrals, promotes our various reservation channels and improves the overall quality of our services. In addition, we employ a customer creditability system for each customer, which tracks credit history, driving record and other factors, and provides a quantitative rating for each customer based on this information. A customer with a high credibility rating can, among other benefits, have more choices of vehicle models, and more favorable discounts on rental and insurance fees.

 

We also have an outdoor advertising program promoting the benefits of car rental. We place many of these advertisements in busy areas such as high speed railway stations, subways, elevators of office and residential buildings and bus stops. These advertisements are designed both to educate and entertain our potential customers. In addition, we cooperate with leading global travel service providers and e-commerce platforms to promote our services.

 

In December 2016, we entered into a multiyear marketing partnership with the NBA China and an endorsement agreement with NBA star Stephen Curry, which made the NBA China our official marketing partner and Stephen Curry our brand ambassador. We expect to promote our car rental services featuring our NBA China and Stephen Curry connections through various channels, such as placing virtual logo and advertisements during NBA games when they are broadcasted on China Central Television and Tencent Video.

 

Car services

 

We provide car services mainly to corporate and institutional clients that entered into long-term framework agreements with us. As such, we have a dedicated corporate sales team targeting corporate and institutional clients across various industries. As of December 31, 2017, our corporate sales team included 152 sales persons across China.

 

For our car services, we have focused on creating a unique brand positioning and conveying our core values to our corporate and institutional clients through advertising and sponsorship activities, such as commercial fairs, business magazines and newspapers, as well as sales force coverage. In addition, we further strengthen our service quality and enhance brand recognition by providing tailored services according to specific corporate and institutional client’s needs, such as safety, equipment or procedural requirements. As of December 31, 2017, we had over 41,000 corporate and institutional clients that used our car services. We analyze our current and potential clients’ available data in our centralized database and design a unique, integrated corporate vehicle services plan for each client, which helps differentiate us from our competitors.

 

Customer service

 

The success of our business hinges on our customer satisfaction level, which in turn depends on a variety of factors. These factors include, among others, our ability to (i) consistently provide high-quality customer experience, (ii) continue to offer comprehensive and complementary services tailored to our customers’ needs, (iii) maintain good vehicle condition, and (iv) provide timely and satisfactory after-sales services.

 

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We have a dedicated service quality management team which constantly monitors our services and proactively seeks feedback from our customers. We encourage our customers to share their experience with us and provide feedbacks through our website, hotline or forums on major social media or messaging applications. We follow up on specific suggestions or complaints with both the customers and the relevant in-house teams. In certain cases, we offer loyalty membership points, refunds, coupons or other complimentary services to customers depending on the nature of their complaints and the extent of the loss or inconvenience suffered. We also incorporate frequently received complaints as case studies in our internal training programs to prevent repeat occurrences of the same complaint. We are dedicated to providing prompt solutions to customers’ complaints and actively learning from the experience of Enterprise in car rental services to further enhance the quality of our services.

 

Strategic cooperation

 

Enterprise

 

We entered into a global affiliation agreement with Enterprise China in March 2012, pursuant to which we are the exclusive partner of Enterprise in China (including Hong Kong and Macau) for a term of ten years. Enterprise China is an affiliate of Enterprise Holdings, and through its operating subsidiaries owns and operates the “National Car Rental” and “Alamo Rent A Car” brands, as well as its flagship “Enterprise Rent-A-Car” brand in North America. This agreement aims to develop an effective global affiliation, enabling customers of Enterprise China, Enterprise and their affiliates to access certain of our services in China, and enabling our customers to access certain of Enterprise’s car rental services outside of China.

 

Pursuant to this agreement, we and Enterprise agree to direct rental referrals to each other in different countries and jointly pursue sales and marketing and other collaborative opportunities to enhance our respective service offerings for the benefit of each other’s customers. Pursuant to this agreement, we have granted Enterprise in certain designated territories a royalty-free license with the right to sublicense certain of our trademarks, service marks, trade names, signages, logos, symbols and designs associated with the name “eHi”, and Enterprise has granted us in certain designated territories a royalty-free license with the right to sublicense certain of its trademarks, service marks, trade names, signages, logos, symbols and designs associated with the names “Enterprise,” “Enterprise Rent-A-Car,” “Alamo,” “Alamo Rent A Car,” “National” and “National Rent A Car”.

 

Furthermore, we and Enterprise established a steering committee and three subcommittees, namely, a finance subcommittee, an IT subcommittee and a sales and marketing subcommittee, which consist of senior officers assigned by both companies, to guide our future cooperation. In particular, both of us are required to use reasonable efforts to facilitate and support each other’s marketing activities in the relevant territories in the manner determined by the sales and marketing subcommittee. In addition, we regularly send our mid-level management to Enterprise for various training programs, through which Enterprise shares their in-depth knowledge and know-how to the car rental industry with our management. Enterprise has also appointed one of its senior management on our board to facilitate better coordination between the two companies.

 

Ctrip

 

Ctrip is a dominant player in the online travel agency business and a well-known travel brand in China. We believe that there are significant synergies for Ctrip and us to cooperate and offer more competitive travel products to individual customers as well as corporate and institutional clients in China. We are the designated and preferred business partner of Ctrip in providing car rental services. Ctrip has integrated access to our car rental reservation system on its website and mobile applications since May 2012 and June 2014 respectively. In addition, in December 2014, we started to expand and promote our chauffeured car services to business-to-consumer model through Ctrip’s website, mobile applications and offline channels. While we maintain cooperation with Ctrip in various aspects, we have not entered into any written partnership agreement with Ctrip.

 

Others

 

In April 2016 and February 2017, we entered into memorandums of understanding to establish a strategic cooperation with SAIC Motor Corporation Limited, or SAIC, a leading automobile manufacturer listed on China’s A-share market, and China Yongda Automobiles Services Holdings Limited, or Yongda Auto, a leading passenger vehicle retailer and comprehensive services provider listed on the Hong Kong Stock Exchange, respectively. We expect that these memorandums of understanding will enable us to cooperate closely with automobile manufacturers and retailers in various areas such as vehicle procurement and used car sales.

 

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We currently cooperate with other leading e-commerce platforms and online travel agencies in China, as well as offline travel service providers and professional association, to promote our services. Our strategic partners include, among others, Alipay, Tuniu Corporation, Ctrip and Tongcheng.

 

In addition, we maintain a network of online advertising partners under “eHi Alliance”, pursuant to which our advertising partners display our ads on blogs, forums, emails and chat windows maintained or operated by them, in return for commissions based on the revenues generated from these properties. We believe such cooperation will further expand our service coverage and enhance our brand name. We are selectively pursuing these opportunities to capitalize on this broader distribution network, thereby further enhancing our strong brand recognition and increasing our revenue and market share.

 

In January 2016, we entered into agreements with Shanghai Chenghuan Car Rental Company Limited, or Shanghai Chenghuan, pursuant to which we agreed to extend, through entrusted bank loans, an aggregate amount of RMB50 million to Shanghai Chenghuan. Shanghai Chenghuan is a middle-to-high-end car rentals and car services provider in the local market, and is an independent third party. Shanghai Chenghuan’s shareholders and affiliated companies provided certain security interests. The entrusted bank loans shall have a term of one year and bear an interest rate of 7.75% per annum. Pursuant to these agreements, in January 2016, through entrusted bank loan arrangements we facilitated RMB50 million in credit to Shanghaia Chenghuan with an initial one-year term, which was extended to a two-year term. As of the date of this annual report, the entire principal amount of the loan has been repaid by the borrower in full.

 

In September 2017, we signed a Memorandum of Understanding with Volkswagen Group China (“Volkswagen”) to jointly explore luxury mobility-on-demand services in China. We believe such cooperation will leverage innovative technologies, rapidly developing mobile Internet and car connectivity to provide luxury mobile services to Chinese consumers. Entirely new on-demand services will satisfy diverse needs, and make luxury mobility more convenient and accessible.

 

Our technology platform

 

Our proprietary technology platform incorporates various features specifically designed to improve customer experience and streamline our operations. These include the integration of our various reservation channels, automatic rental price adjustments, automatic vehicle recommendations, GPS vehicle location system, vehicle management system and online discussion and display forums. Our website and mobile applications feature user-friendly interfaces designed to allow our customers to easily browse and access our services, register as members, search for specific vehicle models or services and complete reservations. This centralized e- commerce platform, supported by our integrated systems, allows us to easily process our membership applications, manage reservations, manage and monitor customers’ vehicle use and other credit data, manage billing and payment, remotely manage our fleet, and monitor and analyze key metrics of each vehicle such as utilization rate, mileage and maintenance requirements.

 

The primary components of our technology platform include the following:

 

  · Online and mobile reservation system. Our online and mobile reservation system allows our customers to reserve vehicles through our website, mobile applications and various other reservation channels such as our call center or local stores, by email, text message and instant messengers, or through our sales channel partners. We have designed our website as a reliable, secure, user-friendly and convenient online reservation platform for our customers. We introduced mobile applications to make reservations in 2011 and believe we were the first car rental service provider in China to do so. The total number of our mobile application downloads increased from over 3.2 million in 2015 to over 18.4 million in 2016 and further to over 31.7 million in 2017. In 2017, approximately 13% and 81% of our car rental services were derived from reservations made through website and mobile applications, respectively. Once our customers book our services online, they have around-the-clock access to the complete, real-time inventory of our fleet through our nationwide service network. Because all of our reservation and customer service data is fed back into our centralized databases on a real-time basis, we are able to track and analyze aggregated customer usage data to better allocate vehicles among different locations for the convenience of our customers.

 

  · Fleet management system. Our fleet management system manages and monitors our widely dispersed fleet, which comprised 64,946 vehicles as of December 31, 2017, with a comprehensive suite of tools focused on real time vehicle tracking, vehicle repair and maintenance, mileage and fuel consumption, insurance and dispatch. Each of our vehicles is equipped with a control unit, including a mobile data device, geographic positioning information system, wireless antennae and vehicle interface modules. This hardware system allows us to monitor our vehicles from our data centers on a real-time basis, provides us with a comprehensive set of fleet management data that is stored in our centralized databases, and improves fleet management efficiency and customer service quality.

 

  · Dynamic pricing mechanism. We have adopted a dynamic pricing mechanism to determine our rental rates. Our rental rates are automatically adjusted by our proprietary technology platform, which determines a specific vehicle model’s rental rate based on its purchase price, taking into consideration other variables, such as pickup/drop-off time and location, the availability of our vehicles during such period at such location, prevailing prices, demand of that specific vehicle model, and the length of rental period. Our management reviews our rental rates on a regular basis.

 

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  · Service location management system. Our service location management system manages our reservations, inventory level and accounting functions at each of our stores. This system also monitors the key operating metrics and other operating data of each service location on a real-time basis.

 

  · Data analysis and operational metrics system. Our data analysis and operational metrics system enables us to conduct a thorough analysis of the vast amount of data received from our daily operations, including utilization rate, mileage, length of rental period, time interval from reservation to pick-up, and maintenance requirements of each of our vehicles. Through this system, we are able to efficiently adjust our operational strategies and policies to be in line with the availability of our vehicles and market demand as the quantitative analysis serve as key assessment instrument for management’s strategic decisions.

 

  · Payment and financial system. Our integrated payment and financial system enables our customers to recharge their accounts online and to make payments from their accounts. This system gives us real-time access to customer payment information, thereby improving the accuracy and efficiency of our financial reporting and allowing greater flexibility to scale our operations efficiently. Our financial system software also allows us to provide detailed and itemized bills for our corporate and institutional clients to accommodate their various internal financial reporting requirements.

 

  · Customer relationship management system. Our customer relationship management system improves our overall customer experience and manages our interactions with customers. This system enables us to track our customers’ rental history and preferences and conduct big data analysis, thereby allowing us to selectively offer tailored rental packages and other targeted marketing efforts.

 

Our data centers store the information contained in our centralized databases and host our website, web-based applications and mobile applications that we have developed to manage our integrated technology platform. Our data centers and reservation system software maintain real-time communication with encrypted message protocols and credit card data. We use industry-standard commercial antivirus, firewall and patch-management technology to protect and maintain the systems and data located at our data centers. Our website is designed to be fault-tolerant, with a collection of identical web servers, providing us with the flexibility to scale up our operations without compromising customer experience.

 

We continue to invest in improving our technology platform to better secure the information of our customers and optimize our systems to meet the needs of our growing business. We also continue to maintain reliable information, management and operational systems, and we have implemented performance monitoring for all key systems to enable us to respond quickly to potential problems. For example, at our headquarters in Shanghai, we provide redundant utility systems, a backup electric generator and 24-hour server support. All servers have multiple, uninterrupted power supplies and redundant file systems to maximize system and data availability. Furthermore, we regularly back up our data to minimize the impact of data loss due to system failure.

 

Our fleet management

 

Leveraging on our integrated technology platform, we believe we are able to maximize our fleet utilization and control costs via “better acquisition”, “better deployment” and “better disposition”.

 

Vehicle acquisition

 

As of December 31, 2017, our total period-end fleet size was 64,946 vehicles. We have a wide variety of vehicles, which include over 300 models primarily from major automobile manufacturers such as Volkswagen, SAIC Motor, Peugeot, Hyundai and General Motors. As of December 31, 2017, approximately 30%, 15%, 13%, 13% and 7% of our vehicles were acquired from these major brands, respectively. We take into account customer preferences in fleet acquisition as we observed that customers in China are generally more sensitive to vehicle models compared to western customers. We also select vehicle models that have a liquid secondary market and seek to control fleet size of each vehicle model, thereby mitigating the pricing impact when we retire such vehicle model. In addition, in anticipation of the growing environmental awareness in Chinese market, we were the first car service provider in China to add alternative energy vehicles to our fleet to capitalize on a growing demand for such vehicles. The acquisition decision is made based on disciplined and systematic analysis, assisted by our proprietary demand forecast model and database. In addition, leveraging our large fleet size and procurement needs, we are able to directly negotiate with vehicle manufacturers and benefit from economies of scale through our centralized vehicle procurement. We also maintain good relationships with car dealers as an alternative channel for our vehicle procurement. As China’s car dealers tapped into used car sales market, in late 2014, we started to have some program car arrangements with car dealers, and in some cases with used car sales brokers and online platforms. Program cars refer to vehicles of which disposal price and holding period have been predetermined and fixed by agreements. Pursuant to program car agreements, we have the option to sell, and car dealers have the obligation to repurchase, or in some cases, used car sales brokers/online platforms have the obligation to purchase, our vehicles at a specified repurchase price and after a specified holding period (typically 12 to 24 months), subject to certain vehicle condition, mileage and holding period requirements. In 2015, 2016 and 2017, approximately 29%, 49% and 60% of the respective period-end fleet size were subject to such program car arrangements. The percentage of our newly purchased vehicles subject to such program car arrangements in future periods depends on a number of factors, including our expectations for future used car prices, our seasonal needs and the availability and attractiveness of car dealers’ program car arrangements.

 

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We have financed our vehicle purchases through a variety of sources including our share issuances, note offering, sales of our strategic investments, bank borrowings and loans from third-party financing companies.

 

After purchasing a vehicle, we apply to the relevant government authority to obtain a license plate, purchase insurance for the vehicle and install a GPS-based tracking device to enable our proprietary fleet management system to monitor the vehicle before deploying the vehicle to our car rentals or car services fleet. Upon completion of these steps, we consider the vehicle fully operational and available for service. The price of a license plate, if any, varies greatly depending on the city in which we intend to obtain a license for the vehicle, as well as by local market conditions.

 

Vehicle deployment

 

Based on our operating experience, the peak time of our car rentals typically falls on weekends and public holidays, while peak time of our car services typically falls on weekdays. We are able to optimize fleet utilization by efficiently allocating our fleet resource to capture the complementing demand cycles of different services we offer. Our dynamic pricing system allows us to better leverage supply-demand trends in local markets.

 

In addition, GPS tracking devices and our proprietary fleet management system enable us to monitor our fleet on a real-time basis to optimize the geographic allocation of our fleet. We also conduct personal identity verification and credit check procedures on each of our customers before the vehicles are handed over to them. These measures help minimize our risk of car-theft.

 

Repair and maintenance

 

As of December 31, 2017, we maintained 29 in-house vehicle repair and maintenance centers in 19 major cities in China, such as Shanghai and Beijing, which provide basic routine repair and maintenance functions for our local fleet. As of December 31, 2017, our repair and maintenance team consisted of 552 employees. We also engage qualified third-party contractors to perform major repair functions in other cities where we do not have such in-house centers. We expect to open additional in-house vehicle repair and maintenance centers in cities where our management determines that the size of our local fleet has justified the costs of such an in- house center. We expect such additional centers to bring benefits of economies of scale as we continue to expand our fleet size and geographical footprint.

 

Vehicle dispositions

 

We generally hold vehicles in our fleet for a term of three to four years, except for program cars which typically have a holding period of 12 to 24 months. We have developed an internal rating system to assess the general conditions of our vehicles, and dispose of our used vehicles through a variety of disposition channels, including auctions, brokered sales, dealers and online used car marketplaces, according to the rating results. We also maintain a well-managed vehicle disposition system with a deliberated decision making process taking into consideration market timing, disposal price and seasonality, pursuant to which we would adjust the holding period of our vehicles. For vehicles subject to program car arrangements, we have the option to sell, and car dealers have the obligation to repurchase, or in some cases, used car sales brokers/online platforms have the obligation to purchase, our vehicles at a specified repurchase price and after a specified holding period (typically 12 to 24 months), subject to certain vehicle condition, mileage and holding period requirements. Repurchase prices of program cars are generally based on a predetermined percentage of original vehicle cost and the month in which the vehicle is repurchased. We calculate the depreciation costs of such vehicles separately, based on their respective contractual repurchase prices and holding periods, and adjust the depreciation costs if the repurchase conditions of such vehicles are not met or we elect not to sell such vehicles as program cars. We believe program car arrangements could hedge certain risk from fluctuations in used car prices in the secondary market and offer additional alternatives of our vehicle acquisition and disposal channels.

 

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Competition

 

The car rental and car service industry in China is competitive and fragmented. For car rentals, we compete primarily on the basis of rental price, user experience, brand recognition, convenience of service locations, geographic coverage and service quality. For car services, we compete primarily on the basis of service quality, ability to provide tailored services, and, to a lesser extent, service charge. We believe that the prominence and reputation of our brand, the quality of our services, our nationwide service network and our advanced, proprietary technology platform differentiate us from our competitors.

 

As we provide comprehensive service offerings, we compete with different market participants in different market sectors at different levels. For car rentals, we compete with both national and regional players, such as Shenzhou, Didi and Shouqi. For business-to-business car services, we primarily compete with Avis China and Yongda. In late 2014, we started to expand our car services to a business-to-consumer model, primarily through Ctrip’s website, mobile applications and offline channels. 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), Yidao 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. However, our car sharing business may compete with other national and regional car sharing players, such as EVCARD (operated by Shanghai International Automobile City EV Operation and Service Co., Ltd.), Car2Go (operated by Daimler Mobility Services), GoFun (operated by Shouqi) and ToGo (operated by Beijing Tuge Technology Co., Ltd.).

 

Insurance

 

For car rentals, we charge customers for basic insurance coverage on an hourly or daily basis, and we encourage our customers to purchase through us supplementary coverage in addition to the basic insurance. If the damages caused by our customers exceed the insurance coverage, our customers bear the exceeding liability.

