THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND … · the revenue sharing arrangement with live...

THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THE INFORMATION MUST BEREAD IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT.

RISK FACTORS

Potential investors should consider carefully all the information set out in this document and,

in particular, should evaluate the following risks associated with the investment in our Shares. You

should pay particular attention to the fact that we conduct our operations in China, the legal and

regulatory environment of which in some respects may differ from that in Hong Kong. Any of the

risks and uncertainties described below could have a material adverse effect on our business, results

of operations, financial condition or on the trading price of our Shares, and could cause you to lose

all or part of your investment.

RISKS RELATING TO OUR BUSINESS AND INDUSTRY

Our limited operating history with a relatively new business model in an emerging market makes itdifficult to evaluate our business and growth prospects.

We have experienced rapid growth since we commenced our business operations in 2016. Our average

monthly active streamers increased from approximately 980 in 2017 to approximately 1,900 in 2019. Our

revenue increased from RMB50.2 million in 2017 to RMB83.0 million in 2019. However, our historical

growth may not be indicative of our future performance. We cannot assure you that we will grow at the

same rate as we did in the past or avoid any decline.

Many aspects of our business are unique and evolving. Our growth prospects should be considered in

light of the risks and uncertainties that a fast-growing company with a limited operating history in a rapidly

evolving industry may encounter. The live streaming industry in China is relatively new and rapidly

developing and is subject to significant challenges. As such, we may not be able to predict future market

trends and adjust our business operations accordingly. As a live streamer facilitator, our business relies

heavily on our ability to capitalize on the development of China’s live streaming industry. Our business

model, which primarily involves streamer incubation and management, online entertainment content

production and distribution, and content marketing, has emerged along with China’s live streaming industry,

and there has been few proven methods for cultivating streamers or monetizing their influence over their fan

base. Some of our current monetization channels are also in a relatively preliminary stage, such as our

creation of short videos and incubation of IP content, and our content marketing services. We cannot assure

you that our attempts to monetize our streamers and their fan base will continue to be successful or we will

be able to develop profitable new monetization channels.

In addition, our growth may slow down, and our revenues may decline due to numerous factors, many

of which are beyond our control, including changing fan preferences, increasing competition, the emergence

of alternative business models, unfavorable regulatory changes and a general economic slowdown in China.

If we fail to successfully address any of the foregoing risks and uncertainties, our business, results of

operations and financial condition may be materially and adversely affected. Such risks and uncertainties

also make it difficult to evaluate our growth prospects. If our growth rate declines, [REDACTED]perceptions of our business and prospects may be materially and adversely affected, which may result in a

substantial decline in the price of our Shares.

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If we fail to maintain stable relationships with existing live streaming platforms or establishcooperation relationships with new ones, our business, results of operations and financial conditioncould be materially and adversely affected.

Our relationship with live streaming platforms is crucial to our success. We and live streaming

platforms generally enter into a cooperation agreement, pursuant to which we share with platforms and our

streamers a portion of the gross billings from the sales of virtual items attributed to our streamers. In 2017,

2018 and 2019, we generated revenue of RMB48.5 million, RMB70.1 million and RMB75.8 million from

the revenue sharing arrangement with live streaming platforms and streamers, respectively, accounting for

96.6%, 94.0% and 91.4% of our total revenue for the same periods, respectively.

China’s live streaming platforms generally have extremely strong bargaining power due to the nature

of the industry. As such, we may have to accept pre-determined revenue sharing arrangements, platform

rules and policies, and other streaming-related terms, as may be modified unilaterally by them from time to

time, which may be unfavorable to us. For example, in December 2019, a major live streaming and short

video sharing platform in China adjusted its revenue sharing ratio with streamers and streamer associations,

which adversely affected our results of operations. Furthermore, we and live streaming platforms generally

enter into cooperation agreements based on their standard form contracts, and there is little room to

negotiate terms and conditions that deviate from such standard form contracts. The standard form contracts

typically contain certain restrictive covenants. For example, some contracts contain exclusivity provisions

prohibiting our streamers from performing on or for competing platforms without their prior written

consent. Although we complied with the cooperation agreements with our partnered live streaming

platforms in all material aspects and did not have any material contractual dispute with them during the

Track Record Period, we cannot assure you that we will always be deemed as having strictly adhered to

these restrictive covenants by such platforms during the course of our business. If we or our streamers

breach or are deemed to be in breach of the terms of use of such platforms, or for any other reasons, the

platform operators may decide at their discretion to curtail or inhibit our ability to use their platforms, for

example, by banning or closing our or our streamers’ user accounts and streaming channels. Any such

dispute may not only be costly and time-consuming to resolve, but could also be detrimental to our

relationships with live streaming platforms.

In addition, live streaming platforms simultaneously cooperate with a multitude of live streamer

associations like us while there is only a limited number of live streaming platforms available in the market.

We may fail to compete effectively with our competitors or may otherwise fail to maintain stable

relationships with live streaming platforms. Our cooperation agreements with live streaming platforms

typically have a term ranging from one to four years and will renew for the same length of period upon

expiration of the original term if no party indicates otherwise. Although we generally managed to renew our

agreements with major live streaming platforms in the past, we cannot assure you that we can continue to

maintain stable business relationships with those platforms on commercially reasonable terms, or at all. If

any live streaming platform terminates its cooperation relationship with us, and if we fail to find a

replacement on commercially reasonable terms or in a timely manner or at all, our business, results of

operations and financial condition could be materially and adversely affected.

Furthermore, as some of those platforms compete against each other, we may be forced to cooperate

exclusively with certain platforms and terminate our business relationships with the others for commercial

consideration if market competition intensifies or if a major platform so demands specifically. We may also

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RISK FACTORS

fail to develop new relationships with additional live streaming platforms. In that case, our services may

become less appealing to streamers, and our business, results of operations and financial condition could be

materially and adversely affected.

We were exposed to concentration and counter-party risks of heavy reliance on a limited number oflive streaming platforms during the Track Record Period. Operators of these platforms may curtailor inhibit our ability to use the platforms, or there may be material disruptions of the platforms.

Our customers primarily include live streaming platforms. We generated 86.5%, 62.7% and 46.1% of

our total revenue from our largest customer in 2017, 2018 and 2019, respectively. In the same periods, we

generated 95.8%, 92.7% and 91.7% of our total revenue from our top five customers, respectively. In

addition, substantially all of our top five streamers in terms of revenue contribution were streaming on our

largest customer in the same periods. We may be subject to concentration and counter-party risks from a

limited number of live streaming platforms. See “Business — Our Customers” for details. Although we

collaborate with a comprehensive league of streaming platforms in China, and continuously enlarge and

diversify our customer base, we cannot assure you that the proportion of the revenue contribution of our top

customers to our total revenues will decrease in the near future, as China’s live streaming market is highly

concentrated, with top five live streaming platforms accounting for an aggregate market share of

approximately 75.8% in terms of the gross billings from the sales of virtual items on live streaming

platforms in 2019.

Our top customers may cease to engage our services, reduce business with us, or unfavorably modify

their revenue sharing arrangements with us. Specifically, any one of the following events that are beyond

our control, among others, may cause material fluctuations or declines in our revenues and have a material

and adverse effect on our business, financial condition, results of operations and prospects:

• an overall decline in the business of one or more of our top customers;

• unexpected business interruptions due to a number of events, including failure in

telecommunications services, viruses and security breaches;

• the failure or inability of any of our top customers to make timely payments;

• non-compliance with law on the part of any top customers or breach of contract by any top

customers vis-a-vis their business partners; or

• unlawful, improper or otherwise inappropriate activities by any top customers that could harm

their business, brand and reputation, or subject them to government investigations.

Should any of the foregoing occur, we may not be able to find replacements with similar revenue

contribution level in a timely manner or at all, considering the limited number of live streaming platforms in

the industry, which could materially and adversely affect our business, results of operations and financial

condition.

If we fail to retain and grow our streamer pool, especially our top streamers, our business, results ofoperations and financial condition could be materially and adversely affected.

During the Track Record Period, our business growth depended, in part, on a limited number of top

streamers. In 2017, 2018 and 2019, our top five streamers contributed 29.1%, 32.2%, and 19.9% of our

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total revenue, respectively. We expect that our top streamers will continue to contribute a substantial portion

of our total revenue. Therefore, our ability to retain and grow our streamer pool, especially our top

streamers, is critical to our success.

For all streamers seeking to join our streamer associations, we send a binding e-invitation through our

streamer association account on a specific live streaming platform following a consensus on cooperation

terms with them, which contains, among other things, our revenue sharing ratio with the specific streamer.

By accepting our e-invitation, the streamer undertakes a series of obligations, including not to transfer to

another platform or streamer association without obtaining our consent. We also make a variety of

arrangements with our streamers in addition to the e-invitation. We selectively enter into an exclusive talent

agency agreement with a limited number of streamers with great potential, which has a term ranging from

one to 20 years and will renew for the same length of period as the initial term upon expiration of the initial

term if no party indicates otherwise in writing. We also partner with certain top streamers and third-party

companies to jointly represent, develop and manage some streamers through our streamer associations.

Despite our efforts to cultivate and promote our streamers, some of them may nevertheless become

dissatisfied with their contractual terms as they grow their popularity and may request to re-negotiate

revenue sharing arrangements and other contractual terms with us. They may also choose to cease their

cooperation with us during the contractual term, or transfer to another streamer association without

obtaining our consent, and we may be unable or choose not to enforce our rights against the departing

streamers if their revenue contribution is insignificant. Even if we can and choose to enforce our rights, the

settlement process may be time-consuming and the gross compensation we receive through enforcement of

breach of contract may be substantially less than the revenues we expect to earn if the contractual term has

been performed in full by the departing streamer. During the Track Record Period, we have been involved

in litigation proceedings regarding breach of contracts by our streamers. Although none of these

proceedings had a material effect on our business, we cannot assure you that there will not be such disputes

in the future. Any such dispute may be costly and time-consuming to resolve, cause our streamers to leave

us, or otherwise harm our reputation and materially and adversely affect our business, results of operations

and financial condition.

In addition, some live streaming platforms enter into a cooperation agreement and a talent agency

agreement with us and the streamer, respectively, to streamline the revenue sharing process, in which case

we are exclusively entrusted by these live streaming platforms to handle live streaming-related matters,

including management and promotion of the concerned streamer, under the relevant cooperation agreement.

Meanwhile, we establish relationships with those streamers through binging e-invitations and/or exclusive

talent agency agreements. If our relationship with the streamer or the live streaming platform deteriorates,

we may not be able to control or supervise such streamer effectively, and contractual disputes may arise in

relation to our cooperation with the live streaming platform and/or the streamer, which could materially and

adversely affect our business, results of operations and financial condition.

To retain and grow our streamer pool, we may have to devise more favorable revenue sharing

arrangements and provide more resources to support and promote our streamers, which could lead to

increased operating costs and expenses. Despite our various efforts, we could still fail to retain and grow our

streamer pool due to a variety of factors beyond our control, such as the streamers’ personal choice, a

general slowdown of the live streaming industry in China, and the ever-changing industry trends. While our

streamers, especially top streamers, demonstrated a high level of loyalty during the Track Record Period, we

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RISK FACTORS

cannot assure you that we are able to continue to retain our streamers, including our top streamers, on

commercially reasonable terms or at all. Certain streamers may choose not to renew our contract when the

original contractual term ends and join in our competitors or establish their own business in the live

streaming industry. Their departure may cause a decline in our revenues. As a result, our business, results of

operations and financial condition could be materially and adversely affected.

We may not be successful in recruiting and cultivating commercially viable streamers and may beunable to recoup the costs incurred.

The success of our business depends in large part on our ability to grow a deep pool of commercially

viable streamers. To this end, we have established a sophisticated streamer grooming system to discover,

train and promote streamers, and guide them in content production.