 

For car services, we bear higher risks and liabilities and typically purchase insurance coverage with higher limits. We are exposed to claims for personal injury or death and property damage as a result of automobile accidents involving vehicles operated by our drivers or our contracted service providers. We purchase motor vehicle damage insurance, third-party liability insurance, compulsory traffic accident insurance, passenger injury insurance, and other insurance coverage that our management considers adequate to protect our assets and operations under different situations. If we have a low accident rate of our fleet, we may benefit from the “no-claim discount” and enjoy lower insurance premium when purchasing relevant insurance for our fleet. We believe that the amount and nature of our insurance coverage are adequate and in line with the market practice in China.

 

Any successful claim against us beyond the scope or limits of the insurance coverage of us or our contracted service providers may have a material adverse effect on our business, financial condition and results of operations.

 

Intellectual Property and Trademark

 

We believe our proprietary technology platform is critical to our business in China. As of December 31, 2017, we registered 30 software copyright in China.

 

We believe brand recognition is key to our success. As of December 31, 2017, we registered 321 trademarks, of which 302 trademarks were registered in the PRC and 19 trademarks were registered in other countries. Our registered trademarks include “eHi Car Rental” and , , and other trademarks in connection with our brand name “eHi” and associated logos that we use or plan to use to market our services or to prevent others from competing with us by using similar logos. In addition, as of December 31, 2017, we registered 219 domain names in connection with our brand name to prevent any dilution of our brand name.

 

Pursuant to the global affiliation agreement with Enterprise, we have granted Enterprise, in certain designated territories, a royalty free license with the right to grant sublicenses to use certain of our trademarks, service marks, trade names, signages, logos, symbols and designs associated with the name “eHi” for the purpose of pursuing referral business to us, processing such referrals and servicing business referred to Enterprise by us, and Enterprise has granted us, in certain designated territories, a reciprocal royalty free license with the right to grant sublicenses to use certain of its trademarks, service marks, trade names, signages, logos, symbols and designs associated with the names “Enterprise,” “Enterprise Rent-A-Car,” “Alamo,” “Alamo Rent A Car,” “National” and “National Rent A Car” for similar purposes.

 

Chinese Government Regulations

 

This section sets forth a summary of the significant regulations or requirements that affect our business activities in China or our shareholders’ rights to receive dividends and other distributions from us.

 

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Regulations on foreign investment in rental industry

 

According to the Category of Industry Guideline for Foreign Investment promulgated by MOFCOM and the NDRC, which was revised in 2007, 2011, 2015 and 2017, respectively, foreign investment in general rental business is permitted. The Administration Measures on Foreign Investment in Rental Industry that was promulgated by MOFCOM on February 3, 2005 and subsequently amended on October 28, 2015 by MOFCOM applies to foreign-invested enterprises that operate general rental or leasing businesses in China, including car rental businesses. Under this regulation, foreign investors of a foreign-invested enterprise operating car rental or financial leasing business shall have total assets of not less than US$5 million and the foreign invested rental company shall follow the general requirements of PRC Company Law and obtain approval from MOFCOM or its relevant local counterparts for its incorporation. According to this regulation, a foreign-invested rental company are subject to the following requirements: (i) its registered capital shall comply with the relevant provisions of the PRC Company Law; (ii) it shall comply with the relevant provisions concerning the registered capital and the total amount of investment of a foreign-invested enterprise; and (iii) the duration of operation of a foreign-invested rental company in the form of limited liability company shall generally not exceed 30 years. A foreign-invested financing leasing company shall meet the following requirements: (i) its registered capital shall be no less than US$10 million; (ii) the duration of operation of a foreign-invested financing leasing company in the form of limited liability company shall generally not exceed 30 years; and (iii) it shall have appropriate professionals and its senior management personnel shall have appropriate professional qualification with at least three years of experience in the sector.

 

Our primary PRC subsidiaries, eHi Rental and eHi Jiangsu, as foreign-invested enterprises that operate car rentals business, and our PRC subsidiaries, Shanghai Taihao and Shanghai Taide, as foreign-invested enterprises that operate financial leasing business, have obtained the approvals from the relevant local branches of MOFCOM pursuant to the above-mentioned regulations.

 

Regulations on car rental and car service industry

 

General requirement on vehicles

 

Regulations applicable to all automotive vehicles generally apply to rental vehicles. According to the Road Traffic Safety Law promulgated by the NPC Standing Committee in October 2003, which was amended in December 2007 and April 2011, respectively, all automotive vehicles are required to be registered with relevant local administration authorities. Vehicle registration certificates, vehicle plates and vehicle licenses shall be obtained from the same authorities, and the compulsory traffic accident insurance shall be purchased for each vehicle. We obtain vehicle registration certificate, vehicle plate and vehicle license and purchase compulsory traffic accident insurance for each vehicle before its operation.

 

There are additional requirements for rental vehicles. In most cities, the usage stated in the vehicle licenses of such vehicles shall be registered as rental or operational. Some cities require additional licenses or vehicle plates for such vehicles. For instance, in Shanghai, Nanchang, Suzhou, Wuxi, Shenyang, Dalian, Wuhan and Kunming, a special transport license or passenger rental vehicle license is required for each rental vehicle. In Shanghai, special vehicle plates shall be obtained for rental vehicles. In Beijing, Guangzhou, Hangzhou and Chongqing, filing with relevant local authority is required for rental vehicles. However, local practices differ and some of these requirements are not strictly implemented or may be modified or suspended by the local administration authorities in practice. Due to various reasons, we have not met all these requirements, which may subject us to penalties and other administrative actions. See “Risk Factors—Risks related to doing business in China—Failure in obtaining all of the requisite permits, licenses or making all of the requisite filings or registrations or meeting other regulatory requirements for operating car rentals and car services business in China by us or any third-party service provider who cooperates with us may subject us to fines or other administrative actions” for more details.

 

Car rental related services

 

As the car rental industry is at an early stage of development in China, the legislation of the car rental industry continues to evolve. The MOT and the NPC, the predecessor of NDRC, promulgated the Interim Rules on Administration of Car Rental Industry in 1998, which was abolished in 2007. Since then, there have been no national laws and regulations in place to specifically regulate the car rental industry in China except the Notice on Promoting the Healthy Development of Car Rental Industry, or the 2011 MOT Notice, promulgated in April 2011 by MOT. The 2011 MOT Notice sets forth general guidelines for the car rental industry in China and requires local government authorities to (i) establish and improve local rules and regulations on car rental business, (ii) promptly formulate local development plans for the car rental industry, (iii) encourage large and well-managed car rental companies of good reputation to set up branches and establish national or regional networks without any restrictions due to local protectionism, (iv) enhance the administration of the car rental business, including requirements to obtain and carry a valid permit or license for each rental car, and prohibitions of car rental companies from engaging in road transportation businesses without appropriate approval, (v) encourage car rental companies to innovate and develop new types of car rental services, (vi) create a favorable environment for the development of the car rental industry, and (vii) enhance the administration and supervision of the car rental industry.

 

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The Road Transportation Regulation promulgated by the State Council in 2004, amended in 2012 and 2016, regulates road transportation businesses (including road passenger transportation business and road freight transportation business) and other business operations related to road transportation (including operations of transportation terminals (sites), vehicle maintenance and repair businesses and training of drivers). According to the Administrative Provisions for Foreign Investment in the Road Transport Industry promulgated by MOFCOM and MOT in 2001 and amended in 2014, foreign investors are generally prohibited from holding more than 49% of the equity interest in PRC entities engaged in road passenger transportation business. Neither the Road Transport Regulation nor the Administrative Provisions for Foreign Investment in the Road Transportation Industry, however, include any provisions relating to car rental businesses.

 

The Administrative Rules on Urban Taxis promulgated by the Ministry of Construction and the MPS, which became effective in 1998, regulates the planning, operations, administration and services related to urban taxis, which was abolished in March 2016. MOT promulgated the Administrative Regulations on Operation and Services of Cruise Taxis in September 2014, which became effective on January 1, 2015 and amended in August, 2016. According to such regulations, the term “cruise taxis operating service” refers to operating activities that provide passenger transport services at the direction of the passengers and charge fees according to travel mileage and travel time by means of seven-under seats car with identifications sprayed and installed as a taxi and driving services, which tour and pick up customers on the roads.

 

The regulatory distinctions between car rental businesses and road transportation businesses or taxi businesses are not clear. As a result, local government authorities in China have imposed different requirements on the operating entities and/or vehicles that are involved in car rental businesses in the respective province or city.

 

Car rental services not accompanied by driving services

 

Set forth below is a summary of local rules and regulatory requirements in China regarding the provision of car rental services, which generally do not contemplate the provision of car rental services concurrently with the provision of driving services.

 

  · Some provinces and cities do not have any specific local rules regulating car rental services.

 

  · Some local authorities promulgated local rules specifically regulating the car rental businesses. For example, the relevant local authority of Beijing promulgated specific local rules for car rental operations in Beijing including a notice issued on August 12, 2014. Car rental service providers in Beijing are required to make filings with the local transportation authority before they may commence their car rental businesses and make subsequent filings with the authority for any changes in the number of vehicles for rental and other relevant operational conditions and car rental service providers are strictly prohibited from facilitating to illegal operators. Beijing eHi Car Rental Co., Ltd. and the Beijing branch of eHi Rental duly completed their filings with the local authority in Beijing on December 15, 2010 and renewed their filing certificate on June 19, 2014 and July 25, 2017 respectively. The filing certificate is valid until July 24, 2020.

 

  · Although the Road Transportation Regulation does not include any provisions relating to car rental businesses, the local road transportation rules of certain provinces and cities, such as Shandong, Sichuan and Hubei and Suzhou require car rental service providers to obtain road transportation licenses from local authorities or make filing with local authorities covering their car rental businesses.

 

  · In some provinces and cities, local rules regulating taxi businesses also partially cover car rental operations, which may impose different requirements on car rental service providers from taxi service providers. For example, according to Shanghai Municipal Administrative Rules on Taxis, car rental service providers in Shanghai are required to obtain car rental licenses, which are different from taxi operation licenses, from the local transportation authority before commencing car rental businesses. eHi Rental obtained such a license on April 15, 2009 and renewed such license on December 15, 2014 and December 22, 2017 respectively. The license is valid until December 31, 2020. Under the local rule in Shanghai, the total number of vehicles for rental, parking space, service locations and networks of car rental service providers are subject to the overall planning of the municipal government.

 

  · Some local authorities promulgated local rules, such as those in Beijing, Guangdong Province, Hubei Province, Chongqing, Xi’an and Kunming to require that the owner of a rental vehicle must be the same person operating the rental services.

 

In addition, among those provinces and cities that have promulgated local rules to regulate car rental business, the actual practice of the local authorities may differ from their local rules.

 

Primarily as a result of the inconsistency in local rules and practices as described above, we have not met all of the qualifications and regulatory requirements in all of the provinces and cities where we currently operate our car rental businesses.

 

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Car rental services accompanied by driving services

 

In addition to the regulatory requirements mentioned above, under the current PRC regulatory environment, our car rental services accompanied by driving services may subject us to additional approvals, licenses, permits or other regulatory requirements.

 

The Road Transportation Regulation requires an operator of road passenger transportation businesses to have appropriate vehicles, qualified drivers, sound safety systems and obtain a road transportation operation license covering passenger transportation. The 2011 MOT Notice provides that a car rental enterprise must obtain appropriate approval before it may conduct road passenger transportation business. However, neither the Road Transportation Regulation nor the 2011 MOT Notice defines the term “road passenger transportation business.” According to the Administrative Rules on Road Passenger Transportation and Passenger Transportation Terminals promulgated by MOT in 2005 and last amended in 2016, the term “road passenger transportation services” refers to public bus services, chartered bus services and travel bus services, which means transportation services provided to unspecified passengers on fixed routes at fixed rate and stops or to chartered groups of passengers or to tourists from or to a tourist attraction. We do not provide public bus services, chartered bus services or travel bus services. In particular, our car rental services are not provided to any unspecified passengers. Therefore, we do not deem any of our operating subsidiaries as a “road passenger transportation service” provider. According to the Administrative Regulations on Operation and Services of Taxis, “taxis operating service” refers to operating activities that provide passenger transport services at the direction of the passengers and charge fees according to travel mileage and travel time by means of seven-under seats car with identifications sprayed and installed as a taxi and driving services, which tour and pick up customers on the roads. According to such regulations, an enterprise engaged in taxi services is required to obtain a taxi operation license and meet other relevant requirements. Our chauffeured car services, which may include driving services under certain circumstances, charge clients based on a number of factors, such as vehicle model, the type of services, the length of rental period, the specific time and location of pick-up and drop-off and price competition. Therefore, we do not believe any of our operating subsidiaries is a taxi service provider.

 

At local levels, some provinces and cities, such as Zhejiang, Shanxi, Jilin, Chongqing, Hubei, Sichuan, Guizhou, Shandong, Jiangxi, Hunan and Shaanxi, have promulgated local road transportation regulations, which generally restrict an entity engaged in car rental businesses from concurrently providing driving services. In August 2011, Shanghai Municipal Transport and Port Authority issued Certain Opinions on Standardizing the Regulation of Car Rental Industry, which provides that car rental companies may not provide drivers for the vehicles they rent but may at the requests of their customers sign service agent contracts on behalf of their customers with third-party labor service companies, under which the labor service companies may provide drivers to car rental customers, and the car rental companies are obligated to provide training to drivers provided by the labor service companies. A few local authorities have also imposed qualification requirements on drivers engaged by a car rental service provider.

 

In order to minimize the uncertainties and potential legal risks caused by the ambiguities of the laws, regulations and rules promulgated by various levels of legislative bodies and authorities in China and their enforcement in practice, we established Shanghai Smart Brand to primarily engage in the provision of driving services in April 2011. We have transferred substantially all of our drivers to Shanghai Smart Brand, its subsidiaries or branches. Our driving services are currently provided solely by Shanghai Smart Brand, its subsidiaries or branches, or at the requests of our customers through third-party driving service providers that cooperate with us, and our car rental services are provided by our other subsidiaries that do not provide driving services. See “Risk Factors—Risks related to doing business in China—Failure in obtaining all of the requisite permits, licenses or making all of the requisite filings or registrations or meeting other regulatory requirements for operating car rentals and car services business in China by us or any third-party service provider who cooperates with us may subject us to fines or other administrative actions” for more details.

 

Regulations on penalties for violation of traffic laws and regulations

 

According to Road Traffic Safety Law, penalties for violations of the law on road traffic safety include: disciplinary warning, fine, temporary suspension or revocation of motor vehicle driver’s license and detention. The traffic administration department of the public security authority may, on the basis of the technical traffic monitoring records, impose a penalty on the owner or manager of the motor vehicle involved in violation of law. If the driver can be identified, it may impose a penalty on the driver.

 

Motor vehicles are subject to periodic inspection. According to Rules on Motor Vehicle Registration promulgated on May 27, 2008 and amended on September 12, 2012 by the MPS, before owners of motor vehicles apply for inspection on their motor vehicles, all the traffic violations related to their motor vehicles shall be settled.

 

Regulations on vehicle insurance

 

Pursuant to Road Traffic Safety Law, compulsory third party liability insurance must be purchased for each vehicle. Pursuant to Regulations on Compulsory Traffic Accident Liability Insurance for Motor Vehicles promulgated on March 21, 2006, amended on December 17, 2012 and February 6, 2016 by the State Council, owners or managers of motor vehicles driving on roads within China shall apply for the compulsory traffic accident liability insurance for their motor vehicles.

 

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Regulations on motor vehicle repair services

 

The Road Transportation Regulation requires that motor vehicle repair services shall obtain approval from competent road transport administration authority before they start their business.

 

According to Administrative Rules on Motor Vehicle Repair promulgated on June 24, 2005, amended on August 8, 2015 and April 19, 2016 by the MOT, anyone that applies to engage in operation of motor vehicle repair services shall have (i) an appropriate site for motor vehicle repair; (ii) necessary equipment and facilities; (iii) necessary technical personnel; (iv) a sound system for management of motor vehicle repair; and (v) necessary environmental protection measures.

 

In addition, motor vehicle repair business shall comply with regulations and rules promulgated by local government authorities of the provinces and cities where such business is operated. Such local regulations and rules may provide additional qualifications and detailed requirements for motor vehicle repair operators.

 

Regulations on limitation of use and purchase of motor vehicles

 

Certain cities in China have issued local regulations or rules to control the number of motor vehicles. For example, Beijing imposes an annual quota on the issuance of new vehicle license plates. Potential motor vehicle purchasers need to meet specific criteria and enter into a monthly draw. Only candidates who have been allocated a plate in the draw can apply to have their motor vehicles registered with the local vehicle administration. Shanghai is implemented an auction system for the issuance of new vehicle license plates. Under this system, each applicant is required to submit a “blind” bid for a vehicle license plate. Only successful bidders can apply to have their motor vehicles registered with the local vehicle administration. There are similar policies that restrict the issuance of new vehicle license plates in Guangzhou, Tianjin, Hangzhou and Guiyang.

 

In addition, some cities in China such as Beijing, Shanghai, Shijiazhuang, Nanjing, Wuhan, Harbin, Nanchang, Chengdu, Guiyang, Hangzhou, Changchun, Lanzhou, Guangzhou and Tianjin also have promulgated regulations or rules to prohibit vehicles with certain license plate from driving on road. For instance, in Beijing vehicles with restricted tail number of license plates are not allowed to drive within five rings road (excluding the fifth ring road) during 7:00 am to 20:00 pm each workday, and the vehicles with non-Beijing license plates shall also be subject to such restrictions. In Shanghai vehicles bearing non-Shanghai license plates are not allowed on certain roads during specified rush hours on workdays.

 

Regulations on online car hailing businesses

 

In July 2016, MOT, together with other six governmental authorities, issued the Car Hailing Measures. The Car Hailing Measures require online car-hailing platform operators to obtain licenses from governmental authorities, be capable of providing online and offline services and meet certain conditions. The vehicles and drivers shall also meet certain conditions and obtain the online car hailing vehicle licenses and driver licenses respectively issued by the relevant governmental authorities to engage in online car hailing business. Following the Car Hailing Measures, some local governmental authorities in cities of Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Qingdao, Chongqing city governments and many other cities further adopted policies regarding the online car-hailing business operations and services in their administrative regions. In addition to the conditions set out in the Car Hailing Measures, almost all those local governments require that the vehicles engage in online car hailing business operations must be registered in the city administrative regions and meet certain vehicle conditions such as minimum wheel base, installing GPS system and emergency alarm system. Beijing and Shanghai city governments specially require the drivers engage in online car hailing business operations to have the city census register.

 

In February 2018, MOT issued the Administration Method on Operation of Supervision Information Interactive Platform of Online Car Hailing Business, which provides that relevant urban transportation authorities shall timely log in and transmit relevant licensing information of the online car hailing platform operators, cars and drivers through the supervision information interactive platform.

 

Regulations on financial leasing

 

In September 2013, MOFCOM issued the Administration Measures of Supervision on Financial Leasing Enterprises, or the Financial Leasing Measures, to further strengthen and administer the business operation of financial leasing companies. Under Financial Leasing Measures, financial leasing companies are permitted to operate the following business: direct leasing, subleasing, sales and leaseback, leveraged leasing, trust leasing and joint leasing. In addition, financial leasing companies may also operate business related to financial leasing, such as purchase of leasing property, residual disposal and maintenance of leasing property, consultancy and security for leasing transactions and other business as approved by the competent authority. A financial leasing company shall not engage in: (i) such financial businesses as deposit taking, loan issuing, and loan issuing on commission, (ii) illegal fund-raising activities in the name of financial leasing, and (iii) inter-bank borrowing and other businesses without the approval from relevant authorities.