However, we cannot assure you that we will always be able to recruit and maintain a sufficient

number of popular streamers on commercially reasonable terms or at all. In addition, our ability to

successfully cultivate popular streamers is subject to many factors beyond our control, such as their

personal style, charisma, attitude and talents, as well as their interaction with fans. If any of our streamers

fails to develop a large fan base in a timely manner or at all, we could fail to generate the expected revenues

from his or her streaming activities. In addition, we have incurred, and expect to continue to incur a

significant amount of operating costs and expenses in recruiting, training and promoting our streamers and

providing them with technical and other support. A significant portion of such costs and expenses are

incurred before the streamers have developed a sufficiently large fan base to generate any revenues. If we

fail to recoup the costs and expenses incurred in recruiting, training and promoting our streamers and

providing them with technical and other support, our business, results of operations and financial condition

could be materially and adversely affected.

If we fail to help our streamers maintain and enlarge their fan base, our business, results ofoperations and financial condition could be materially and adversely affected.

The success of our business also depends, in part, on our ability to help our streamers maintain and

enlarge their fan base. As of April 30, 2020, our top 50 PC-based streamers and top 30 mobile-based

streamers accumulated an aggregate of 221.7 million fans. We have invested, and expect to continue to

invest, substantial resources in attracting and retaining fans for our streamers through our training and

promotional activities. A number of factors could negatively affect our streamers’ fan base, including:

• our or our streamers’ ability to accurately anticipate and respond to changes in fans’ and live

streaming platform users’ preferences;

• negative publicity or regulatory sanctions against us or our streamers;

• failure to maintain stable relationships with live streaming platforms; and

• unfavorable changes in industry-specific laws and regulations.

If our streamers’ fan base shrinks or becomes less active, the gross billings generated from the sales of

virtual items attributed to them could reduce, and they could lose other commercial opportunities due to

their declined popularity or influence among fans, which would in turn result in a decline in our revenues.

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RISK FACTORS

If we fail to maintain and further develop and diversify our monetization channels, our business,results of operations and financial condition could be materially and adversely affected.

We generate revenues primarily from sharing a portion of the gross billings from the sales of virtual

items attributed to our streamers on live streaming platforms. To a lesser extent, we also generate revenues

from licensing of short video contents, sponsored product sales, advertising services, brand endorsements

and offline performing activities by streamers. We cannot assure you that we could maintain or improve the

profitability of our existing monetization channels, as our partnered live streaming platforms could modify

our revenue sharing arrangements, elect to collaborate with our streamers directly, or otherwise cease to

collaborate with us on commercially reasonable terms or at all.

We intend to explore more monetization opportunities and expand our revenue sources leveraging our

deep pool of streamers and their fan base. For example, we will strengthen cooperation with e-commerce

platforms and third-party merchants to offer sponsored product sales and advertising services leveraging the

“fan effect” out of our streamers’ influence. We also seek to enhance our monetization capabilities in the

thriving short video market by recruiting additional qualified personnel and expanding our production

facilities. These diversification plans may require us to devote significant financial and managerial

resources and may not perform as expected due to a variety of factors beyond our control. For example,

third-party merchants may have financial difficulties, suffer decreased customer demand, or otherwise

reduce their marketing efforts as a result of economic downturn. In addition, as we monitor market

developments, we may adjust our monetization strategies from time to time, which could result in decreases

of our total revenues or revenue contributions from certain monetization channels. If we are not successful

in enhancing our existing monetization channels or developing new monetization approaches, we may not

be able to maintain or increase our revenues or recoup our investments in any new monetization initiatives,

which could materially and adversely affect our business, results of operations and financial condition.

If we fail to compete and manage our growth effectively, our business, results of operations andfinancial condition could be materially and adversely affected.

The market for China’s live streamer associations is rapidly evolving, highly fragmented and intensely

competitive, with the top five players accounting for an aggregate market share of 13.1% in terms of net

revenues from live streaming in 2019, according to the F&S Report. We face competition from a great

number of live streamer facilitators, talent agencies and entertainment companies. We expect intensified

competition in the future from new market entrants as the industry continues to evolve. The principal

competitive factors in our market include comprehensiveness of service coverage, number and quality of

streamers, relationships with major live streaming platforms, brand awareness and reputation, and financial,

managerial and other resources. Some of our competitors and potential competitors are larger and have

greater brand recognition, longer operating histories, more established streamer development systems and

greater resources than we do. As a result, our competitors may be able to respond more quickly and

effectively than we can to new or changing opportunities, industry standards or fan preferences. Our current

and potential competitors may also develop new monetization channels or business models. Intensified

competition may result in a decrease in our market share, reduction in our revenues or difficulty in

recruiting streamers and enlarge their fan base, any of which could negatively affect our business, results of

operations, financial condition and our ability to grow our business. Moreover, as we expand the scope of

our operations, we may face additional competition. If one or more of our competitors were to merge or

partner with another of our competitors, the change in the competitive landscape could also adversely affect

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our ability to compete effectively. If we cannot compete effectively against our current and future

competitors, our business, financial condition and results of operations could be adversely affected.

In addition, our rapid growth and expansion have placed, and continue to place, significant strain on

our management and resources. This level of significant growth may not be sustainable or achievable at all

in the future. We believe that our continued growth will depend on many factors, including our ability to

solidify collaboration with live streaming platforms, attract, cultivate and retain viable streamers, develop

new monetization channels, increase brand awareness among streamer candidates and live streaming

platforms, control costs and expenses effectively, and adapt to the rapidly changing regulatory environment

in China. We cannot assure you that we will achieve any of the foregoing goals, which could materially and


Our failure to collect trade receivables could have a material adverse effect on our business, results ofoperations and financial condition.

As of December 31, 2019, our trade receivables were RMB17.0 million, of which 68.4% were aged

less than 30 days. Our trade receivables turnover days were 68 in 2019. In 2019, our trade receivables

consisted of amounts due from partnered live streaming platforms and a live streamer.

As our business continues to scale up, our trade receivables due from partnered live streaming

platforms may continue to grow, which may increase our risks for uncollectible receivables. We generally

do not require collateral or other security from our partnered live streaming platforms. Actual losses on

trade receivables could differ from our anticipated amount reserved in our allowance account, if any. Our

partnered live streaming platforms may experience financial difficulties due to changes in macroeconomic

conditions and, as a result, they may delay in payments to us, request modifications to their payment

arrangements or default on their payment obligations to us. If we are unable to collect our trade receivables

from our them, our business, results of operations and financial condition may be materially and adversely

affected.

In addition, our trade receivables due from a streamer were overdue because of our dispute with the

streamer. We filed a civil action against this streamer in October 2018, alleging the streamer’s breach of the

exclusive talent agency agreement with us and seeking full payment of the receivable amount under the

agreement plus liquidated damages. In December 2019, the court ruled in favor of us, and ordered the

streamer to pay the receivable amount under the agreement and liquidated damages. The streamer

subsequently appealed. As of the Latest Practicable Date, this litigation was still in progress. We had not

recognized credit loss allowance against our trade receivables due from this streamer, as our Directors

believed that such amount would be fully recoverable, considering the court’s first trial decision, the

opinion of our legal counsel, and the streamer’s sound financial condition and ability to make the payment.

However, we cannot assure you the outcome of the pending litigation, or that we can fully recover the

receivable amount. If we are unable to collect our trade receivables from the streamer, our results of

operations and financial condition may be materially and adversely affected.

We have a significant amount of intangible assets for which we may have to incur impairment losses,which could harm our results of operations.

We had intangible assets of RMB34.8 million, RMB38.8 million and RMB35.8 million as of

December 31, 2017, 2018 and 2019, respectively, which primarily consisted of acquired streamer

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associations and exclusive agency contracts with our streamers. The intangible asset is stated at its historical

costs less accumulated amortization, net of any impairment. When the carrying amount of an intangible

asset exceeds its recoverable amount, we recognize an impairment loss. The recoverable amount is the

higher of the intangible asset’s fair value less costs of disposal and its value in use. Future events such as

popularity of our streamers, operations of our acquired streamer associations, market competition and

regulatory actions could have a material impact on our key assumptions in determining the recoverable

amount of our intangible assets, which in turn could result in write-downs of our intangible assets. Future

impairment of our intangible assets could decrease our profit and materially and adversely affect our results

of operations.

Our strategic investments or acquisitions may turn out to be unsuccessful and materially andadversely affect our financial condition and results of operations.

We have acquired individual streamers with great potential and well-performing streamer associationsduring the Track Record Period, and may continue to acquire such or other assets, technologies andbusinesses that are complementary to our existing business or otherwise. We may also establish strategicpartnerships or enter into cooperation agreements with other businesses to expand and penetrate into otherverticals of the online entertainment industry. Negotiating these transactions can be time-consuming,challenging and expensive, and our ability to close these transactions may often be subject to regulatoryapprovals that are beyond our control. In addition, investments and acquisitions could result in the use ofsubstantial amounts of cash, potentially dilutive issuances of equity securities, significant depreciation andsignificant amortization expenses related to acquired streamer associations and exclusive agency contractswith acquired streamers, impairment losses, deferred compensation charges, adverse tax consequences,significant diversion of management attention, incurrence of debt on unfavorable terms and exposure topotential unknown liabilities of the acquired business. Moreover, the cost of identifying and consummatinginvestments and acquisitions and integrating the acquired businesses into ours may be significant, and theintegration of acquired businesses may be disruptive to our existing business operations. We may encounterdifficulties retaining key employees of the acquired company, integrating diverse business cultures, orassimilating acquired operations. Consequently, these transactions, even if undertaken and announced, maynot close. If our investments and acquisitions are not successful, our business, results of operations andfinancial condition may be materially and adversely affected.

If our streamers’ online activities are deemed to violate any PRC laws or regulations, we may be heldliable and our business, results of operations and financial condition may be materially and adverselyaffected.

Online activities are subject to extensive regulations in China. In 2016, the Office of the Anti-

pornography and Illegal Publications Working Group, the State Internet Information Office, MIIT, the

MOC, the MPS and the NRTA jointly launched a “Clean Up the Internet 2016” campaign. Based on

publicly available information, the campaign aimed to eliminate obscene information and content over the

Internet by, among other things, holding liable individuals and corporate entities that distribute or facilitate

the distribution of obscene information and content.

We have implemented various internal rules and monitoring measures to regulate our streamers’

online activities, such as regular ongoing training sessions for both streamers and our operational staff.

However, as live streaming is real-time in nature and many of our streamers may conduct live streaming

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simultaneously, we cannot assure you that we have adequate manpower, resources or technology to identify

and terminate our streamer’s activities that may be viewed as illicit or otherwise non-compliant with PRC

law and regulations. In addition, government’s standards as to what constitutes illicit online content are

subject to interpretations and may change in a manner that could render our current regulatory and

monitoring efforts insufficient. The PRC government has wide discretion in regulating online activities and,

irrespective of our efforts, government campaigns and other actions to reduce illicit content and activities

could suspend our streamers’ activities, which in turn could materially and adversely affect our revenue. In

addition, we may be subject to restrictive measures imposed by our partnered live streaming platforms and

incur contractual liabilities under our cooperation agreements with these platforms, which could undermine

our relationship with them. Although we have included an indemnity clause in the exclusive talent agency

agreement with our streamers, our reputation could be harmed due to our streamers’ illicit online content

and activities.

Live streaming platforms in China are subject to extensive regulations, which could adversely affecttheir operations, which in turn could materially and adversely affect our business, results ofoperations and financial condition.