 

The PRC Contract Law promulgated on March 15, 1999 sets forth mandatory rules on financial leasing contracts. Under the PRC Contract Law, a financial leasing contract shall be made in written form and shall contain such clauses as the name of the leased object, quantity, specifications, technical performance, inspection method, lease term, composition of rent, payment term, payment method and kind of currency for the payment of rent, and the ownership over the leased object at the expiration of the lease term. The lessor enjoys the ownership over the leased object during lease period. If the lessee goes bankrupt, the leased object shall not fall into the category of bankrupt property. Within the period of possession over the leased object by the lessee, if the leased object causes any personal injury or property loss to a third party, the lessor shall not bear any liability.

 

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Regulations on Internet content provision service

 

The Telecommunications Regulations, promulgated by the State Council in 2000, amended in 2014 and 2016, draw a distinction between “basic telecommunication services” and “value-added telecommunication services.” Internet content provision service is a subcategory of value-added telecommunications services. The State Council issued the Administrative Measures on Internet Information Services concurrently with the Telecommunications Regulations in 2000 and subsequently amended it in 2011 to regulate Internet content provision services. According to these measures, commercial Internet content provision service operators must obtain a value-added telecommunication business operating license, or ICP license, from the appropriate telecommunication authorities in order to conduct any commercial Internet content provision operations in China, while non-commercial Internet content provision service operators shall make filings with the appropriate telecommunication authorities before conducting non-commercial internet content provision operations. These measures further stipulate that entities providing Internet content provision services regarding news, publishing, education, medicine, health, pharmaceuticals and medical equipment must procure the approval of the national government authorities responsible for such areas prior to applying for an operating license from the relevant government authorities.

 

According to the Administrative Rules for Foreign Investments in Telecommunications Enterprises, issued on December 11, 2001 by the State Council and effective as of January 1, 2002, amended on September 10, 2008 and February 6, 2016, a foreign investor is prohibited from owning more than 50% equity interest in a PRC entity providing value-added telecommunications services and the major foreign investor(s) in a foreign invested valued-added telecommunications enterprise is required to be in good standing and have the relevant experience in operating a value-added telecommunications business. On July 13, 2006, the Ministry of Information Industry, or the MIIT publicly released the Notice on Strengthening the Administration of Foreign Investment in Operating Value-added Telecommunications Business, or the MIIT Notice, which reiterates certain provisions under the Administrative Rules for Foreign Investments in Telecommunications Enterprises prohibiting a domestic company that holds an ICP license, from renting, transferring or selling a telecommunications license to foreign investors in any form, or providing any resources, sites or facilities to foreign investors that intend to conduct value-added telecommunication business illegally in China. Trademarks and domain names that are used in the provision of Internet content services must be owned by the ICP license holder.

 

Our current major operations are not subject to the ICP license requirements. To further expand our Internet and mobile services, in March 2014, we entered into a series of contractual arrangements with eHi Information and its shareholders. In January 2015, we entered into a series of contractual arrangements with our PRC incorporated variable interest entity eHi Car Sharing and its shareholders. Both eHi Information and eHi Car Sharing are our variable interest entities in China. eHi Information obtained an ICP license from the relevant telecommunication authorities on September 24, 2014. eHi Car Sharing is currently not yet in operation.

 

Regulations on information security

 

The National People’s Congress has enacted legislation that prohibits use of the internet that breaches the public security, disseminates socially destabilizing content or leaks state secrets. Breach of public security includes breach of national security and infringement on legal rights and interests of the state, society or citizens. Socially destabilizing content includes any content that incites defiance or violations of PRC laws or regulations or subversion of the PRC government or its political system, spreads socially disruptive rumors or involves cult activities, superstition, obscenities, pornography, gambling or violence. State secrets are defined broadly to include information concerning PRC national defense, state affairs and other matters as determined by the PRC authorities.

 

Pursuant to applicable regulations, ICP operators must complete mandatory security filing procedures and regularly update information security and censorship systems for their websites with local public security authorities, and must also report any public dissemination of prohibited content.

 

On December 27, 2015, the Standing Committee of the National People’s Congress promulgated Anti-Terrorism Law, which took effect on January 1, 2016. According to the Anti-Terrorism Law, telecommunication service operators or internet service providers shall (i) carry out pertinent anti-terrorism publicity and education to society; (ii) provide technical interfaces, decryption and other technical support and assistance for the competent departments to prevent and investigate terrorist activities; (iii) implement network security, information monitoring systems as well as safety and technical prevention measures to avoid the dissemination of terrorism information, delete the terrorism information, immediately halt its dissemination, keep relevant records and report to the competent departments once the terrorism information is discovered; and (iv) examine customer identities before providing services. Any violation of the Anti-Terrorism Law may result in severe penalties, including substantial fines.

 

In November 2016, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law, which became effective on June 1, 2017. In accordance with the Cyber Security Law, network operators must comply with applicable laws and regulations and fulfill their obligations to safeguard network security in conducting business and providing services. Network service providers must take technical and other necessary measures as required by laws, regulations and mandatory requirements to safeguard the operation of networks, respond to network security effectively, prevent illegal and criminal activities, and maintain the integrity, confidentiality and usability of network data.

 

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In addition, the State Secrecy Bureau has issued provisions authorizing the blocking of access to any website it deems to be leaking state secrets or failing to comply with the relevant legislation regarding the protection of state secrets during online information distribution. Specifically, internet companies in China with bulletin boards, chat rooms or similar services must apply for specific approval prior to operating such services. Furthermore, the Provisions on Technological Measures for Internet Security Protection, promulgated by the Ministry of Public Security, require all ICP operators to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws and regulations. The Network Information Protection Decision states that ICP operators must request identity information from users when ICP operators provide information publication services to the users. If ICP operators come across prohibited information, they must immediately cease the transmission of such information, delete the information, keep relevant records, and report to relevant government authorities.

 

Regulations on registration of branch companies

 

According to the amended PRC Company Law, which became effective on March 1, 2014 and the amended Administration Regulations of Company Registration, which became effective on March 1, 2016, a company may establish branch companies, which are entities without the status of a legal person and conduct business outside the domicile of the company. Branch companies must be registered at the competent government agency and obtain a business license. The amended Administration Regulations of Company Registration, set forth the detailed formalities on the registration of branch companies.

 

Our PRC subsidiaries have registered 513 branches and obtained a business license for each of them as of December 31, 2017.

 

Regulations on employment contracts

 

The Labor Contract Law of the PRC was promulgated on June 29, 2007, as amended on December 28, 2012 and effective on July 1, 2013. On September 18, 2008, the PRC State Council issued the PRC Labor Contract Law Implementing Rules, which became effective as of the date of issuance. The Labor Contract Law and its Implementing Rules govern the establishment of employment relationships between employers and employees, and the conclusion, performance, termination of, and the amendment to employment contracts. To establish an employment relationship, a written employment contract must be signed. In the event that no written employment contract was signed at the time of establishment of an employment relationship, a written employment contract must be signed within one month after the date on which the employer starts to use the employee’s services. An employer may terminate the labor agreement of an employee under certain specified circumstances and in some cases, such termination can only be done after fulfillment of certain procedural requirements, such as 30 days’ prior notice or upon payment of one month’s salary in lieu of such notice. In certain cases, the terminated employee is entitled to receive a severance payment equal to the average monthly salary during the 12-month period immediately preceding to the termination (inclusive of all monetary income such as base salary, bonus, allowances, etc.), for each year of service up to the date of termination. If an employer terminate an labor contract in any circumstance other than those specified under the Labor Contract Law and its implementing rules, including termination without cause, the employer must either reinstate and continue to perform the employee’s employment contract or pay the employee damages calculated at twice the rate for calculating the severance payment, subject to the employee’s own request. In the case that the employee requests for damages, the employer is not required to pay other severance or the remainder of the amount owed under the employment contract unless the employment contract has otherwise provided for.

 

In addition, according to the Labor Contract Law and its implementing rules, in order to enforce the non-compete provision with the employees after the termination or ending of employment relationship, the employer shall compensate the employees on a monthly basis during the non-competition period after such termination or ending of employment.

 

On January 24, 2014 the Ministry of Human Resources and Social Security promulgated Interim Provisions on Labor Dispatching, or Circular 22, effective from March 1, 2014, which provides that an employer shall strictly control the number of employees under labor dispatching arrangements and dispatched employees can only be used in temporary, ancillary and replaceable positions. The number of dispatched workers used by an employer shall be reduced to no more than 10% of the total number of its employees within two years after March 1, 2014. However, the labor contract and labor dispatching agreement lawfully concluded prior to the promulgation date of the Decision of the Standing Committee of the NPC on Revising the “Labor Contract Law of the PRC” may continue to be performed until the expiry of the above contract or agreement if expiry date of such contract or agreement is later than the day after two years calculating from March 1, 2014. If the employer fails to reduce the number of dispatched employees as required by Circular 22 and could not correct its practice after receiving warnings from government authority, the employer may be subject to a fine ranging from RMB1,000 to RMB5,000 per dispatched employee.

 

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Regulation on houses lease

 

According to Administrative Measures for the Leasing of Commodity Housing promulgated by Ministry of Housing and Urban- Rural Development on December 1, 2010, within 30 days after the execution of the housing lease contract, the parties involved shall handle the filing procedure of the leasing of housing at local competent authorities. Failure to completion of such filing may result in fines up to RMB10,000.

 

Regulation on PRC business tax and VAT

 

Prior to January 1, 2012, pursuant to the Provisional Regulation of China on Business Tax and its Implementing Rules, an entity or individual rendering services in China was generally subject to a business tax at the rate of 5% on revenues generated from the provision of such services. Since January 1, 2012, the MOF and the SAT have started to implement the VAT Pilot Program, which imposes VAT in lieu of business tax for certain industries in Shanghai. Since August 1, 2012, the VAT Pilot Program has been expanded to and implemented in other regions, including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong. On May 24, 2013, the MOF and the SAT jointly issued Notice 37, which expanded the VAT Pilot Program nationwide starting on August 1, 2013. On December 12, 2013, the MOF and the SAT jointly issued Notice 106, effective on January 1, 2014, which replaced Notice 37 and improved some tax policies in the VAT Pilot Program. From May 1, 2016, the VAT were expanded to all business tax taxpayers. As a result of the VAT, an entity or individual rendering services in China is subject to VAT at the rate of 17%, 11% or 6%, as applicable.

 

Regulations on PRC Enterprise Income Tax on indirect transfer of non-resident enterprises

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the SAT on December 10, 2009 with retroactive effect from January 1, 2008, when a non-PRC resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposing of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, non-PRC resident enterprise, being the transferor, shall report this Indirect Transfer to the competent tax authority of the PRC resident enterprise. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if the Indirect Transfer lacks a reasonable commercial purpose and is arranged for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax at a rate of up to 10%. Circular 698 also provides that in the event that a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than their fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction. In addition, SAT released SAT Public Notice (2011) No. 24, or Public Notice 24, which took effect on April 1, 2011, to clarify several issues related to Circular 698. Under Public Notice 24, the term ‘‘effective tax rate’’ refers to the effective tax rate on the gain derived from a disposition of any equity interest of an overseas holding company. There is uncertainty as to the application of Circular 698.

 

On February 3, 2015, the SAT issued the Announcement of the State Administration of Taxation on Certain Issues Concerning the Enterprise Income Tax on the Indirect Transfer of Properties by Non-resident Enterprises, or Circular 7, which abolishes certain provisions of Circular 698 and Public Notice 24 and also provides more guidance on a number of issues in Circular 698. Circular 7 stipulates that when a non-resident enterprise transfers the assets (including equity interests) in an overseas holding company, which directly or indirectly owns PRC taxable properties, including shares in a PRC company (or PRC Taxable Assets), for the purposes of avoiding PRC enterprise income taxes through an arrangement without reasonable commercial purpose, such indirect transfer should be reclassified and recognized to be a direct transfer of the assets (including equity interests) of a PRC resident enterprise in accordance with the Enterprise Income Tax Law, unless the overall arrangements relating to an indirect transfer of PRC Taxable Assets fulfill one of the following conditions: (i) where a non-resident enterprise derives income from the indirect transfer of PRC Taxable Assets by acquiring and selling equity interests of a listed overseas company on a public market; and (ii) where the non-resident enterprise had directly held and transferred such PRC Taxable Assets, the income from the transfer of such PRC Taxable Assets would have been exempted from enterprise income tax in the PRC under an applicable tax treaty or arrangement. On October 17, 2017, the State Administration of Taxation, or the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax. Pursuant to Circular 7 and SAT Bulletin 37, both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

 

As Circular 7 and SAT Bulletin 37 were newly implemented, there might be limited precedents regarding the application and enforcement of Circular 7 and SAT Bulletin 37 and other related SAT notices and it remains uncertain whether such exemptions or relevant provisions of Circular 7 and SAT Bulletin 37 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.

 

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Torts law

 

The PRC Torts Law was promulgated by the NPC Standing Committee on December 26, 2009 and became effective on July 1, 2010. According to the Torts Law, in the case of car rental, where the driver is different from the owner of the vehicle, if the driver is held liable for a traffic accident, such liability will first be covered by the insurance company within the coverage of the compulsory traffic accident insurance of the vehicle. If the insurance coverage is not sufficient, the driver shall be responsible for the remaining compensation, and the vehicle owner shall not be liable for compensation unless the owner has fault in such accident. However, if we provide driving services, where the driver is our employee or an employee dispatched by other third-party entity, if the driver causes damages or injuries to others when providing driving service, such liability will first be covered by the insurance company within the coverage of the compulsory traffic accident insurance of the vehicle. If the insurance coverage is not sufficient, we will generally be held liable for the remaining compensation.

 

Regulations on foreign currency exchange and dividend distribution

 

Foreign currency exchange

 

The principal regulations governing foreign currency exchange in China are the Foreign Currency Administration Regulations of 1996, as amended in August 2008 and Administration Rules of the Settlement, Sale and Payment of Foreign Exchange, or the Administration Rules promulgated by PBOC in June, 1996. Under these regulations, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions without SAFE approval except as otherwise explicitly provided by laws and regulations. However, conversion of the Renminbi for capital account items, such as direct investment, loans, repatriation of investment and investment in securities outside China, is subject to approvals of or registration with, SAFE or its competent local branches.

 

Under the Administration Rules, enterprises may only buy, sell or remit foreign currencies at banks that are authorized to conduct foreign exchange business after the enterprise provides valid commercial documents and relevant supporting documents and, in the case of certain capital account transactions, after obtaining approval from SAFE or its competent local branches. Capital investments by enterprises outside of China are also subject to limitations, which include approvals by the MOFCOM, SAFE and the National Development and Reform Commission, or their respective competent local branches.

 

On August 29, 2008, the SAFE promulgated a notice, Circular 142, regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice requires that the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, the SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Furthermore, on November 9, 2010, SAFE promulgated the Notice Relating to Strengthening the Administration of Foreign Exchange Businesses, which tightens the regulation on the settlement of net proceeds from overseas offerings , and requires (i) that the settlement of net proceeds must be consistent with the uses stated in the prospectus for the offering, and (ii) the submission of relevant board resolutions for the portion of proceeds that is over-subscripted or fall outside the uses stated in the prospectus. On March 30, 2015, the SAFE promulgated a Circular on Reforming of Administrative Methods Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Companies, or Circular 19, which became effective on June 1, 2015, superseding Circular 142. According to Circular 19, although it restates certain restrictions on use of investment capital in foreign currency by foreign invested company, it specifies that the registered capital of a foreign-invested company in foreign currency can be converted into RMB voluntarily and be allowed to use for equity investment in the PRC subject to certain reinvestment registration with local SAFE made by the invested company. In June 2016, SAFE promulgated SAFE Circular 16, which removed certain restrictions previously provided under several SAFE circulars, including SAFE Circular 19, in respect of conversion by a foreign-invested enterprise of foreign currency registered capital into RMB and use of such RMB capital. However, SAFE Circular 16 continues to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, and providing loans to non-affiliated enterprises except as permitted in the business scope.

 

We derive substantially all of our revenues in the Renminbi, which is not a freely convertible currency. Under our current structure, our income will be primarily derived from dividend payments from our subsidiaries in China. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including the U.S. dollar, has been based on rates set by PBOC. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a band against a basket of certain foreign currencies. There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar.

 

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Dividend distribution

 

The principal regulations governing distribution of dividends of a company include the amended Company Law (promulgated on December 28, 2013, effective on March 1, 2014), the amended Wholly Foreign-Owned Enterprise Law (or the WFOE Law, effective on October 31, 2000 and amended on September 3, 2016), and the amended Wholly Foreign-Owned Enterprise Law Implementing Rules (or the Implementing Rules of WFOE Law, effective on March 1, 2014).

 

Under the above laws and regulations, a company may pay dividends only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations after funding certain reserve funds. Sino-foreign joint venture companies may make such reservation according to the percentage determined by the board of directors. Other companies in China, including wholly foreign-owned enterprises are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of registered capital. These reserves are not distributable as cash dividends.

 

According to the EIT Law and the Implementing Rules dividends paid by a wholly foreign owned enterprise to non-resident enterprise may be subject to a withholding tax at the rate of 10% unless the non-resident enterprise is entitled to a lower tax rate according to applicable tax treaties or similar tax arrangements.

 

Under the EIT Law and its Implementing Rules, if a company incorporated outside China has its “de facto management body” located within China, the company would be classified as a resident enterprise and thus would be subject to an enterprise income tax rate of 25% on all of its income on a worldwide basis, with the possible exception of dividends received directly from another Chinese resident enterprise.

 

Our Chinese subsidiaries are restricted from distributing any dividends to us until they have met these requirements set out in the above laws and regulations.

 

Regulations on employee share options

 

Pursuant to the Implementing Rules of the Administration Measure for Individual Foreign Exchange, or the Individual Foreign Exchange Rule, and the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plan of Overseas-Listed Companies, or Share Option Rule, issued in January 2007 and February 2012, respectively, by the SAFE, domestic individuals who have participated in any stock incentive plan including employee stock holding plan, share option plan or similar plan in an overseas-listed company are required to register with the relevant SAFE branch and complete certain other procedures related to the share incentive plan through a PRC agent. Under the Share Option Rule, individuals in PRC including PRC citizens (including of Hong Kong, Macau and Taiwan nationals) and foreign nationals who have continuously resided in China for at least a year who participate in the share incentive plan of a same overseas listed company shall collectively appoint a qualified PRC domestic agent or a PRC subsidiary of such overseas listed company, or the PRC agent, to conduct foreign exchange registration, open bank accounts and transfer and exchange funds and an overseas entity shall be appointed to conduct exercise of option, buying and selling of relevant stocks or equities and transfer of relevant funds. The individuals’ foreign exchange income received from the sale of shares or dividends distributed by the overseas-listed company which is repatriated back to China shall first be remitted into a collective foreign exchange account opened and managed by the PRC agent before distribution to such individuals in a foreign currency or in RMB. We and our employees who are domestic individuals and have participated in our stock incentive plan, or PRC optionees, have been subject to these rules since the listing of our ADSs on the NYSE. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions. In addition, the SAT has issued certain circulars concerning employee share options. Pursuant to these circulars, our employees working in China who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options with relevant tax authorities and withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities.

 

Regulations on foreign exchange registration of offshore investment by PRC residents

 

On July 4, 2014, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange for Overseas Investment and Financing and Reverse Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which replaced the Notice on Issues Relating to the Administration of Foreign Exchange for the Financing and Reverse Investment by Domestic Residents via Offshore Special Purpose Vehicles issued by SAFE in October 2005, or Circular 75. Pursuant to Circular 37, any PRC residents, including both PRC institutions and individual residents, are required to register with the local SAFE branch before making contribution to a company set up or controlled by the PRC residents outside of the PRC for the purpose of overseas investment or financing with their legally owned domestic or offshore assets or interests, referred to in this circular as a “special purpose vehicle.” Under Circular 37, the term “PRC institutions” refers to entities with legal person status or other economic organizations established within the territory of the PRC. The term “PRC individual residents” includes all PRC citizens (also including PRC citizens abroad) and foreigners who habitually reside in the PRC for economic benefit. A registered special purpose vehicle is required to amend its SAFE registration or file with respect to such vehicle in connection with any change of basic information including PRC individual resident shareholder, name, term of operation, or PRC individual resident’s increase or decrease of capital, transfer or exchange of shares, merger, division or other material changes. In addition, if a non-listed special purpose vehicle grants any equity incentives to directors, supervisors or employees of domestic companies under its direct or indirect control, the relevant PRC individual residents could register with the local SAFE branch before exercising such options. The SAFE simultaneously issued a series of guidances to its local branches with respect to the implementation of Circular 37. Under Circular 37, failure to comply with the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including restrictions on the payment of dividends and other distributions to its offshore parent company and the capital inflow from the offshore entity, and may also subject the relevant PRC residents and onshore company to penalties under the PRC foreign exchange administration regulations.

 

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Regulations on cross-border direct investment in Renminbi

 

On October 12, 2011, MOFCOM issued the Notice of the Ministry of Commerce on Issues concerning Cross border Direct Investment in Renminbi which was abolished in 2013 and on December 3, 2013 the MOFCOM promulgated the Announcement on Issues relating to Cross-border Direct Investment in RMB, effective from January 1, 2014. Under this announcement, the “cross- border direct investment in RMB “shall refer to the direct investment activities conducted by foreign investors (including the investors from Hong Kong, Macau and Taiwan) in China with offshore RMB funds obtained legally, including, among other things, the establishment of new enterprises, increase of capital, shareholding or merger and acquisition of domestic enterprises. The cross-border direct investment in RMB by a foreign investor or reinvestment by its foreign-invested enterprise shall conform to the requirements of laws, regulations and relevant provisions on foreign investment and comply with the foreign investment industry policies of China and the provisions on security review of foreign investment mergers and acquisitions and anti-monopoly review. No foreign-invested enterprise is allowed to use the funds of cross-border direct investment in RMB for investment, directly or indirectly, in negotiable securities and financial derivatives in China (except for strategic investment in listed companies) or for entrusted loans. On October 13, 2011, the PBOC issued the Management Rules on the Settlement of Foreign Direct Invested Renminbi, which provide that foreign invested enterprises with RMB-dominated foreign direct investment must register with the PBOC or its local branch after obtaining the permit from MOFCOM and the business license.

 

Regulations on intellectual property rights

 

China has adopted comprehensive legislation governing intellectual property rights, including copyright, trademark, patents and domain names.

 

Copyright

 

The Copyright Law of the PRC was adopted in 1990 and amended in 2001 and 2010. Copyrighted software is protected under the Copyright Law and other regulations. In addition, there is a voluntary registration system administered by the China Copyright Protection Center.

 

In order to strengthen the protection of the rights and interests of computer software copyright owners, the State Council promulgated the Regulations on the Protection of Computer Software on December 20, 2001, which became effective on January 1, 2002 and amended it in 2011 and 2013, and the State Bureau of Copyright promulgated the Measures on the Registration of Computer Software Copyright on February 20, 2002, which was subsequently amended by the State Council in 2011. For the software copyrights of legal persons or other organizations, the term of protection for the software copyright is 50 years, ending on December 31 of the fiftieth year after the first publication of the software. The software copyright owner may follow registration procedures with the software registration institution authorized by the State Bureau of Copyright and obtain a Registration Certificate of Software Copyright, which is the prima facie proof of the registered copyright ownership. As of December 31, 2017, our PRC subsidiaries had registered the copyrights of 30 computer software in the PRC, and have obtained all Registration Certificates of Software Copyright.

 

Trademark

 

As of December 31, 2017, our PRC subsidiaries had registered 321 trademarks, of which 302 trademarks were registered in the PRC and 19 trademarks were registered in other countries. Registered trademarks are protected under the Trademark Law adopted on August 23, 1982 (effective on March 1, 1983) and amended on February 22, 1993 (effective on July 1, 1993), October 27, 2001 (effective on December 1, 2001) and August 30, 2013 (effective on May 1, 2014), the Trademark Office of the State Administration of Industry and Commerce (or the Trademark Office) is responsible for the registration and administration of trademarks throughout China and grants a term of ten years to registered trademarks. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration has been made is identical or similar to another trademark that has already been registered or been subject to a preliminary examination and approval for use on the same kind of or similar commodities or services, the application for registration of such trademark may be rejected. Any person applying for the registration of a trademark shall not prejudice the existing right of others obtained by priority, nor shall any person register in advance a trademark that has already been used by another person and has already gained “sufficient degree of reputation” through that person’s use. After receiving an application, the Trademark Office will make a public announcement if the relevant trademark passes the preliminary examination. Within three months after such public announcement, any person may file an opposition against a trademark that has passed a preliminary examination. The Trademark Office’s decisions on rejection, opposition or cancellation of an application may be appealed to the Trademark Review and Adjudication Board, whose decision may be further appealed through judicial proceedings.

 

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If no opposition is filed within three months after the public announcement period or if the opposition has been overruled, the Trademark Office will approve the registration, issue a registration certificate and make an announcement, upon which the trademark is registered and will be effective for a renewable ten-year period, unless otherwise revoked. In the case of a trademark infringement, where the actual loss suffered by the right holder as a result of the infringement, the profits gained by the infringer from the infringement and the royalties of the registered trademark concerned are difficult to determine, the people’s court shall render a judgment on awarding damages of up to RMB300.0 million depending on the circumstances of the infringing acts.

 

Patent

 

The NPC adopted the Patent Law of the PRC in 1984, and amended it in 1992, 2000 and 2008. The purpose of the Patent Law is to protect and encourage invention, foster applications of invention and promote innovations and the development of science and technology. A patentable invention or utility model must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear transformation. The Patent Office under the State Council is responsible for receiving, examining and approving patent applications. A patent is valid for a term of 20 years in the case of an invention and a term of ten years in the case of a utility model and design, starting from the application date. A third-party user must obtain consent or a proper license from the patent owner to use the patent except for certain specific circumstances provided by law. Otherwise, the use will constitute an infringement of the patent rights.

 

Domain name

 

As of December 31, 2017, our PRC subsidiaries had registered 219 domain names. On November 5, 2004, the Ministry of Industry and Information Technology promulgated the Measures for Administration of Domain Names for the Chinese Internet (or the Domain Name Measures, effective on December 20, 2004 and amended on August 16, 2017). The Domain Name Measures regulate the registration of domain names, such as the first tier domain name “cn”. On May 29, 2012, the China Internet Network Information Center, or the CNNIC, issued the Implementing Rules for Domain Name Registration setting forth detailed rules for registration of domain names (effective on the promulgation date). On June 28, 2012, the CNNIC issued the Measures on Domain Name Disputes Resolution (effective on the promulgation date and amended on September 1, 2014), pursuant to which the CNNIC can authorize a domain name dispute resolution institution to decide disputes.

 

C.Organizational Structure

 

We commenced our business in 2006, which was initially focused on providing car services to premium corporate clients. In 2008, we began to provide car rentals to individual customers. Our company, eHi Car Services Limited (previously known as Prudent Choice International Limited or eHi Auto Services Limited), was incorporated in the Cayman Islands on August 3, 2007. eHi Car Services Limited is a holding company. Currently we operate our car rental and car services business through our PRC subsidiaries. For our car rental business, we provide vehicles through our PRC subsidiaries eHi Rental and eHi Jiangsu, and their subsidiaries and branches in different cities; and we provide fleet management, information technology support and other car rental related services through eHi Management, which is a subsidiary of eHi Rental. For our car services business, we provide vehicles through eHi Rental, eHi Jiangsu and their subsidiaries and branches, and provide chauffeur services through our PRC subsidiary Shanghai Smart Brand, and its subsidiaries and branches.

 

In March 2008, eHi Rental was established in China by two nominee shareholders designated by Mr. Ray Ruiping Zhang to engage in, among other things, car rentals. Also in March 2008, we established our first wholly foreign owned subsidiary Shuzhi Information Technology (Shanghai) Co., Ltd., or Shuzhi, in China. In November 2009, Shuzhi acquired the 94.13% equity interest of eHi Rental, and two nominee shareholders designated by Shuzhi acquired the remaining 5.87% equity interest of eHi Rental.

 

In September 2010, we acquired all the shares of eHi Auto Services (Hong Kong) Holding Limited, or eHi Hong Kong, a then dormant company incorporated in Hong Kong, and became its sole shareholder. In January 2011, Shuzhi and eHi Hong Kong completed a share transfer and capital increase of eHi Rental, upon which eHi Hong Kong acquired the 5.87% equity interest of eHi Rental from the two nominee shareholders. As a result, eHi Rental was converted into a Sino foreign joint venture enterprise. The registered capital of eHi Rental was increased several times and reached US$468 million in 2015. eHi Hong Kong and Shuzhi currently hold 94.24% and 5.76% equity interests of eHi Rental, respectively.

 

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In December 2011, we established our second wholly foreign owned subsidiary, eHi Jiangsu, in China. eHi Jiangsu is wholly owned by eHi Hong Kong. We have, through eHi Rental and eHi Jiangsu, established and acquired several subsidiaries in various regions in China to expand the geographic coverage of our business operations.

 

In November 2015, we, through eHi Rental, established a wholly owned subsidiary eHi Management. eHi Management was incorporated to operate car rental management and related software development business. 

 

In connection with our car services business, we provide vehicles and chauffeur services through different subsidiaries. We provide vehicles through eHi Rental and eHi Jiangsu as well as their subsidiaries and branches, and provide chauffeur services through Shanghai Smart Brand, which was established by Shuzhi in April 2011. Several subsidiaries and branches of Shanghai Smart Brand were also established to provide chauffeur services in various regions in China.

 

Our current major operations are not subject to the ICP license requirements. In March 2014, we entered into a series of contractual arrangements with our PRC incorporated variable interest entity eHi Information, and its shareholders to further expand our Internet and mobile services. Such contractual arrangements enable us to exercise effective control over the operations of eHi Information which resulted in the consolidation of eHi Information by eHi Rental. eHi Information obtained the ICP license from the relevant telecommunication authorities on September 24, 2014. eHi Information currently does not have any material operation. In January 2015, we entered into a series of contractual arrangements with our PRC incorporated variable interest entity eHi Car Sharing and its shareholders. eHi Car Sharing is currently not yet in operation.

 

In October 2013, we established L&L Financial Leasing Holding Limited, or L&L, in Hong Kong through eHi Hong Kong, which is a holding company of Shanghai Taihao Financial Leasing Co., Ltd., or Shanghai Taihao, and Shanghai Taide Financial Leasing Co., Ltd., or Shanghai Taide. Shanghai Taide was incorporated in the Shanghai Free Trade Zone. Shanghai Taihao and Shanghai Taide are authorized to operate financial leasing business in China.

 

In November 2013, we, through Shuzhi, established a wholly owned subsidiary Shangahi Taihan Trading Co., Ltd., or Shanghai Taihan. Shanghai Taihan was incorporated in the Shanghai Free Trade Zone to operate sales of vehicles and used vehicles business.

 

In April 2014, we, through our then-wholly owned subsidiary, Elite Plus Developments Limited, or Elite Plus, invested US$25 million for a subscription in series B preferred shares of Travice Inc., which developed and operates the Kuaidi mobile taxi and car hailing service, representing 8.4% of the then outstanding share capital of Travice Inc. Travice Inc. also issued a warrant to Elite Plus to purchase an additional 4,684,074 series C preferred shares of Travice Inc. In January 2015, the Company waived the warrant and received US$3 million in exchange for the waiver of the warrant. In February 2015, Travice Inc. was merged with and into Xiaoju Science and Technology Limited, which developed and operates the Didi mobile taxi and car hailing service. After the completion of such merger, Elite Plus’s investment in Travice Inc. was exchanged to a minority stake of the surviving company Xiaoju Kuaizhi Inc. In June 2015, we transferred 100% of our equity interest in Elite Plus to an independent third party for gross proceeds of US$160.9 million.

 

In November 2014, we completed an initial public offering of 10,000,000 ADSs at the price of US$12.00 per ADS. Each ADS represents two Class A common shares. On November 18, 2014, our ADSs were listed on the New York Stock Exchange under the symbol “EHIC”. In November 2014, we also issued 5,000,000, 1,666,666 and 1,666,666 Class A common shares to Dongfeng Asset Management Co. Ltd., China Universal Asset Management Co., Ltd. and Ctrip, respectively, at the price of US$6.00 per share (equivalent to US$12.00 per ADS), in a private placement concurrent with the initial public offering.

 

In December 2015, we completed an offering of US$200 million in aggregate principal amount of senior unsecured notes due 2018. The 2018 Senior Notes were offered by our Cayman holding company, and all of our offshore subsidiaries eHi Hong Kong, Brave Passion Limited and L&L jointly and severally provided guarantees.

 

In August, 2016, we entered into a US$150 million in principal amount syndicated bank facility, or the 2016 Facility. The 2016 Facility was offered by our Cayman holding company, and our existing and future-established offshore subsidiaries are required to jointly and several guarantee the facility, subject to certain exceptions. The 2016 Facility has been repaid in full in August 2017.

 

In August 2017, we completed an offering of US$400 million in aggregate principal amount of senior unsecured notes due 2022. The 2022 Senior Notes were offered by our Cayman holding company, and all of our offshore subsidiaries jointly and severally provided guarantees.

 

In January 2018, the board of directors of our company received a preliminary non-binding proposal letter dated January 1, 2018 from affiliates of MBK and Mr. Ray RuiPing Zhang, our chairman and chief executive officer, and his affiliates, that proposes a “going-private” transaction for US$13.35 in cash per ADS of our company, or US$6.675 in cash per common share. Our board of directors has formed a special committee of independent directors to evaluate the proposal and no decisions have been made by our board nor the special committee with respect to our response to the proposal.

 

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The following diagram illustrates our principal corporate structure as of the date of this Form 20-F :

 

 

(1) eHi Information is a variable interest entity incorporated in China and is 50% owned by Mr. Hongtao Han and 50% owned by Mr. Chun Xie. We effectively control eHi Information through contractual arrangements.

 

(2) eHi Car Sharing is a variable interest entity incorporated in China and is 70% owned by Mr. Dalu Jiang and 30% owned by Mr. Chengzhu Wang. We effectively control eHi Car Sharing through contractual arrangements.

 

D.Property, Plant and Equipment

 

Our corporate headquarters are located in Shanghai, China, where we own a gross floor area of approximately 4,482 square meters and lease an aggregate gross floor area of approximately 2,319 square meters for our general administration. Specifically, in 2017, we acquired an office space in Shanghai with a gross floor area of approximately 2,241 square meters.

 

As of December 31, 2017, we directly operated a total of 4,463 service locations in 303 cities across China. Our lease agreements for office space of our stores generally have a term of one to three years. All of our service locations have a standardized design, appearance, decoration, color scheme and display. We select locations for our stores and pick-up points based on criteria including convenient access to transportation hubs, major office buildings, shopping centers or universities, which we believe have more potential for sustainable and increasing demand for our services.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report on Form 20-F. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. For more information regarding forward-looking statements, see “Forward-Looking Statements.” In evaluating our business, you should carefully consider the information provided under Item 3.D, “Key Information—Risk Factors.” We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

 

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A.Operating Results

 

Overview

 

We provide one-stop comprehensive services to both individual customers as well as corporate and institutional clients. This business model, together with our leading positions in both China’s car service market and car rental market, enables us to cross-sell to different target customers and capture complementary and evolving market opportunities.

 

Our one-stop comprehensive services include the following:

 

  · Car rentals. We provide self-drive car rental services to both individual customers as well as corporate and institutional clients to meet their travel, leisure, business and ground transportation needs. Our short-term car rentals have a term of less than one year and are primarily provided to individual customers on an hourly, daily, weekly or monthly basis. Our long-term car rentals have a term of one year or longer and are primarily provided to corporate and institutional clients. As of December 31, 2017, our car rental fleet included 62,101 vehicles of over 300 models primarily from major automobile manufacturers. In 2017, we derived approximately 80.2% of our net revenues from car rentals.

 

  · Car services. We provide chauffeured car services primarily to corporate and institutional clients, including many Fortune 500 companies in China. Our car services include routine services such as airport pickup and drop-off, inter-office transfers and other business transportation needs, as well as event-driven activities such as conventions, promotional tours and special events. We generally enter into long-term framework agreements with our corporate and institutional clients pursuant to which our vehicles and chauffeur services are provided by different subsidiaries. With 2,845 vehicles and 3,211 drivers as of December 31, 2017, our car services were offered by us and our contracted service providers in 200 cities across China, with a focus on first-tier cities including Beijing, Shanghai, Guangzhou and Shenzhen. In 2017, we derived approximately 19.8% of our net revenues from car services.

 

Factors Affecting Our Results of Operations

 

We believe that the most significant macro-level factors affecting our results of operations include:

 

  · health of the global economy and the growth and development of China’s economy;

 

  · overall growth of China’s car services industry;

 

  · automobile ownership penetration rate and the number of driver license holders in China;

 

  · increasing demand for leisure travel and shift in lifestyle in China towards driving as a preferred means of travel;

 

  · growth of transportation infrastructure in China; and

 

  · governmental regulations and measures relating to vehicle purchase, ownership and usage and tax policies.

 

Our results of operations in any given period are more directly affected by company specific factors, including:

 

  · Fleet utilization. Our ability to effectively utilize our fleet will have a material effect on our results of operations. We view our entire vehicle fleet as one pool of assets that are cross-utilizable, and we re-deploy our fleet to complement different demand cycles. Factors affecting the utilization of our fleet include, among others, our fleet size, the demand for our services, our pricing, our customer experience, the effective management of our operations through our proprietary technology platform, and the competitive landscape of car services market in China. In 2015, 2016 and 2017, the fleet utilization rate of our car rental fleet was 71.4%, 72.4% and 72.2%, respectively.

 

  · Fleet size and geographic coverage. Expansion of our fleet size and geographic coverage is essential to the growth of our business. We had grown our total fleet size from 38,070 vehicles as of December 31, 2015 to 56,916 vehicles as of December 31, 2016 and further to 64,946 vehicles as of December 31, 2017, and expanded our geographic coverage from 151 cities as of December 31, 2015 to 216 cities as of December 31, 2016 and further to 303 cities as of December 31, 2017. We intend to continue to expand our total fleet size, further penetrate our existing markets, and extend our services to selected new cities which have strong growth potential and are close to our existing markets, transportation hubs or tourist spots. Our business and results of operations will depend significantly on our ability to expand fleet size and geographic coverage in a timely manner.