Internet information service providers in China, including live streaming platforms, are subject to a

variety of existing and new rules, regulations, policies, and license and permit requirements. For example,

pursuant to the Regulation on Internet Information Service of the PRC, which was issued and adopted by

the State Council of the PRC (the “State Council”) on September 20, 2000 and latest amended on January 8,

2011, Internet content providers are prohibited from distributing over the Internet content that, among other

things, violates PRC laws and regulations, impairs the national dignity of China or the public interest, or is

obscene, superstitious, fraudulent, violent or defamatory. Internet content providers are also prohibited from

distributing content that may be deemed by relevant government authorities as “socially destabilizing” or

leaking “state secrets” of China. In connection with enforcing these rules, regulations, policies and

requirements, relevant government authorities may suspend services by, or revoke licenses of, any Internet

information service providers that is deemed to provide illicit content online, and such activities may be

intensified in connection with any ongoing government campaigns to eliminate prohibited content online. In

addition, pursuant to the Provisions on the Administration of Online Live Streaming Services promulgated

by the State Internet Information Office of the PRC on November 4, 2016 and took effect on December 1,

2016, live streaming platforms are required to establish a content review system, verify their users’

identities using information such as mobile phone numbers, enter into a service agreement with their users

to specify both parties’ rights and obligations, and file the identity information of the publishers of online

streaming programs with local government authorities for record. Also, according to the Administrative

Measures for Business Activities of Online Performances issued by the Ministry of Culture on December 2,

2016, which took effect on January 1, 2017, live streaming platforms shall require streamers on their

platforms to make real-name registration. The Circular on Tightening the Administration of Internet Live-

Streaming Services jointly issued by MIIT, the State Internet Information Office (“SIIO”) and several other

government agencies on August 1, 2018 reiterates the requirements for platforms to perform ICP

registration and to obtain other applicable licenses for providing relevant online streaming services, and

requires the operators to file with local public security authorities within 30 days after it commences online

streaming services. Related laws and regulations and their interpretation and enforcement involve

significant uncertainties, and new laws and regulations may continue to be promulgated.

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As a result, if any of our partnered live streaming platforms fails to comply with any existing or new

laws and regulations, they could be subject to various administrative actions, including fines and

discontinuation of or restrictions on their operations, which could adversely affect our streamers’ streaming

activities on such platform and gross billings generated from sales of virtual items. We cannot assure you

that we can migrate our streamer associations on such platform elsewhere and find alternative platforms on

commercially reasonable terms and in a timely manner or at all, which could material and adversely affect

our business, results of operations and financial condition.

Restrictions on virtual currency may materially and adversely affect our business, results ofoperations and financial condition.

We generate revenues primarily through sharing a portion of the gross billings from the sales of

virtual items attributed to our streamers on live streaming platforms. Live streaming platforms issue

different virtual currencies to their users for them to purchase virtual items, which could be sent to streamers

as gifts. However, restrictions on virtual currencies may disrupt the business operations of live streaming

platforms, which in turn could materially and adversely affect our business, results of operations and

financial condition.

Currently, the PRC government has not promulgated any specific rules, laws or regulations to directly

regulate virtual currencies for live streaming business. However, since the live streaming industry in China

is relatively new and still in its early development stage, there are uncertainties as to the interpretation and

implementation of the relevant laws and regulations, and we cannot assure you that the PRC regulatory

authorities will not adopt stringent enforcement measures or issue new rules to regulate virtual currencies

for the live streaming industry. As a result, live streaming platforms may be required to obtain additional

approvals or licenses or change current business model, which could materially and adversely affect the

sales of their virtual items, and could require us to modify our revenue sharing arrangements with live

streaming platforms or otherwise modify our monetization approach. If any of the foregoing occurs, our

business, results of operations and financial condition could be materially and adversely affected.

Advertising activities conducted by our streamers may subject us to penalties and otheradministrative actions.

Our streamers sometimes provide sponsored product sales and advertising services for third-party

merchants through live streaming primarily in the form of oral recommendations and advertisements placed

in their streaming rooms. We also provide content marketing services through short videos we assist in

producing and distributing. Under PRC advertising laws and regulations, we are obligated to monitor such

advertising content to ensure its authenticity, accuracy and compliance with applicable laws and regulations.

In addition, where a special government review is required for specific types of advertisements prior to

distribution, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and

veterinary pharmaceuticals, we are obligated to confirm that such review has been performed and approval

has been obtained from competent governmental authorities. To fulfill these monitoring obligations, we

typically include clauses in our contracts requiring that all advertising content provided by third-party

merchants comply with relevant laws and regulations. Under PRC law, we may have claims against third-

party merchants for all damages to us caused by their breach of such representations. Violation of these

laws and regulations may subject us to penalties, including fines, confiscation of our income, orders to cease

dissemination of the advertisements and orders to publish an announcement correcting the misleading

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information. In circumstances involving serious violations, such as posting a pharmaceutical product

advertisement without approval, or posting an advertisement for fake pharmaceutical product, PRC

regulatory authorities may force us to suspend our business operations. See “Regulatory Overview —

Regulations Relating to Marketing Business.”

Although we have implemented content monitoring measures to ensure that the advertisements our

streamers distribute are in full compliance with applicable laws and regulations, we cannot assure you that

all the content contained in such advertisements is true, accurate and legitimate as required by the

advertising laws and regulations, especially given the uncertainty in the application of these laws and

regulations. The inability of our systems and procedures to adequately and timely discover such

non-compliances may subject us to regulatory penalties or administrative sanctions. As of the Latest

Practicable Date, we had not been subject to material penalties or administrative sanctions arising from

violations of applicable PRC advertising laws and regulations. However, we cannot assure you that we will

not be found in violation of applicable PRC advertising laws and regulations, or that we will not be subject

to penalties or sanctions in the future. The occurrence of any of the foregoing could materially and


If we fail to obtain requisite approvals, licenses or permits applicable to our business or to complywith applicable laws and regulations, our business, results of operations, financial condition andprospects may be materially and adversely affected.

Our business is subject to governmental supervision and regulation by the relevant PRC government

authorities. As the live streaming industry in China is still at a relatively early stage of development,

government authorities may from time to time issue new laws, rules and regulations governing these

industries, enhance enforcement of existing laws, rules and regulations, and require us to obtain new and

additional approvals, licenses or permits. Considerable uncertainties could exist with respect to the

interpretation and implementation of existing and future laws and regulations governing our business

activities.