 

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  · Pricing. We have adopted a dynamic pricing mechanism to determine our rental rates for car rentals. This mechanism determines a specific vehicle model’s rental rate based on its purchase price taking into consideration other variables such as pickup/drop-off time and location, the availability of our vehicles during such period at the location, prevailing market prices, demand for such vehicle model and the length of rental period. Operating expenses such as store expenses and other executory costs are not significant considerations in determining our car rental rates. Our management reviews our rental rates for car rentals on a regular basis.

 

We determine the rates for our car services based on a number of factors, including vehicle model, service type, the length of rental period, time and location of pickup and drop-off, and prevailing market prices. Operating expenses such as store expenses and other executory costs are not significant considerations in determining rates for car services. Our management reviews these rates on a regular basis. Our long-term framework agreements with our corporate and institutional clients provide for predetermined price ranges and, as a result, our rates for car services are generally more stable.

 

  · Finance costs. We use banks and third-party financing companies to finance the procurement of a portion of our fleet. Also, in 2015 we closed a US$200 million note offering and in August 2016 entered into a US$150 million syndicated loan facility which was early repaid in August 2017 and in August 2017 we closed a US$400 million note offering, to fund our fleet procurement activities, refinance existing debt and provides capital for general corporate purposes. Given our large fleet size and procurement needs, our operating results could be materially impacted by any failure to obtain proper financing sources or to properly manage related finance costs.

 

  · Vehicle acquisition and disposition and our ability to control operating expenses. Vehicle purchases have historically accounted for, and are expected to continue to account for, most of our capital expenditures. To provide our customers with vehicles in good condition, we typically hold vehicles in our fleet for three to four years, except for program cars which typically have a holding period of 12 to 24 months. The difference between the disposal price of a used vehicle and the residual book value of such vehicle is recorded as a gain or loss under our depreciation expenses. Therefore, our ability to dispose of retired vehicles at optimal prices will have a material effect on our results of operations.

 

In addition, our results of operations will be impacted by our ability to control other operating expenses, including without limitation vehicle-related depreciation, payroll-related expenses, vehicle insurance expenses, vehicle repair and maintenance expenses fuel expenses and store expenses. Our large fleet size provides us economies of scale, enabling us to obtain favorable prices and discounts from key players in the vehicle supply ecosystem. We also plan to open additional in-house vehicle repair and maintenance centers in cities where our fleet has achieved economies of scale and additional in-house repair and maintenance centers are expected to be more cost-effective compared to third-party service providers.

 

  · Ability to attract and retain customers. The success of our business hinges on our customer satisfaction level, which in turn depends on a variety of factors. These factors include, among others, our ability to (i) consistently provide high-quality customer experience, (ii) continue to offer comprehensive and complementary services tailored to our customers’ needs, (iii) maintain good vehicle condition, and (iv) provide timely and satisfactory after-sales services.

 

  · Seasonality. We generally experience some effects of seasonality due to increases in leisure travel activities and decreases in business travel activities during the summer season and public holidays in the PRC such as Chinese New Year, Labor Day, and National Day. The seasonal impacts on our car rentals and car services may, to some extent, offset each other. In addition, we typically launch promotions for certain car rentals and car services in selected cities after major holidays in China. Our revenues may also fluctuate due to adverse weather conditions, such as snow or rain storms. Seasonal changes in our revenues do not alter our depreciation and labor costs or certain other expenses, such as rent and insurance, which are fixed in the short run.

 

Key operating metrics

 

We utilize a set of key operating metrics which our senior management reviews frequently. The review of these metrics facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing our business to react promptly to changing customer demands and market conditions. When evaluating business performance and profitability, the assessment is made on our entire business as opposed to separate revenue streams. Spending, budgeting and resource allocation decisions are also made taking into account our entire business.

 

The following tables set forth our key operating metrics as of the dates and for the periods indicated:

 

Period-end fleet size(1) (2)

 

   As of
December 31,
 
   2015 (2)   2016(2)   2017 
Car rentals   35,647    53,658    62,101 
Car services   2,423    3,258    2,845 
Total   38,070    56,916    64,946 

 

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(1) “Period-end fleet size” refers to the aggregate number of vehicles in our car rentals and car services fleets as of the last day of a given period to which we hold legal title, including vehicles that we have written off in accordance with our accounting policy and vehicles that are currently missing but have not been written off.

 

(2) In 2015, we adopted a revised definition of “Period-end fleet size”, which refers to the aggregate number of vehicles in our car rentals and car services fleets as of the last day of a given period which we hold legal title to and also reflect in our balance sheet, including vehicles that are currently missing but have not been written off. The period-end fleet size as of December 31, 2015 excluded 151 vehicles which we had written off from our balance sheet as of December 31, 2015, and the period-end fleet size as of December 31, 2016 excluded 162 vehicles which we had written off from our balance sheet as of December 31, 2016, and the period-end fleet size as of December 31, 2017 excluded 183 vehicles which we had written off from our balance sheet as of December 31, 2017, in accordance with our accounting policy.

 

Car rentals and car services

 

    For the Years Ended  
    December 31,  
    2015     2016     2017  
Average available fleet size(1)     26,460       38,944       47,999  
RevPAC (RMB)(2)     150       148       156  

 

Car rentals

 

    For the Years Ended
December 31,
 
    2015     2016     2017  
Average available fleet size(1)     24,573       36,455       45,031  
RevPAC (RMB)(2)     123       125       134  
Fleet utilization rate (%)(3)     71.4       72.4       72.2  
Average daily rental rate (RMB)(4)     172       173       185  

 

Car services

 

    For the Years Ended
December 31,
 
    2015     2016     2017  
Average available fleet size(1)     1,887       2,489       2,968  
RevPAC (RMB)(2)     508       490       501  

 

(1) “Average available fleet size” is calculated by dividing the aggregate number of days in which our fleet was in operation during a given period by the total number of days during the same period. In determining the size of our fleet in operation, we include all vehicles in our car rentals and car services fleets except for vehicles that have been written off in accordance with our accounting policy and vehicles that have not been consistently made available for rent and that we may consider to dispose of when appropriate opportunities arise.

 

(2) “RevPAC” refers to average daily net revenue per available car, which is calculated by dividing the net revenues during a given period by the aggregate number of days in which our fleet was in operation during the same period.

 

(3) “Fleet utilization rate” refers to the aggregate transaction days for our car rental fleet during a given period divided by the aggregate days our car rental fleet are in operation during the same period. “Transaction days” refer to the aggregate number of days on which a vehicle in our car rental or car services fleet was on rent during a given period.

 

(4) “Average daily rental rate” refers to RevPAC during a given period divided by the fleet utilization rate during the same period.

 

There is no industry norm with respect to the calculations of these operating metrics. As a result, our operating metrics may not be comparable to those used by other industry participants.

 

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Certain income statement line items

 

Net revenues

 

Our net revenues represent our gross revenues from operations, less business tax, VAT and other related surcharges. The following table sets forth our net revenues for the periods presented by service type. No single individual customer, corporate or institutional client accounted for more than 5% of our net revenues in any period presented.

 

   For the Year Ended December 31, 
   2015   2016   2017 
       % of Net       % of Net           % of Net 
   RMB   Revenues   RMB   Revenues   RMB   US$   Revenues 
   (in thousands, except percentages) 
Car rentals   1,100,579    75.9%   1,663,546    78.9%   2,196,456    337,589    80.2%
Car services   350,051    24.1    445,398    21.1    543,066    83,468    19.8 
Total net revenues   1,450,630    100.0%   2,108,944    100.0%   2,739,522    421,057    100.0%

 

Car rentals

 

We provide self-drive car rental services to both individual customers as well as corporate and institutional clients. Our short-term car rentals have a term of less than one year and are primarily provided to individual customers on an hourly, daily, weekly or monthly basis. A majority of our revenues derived from short-term car rentals are from our basic car rental service package, the charges for which include an hourly or daily rental fee, a transaction based handling fee and a basic insurance charge. We also derive a small portion of short-term car rentals revenues from fees and charges for premium services such as increased insurance coverage, GPS-based navigation device rentals, charges for inter-city return, and excess mileage charges. Our long-term car rentals have a term of one year or longer and are primarily provided to corporate and institutional clients at a negotiated rental rate under long-term contracts.

 

Car services

 

We provide chauffeured car services primarily to corporate and institutional clients. We generally enter into long-term framework agreements with our corporate and institutional clients pursuant to which our vehicles and chauffeur services are provided by different subsidiaries. We usually charge our corporate and institutional clients for car services a negotiated fixed service fee for a specified trip or for services in a certain period of time, which include the provision of chauffeur services. In certain circumstances, based on demand from key corporate and institutional clients, we also cooperate with contracted service providers to provide car services in certain cities where we currently do not provide car services or the demand for such services exceeds our existing capacity. We recognize the revenues derived from such contracted service providers on a gross basis and recognize the costs related to them as part of our cost of revenues.

 

Cost of revenues

 

The principal components of our cost of revenues include vehicle-related depreciation, payroll-related expenses, vehicle insurance expenses, vehicle repair and maintenance expenses, car rental expenses, fuel expenses as well as store expenses. The following table sets forth the components of our cost of revenues for the periods indicated:

 

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   For the Years Ended December 31, 
   2015   2016   2017 
   RMB   % of Net
Revenues
   RMB   % of Net
Revenues
   RMB   US$   % of Net
Revenues
 
   (in thousands, except percentages) 
Net revenues   1,450,630    100.0%   2,108,944    100.0%   2,739,522    421,057    100.0%
Cost of revenues:                                   
Vehicle-related depreciation   457,479    31.5    653,347    31.0    732,867    112,640    26.8 
Payroll-related expenses   252,015    17.4    361,630    17.1    472,334    72,596    17.2 
Vehicle insurance expenses   116,491    8.0    113,490    5.4    160,236    24,628    5.8 
Fuel expenses   70,019    4.8    94,508    4.5    98,877    15,197    3.6 
Store expenses   76,041    5.2    102,330    4.9    144,706    22,241    5.3 
Vehicle repair and maintenance expenses   64,126    4.4    77,843    3.7    122,726    18,863    4.5 
Car rental expenses   44,274    3.1    42,405    2.0    56,212    8,640    2.1 
Others   57,533    4.0    69,728    3.3    92,390    14,200    3.4 
Total cost of revenues   1,137,978    78.4%   1,515,281    71.9%   1,880,349    289,004    68.6%

 

Vehicle-related depreciation. A significant component of our cost of revenues is vehicle-related depreciation. As our fleet continues to grow, depreciation has become, and will continue to be, a significant portion of our cost of revenues. Our depreciation expenses are also affected by the following factors, some of which may be beyond our control: (i) our average vehicle and in-car equipment acquisition cost, (ii) our management’s periodic review of present and estimated future market conditions and their effect on residual values of our vehicles at the time of disposal, (iii) provision or write-off in connection with our lost or stolen vehicles, and (iv) any gain or loss resulting from vehicle disposals. Depreciation begins when three criteria are met: (i) the license plate for the vehicle is obtained, (ii) insurance for the vehicle becomes effective, and (iii) a GPS-based tracking device is installed on the vehicle, which allows our proprietary technology platform to monitor the location of the vehicle.

 

Payroll-related expenses. Our payroll-related expenses primarily consist of salaries, social insurance and welfare benefits of our employees directly involved in vehicle operations. Our full-time employees who were directly involved in vehicle operations and services increased from 3,901 as of December 31, 2015 to 4,858 as of December 31, 2016, including 2,735 drivers, and further to 5,849 as of December 31, 2017, including 3,211 drivers. We expect the number of our employees to continue to increase along with the expansion of our operations. As overall wages in China continue to increase, we expect our labor costs to continue to rise in the foreseeable future. We seek to maintain compensation levels in accordance with prevailing trends in our industry.

 

Vehicle insurance expenses. We purchase motor vehicle damage insurance, third-party liability insurance, compulsory traffic accident insurance, passenger injury insurance, and other insurance coverage that our management considers adequate to protect our assets and operations under different situations. If we have a low accident rate of our fleet, we may benefit from the “no-claim discount” and enjoy lower insurance premiums when purchasing relevant insurance for our fleet. Our fleet size increased from 56,916 as of December 31, 2016 to 64,946 as of December 31, 2017. As our fleet size increases, we expect these expenses to increase.

 

Fuel expenses. We bear the fuel expenses consumed when we provide car services to our corporate and institutional clients. We also bear the fuel expenses for gasoline in our vehicles when we deliver our rental cars to customers and when we provide vehicle pick-up and drop-off services to them, as well as the fuel expenses of internal fleet dispatching and repair and maintenance.

 

Store expenses. Our store expenses include rental expenses with respect to our service locations, which include our stores and pick-up points, depreciation of store equipment and leasehold improvements, and other store related expenses. We typically enter into lease agreements for our stores with terms of one to three years. The increase in our store expenses primarily resulted from our continued expansion, the number of our stores increased from 391 as of December 31, 2016 to 449 as of December 31, 2017. And we expect our store expenses will continue to increase as we further expand our nationwide service network.

 

Vehicle repair and maintenance expenses. Vehicle repair and maintenance expenses are largely a function of our fleet size. As our fleet size increases, we expect these expenses to increase. Vehicle repair and maintenance expenses are also affected by the age and model of vehicles. A new vehicle typically incurs less repair and maintenance expenses than an older one. We also expect that opening more in-house vehicle repair and maintenance centers in cities where we have sizable fleets will help reduce average repair and maintenance expenses per vehicle.

 

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Car rental expenses. Our car rental expenses primarily consist of fees paid to contracted service providers for car services provided by them to our customers in certain cities where we currently do not provide car services or the demand for such services exceeds our existing capacity.

 

Other expenses. Other expenses include, among others, tolls, vehicle annual inspection fees and other miscellaneous expenses.

 

As we continue to expand the scale of our operations, we expect to gradually benefit from economies of scale and increasing operating efficiency, thereby lowering our cost of revenues as a percentage of our net revenues.

 

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Selling and marketing expenses

 

Selling and marketing expenses consist primarily of advertising and promotion expenses. We have historically promoted our brand and services primarily through online channels, such as search engines, social network websites and Internet portals. We also utilize offline advertising channels, such as outdoor advertising. Attributable to our commitment to enhanced customer experience, we have built a broad and diverse customer base and are increasingly benefiting from word-of-mouth referrals, thereby lowering the growth rate of our selling and marketing expenses. Selling and marketing expenses also include payroll-related expenses in connection with our sales and marketing force as well as commission fee which refers to commissions paid to sale channels promoting our services. Other selling and marketing expenses include other miscellaneous fees related to our sales and promotion activities.

 

The following table sets forth the key components of our selling and marketing expenses for the periods indicated:

 

   For the Years Ended December 31, 
   2015   2016   2017 
   RMB   % of Net
Revenues
   RMB   % of Net
Revenues
   RMB   US$   % of Net
Revenues
 
   (in thousands, except percentages) 
Net revenues   1,450,630    100.0%   2,108,944    100.0%   2,739,522    421,057    100.0%
Selling and marketing expenses:                                   
Advertising and promotion expenses   28,947    2.0    38,968    1.8    89,925    13,821    3.3 
Payroll-related expenses   16,116    1.1    21,871    1.0    26,437    4,063    1.0 
Commission fee   16,616    1.1    29,852    1.4    17,675    2,717    0.6 
Others   3,380    0.3    6,497    0.3    4,995    768    0.2 
Total selling and marketing expenses   65,059    4.5%   97,188    4.6%   139,032    21,369    5.1%

 

General and administrative expenses

 

General and administrative expenses consist primarily of (i) payroll-related expenses relating to our administrative and management functions, (ii) share-based compensation expenses, (iii) professional services fees paid to external advisers, (iv) office rental expenses for our headquarters, (v) bank charge related to service fees charged by payment agencies and banks in connection with payments to us made by our customers, (vi) travel expenses for business trips, (vii) Depreciation, and (viii) other administrative expenses.

 

The increases in our general and administrative expenses from 2015 to 2017 primarily reflected our business expansion and share-based compensation charges associated with options and restricted share units. We also recorded significant external professional services fees in 2015, 2016 and 2017 in connection with our financing activities. We expect our general and administrative expenses to continue to increase in absolute amounts as our business expands and as we become a public company resulting in significant reporting and compliance costs. We believe our facilities and proprietary technology platform enable us to support a substantial further increase in net revenues without causing a proportionate increase in our general and administrative expenses, and as a result, we expect our general and administrative expenses as a percentage of our net revenues to decline in the long run as we grow our business.

 

The following table sets forth the key components of our general and administrative expenses for the periods indicated:

 

    For the Year Ended December 31,  
    2015     2016     2017  
    RMB     % of Net
Revenues
    RMB     % of Net
Revenues
    RMB     US$     % of Net
Revenues
 
    (in thousands, except percentages )  
Net revenues     1,450,630       100.0 %     2,108,944       100.0 %     2,739,522       421,057       100.0 %
General and administrative expenses:                                                        
Payroll-related expenses     89,955       6.2       108,993       5.1       129,009       19,828       4.7  
Share-based compensation     12,727       0.9       14,800       0.7       12,402       1,906       0.5  
Professional fees     20,223       1.4       24,977       1.2       35,469       5,451       1.3  
Office rental expenses     13,215       0.9       16,030       0.8       19,661       3,022       0.7  
Bank charge     10,255       0.7       12,174       0.6       12,019       1,847       0.4  
Travel expense     13,017       0.9       13,957       0.7       15,781       2,425       0.6  
Depreciation expense     1,790       0.1       2,475       0.1       4,107       631       0.1  
Others     22,367       1.6       58,532       2.7       42,222       6,489       1.5  
Total general and administrative expenses     183,549       12.7 %     251,938       11.9 %     270,670       41,601       9.9 %

 

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Other operating income

 

Other operating income relates primarily to government grants and subsidies that we receive from various level of local governments, including the financial subsidies in relation to the VAT Pilot Program. We recognize such grants and subsidies on a cash basis. Government grants and subsidies are granted from time to time at the discretion of the relevant government authorities. These grants and subsidies are granted for general corporate purposes and to support our ongoing operations in the region.

 

Share-based compensation expenses

 

We recognize share-based compensation based on the grant date fair value of equity awards, with compensation expense recognized over the period in which the grantee is required to provide services to our company in exchange for the equity award. Share-based compensation expense is classified in the consolidated statements of comprehensive income (loss) based upon the job function of the grantee. We recognized share-based compensation expenses related to restricted shares, restricted share units or share options granted to certain directors, officers and employees for their services to us in the amount of RMB14.0 million, RMB16.0 million and RMB13.6 million (US$2.1 million) in 2015, 2016 and 2017, respectively.

 

Taxation

 

Cayman Islands

 

We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

 

Hong Kong

 

Our wholly owned Hong Kong subsidiaries, eHi Hong Kong and L&L, are subject to Hong Kong profit tax on their activities conducted in Hong Kong. No provision for Hong Kong profits tax has been made in the consolidated financial statements as eHi Hong Kong and L&L had no assessable income in 2015, 2016 and 2017. Dividends from our Hong Kong subsidiaries to us are exempt from withholding tax.