As confirmed by our PRC Legal Advisors, we have obtained all material approvals, licenses and

approvals required to conduct our business operations from the relevant PRC government authorities,

including the License for Production and Distribution of Radio or Television Programs (廣播電視節目製作經營許可證), the Online Culture Operating License (網絡文化經營許可證) and the Commercial Performance

License (營業性演出許可證). See “Business — Licenses, Permits and Approvals” for details. We may fail to

renew theses approvals, licenses or permits upon expiration in a timely manner. In addition, we may be

required to obtain additional licenses or permits as a result of our business expansion, change in our

operations or change in laws and regulations applicable to us. If we fail to obtain or maintain any of the

required licenses or approvals or make the necessary filings, we may be subject to various penalties, such as

confiscation of the revenues that were generated through the unlicensed business operations, the imposition

of fines and the discontinuation or restriction of our operations. Any such penalties may disrupt our business

operations and materially and adversely affect our business, results of operations and financial condition.

Non-compliance with law on the part of any third parties with which we conduct business coulddisrupt our business and adversely affect our results of operations and financial condition.

In addition to live streaming, we strive to explore other commercial opportunities for our streamers,

such as advertising, sponsored product sales and offline performing activities. Third parties with which we

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conduct these businesses, such as advertising customers and event planners, may be subject to regulatory

penalties or punishments because of their regulatory compliance failures or may be infringing upon other

parties’ legal rights, which may, directly or indirectly, disrupt our business. Although we conduct review of

legal formalities and certifications before entering into contractual relationships with third parties, and take

measures to reduce the risks that we may be exposed to in case of any non-compliance by third parties, we

cannot be certain whether such third party has violated any regulatory requirements or infringed or will

infringe any other parties’ legal rights. For example, third-party merchants may submit copyrighted

advertising content that they have no right to distribute, and we may not be able to identify all instances of

copyright infringement. If we or our streamers deliver content that violates copyrights of a third party, we

may be required to pay damages to compensate such third party. Even though we have the contractual right

to seek indemnification from the relevant third parties liable for such violations, we cannot assure you that

we will be able to enforce such right. As a result, our business, results of operations and financial condition

could be materially and adversely affected. We cannot rule out the possibility of incurring liabilities or

suffering losses due to any non-compliance by third parties. We cannot assure you that we will be able to

identify irregularities or non-compliance in the business practices of third parties we conduct business with,

or that such irregularities or non-compliance will be corrected in a prompt and proper manner. Any legal

liabilities and regulatory actions affecting third parties involved in our business may affect our business

activities and reputations, and may in turn affect our business, results of operations and financial condition.

The success of our business depends on our ability to maintain and enhance our brands.

We conduct business operations on each partnered live streaming platform as a streamer association

under various brands, such as Huashe Culture on YY Live and Guangzhou Yuntu on Huya Live. We depend,

in part, on the reputation and brand image of our streamer associations to attract more streamers, live

streaming platforms and other business partners, and grow our business in an efficient and sustainable

manner. Therefore, maintaining and enhancing our brands is critical to the success of our business.

However, we cannot assure you that we will be able to maintain and enhance our brands and remain our

leadership position in China’s live streamer association market.

Negative publicity about us, our streamers, our business and our management could threaten the

perception of our brands. For example, our streamers may distribute illicit, false, offensive or controversial

content through live streaming notwithstanding any terms of use of the live streaming platforms and our

internal rules and monitoring measures, which could result in negative comments and complaints, cause

their accounts to be closed by live streaming platforms, or subject them or us to administrative or legal

proceedings in serious cases. In addition, they may also receive negative publicity if they are involved in

any illegal activities, scandals or rumors. We have, in rare cases, received negative publicity, including

negative Internet and blog postings about our Company, streamers and streamer associations, business

operations and management. Certain of such negative publicity may come from malicious harassment or

unfair competition acts by third parties. Any such negative publicity, regardless of veracity, could cause

relevant streamers to lose fans, subject us to government or regulatory investigations, divert management’s

attention, incur additional financial and other resources, and we may not be able to conclusively refute each

of the allegations within a reasonable period of time, or at all. Harm to our reputation can also arise for

many other reasons, including misconduct of our employees or any third parties we conduct business with.

As a result of any aforementioned circumstance, our brands may suffer, our operational and financial

performance may be negatively impacted, and the price of our Shares may decline.

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RISK FACTORS

Our business, prospects and financial results may be affected by our relationship with third-partyplatforms.

We and our streamers distribute certain of our content through our accounts on leading third-partyInternet and social media platforms, including Weibo and WeChat. These third-party platforms enable us toeffectively extend our reach and enhance our and our streamers’ influence. To the extent that we fail toleverage such third-party platforms, our ability to attract or retain fans may be harmed. In addition, oure-commerce streamers facilitate sponsored product sales and provide advertising services through third-party e-commerce platforms. If our relationship with these third-party platforms deteriorates or is terminatedor we fail to establish or maintain relationships with them on commercially reasonable terms, we may not beable to quickly locate alternative channels. Any aforementioned circumstance may limit our ability to growour fan base and expand our monetization channels, and have a material adverse effect on our business,results of operations and financial condition.

Our investment in film and television series production may not be successful, which could materiallyand adversely affect our results of operations and financial condition.

We have invested, and will continue to invest in, production of films and television series, which is

generally conditional on the involvement of our streamers in the film or television series, in order to drive

their all-round development. We also expect to generate returns from such investment to further our core

businesses. However, the films and television series we invest in may fail to enhance our streamers’

popularity, which depends upon a number of factors, such as our streamers’ actual performance and the

overall market acceptance. In addition, we may not be able to achieve the expected returns from our

investment in a timely manner or at all, which are generally calculated based on the expected profits of

relevant films and television series and in turn depends on the box office performance and/or viewership.

We cannot assure you that the films and television series we invest in would be released on schedule, or at

all, which is subject to a number of factors, many of which are beyond our control, such as a prolonged

production cycle and unfavorable governmental policies. Any of the foregoing could materially and

adversely affect our results of operations and financial condition.

We face potential risks regarding to the recoverability of deferred income tax assets.