 

PRC

 

Prior to the effective date of the EIT Law on January 1, 2008, enterprises in China were generally subject to an enterprise income tax at a statutory rate of 33% unless they qualified for certain preferential treatment. Effective as of January 1, 2008, the EIT Law applies a uniform enterprise income tax rate of 25% to all domestic enterprises and foreign-invested enterprises and grants tax incentives for qualified enterprises. Therefore, unless otherwise specified, all of our PRC subsidiaries transitioned from an income tax rate of 33% to 25%, effective January 1, 2008. The EIT Law and its Implementing Rules also permit qualified small-scale enterprises with low profit margins to enjoy a reduced 20% enterprise income tax rate. On November 29, 2011, Circular 117 further provided that if a qualified small-scale enterprise with low profit margins has an annual taxable income of not more than RMB60,000, then 50% of its taxable income can be exempted from enterprise income tax until December 31, 2015, further reducing the effective enterprise income tax rate to 10% until then.

 

In addition, the EIT Law treats enterprises established outside of China that have “de facto management bodies” located in China as PRC resident enterprises for tax purposes. Under the EIT Law and its Implementing Rules, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, Circular 82 provides that certain Chinese-invested enterprises controlled by PRC enterprises or PRC enterprise groups and established outside of China will be classified as resident enterprises only if all the following items are located or resident in China: (i) senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; (ii) key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and (iii) half or more of the senior management or directors with voting rights. Circular 82 also clarified that dividends and other income paid by such resident enterprises will be considered as PRC sourced income and be subject to PRC enterprise income tax. In January 2014, the SAT further issued an amendment to Circular 82 delegating the authority to its provincial branches to determine whether a Chinese-invested established outside China should be considered a PRC resident enterprise. We have not been informed by any PRC tax authorities that we or any of our offshore subsidiaries are treated as a resident enterprise for PRC tax purposes as of the date of this annual report. However, PRC tax authorities could make such a determination in the future, and if considered a resident enterprise for PRC tax purposes, our company would be subject to the PRC enterprise income tax on our global income.

 

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Since January 1, 2012, the MOF and the SAT have started to implement the VAT Pilot Program, providing that companies which are classified by Shanghai’s local tax authorities as in transportation or certain modern service sectors are required to pay VAT, instead of business tax. Since August 1, 2012, the VAT Pilot Program has been expanded to and implemented in other regions, including Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong. Since August 1, 2013, the VAT Pilot Program has been expanded nationwide. On March 23, 2016, the Ministry of Finance and the SAT jointly issued the Notice on Comprehensive Implementation of the Pilot Program for Imposition of Value-Added Tax to Replace Business Tax, pursuant to which the VAT was implemented comprehensively across the country and extended to all industries, effective from May 1, 2016. As a result of the VAT in general, we are subject to a 17% VAT for car rental services, an 11% VAT for designated driving services and a 6% VAT for qualified management services, respectively. Furthermore, a 3% simplified VAT rate is applied for the rental services provided by an entity or branch who are small-scale VAT payers.

 

Critical accounting policies

 

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenue and expenses during each reporting period. We evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, and expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places significant demands on the judgment of our management.

 

Revenue recognition

 

We provide car rentals and car services to our customers. Revenues are primarily comprised of vehicle rental fees and insurance charges, which are recognized over the rental period. Revenue from the sale of gasoline is recognized when the vehicle is returned and is based on the actual volume of gasoline consumed or a contracted fee paid by the customer. Payments for our services from individual customers are generally collected in advance and such amounts received are recorded as advances from customers on the consolidated balance sheets, and are recognized as revenue when services are rendered and revenue recognition criteria are met. For corporate and institutional clients who are on credit terms, the initial credit evaluation is conducted before trade credit is extended, and revenue is recognized when collectability is reasonably assured, services are rendered and all other revenue recognition criteria are met.

 

Based on demand from our corporate and institutional clients, we engage contracted service providers in offering car services to our customers where we currently do not provide such services in certain cities or the demand for such services exceeds our existing capacity. The end customers sign service contracts directly with us in such arrangements and we are the party who is responsible for customers’ acceptance for services rendered. In case of customer disputes, we resolve customer complaints and are solely responsible for refunding customers their payments. Therefore, we are considered the primary obligor. We also determine the service fee and bear the credit risk. As a result, we recognize this type of revenue on a gross basis.

 

In the consolidated statements of comprehensive income (loss), revenues are presented net of business tax, VAT and other related surcharges. Cost of revenues associated with car rentals and car services have not been presented separately as we cannot reasonably and reliably estimate and allocate expenses to each of the revenue streams.

 

Customer loyalty program

 

We established our customer loyalty program, eHi loyalty program, in 2008. Our registered members who have used our car rental services could join this program and earn loyalty membership points upon eligible purchases, and such points can be redeemed for free rental periods, mileage upgrades, and other free gifts. We account for the customer loyalty program using the incremental cost method to estimate the costs associated with the future obligation to our customers, and record such costs as selling and marketing expenses in the consolidated statements of comprehensive income (loss). Unredeemed membership points are recorded in accrued expenses and other current liabilities in the consolidated balance sheets. We adjust the liability associated with our customer loyalty program based on our estimate of future redemption of membership points prior to their expiration, which is three calendar years from the day the membership points are awarded. Our estimate of the rate of future redemptions of membership points is based primarily upon our actual historical redemptions.

 

Allowance for doubtful accounts

 

We perform ongoing credit evaluation, and provide for an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. We review our allowance for doubtful accounts quarterly by assessing individual accounts receivable over a specific aging and amount. Delinquent account balances are written off when we have determined that the likelihood of collection is remote.

 

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Investments

 

For investments where we do not have a controlling financial interest, we evaluate if they are investments in debt and equity securities and if they provide us with the ability to exercise significant influence over the operating and financial policies of the investees. Investments in debt and equity securities are classified into one of three categories: (i) “held to maturity” which are reported at amortized cost; (ii) “trading securities” which are reported at fair value with unrealized holding gains and losses recorded in earnings; and (iii) “available for sale” which are reported at fair value with changes in unrealized gains and losses recorded in other comprehensive income. The equity method is used for investments where we do not have a controlling financial interest but has the ability to exercise significant influence over the operating and financial policies of the investee. The cost method is used for investments where we do not have the ability to exercise significant influence over the operating and financial policies of the investee.

 

Investments are evaluated for impairment when facts or circumstances indicate that the fair value of an investment is less than its carrying value. We review several factors to determine whether a loss is other-than-temporary including, but not limited to, (1) nature of the investment; (2) cause and duration of the impairment; (3) extent to which fair value is less than cost; (4) current economic and market conditions; and (5) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Property and equipment, net

 

Property and equipment is stated at cost, less accumulated depreciation and impairment. Depreciation of property and equipment is recorded on a straight-line basis upon the purchase date, which approximates the in-use date, except for vehicles and leasehold improvements, for which the in-use dates are tracked and monitored separately.

 

Vehicles

 

The initial cost of a vehicle is comprised of purchase price, plus any costs directly attributable to bringing the vehicle to the location and condition necessary for its intended use. Depreciation of vehicles is recorded on a straight-line basis, after consideration of expected holding periods and estimates of residual values. We expect to hold our vehicles generally for a period of approximately three to four years, except for program cars which typically have a holding period of 12 to 24 months. We estimate residual value of our vehicles which are not subject to the program car arrangements typically based on the current market price for used vehicles we obtained from used vehicles dealers or the used car market of similar models. However, the used vehicle market in China is still relatively premature and the price for similar vehicles could vary in different cities throughout the country depending on local market factors. We monitor accounting estimates relating to our vehicles on a quarterly basis, including the used vehicle market as well as the selling price of our vehicles when disposed of to assess the appropriateness of our estimated residual value. Changes made to estimates such as the estimated useful lives or residual values are reflected in vehicle related depreciation expense on a prospective basis. In addition, depreciation expenses associated with vehicles subject to the program car arrangements are recorded based on their respective contractual repurchase prices and holding periods, and are adjusted if the repurchase conditions of such vehicles are not met or we elect not to sell such vehicles as program cars. A 1% increase or decrease in the estimated residual value of vehicles which are not subject to the program car arrangements would result in a corresponding decrease or increase in the vehicle related depreciation expense by RMB19.6 million (US$3.0 million) for the year ended December 31, 2017. Gain or loss on disposal of vehicles is calculated as the difference between the net sales proceeds and the carrying amount of the vehicle, and such amount is recognized as an adjustment to the vehicle related depreciation expense as part of cost of revenues in the consolidated statements of comprehensive income (loss).

 

Vehicles that are available or unavailable for immediate rental (such as vehicles under repair and maintenance or vehicles in- transit) are subject to the same accounting treatment including recording of depreciation expense, impairment assessments, and periodic analysis of estimated useful lives and salvage value. We monitor activities and utilization of our vehicles on a regular basis via the installed GPS equipment. Vehicles that cannot be tracked via the installed GPS equipment and cannot be otherwise located are considered missing and/or lost. We have a dedicated department to locate and recover vehicles in this category and have a history of recovering a majority of such vehicles within the first six months after the time they could not be located. We write off the net carrying value of the vehicle and record a loss in our operating results if a vehicle cannot be tracked via the installed GPS system for more than six months and cannot be otherwise located, as we believe that the chance of recovering a vehicle in such circumstances is remote.

 

Vehicles held for sale

 

Vehicles held for sale consist of used vehicles subject to signed sales agreements awaiting completion of title transfer to the purchaser. When a vehicle is reclassified as held for sale and transferred from property, plant and equipment, it is not further depreciated and is stated at lower of cost and net realizable value. Cost is the net book value upon the reclassification of the vehicle. Net realizable value is the selling price in accordance with the sales agreement less the estimated costs to be incurred upon the completion of title transfer.

 

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Impairment of long-lived assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the estimated undiscounted future cash flow is less than the carrying amount of the assets, we recognize an impairment loss equal to the excess of the carrying value over the fair value of the assets. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. Our estimates of cash flow are based on the current regulatory, social and economic climates where we conduct our operations as well as recent operating information and budgets for our business. These estimates could be negatively impacted by changes in laws and regulations, economic downturns, or other events affecting our business. If our ongoing estimates of future cash flows are not met, we may have to record additional impairment charges in future accounting periods.

 

Government grants and subsidy income

 

We receive government subsidies in the PRC from various levels of local governments from time to time which are granted for general corporate purposes and to support our ongoing operations in the region. We also received financial subsidies in relation to the VAT Pilot Program. These government subsidies are granted at the discretion of the relevant government authorities and, therefore, such amounts are recorded as other operating income on the consolidated statements of comprehensive income (loss) in the period when cash is received.

 

Share-based compensation

 

We adopted the 2010 Plan in April 2010, which was amended and restated in December 2010 and August 2014. In October 2014, we adopted the 2014 Plan, which become effective immediately after the completion of our initial public offering in November 2014. These performance incentive plans were adopted to help us recruit and retain key employees, directors or consultants and to motivate such persons to exert their best efforts on behalf of our company by providing incentives through the granting of share-based awards. The plan administrator is our board of directors or a committee appointed and determined by the board. Under the 2010 Plan, we are authorized to issue a maximum of 6,698,470 common shares, and the awards vest upon satisfaction of continuous service, which varies over a period of three to five years from the date of grant. Under the 2014 Plan, we are authorized to initially reserve a maximum of 4,000,000 common shares, provided that the shares reserved shall automatically increase on January 1 of each year during the term of the 2014 Plan, commencing on January 1, 2015, by an amount equal to the lesser of (i) one percent (1%) of the total number of common shares issued and outstanding on December 31 of the immediately preceding calendar year, (ii) 1,000,000 common shares or (iii) such number of common shares as may be determined by our board of directors. As of the date of this annual report, a total of 3,192,000 options and 1,500 unvested restricted share units granted under the 2010 Plan and the 2014 Plan were outstanding.

 

We recognize share-based compensation on a straight-line basis based on the grant date fair value of equity awards, with compensation expense recognized over the period in which the grantee is required to provide services to us in exchange for the equity award. Share-based compensation expense is classified in the consolidated statements of comprehensive income (loss) based upon the job function of the grantee. We account for a cancellation or settlement of an equity settled share-based payment award as an acceleration of vesting, and recognize immediately the amount that otherwise would have been recognized for services received over the remainder of the vesting period.

 

As the share-based compensation expense recognized in the consolidated statements of comprehensive income (loss) is based on awards ultimately expected to vest, such amounts have been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on our historical experience and revised in subsequent periods if actual forfeitures differ from those estimates.

  

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Results of Operations

 

The following table sets forth our condensed consolidated statements of operations by amount and as a percentage of our total net revenues for 2015, 2016 and 2017:

 

    For the Years Ended December 31,  
    2015     2016     2017  
    RMB     % of Net
Revenues
    RMB     % of Net
Revenues
    RMB     US$     % of Net
Revenues
 
    (in thousands, except percentages)  
Consolidated statements of comprehensive income data                                                        
Net revenues     1,450,630       100.0 %     2,108,944       100.0 %     2,739,522       421,057       100.0 %
Cost of revenues(1)     (1,137,978 )     (78.4 )     (1,515,281 )     (71.9 )     (1,880,349 )     (289,004 )     (68.6 )
Gross profit     312,652       21.6       593,663       28.1       859,173       132,053       31.4  
Selling and marketing expenses:                                                        
Third party     (48,869 )     (3.4 )     (67,788 )     (3.2 )     (122,768 )     (18,869 )     (4.5 )
Related party     (16,190 )     (1.1 )     (29,399 )     (1.4 )     (16,264 )     (2,500 )     (0.6 )
Total selling and marketing expenses(1)     (65,059 )     (4.5 )     (97,188 )     (4.6 )     (139,032 )     (21,369 )     (5.1 )
General and administrative expenses(1)     (183,549 )     (12.7 )     (251,938 )     (11.9 )     (270,670 )     (41,601 )     (9.9 )
Other operating income     10,764       0.7       10,310       0.5       3,763       578       0.1  
Total operating expenses     (237,844 )     (16.5 )     (338,816 )     (16.1 )     (405,939 )     (62,392 )     (14.8 )
Income from operations     74,808       5.1       254,847       12.1       453,234       69,661       16.5  
Interest income     2,653       0.2       8,414       0.4       14,962       2,300       0.5  
Interest expense:                                                        
Third party     (109,566 )     (7.6 )     (206,425 )     (9.8 )     (273,589 )     (42,050 )     (10.0 )
Related party     (14,203 )     (1.0 )     (18,534 )     (0.9 )     (6,996 )     (1,075 )     (0.3 )
Total interest expense:     (123,769 )     (8.6 )     (224,959 )     (10.7 )     (280,585 )     (43,125 )     (10.2 )
Gain from waiver of warrants     16,870       1.2                                
Gain from sale of cost method investment     803,060       55.4                                
Other income, net     10,205       0.7       1,444       0.1       1,957       301       0.1  
Early extinguishment of debt costs                             (19,977 )     (3,070 )     (0.7 )
Income before income taxes     783,827       54.0     39,746       1.9       169,591       26,066       6.2  
Provision for income taxes     (87,488 )     (6.0 )     (6,611 )     (0.3 )     (47,375 )     (7,281 )     (1.7 )
Net income     696,339       48.0     33,135       1.6       122,216       18,784       4.5  

  

(1) Include share-based compensation charges of RMB14.0 million, RMB16.0 million and RMB13.6 million (US$2.1 million) in 2015, 2016 and 2017, respectively, allocated as follows:

 

   For the Years Ended December 31, 
   2015   2016   2017 
   RMB   RMB   RMB   US$ 
   (in thousands) 
Cost of revenues   (362)   (840)   (844)   (130)
Selling and marketing expense   (894)   (401)   (336)   (52)
General and administrative expenses   (12,727)   (14,800)   (12,409)   (1,907)
Total share-based compensation expense   (13,983)   (16,041)   (13,589)   (2,089)

 

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Year ended December 31, 2017 compared to year ended December 31, 2016

 

Net revenues

 

Our total net revenues increased by RMB630.6 million, or 29.9%, from RMB2,108.9 million in 2016 to RMB2,739.5 million (US$421.1 million) in 2017, primarily due to our increased fleet size, geographic coverage and increased demand from new and existing customers.

 

Car rentals. Our net revenues from car rentals increased by RMB532.9 million, or 32.0%, from RMB1,663.5 million in 2016 to RMB2,196.5 million (US$337.6 million) in 2017, primarily as a result of a 23.5 % increase in our growing average available fleet size for car rentals from 36,455 vehicles in 2016 to 45,031 vehicles in 2017 in response to customer demand. RevPAC for car rentals increased from RMB125 in 2016 to RMB134 in 2017, primarily due to the vehicle mix of our operating fleet in 2017 which consisted of more vehicle models with higher rentals. Our fleet utilization rate decreased slightly during these periods from 72.4% in 2016 to 72.2% in 2017, and average daily rental rate slightly increased from RMB173 in 2016 to RMB185 in 2017. In 2017, our net revenues from car rentals accounted for 80.2% of our total net revenues, representing an increase from 78.9% of our total net revenues in 2016.

 

Car services. Our net revenues from car services increased by RMB97.7 million, or 21.9%, from RMB445.4 million in 2016 to RMB543.1 million (US$83.5 million) in 2017, primarily as a result of an increase in our average daily rental fleet for car services from 2,489 in 2016 to 2,968 in 2017, in response to increased demands from our new and existing customers for car services. RevPAC for car services increased from RMB490 in 2016 to RMB501 in 2017.

 

Cost of revenues

 

Our cost of revenues increased by RMB365.1 million, or 24.1%, from RMB1,515.3 million in 2016 to RMB1880.3 million (US$289.0 million) in 2017. The increase in our cost of revenues was primarily due to (i) an increase in payroll-related expenses of RMB110.7 million, as we increased our headcount to support our business expansion; (ii) an increase in vehicle-related depreciation of RMB79.5 million resulted from the expansion of fleet size; and (iii) an increase in vehicle insurance expenses of RMB46.7 million resulted from the expansion of fleet size.

 

In 2017, we disposed of 13,870 used vehicles, and signed sales contracts for 936 used vehicles pending title transfer. We recorded a disposal gain of RMB24.2 million (US$3.7 million) in aggregate for these 14,806 vehicles. In 2016, we disposed of 4,775 vehicles and recorded a disposal gain of RMB1.8 million. These amounts were included in vehicle related depreciation expense in 2016 and 2017, respectively.

 

Gross profit

 

Our gross profit increased by RMB265.5 million, or 44.7%, from RMB593.7 million in 2016 to RMB859.2 million (US$132.1 million) in 2017. Gross profit margin for 2017 was 31.4%, as compared to 28.1% for 2016. The gross profit margin improvement from 2016 to 2017 was primarily attributable to economic of scale resulted from the expansion of fleet size in 2017.

 

Selling and marketing expenses

 

Our total selling and marketing expenses increased by RMB41.8million, or 43.1%, from RMB97.2million in 2016 to RMB139.0 million (US$21.4 million) in 2017. This increase was primarily due to a RMB51.0 million increase in expenses regarding our advertising and promotion activities related to NBA and a RMB4.5 million payroll-related expenses in 2017, partially offset by a RMB12.2 million decrease in commissions paid to sales channels.

 

In December 2016, we entered into a multiyear marketing partnership with the NBA China and an endorsement agreement with NBA star Stephen Curry, which made the NBA China as their official marketing partner and Stephen Curry as their brand ambassador.

 

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Among the total selling and marketing expenses, our related party selling and marketing expenses decreased from RMB29.4 million in 2016 to RMB16.3 million (US$2.5 million) in 2017. The decrease was primarily due to the lower effective commission rate charged by Ctrip as Ctrip stopped charging minimum referral commission to eHi since November 2016 for the selling and marketing services.

 

General and administrative expenses

 

Our general and administrative expenses increased by RMB18.7 million, or 7.4%, from RMB251.9 million in 2016 to RMB270.7 million (US$41.6 million) in 2017, primarily due to RMB20.0 million increase in employee-related costs such as salaries and welfare expenses as a result of increased headcount for our expansion.

 

Other operating income

 

We recorded other operating income of RMB10.3 million and RMB3.8 million (US$0.6 million) in 2016 and 2017, respectively, which primarily consisted of government grants and subsidies we received from various levels of local governments in the respective years. See “—Certain income statement line items—Other operating income.”

 

Interest expense

 

Our total interest expense increased by RMB55.6 million, or 24.7%, from RMB225.0 million in 2016 to RMB280.6 million (US$43.1 million) in 2017. The increase was primarily due to a RMB62.3 million interest expense increase incurred in connection with our US$400 million senior unsecured notes issued in August 2017.

 

Among the total interest expense, our related party interest expenses decreased from RMB18.5million in 2016 to RMB7.0 million (US$1.1 million) in 2017, as a result of a RMB300 million loan extended to us in April 2015 by our strategic partner, Ctrip, through its affiliate Ctrip Travel Information Technology (Shanghai) Co. Ltd. In October 2016, we voluntarily repaid RMB200 million to Ctrip Travel Information before the due date, and only RMB100 million loan remained outstanding as of December 31, 2017.

 

Other income, net

 

We recorded other income of RMB1.4 million and RMB1.9 million (US$0.3 million) in 2016 and 2017, respectively, which mainly included tax refund and other miscellaneous items.

 

Early extinguishment of debt costs

 

On August 15, 2017, we early repaid the US$150 million syndicated bank facility entered into in August 2016 and hence expensed off the unamortized issuance costs of US$ 3.1 million (equivalent to RMB 20 million) incurred for the syndicated bank facility as an early extinguishment cost.

 

Provision for income taxes

 

We made provisions for income taxes of RMB6.6 million and RMB47.4 million (US$7.3 million) in 2016 and 2017, respectively. Provision for income taxes made in 2017 comprise withholding tax for interest paid to foreign (non-PRC) entities of RMB17.2 million and deferred income tax expense of RMB30.2 million, which was primarily because we recorded net income of certain PRC subsidiaries in 2017 and such provision was assessed and made based on a 25% enterprise income tax rate for our PRC operating subsidiaries. For the year ended December 31, 2017, the effective tax rate increase was mainly due to less utilization of net operating loss carry forwards, for which valuation allowance was provided in prior year.

 

Net income

 

We recorded net income of RMB33.1 million in 2016, and recorded a net income of RMB122.2 million (US$18.8 million) in 2017. Net income margin for the year of 2017 was 4.5%, up 290 basis points from 1.6% for the full year of 2016.

 

Year ended December 31, 2016 compared to year ended December 31, 2015

 

Net revenues

 

Our total net revenues increased by RMB658.3 million, or 45.4%, from RMB1,450.6 million in 2015 to RMB2,108.9 million in 2016, primarily due to our increased fleet size, geographic coverage and increased demand from new and existing customers.

 

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Car rentals. Our net revenues from car rentals increased by RMB563.0 million, or 51.2%, from RMB1,100.6 million in 2015 to RMB1,663.5 million in 2016, primarily as a result of a 48.4% increase in our growing average available fleet size for car rentals from 24,573 vehicles in 2015 to 36,455 vehicles in 2016 in response to customer demand. RevPAC for car rentals increased from RMB123 in 2015 to RMB125 in 2016, primarily due to the vehicle mix of our operating fleet in 2016 which consisted of more vehicle models with higher rentals. Our fleet utilization rate increased slightly during these periods from 71.4% in 2015 to 72.4% in 2016, and average daily rental rate slightly increased from RMB172 in 2015 to RMB173 in 2016. In 2016, our net revenues from car rentals accounted for 78.9% of our total net revenues, representing an increase from 75.9% of our total net revenues in 2015.

 

Car services. Our net revenues from car services increased by 95.3 million, or 27.2%, from RMB350.1 million in 2015 to RMB445.4 million in 2016, primarily as a result of an increase in our average daily rental fleet for car services from 1,887 in 2015 to 2,489 in 2016, in response to increased demands from our new and existing customers for car services. RevPAC for car services decreased from RMB508 in 2015 to RMB490 in 2016, as we provide more car services to individual customers in 2016, which generally used economic car models with associated lower market rates compared to car models utilized when we provide car services to traditional corporate and institutional clients.

 

Cost of revenues

 

Our cost of revenues increased by RMB377.3 million, or 33.2%, from RMB1,138.0 million in 2015 to RMB1,515.3 million in 2016. The increase in our cost of revenues was primarily due to (i) an increase in vehicle-related depreciation of RMB195.9 million; (ii) an increase in payroll-related expenses of RMB109.6 million, as we increased our headcount to support our business expansion; and (iii) an increase in store expenses of RMB26.3 million, as we expanded our services locations.

 

In 2016, we disposed of 4,775 used vehicles, and signed sales contracts for 1,890 used vehicles pending title transfer. We recorded a disposal gain of RMB1.8 million in aggregate for these 6,665 vehicles. In 2015, we disposed of 4,140 vehicles and recorded a loss of RMB5.1 million. These amounts were included in vehicle related depreciation expense in 2015 and 2016, respectively.

 

Gross profit

 

Our gross profit increased by RMB281.0 million, or 89.9%, from RMB312.7 million in 2015 to RMB593.7 million in 2016. Gross profit margin for 2016 was 28.1%, as compared to 21.6% for 2015. The gross profit margin improvement from 2015 to 2016 was primarily attributable to certain percentage decreases in vehicle insurance expenses as a result of economies of scale as our fleet grew in 2016 and, to a lesser extent, in vehicle repair and maintenance expenses due to certain of our cost control measures to enhance our operating efficiency.

 

Selling and marketing expenses

 

Our total selling and marketing expenses increased by RMB32.1 million, or 49.4%, from RMB65.1million in 2015 to RMB97.2 million in 2016. This increase was primarily due to a RMB13.2 million increase in commissions paid to sales channels and a RMB10.0 million increase in expenses regarding our advertising and promotion activities as a result of our increased sales and marketing activities in 2016.

 

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Among the total selling and marketing expenses, our related party selling and marketing expenses increased from RMB16.2 million in 2015 to RMB29.4 million in 2016. The increase was primarily because we expanded and promoted our car services to a business-to-consumer model through Ctrip’s channels.

 

General and administrative expenses

 

Our general and administrative expenses increased by RMB68.4 million, or 37.3%, from RMB183.5 million in 2015 to RMB251.9 million in 2016, primarily due to a RMB19.0 million increase in employee-related costs such as salaries and welfare expenses as a result of increased headcount for our expansion, as well as a foreign exchange loss in 2016 compared with a foreign exchange gain in 2015.

 

Other operating income

 

We recorded other operating income of RMB10.8 million and RMB10.3 million in 2015 and 2016, respectively, which primarily consisted of government grants and subsidies we received from various levels of local governments in the respective years. See “—Certain income statement line items—Other operating income.”

 

Interest expense

 

Our total interest expense increased by RMB101.2 million, or 81.8%, from RMB123.8 million in 2015 to RMB225.0 million in 2016. The increase was primarily due to a RMB106.8 million interest expense increase incurred in connection with our US$200 million senior unsecured notes issued in December 2015 and our US$400 million senior unsecured notes issued in August 2017.

 

Among the total interest expense, our related party interest expenses increased from RMB14.2 million in 2015 to RMB18.5 million in 2016, as a result of a RMB300 million loan extended to us in April 2015 by our strategic partner, Ctrip, through its affiliate Ctrip Travel Information Technology (Shanghai) Co. Ltd. In October 2016, we voluntarily repaid RMB200 million to Ctrip Travel Information before the due date, and only RMB100 million loan remained outstanding as of December 31, 2016.

 

Other income, net

 

We recorded other income of RMB10.2 million and RMB1.4 million in 2015 and 2016, respectively. Our other income in 2016 primarily consisted of a RMB1.0 million tax refund.

 

Provision for income taxes

 

We made provisions for income taxes of RMB87.5 million and RMB6.6 million in 2015 and 2016, respectively. Provision for income taxes made in 2016 was primarily because we recorded net income of certain PRC subsidiaries in 2016 and such provision was assessed and made based on a 25% enterprise income tax rate for our PRC operating subsidiaries. Provision for income taxes made in 2015 was primarily due to a 10% PRC tax assessed on the one-time gain from our sale of our cost method investment.

 

Net income

 

We recorded net income of RMB696.3 million in 2015 (including a net gain of RMB736.8 million related to sales of investment assets after transaction costs and tax provision), and recorded a net income of RMB33.1 million in 2016. Net income margin for the year of 2016 was 1.6%.

 

B.Liquidity and Capital Resources

 

We generated operating income in 2015, 2016, and 2017. Our operations and our growth have primarily been financed by issuances of shares, bank borrowings and credit arrangements with financing entities of automobile manufacturers, issuance of senior unsecured notes, sale of investments and syndicated bank facility. We expect self-financing from operating income to be an increasing source of our cash flows in future periods.

 

We had negative working capital at December 31, 2017 primarily due to the maturity of our 2018 Senior Notes in December 2018. Our management believes that our current cash position as of December 31, 2017, the cash expected to be generated from investing activities through our proper management of fleet size, operations and funds available from borrowings under the bank facilities will be sufficient to meet the Company’s working capital and capital expenditure for at least the next twelve months from the date of this annual report. 

 

As of December 31, 2017, we had RMB1,283.5 million (US$197.3 million) in cash, cash equivalents and restricted cash, among which RMB369.1 million (US$56.7 million) was denominated in RMB, RMB914.3 million (US$140.5 million) was denominated in US dollars and RMB73,597 (US$11,312) was denominated in Hong Kong dollars. We generally transfer cash from our offshore holding companies to PRC operating subsidiaries through: (i) making shareholder loans to PRC operating subsidiaries, (ii) making additional capital contributions to PRC operating subsidiaries; (iii) extending domestic loans through PRC operating subsidiaries while providing security interests for such loans through offshore holding companies, and (iv) transferring cash through cross-border “cash pooling” within our group companies. On the other side, we plan to transfer cash from PRC operating subsidiaries back to offshore holding companies through: (i) repaying shareholder loans to offshore holding companies, (ii) paying dividends to offshore holding companies (iii) extending foreign loans through offshore holding companies while providing security interests for such loans through PRC operating subsidiaries, and (iv) transferring cash through cross border “cash pooling” within our group companies. All of such transfers shall be conducted in compliance with PRC laws, regulations and rules. For examples, “cash pooling” was recently permitted by PRC governments for cross-border cash transfer, subject to restrictions including (i) such transfers shall only be conducted within group companies, and one of which shall be incorporated in a PRC free trade zone, and (ii) proceeds from loans or bonds could not be transferred by using “cash pooling”. For more details regarding restrictions on transferring cash within our corporate structure, please see “Risk Factors - PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds from the offerings of any securities to make loans or additional capital contributions to our PRC operating subsidiaries”, “- Limitations on the ability of our operating subsidiaries to pay dividends or other distributions to us could have a material adverse effect on our ability to conduct our business”, and “- Government control over currency conversion may limit our ability to issue dividends to our shareholders in foreign currencies, and may therefore adversely affect the value of your investment.

 

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As of December 31, 2017, we had an aggregate of RMB5.6 billion (US$862.9 million) in total debt, including RMB2,657.4 million (US$408.4 million) outstanding short-term debt and RMB2,957.1 million (US$454.5 million) outstanding long-term debt from banks and third-party financing companies and issuance of senior unsecured notes. Among the total debt of RMB5.6 billion (US$862.9 million), RMB254.7 million (US$39.1 million) were collateralized by some of our vehicles and accounts receivable from one of the Company’s wholly-owned subsidiaries. As of December 31, 2017, RMB100.0 million (US$15.4 million) of our outstanding long-term debt represented related party debt provided by our strategic partner, Ctrip, via an entrusted bank loan.

 

On December 8, 2015, we issued the 2018 Senior Notes with an aggregate principal amount of US$200 million, which have a trading market on the Stock Exchange of Hong Kong Limited. The 2018 Senior Notes bear a fixed interest rate of 7.5% per annum, yielding 7.75%, with interest payable semi-annually in arrears, and will mature on December 8, 2018 unless previously repurchased in accordance with their terms prior to such date. The 2018 Senior Notes are general obligations of our Company and are (i) subordinated to secured obligations of our Company, (ii) senior in right of payment to any existing and future obligations of our Company expressly subordinated in right of payment; (iii) guaranteed by our offshore subsidiaries eHi Hong Kong, Brave Passion Limited and L&L on a senior basis, subject to certain limitations, and (iv) effectively subordinated to all existing and future obligations of our non-guarantor subsidiaries. In addition, under the terms of the 2018 Senior Notes, we are subject to restrictive covenants including, among others, limitations on incurring additional indebtedness or liens, maintenance of a fixed charge coverage ratio, maintenance of our shareholding structure, limitations on consolidation, merger and investment, and limitations on asset sales or use of proceeds. As of the date of this annual report, we have been in continuous compliance with all restrictive covenants under the Indenture in connection with the 2018 Senior Notes.

 

On August 30, 2016, we issued the 2016 Facility with an aggregate principal amount of US$150 million with a syndicate of banks. Pursuant to the 2016 Facility, 50% of the proceeds has been used to repay our existing indebtedness, and remaining proceeds will be used for fund capital expenditures of our PRC subsidiaries and other general corporate purposes. The 2016 Facility was jointly and severally guaranteed by our existing and future-established offshore subsidiaries, subject to certain exceptions according to terms therein. The 2016 Facility bears a floating interest rate of LIBOR plus 3.50% margin per annum. In August 2017, the Company early repaid all outstanding borrowings under the syndication loan originally due in 2019 using proceeds received from its 2022 Senior Note.

 

On August 14, 2017, we issued the 2022 Senior Notes with an aggregate principal amount of US$400 million, which have a trading market on the Singapore Exchange Securities Trading Limited. The 2022 Senior Notes bear a fixed interest rate of 5.875% per annum, yielding 6.075%, with interest payable semi-annually in arrears, and will mature on August 14, 2022 unless previously repurchased in accordance with their terms prior to such date. The 2022 Senior Notes are general obligations of our Company and are (i) subordinated to secured obligations of our Company, (ii) senior in right of payment to any existing and future obligations of our Company expressly subordinated in right of payment; (iii) guaranteed by our offshore subsidiaries eHi Hong Kong, Brave Passion Limited and L&L on a senior basis, subject to certain limitations, and (iv) effectively subordinated to all existing and future obligations of our non-guarantor subsidiaries. In addition, under the terms of the 2022 Senior Notes, we are subject to restrictive covenants including, among others, limitations on incurring additional indebtedness or liens, maintenance of a fixed charge coverage ratio, maintenance of our shareholding structure, limitations on consolidation, merger and investment, and limitations on asset sales or use of proceeds. As of the date of this annual report, we have been in continuous compliance with all restrictive covenants under the Indenture in connection with the 2022 Senior Notes. 

 

The following table sets forth a summary of our net cash flows for the periods indicated:

 

   For the Years Ended December 31, 
   2015   2016   2017 
   RMB   RMB   RMB   US$ (Note 2(d)) 
   (in thousands) 
Net cash provided by operating activities   296,691    420,744    719,865    110,641 
Net cash used in investing activities   (991,917)   (3,381,959)   (2,585,661)   (397,409)
Net cash provided by financing activities   2,281,227    798,299    2,032,193    312,342 
Effect of exchange rate changes on cash and cash equivalents   97,879    82,347    (24,565)   (3,776)
Net increase (decrease) in cash and cash equivalent   1,683,880    (2,080,570)   141,832    21,799 
Cash and cash equivalents-beginning of year   926,208    2,610,088    529,519    81,386 
Cash and cash equivalents-end of year   2,610,088    529,519    671,350    103,185 

 

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Operating activities

 

Net cash provided by operating activities consists primarily of our net income, non-cash adjustments including depreciation and amortization, share-based compensation expenses as well as one-time gains from sale of cost method investment and waiver of warrants, and changes in operating assets and liabilities, such as accrued expenses and other current liabilities, accounts receivable, and prepaid expenses and other current assets.

 

Net cash provided by operating activities in the year ended December 31, 2017 was RMB719.9 million (US$110.6 million), primarily attributable to (i) our net income of RMB122.2 million (US$18.8 million) in 2017, (ii) an add-back of depreciation and amortization expenses of RMB755.1 million (US$116.1 million), which were non-cash item and primarily related to vehicle-related depreciation, and partially offset by (i) an increase of RMB165.2 million (US$25.4 million) in prepaid expenses and other assets, primarily related to value-added tax payments which could be deducted as expenses in the future periods, and (ii) an increase of RMB155.2 million (US$23.9 million) in accounts receivable.

 

Net cash provided by operating activities in the year ended December 31, 2016 was RMB420.7 million, primarily attributable to (i) our net income of RMB33.1 million in 2016, (ii) an add-back of depreciation and amortization expenses of RMB668.0 million, which were non-cash item and primarily related to vehicle-related depreciation, and partially offset by (i) an increase of RMB251.6 million in prepaid expenses and other assets, primarily related to value-added tax payments which could be deducted as expenses in the future periods.

 

Net cash provided by operating activities in the year ended December 31, 2015 was RMB296.7 million , primarily attributable to (i) our net income of RMB696.3million in 2015, (ii) an add-back of depreciation and amortization expenses of RMB474.7 million , which were non-cash item and primarily related to vehicle-related depreciation, and partially offset by (i) one-time gains of RMB820.0 million from sale of investment assets and waiver of warrants, which were cash flows generated from our investing activities, and (ii) an increase of RMB166.5 million in prepaid expenses and other assets, primarily related to value-added tax payments which could be deducted as expenses in the future periods.

 

Investing activities

 

Our cash used in investing activities is primarily related to investments in property and equipment, mostly vehicle purchases.

 

Net cash used in investing activities amounted to RMB2,585.7 million (US$397.4 million) in the year ended December 31, 2017, primarily attributable to RMB3,252.5 million (US$499.9 million) associated with purchases of property and equipment, mostly vehicles, as we expanded our fleet size significantly in 2017, and an increase in restricted cash of RMB377.0 million (US$57.9 million), partially offset by RMB1,057.3 million (US$162.5 million) in proceeds from the disposal of property and equipment, mostly used vehicles.

 

Net cash used in investing activities amounted to RMB3,382.0 million in the year ended December 31, 2016, primarily attributable to RMB3,687.8 million associated with purchases of property and equipment, mostly vehicles, as we expanded our fleet size significantly in 2016, and RMB50.0 million cash paid for loans to a third party, partially offset by RMB410.7 million in proceeds from the disposal of property and equipment, mostly used vehicles.

 

Net cash used in investing activities amounted to RMB991.9 million in the year ended December 31, 2015, primarily attributable to RMB2,183.4 million associated with purchases of property and equipment, mostly vehicles, as we expanded our fleet size significantly in 2015, partially offset by (i) RMB954.4 million in proceeds from sales of investment assets (net of transaction costs), as we transferred our investment in Travice Inc. in 2015, and (ii) RMB241.8 million in proceeds from the disposal of property and equipment, mostly used vehicles. 

 

Financing activities

 

Net cash provided by financing activities consists primarily of proceeds from note offering, equity financings, and borrowings from banks, third-party financing companies and our related party Ctrip. Our financing activities for the periods discussed below were primarily to fund the expansion of our fleet and service network throughout China.