As of December 31, 2017, 2018 and 2019, we had deferred tax assets of RMB35,000,

RMB1.0 million and RMB2.8 million, respectively. Deferred income tax assets relate to deductible

temporary differences between the tax bases of assets and liabilities and their carrying amounts to the extent

that the utilization of such differences and losses against future taxable profits is probable. Significant

management judgment is required to determine the amount of deferred income tax assets that can be

recognized based upon the likely timing and level of our future taxable profits together with related tax

planning strategies.

Although we estimated and recognized the deferred income tax assets in good faith, we cannot assure

you that we will generate sufficient taxable profits in the future to fully utilize the deferred income tax

assets as forecasted, which is subject to uncertainties beyond our control, such as deterioration in market

conditions or other circumstances. In addition, the amount of our deferred income tax assets could be

reduced due to changes in applicable tax laws, regulations or accounting principles related to future

deductions of income tax rates. In the case that the value of our deferred income tax assets has changed, we

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RISK FACTORS

may have to write down our deferred income tax assets, which would materially and adversely affect our

results of operations and financial condition.

Our results of operations are subject to seasonal fluctuations.

We have experienced, and expect to continue to experience, seasonality in our business. For example,

we generally experience a higher level of revenues in the fourth quarter of each year, as live streaming

platforms generally organize marketing campaigns, streamer contests and promotional activities towards the

year end, which stimulate viewer spending. Other seasonal trends that affect us or China’s live streaming

industry as a whole may develop, and current seasonal trends may become more extreme, all of which

would contribute to fluctuations in our results of operations. As a result, historical patterns of our results of

operations may not be indicative of our future performance, and period-to-period comparisons of our results

of operations may not be meaningful, especially given our limited operating history. Our results of

operations in future quarters or years may fluctuate and deviate from the expectations of securities analysts

and investors, and any occurrence that disrupts our business during any particular quarters could have a

disproportionately material adverse effect on our liquidity and results of operations.

Unauthorized use of our proprietary information and exclusive rights by third parties, and theexpenses incurred in protecting our rights, may adversely affect our business, reputation andcompetitive edge.

We consider trade secrets, confidential know-how and other proprietary information and exclusiverights to be important to our business. We rely on a combination of copyright, trademark and otherintellectual property laws, as well as confidentiality and license agreements with our employees, suppliers,customers and others, to protect our proprietary information and exclusive rights. For example, ourexclusive talent agency agreement with streamers typically provides that we own their portrait rights orright of publicity as well as their accounts on social media platforms including live streaming platforms.Such agreements also include provisions on confidentiality and intellectual property rights protection. Wehave also entered into confidentiality agreements with substantially all of our key employees, executives,and business partners.

Nevertheless, current or former streamers, employees, executives and business partners may

unintentionally or willfully disclose our proprietary information or misappropriate our exclusive rights, and

our current protective measures may not provide an adequate remedy in the event of such unauthorized

disclosure or misappropriation. Policing any unauthorized use can be difficult, time- consuming and costly.

Litigations to enforce our proprietary rights and exclusive rights could cause us to incur substantial costs

and divert our managerial and financial resources. We cannot assure you that we will prevail in such

litigations or that we would be able to halt any unauthorized use of our proprietary information and

exclusive rights. In addition, our trade secrets and confidential know-how may be leaked or otherwise

become available to, or be independently discovered by, our competitors. Any failure in protecting or

enforcing our proprietary rights and exclusive rights could have a material adverse effect on our business,

results of operations, financial condition and competitive position.

Third parties may claim that we infringe their intellectual property rights, which could cause us toincur significant costs and prevent us from conducting our business.

Third parties may claim that the content and information our streamers provide or the content we

produce and distribute in various forms infringe upon their intellectual property rights. Although we did not

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have any material disputes or any other pending legal proceedings with third parties regarding intellectual

property rights during the Track Record Period, we cannot assure you that we would not be subject to such

proceedings in the future. The possibility of intellectual property claims against us increases as we continue

to grow. The outcome of any such claims 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 such litigation could cause us to pay

damages, legal fees and other costs, as well as limit our ability to conduct business or require us to change

the way we operate. We may need to obtain licenses from third parties who allege that we have infringed

their rights in order to continue our operations, but such licenses may not be available on terms acceptable

to us or at all. Even if such claims against us are unsuccessful or even meritless, they may harm our

reputation and, cause us to lose existing and future business and incur substantial legal fees. Any liability or

expenses resulting from such claims, or necessary changes to our business to reduce the risk of future

liability, may have a material adverse effect on our business, results of operations and financial condition.

The proper functioning of our IT systems is essential to our business. Any disruption to our ITsystems could materially and adversely affect our business, results of operations and financialcondition.

Our business relies on the proper functioning of our IT systems. We use third-party IT systems to

conduct our operations, including streamer association management systems provided by partnered live

streaming platforms and a financial management system purchased from a third-party. We have also internally

developed an IT system to host and analyze our business operation and market data. Although we did not

experience any material malfunction, failure or breakdown of our IT systems during the Track Record Period,

we cannot assure you that our IT systems will always operate without interruptions. Any malfunction, failure

or breakdown of our IT systems, whether caused by computer viruses, hacking or other security breaches, that

result in the unavailability or slowdown of our IT systems may, individually or collectively, adversely affect

our business, results of operations and financial condition. In particular, if the IT systems we use for streamer

management, whose maintenance is beyond our control, experience malfunctions, failures or breakdowns, our

business, results of operations and financial condition would be materially and adversely affected. We cannot

assure you that our security mechanisms will be sufficient to protect IT systems from any such occurrence.

Further, we must continue to upgrade and improve our IT systems to support our business growth.

However, we cannot assure you that we will be successful in implementing these upgrades and

improvement plans, and failure to do so may substantially impede our growth. In particular, our systems

may experience interruptions during upgrades and improvements, and any new technology may not be fully

integrated with our existing systems on a timely basis, or at all. In addition, third parties may alter, update or

improve the IT systems we currently use, which may lead to business interruptions. If our existing or future

IT systems do not function properly, we could experience disruptions and failures, which in turn could

materially and adversely affect our business, results of operations and financial condition.