 

Net cash provided by financing activities amounted to RMB2,032.2 million (US$312.3 million) in the year ended December 31, 2017, primarily attributable to (i) proceeds from issuance of the 2022 Senior Notes (net of issuance costs) of RMB2,611.6 million (US$401.4 million); and (ii) proceeds from borrowings from third parties of RMB1,874.4 million (US$288.1 million), partially offset by (i) repayment of borrowings from third parties of RMB1,441.5 million (US$221.6 million) and (ii) repayment of Syndicated loan of RMB1,000.3 million (US$153.7 million) during the same period.

 

Net cash provided by financing activities amounted to RMB798.3 million in the year ended December 31, 2016, primarily attributable to proceeds from borrowings from third parties of RMB2,142.4 million, partially offset by (i) repayment of borrowings from third parties of RMB1,166.8 million and (ii) repayment of borrowings from a related party of RMB200.0 million during the same period.

 

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Net cash provided by financing activities amounted to RMB2,281.2 million in the year ended December 31, 2015, primarily attributable to (i) proceeds from issuance of the 2018 Senior Notes (net of issuance costs) of RMB1,241.3 million, and (ii) proceeds from the issuance of Class A common shares in a private placement to Tiger Fund and SRS Funds (net of issuance costs) of RMB792.9 million, and (iii) proceeds from borrowings of RMB704.1 million from banks and third-party financing companies and borrowings of RMB300 million from our related party Ctrip, and partially offset by repayment of borrowings of RMB741.3 million during the same period.

 

Capital expenditures

 

Our capital expenditures are primarily used for vehicle purchases. Our capital expenditures totaled RMB2,183.4 million, RMB3,687.8 million and RMB3,252.5 million (US$499.9 million) in 2015, 2016 and 2017, respectively. We expect the substantial majority of our capital expenditures in 2018 to relate to the planned growth of our fleet. We intend to fund our capital expenditures with existing cash balances, cash generated from our operating activities, and borrowings from banks and third-party financing companies.

 

Inflation

 

Inflation in China has not materially impacted our results of operations in recent years. According to the National Bureau of Statistics of China, the year-over-year increase in the consumer price index for 2015, 2016 and 2017 was 1.4%, 2.0% and 1.6%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future. If inflation continues to rise, we may experience increases in the wages of our employees as a result of the increasing inflation levels in China or otherwise. See “Risk Factors—Risks related to our business and industry—If the average salary or statutory welfare expenses of our employees increase significantly, our profitability maybe materially adversely impacted.”

 

C.Research and Development

 

Not applicable.

 

D.Trend Information

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2017 to December 31, 2017 that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

 

E.Off-Balance Sheet Arrangements

 

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

F.Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations, including interest payable, as of December 31, 2017:

 

   Payments Due by Period 
   Total   Within 1 Year   1-3 Years   3-5 Years   More than 5 Years 
   (RMB in thousands) 
Short-term debt(1)   951,781    951,781             
Long-term debt due to third parties(1)   5,563,492    1,923,802    718,903    2,920,787     
Long-term debt due to a related party(1)   102,262    102,262             
Operating leases   99,046    51,631    37,439    9,124    852 
Purchase commitments(2)   560,048    550,510    9,538         
Total   7,276,629    3,579,986    765,880    2,929,911    852 

 

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(1) Amounts include (i) principal amounts included in short-term borrowings and long-term borrowings on the consolidated balance sheets, and (ii) estimated interest payments of RMB22.9 million and RMB914.0 million on the outstanding short-term and long-term debt, respectively, based on the contractual borrowing terms and the respective applicable interest rates.

 

(2) Purchase commitments include vehicle purchase deposits and commitments relate to purchase of rental vehicles and marketing resources.

 

Our 2018 Senior Notes are in the aggregate principal amount of US$200 million and will mature on December 8, 2018, unless previously repurchased in accordance with their terms prior to such date. The Senior 2018 Notes bear interest at a rate of 7.5% per annum, payable semiannually in arrears on June 8 and November 8 of each year, beginning on June 8, 2016.

 

Our 2016 Facility is in the aggregate principal amount of US$150 million has been repaid in full in August 2017.

 

Our 2022 Senior Notes are in the aggregate principal amount of US$400 million and will mature on August 14, 2022, unless previously repurchased in accordance with their terms prior to such date. The Senior 2022 Notes bear interest at a rate of 5.875% per annum, payable semiannually in arrears on February 14 and August 14 of each year, beginning on February 14, 2018.

 

While the table above indicates our contractual obligations as of December 31, 2017, the actual amounts we are eventually required to pay may be different in the event that any agreements are renegotiated, cancelled or terminated.

 

G.Safe Harbor

 

See “Forward-Looking Statements” on page 3 of this annual report.

 

ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.Directors and Senior Management

 

The following table sets forth certain information relating to our directors and executive officers as of the date of this annual report. The business address of each of our directors and executive officers is Unit 12/F, Building No.5, Guosheng Center, 388 Daduhe Road, Shanghai, 200062, the People’s Republic of China.

 

Name   Age   Position/Title
Ray Ruiping Zhang   54   Chairman, Chief Executive Officer
Greg Stubblefield   58   Director
Gang Chen   39   Director
Qian Miao   52   Independent Director
Andrew Xuefeng Qian   55   Independent Director
David Jian Sun   53   Independent Director
Ronald Meyers   60   Independent Director
Leo Lihong Cai   54   Executive Vice President of Sales and Marketing
Colin Chitnim Sung   52   Chief Financial Officer
Chun Xie   39   Chief Information Officer
Hongtao Han   49   Vice President of Operations
Nina Yan Wu   46   Director of Human Resource and Training Department
Jane Fengjuan Zheng   35   Director of Corporate Sales and Business Development

 

Ray Ruiping Zhang is our founder, chief executive officer and chairman of our board of directors. Mr. Zhang has served as our chief executive officer and our director since our inception. Mr. Zhang has over 20 years of experience in vehicle dispatching and fleet management system integration and implementation. Prior to establishing our company, from September 1990 to April 2002, Mr. Zhang was the co-founder and chief executive officer of Aleph, Inc., which is a leading supplier of vehicle dispatching and scheduling systems in the United States based in Berkeley, California. Mr. Zhang received his bachelor’s degree in computer science from Fudan University in 1985, studied in the graduate school of computer science at California State University, Sacramento from 1985 to 1987, and received his executive MBA degree from China Europe International Business School in 2005.

 

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Greg Stubblefield has served as our director since August, 2016, who was appointed by our board of directors after Mr. William W. Snyder’s resignation and re-elected by our shareholders at the 2016 annual general meeting of shareholders. Mr. Stubblefield has served as executive vice president and chief strategy officer of Enterprise Holdings since 2009, during which period he led Enterprise Holdings’ global business development as well as global sustainability strategy and initiative, including its car-sharing program, its Alamo and National franchise locations and its marketing & communications organization. Mr. Stubblefield joined Enterprise Holdings Inc., or Enterprise Holdings, in 1982. He was named president of Alamo and National franchises in 2007 and president of operations California and Hawaii in 2004. Mr. Stubblefield received his bachelor’s degree in social science from University of California, Berkeley in 1982.

 

Gang Chen has served as our director since June 2017, and was appointed by our board of directors after Mr. James Jianzhang Liang’s resignation. Mr. Gang Chen is currently a senior vice president of Ctrip and is responsible for its Ground Transport business and Innovation Works. He also helped establish Ctrip’s Bus Ticketing business in 2014 and Train Ticketing business in 2013. Prior to Ctrip, Mr. Chen joined Tieyou Train Ticketing in 2011, which was subsequently acquired by Ctrip. Mr. Chen is a serial entrepreneur and had several start-up experiences. Mr. Chen obtained his master’s and bachelor’s degrees in Computer Science from Zhejiang University.

 

Qian Miao has served as our independent director since April 2008. Mr. Miao is the general manager and a director of China Network Co., Ltd. From December 1995 to December 2002, Mr. Miao served as a department manager at Wonders Information Co., Ltd., a listed company in China. From July 1987 to December 1995, Mr. Miao was an IT engineer and project manager at Shanghai Institute of Computer Software. Mr. Miao completed his postgraduate study in software engineering from Fudan University in 1987 and received his bachelor’s degree in computer science from Fudan University in 1985.

 

Andrew Xuefeng Qian has served as our independent director since November 2014. Mr. Qian currently serves as the chairman of New Access Capital, which he founded in 2003. Prior to that, Mr. Qian worked at Softbank China Venture Capital as a vice president from 2000 to 2003. Prior to joining Softbank China Venture Capital, Mr. Qian worked as a corporate attorney at Simpson Thacher & Bartlett LLP, Cleary Gottlieb Steen & Hamilton LLP and Cravath, Swaine & Moore LLP. He is the guest professor of Shanghai Jiaotong University Aetna Graduate School of Business Administration and Nanjing University School of Business Management. He received the awards of “2007 Top 10 New Financiers of China”, “2008 Top 10 Young Investors in China”, “2011 Outstanding Venture Investor” and “2013 Outstanding PE/VC Achievement Award”. He was a former president of Yale Club of Shanghai from 2002 to 2007. He was a visiting fellow at Queen Elizabeth House of Oxford in 1986. Mr. Qian received his juris doctor’s degree from Yale Law School in 1994, his M.A./Ph.D. qualification in political science from University of California Los Angeles in 1991 and his LL.B. degree from Foreign Affairs College in Beijing in 1985.

 

David Jian Sun has served as our independent director since November 2014. Mr. Sun has over ten years of experience in consumer industry. Mr. Sun has served as an executive director and the general manager of BTG Hotels (Group) Co., Ltd. since September 2016. He served as the executive director and chief executive officer of Home Inns & Hotels Management Inc. from December 2004 to August 2016. Prior to that, Mr. Sun served as a vice president of operations at B&Q (China) Ltd., a subsidiary of Kingfisher plc, the third largest home improvement retail group in the world from 2003 to 2004, overseeing the operation of 15 B&Q superstores in China. From 2000 to 2003, Mr. Sun served as a vice president of marketing at B&Q (China) Ltd., and led B&Q’s market positioning and branding efforts in China. Mr. Sun served as an independent director of Mecox Lane Limited from 2010 to 2013. Mr. Sun has served as an independent director of E-house (China) Holdings Limited (NYSE:EJ) since March 2014 and an independent director of Leju Holdings Limited (NYSE:LEJU) since April 2014. Mr. Sun received a bachelor’s degree from Shanghai Medical University in China in 1987.

 

Ronald Meyers has served as our independent director since November 2014. Mr. Meyers is a certified public accountant and has 34 years of experience in public accounting. He joined Ernst & Young LLP in 1979 and was promoted to audit partner in 1991. In 2006, Mr. Meyers relocated to Ernst and Young’s Shanghai office as part of the Far East region management team. He was promoted in 2009 to the role of chief operating officer of the Greater China practice. He retired from the firm in 2013. During his career in public accounting, Mr. Meyers served as audit partner for a number of publicly traded clients including those with substantial international operations. He also held numerous other management positions while at Ernst & Young LLP, including the managing partner of the Midwest subarea audit practice. Mr. Meyers graduated summa cum laude from Southern Illinois University with a bachelor’s degree in economics in 1979.

 

Leo Lihong Cai has served as our executive vice president of sales and marketing since April 2008. Dr. Cai has over 15 years of experience in marketing and IT industry and over ten years of experience in car rental and car service industry. Prior to joining us, Dr. Cai served as a market development director of EMC Corporation, a pre-sales director of Hewlett-Packard Company and an enterprise solution and strategic alliances director of Mercury Interactive Corporation. Dr. Cai obtained a bachelor’s degree in naval architecture from Shanghai Jiao Tong University in 1988, a master’s degree in mechanical engineering from University of Missouri in 1992 and a Ph.D. degree in mechanical engineering from the University of California, Berkeley in 1996.

 

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Colin Chitnim Sung has served as our chief financial officer since April 2013. Mr. Sung is currently a member of the board of directors and chairman of the audit committee of Hollysys Automation Technologies Ltd. (NASDAQ: HOLI) since February 2008. Prior to joining us, Mr. Sung also has served as adviser of NeWorld Education Group, Inc. since August 2012 and served as Chief Financial Officer of NeWorld Education Group since August 2011. Mr. Sung served as the deputy Chief Executive Officer and the Chief Financial Officer of Linktone Ltd. (NASDAQ: LTON), a wireless interactive entertainment service provider in China, from 2008 to 2011. From 2005 to 2008, he was the Chief Financial Officer of Linktone Ltd., where he also served as the acting Chief Executive Officer in 2006 and as its director of board from 2007 to 2008. From 2004 to 2005, Mr. Sung was the Corporate Controller of UTI, United States, Inc., a subsidiary of International Freight Forwarder (NASDAQ: UTIW), and from 2001 to 2004, was a Vice President of finance and Corporate Controller of USF Worldwide, Inc., a subsidiary of US Freightways. From 1997 to 2001, Mr. Sung was Vice President and Corporate Controller for US Operation of Panalpina Welttransport Holding, (PWTN.SW). Mr. Sung received his bachelor’s degree in accounting from William Paterson University in 1992 and his MBA degree from American InterContinental University in 2004. Mr. Sung is a Certified Public Accountant and Chartered Global Management Accountant.

 

Chun Xie has served as our chief information officer since 2006. Prior to joining us, Mr. Xie served as a senior engineer and an IT manager at Surrey Technology Co., Ltd. from August 2002 to February 2006. Mr. Xie also served as a senior engineer at Chinaquest.com from August 2000 to July 2001. Mr. Xie graduated from the advanced software engineering & project management program of National Institute Information Technology, India, and was certified as a PMP (project management professional) by PMI (Project Management Institute, USA) in 2006 and obtained a bachelor’s degree from Tongji University in 2000.

 

Hongtao Han has served as our vice president of operation since 2006. Prior to joining us, Mr. Han served as the finance manager at Shanghai Kailun International Trading Co., Ltd. from January 1997 to January 2006. From July 1989 to January 1997, Mr. Han served as an accounting manager at Shanghai Kailun Paper and Printing Group Co., Ltd. Mr. Han received his bachelor’s degree from Shanghai University of Finance and Economics in 1990.

 

Nina Yan Wu has served as our director of human resource and training department since February 2011. Prior to join us, Ms. Wu served as an operation director at WTM Marketing Services Co., Ltd. from 2008 to 2011. From 2006 to 2008, Ms. Wu served as a human resource director of Shanghai Unisys Technology Company. From 2002 to 2006, Ms. Wu served as a human resource manager at Microsoft (China) Co., Ltd. Ms. Wu received her bachelor’s degree in Chinese language and literature from Shanghai Normal University in 1994.

 

Jane Fengjuan Zheng has served as our director of corporate sales and business development since April 2011, and has over almost ten years of experience in corporate sales and marketing management in the car rental and car service industry. Ms. Zheng received her bachelor’s degree in business administration from Wuhan University of Technology and has completed the EMBA program from Antai Business School of Economics and Management, Shanghai Jiaotong University.

 

B.Compensation

 

Compensation of Directors and Executive Officers

 

In 2017, the aggregate cash compensation earned by our executive officers and all of our directors was approximately RMB10.3 million (US$1.6 million). For information regarding options granted to officers and directors, see “—Equity Incentive Plans”. We do not pay or set aside any amounts for pensions, retirement or other benefits for our officers and directors.

 

Employment agreements

 

We have entered into employment agreements with all of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate an executive officer’s employment for cause at any time, without prior written notice, or without cause with prior written notice, for certain acts of the employee, including but not limited to willful gross misconduct by the employee in connection with his or her employment, or violation of our internal rules. An executive officer may, with prior written notice, terminate his or her employment at any time without cause.

 

Each executive officer has agreed to hold, both during and subsequent to the terms of his or her agreement, in confidence and not to use, except as required in the performance of his or her duties in connection with the employment, any of our confidential information, technological secrets, commercial secrets and know-how. Our executive officers have also agreed to disclose to us all inventions, designs and techniques resulted from work performed by them, and to assign us all right, title and interest of such inventions, designs and techniques. Moreover, each of our executive officers has agreed during the term of his or her employment with us and two years thereafter, (i) not to engage in any manner in any business that may compete with our business, or own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any person that competes with us; (ii) not to refer or attempt to refer to any third party any business in which we currently engage or will likely engage or participate; and (iii) not to solicit or employ any person with whom we maintain employment or consulting relation, or otherwise direct or cause any person to terminate his employment or consulting relationship with us.

 

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We have also entered into an indemnification agreement with each of our directors and executive officers. Under these agreements, we agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.

 

Equity Incentive Plans

 

We adopted the 2010 Plan in April 2010, which was amended and restated in December 2010 and August 2014. In October 2014, we adopted the 2014 Plan, which came into effect upon completion of our initial public offering. These performance incentive plans were adopted to help us recruit and retain key employees, directors or consultants and to motivate such persons to exert their best efforts on behalf of our company by providing incentives through the granting of share-based awards. The plan administrator is our board of directors or a committee appointed and determined by the board. Under the 2010 Plan, we are authorized to issue a maximum of 6,698,470 common shares, and the awards vest upon satisfaction of continuous service, which varies over a period of three to five years from the date of grant. Under the 2014 Plan, we are authorized to initially reserve a maximum of 4,000,000 common shares, provided that the shares reserved shall automatically increase on January 1 of each year during the term of the 2014 Plan, commencing on January 1, 2015, by an amount equal to the lesser of (i) one percent (1%) of the total number of common shares issued and outstanding on December 31 of the immediately preceding calendar year, (ii) 1,000,000 common shares or (iii) such number of common shares as may be determined by our board of directors. As of the date of this annual report, a total of 3,192,000 options and 1,500 unvested restricted share units granted under the 2010 Plan and the 2014 Plan were outstanding.

 

The following paragraphs describe the principal terms of our 2010 Plan:

 

Plan Administration. Our 2010 Plan will be administered by our board of directors or one or more committees appointed by our board of directors or another committee (within its delegated authority). Any such administrator is authorized and empowered to, subject to the express provisions of the 2010 Plan, do all things necessary or desirable in connection with the authorization of awards and the administration of the 2010 Plan.

 

Types of Awards. The types of awards that may be granted under our 2010 Plan are:

 

  · Share Options. A share option is the grant of a right to purchase a specified number of common shares during a specified period as determined by the administrator. The maximum term of each option shall be ten years. The per share exercise price for each option granted to any eligible person subject to United States income tax shall be not less than 100% of the fair market value of a common share on the date of grant of the option.

 

  · Share Appreciation Rights. A share appreciation right, or SAR, is a right to receive a payment, in cash and/or common shares, equal to the excess of the fair market value of a specified number of common shares on the date the SAR is exercised over the “base price” of the award, which base price shall be set forth in the applicable award agreement and, with respect to any eligible person subject to United States income tax, shall be not less than 100% of the fair market value of a common share on the date of grant of the SAR. The maximum term of a SAR shall be ten years.

 

  · Other Awards. The other types of awards that may be granted under the 2010 Plan include: (i) share bonuses, restricted shares, performance shares, share units, phantom shares, dividend equivalents, or similar rights to purchase or acquire shares, whether at a fixed or variable price or ratio related to the common shares, upon the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or any combination thereof; (ii) any similar securities with a value derived from the value of or related to the common shares and/or returns thereon; or (iii) cash awards.

 

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Acceleration of Awards upon Certain Corporate Transactions. Upon the occur