We depend on the continued services of our senior management, key employees and qualifiedpersonnel. Our inability to retain their services could adversely affect our business, results ofoperations and financial condition.

Our future success is significantly dependent upon the continued service of our senior management

and other key employees. If any of our senior management or key personnel becomes unable or unwilling to

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continue to contribute their services to us, we may not be able to replace them easily or at all, and their

departure may impact our existing corporate culture. In addition, they may join a competitor or form a

competing company. As a result, our business may be severely disrupted, our results of operations and

financial condition may be materially and adversely affected, and we may incur additional expenses to

recruit, train and retain qualified personnel with comparable industry know-how and skills. We have entered

into employment and non-compete agreements with our senior management and other key personnel, which

contain non-solicitation and confidentiality provisions. However, these agreements and provisions do not

ensure the continued service of these senior management and key personnel, and we may not be able to

enforce these agreements and provisions.

Our existing operations and future growth require a sizeable and qualified personnel. For example, we

depend, in part, on our professional employees to recruit, train and promote our streamers, as well as

provide technical and other support. We also rely on experienced personnel to anticipate and effectively

respond to the changing fan preferences and market trends. Our failure to retain and attract qualified

personnel in a timely manner may materially and adversely affect our business, results of operations and

financial condition. However, our industry is characterized by high demand and intense competition for

talent. In order to attract and retain talent, we may need to offer higher compensation, better trainings, more

attractive career trajectory and other benefits to our employees, which may be costly and burdensome. We

cannot assure you that we will be able to attract or retain qualified personnel necessary to support our future

growth. We may fail to manage our relationship with our employees, and any disputes between us and our

employees, or any labor-related regulatory or legal proceedings may divert managerial and financial

resources, negatively impact staff morale, reduce our productivity, or harm our reputation and future

recruiting efforts. In addition, as our business has grown rapidly, our ability to train and integrate new

employees into our operations may not meet the increasing demands of our business. Any of the above

issues related to our personnel may materially and adversely affect our results of operations and future

growth.

Our operations depend on the performance of the Internet infrastructure and fixedtelecommunications networks in China, any disruption of or interference with which would adverselyaffect our business, results of operations and financial condition.

Our streamers conduct live streaming on our partnered live streaming platforms, and we conduct

certain aspects of our operations online, which requires wireless and landline telecommunications networks

in China for data and information transmission and communications. Almost all access to the Internet in

China is maintained through state-owned telecommunications service providers under the administrative

control and regulatory supervision of MIIT. Moreover, we primarily rely on a limited number of

telecommunications service providers to provide us with communications capacity through local

telecommunications lines and Internet data centers to host our servers. We have limited access to alternative

networks or services in the event of disruptions, failures or other problems with China’s Internet

infrastructure or the fixed telecommunications networks. In addition, Internet traffic in China has

experienced significant growth during the past few years, which may put pressure on China’s Internet

infrastructure. We may also be required to upgrade our infrastructure to accommodate our growing business

size and coverage. If China’s Internet infrastructure and fixed telecommunications networks fail to support

our operations and growth, our business, results of operations and financial condition could be materially

and adversely affected.

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Unintended leakage of personal data and confidential information may materially and adverselyaffect our reputation and business.

We are required to protect personal data and confidential information under applicable laws, rules and

regulations. However, our security control may not prevent the improper leakage of our confidential

information and other personal data. Anyone may circumvent our security measures, misappropriate

proprietary information and cause interruptions in our operations. A security breach that leads to leakage of

our confidential information, even though anonymized, could still subject us to legal liabilities, regulatory

sanctions and reputational damage. We have implemented management protocols for personal data and

confidential information, including prescribing an explicit clause in exclusive talent agency agreements to

protect steamers’ personal information. We have also applied data security and management systems, such

as antivirus software and firewall for computer security. Despite our efforts, we may not detect and prevent

all unintended leakages caused by our employees or streamers’ misconduct, mistakes or other malfeasance.

We may be required to expend significant capital and other resources to prevent such unintended leakages,

which could adversely affect our business, results of operations and financial condition.

Any catastrophe, including outbreaks of health pandemics and other extraordinary events, couldhave a negative impact on our business operations.

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power

loss, telecommunications failures, break-ins war, riots, terrorist attacks or similar events may give rise to

server interruptions, breakdowns, system failures or Internet failures, which could cause the loss or

corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide

our services.

Our business could also be adversely affected by the effects of Ebola virus diseases, H1N1 flu, H7N9

flu, avian flu, Severe Acute Respiratory Syndrome (SARS), 2019 Coronavirus Disease (COVID-19), or

other epidemics. Our business operation could be disrupted if any of our employees is suspected of having

any of the aforementioned epidemics or another contagious disease or condition, since it could require our

employees to be quarantined and/or our offices to be disinfected. In addition, our business, results of

operations and financial condition could be adversely affected to the extent that any of these epidemics

harms the business of our customers and the Chinese economy in general. For example, an outbreak of

COVID-19 has and is continuing to spread rapidly throughout China and other parts of the world. On

March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Many businesses

and social activities in China and other countries and regions were severely disrupted. The global outbreak

has also caused market panics, which materially and negatively affected the global financial markets, such

as the plunge of global stocks on major stock exchanges in the middle of March 2020. The overall live

streaming industry and our live streaming business have not been negatively affected following the COVID-

19 outbreak, primarily due to the mandated quarantine measures which resulted in people’s rising demands

for entertainment and companionship online. We have nonetheless experienced partial disruptions to our

short video business and offline performing activities as a result of the outbreak and the corresponding

government-mandated quarantine measures. Furthermore, our business, results of operations and financial

condition may be materially and adversely affected in the long run as the Chinese economy is subject to the

risk of a general slowdown in 2020 and beyond as a result of the COVID-19 outbreak. We are closely

monitoring the development of the COVID-19 pandemic and continuously evaluating its impact on our

business, results of operations and financial condition, which we believe will depend on the duration of the

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pandemic and the government’s responsive measures. If the outbreak persists or escalates, we may

experience further negative impact on our business, results of operations and financial condition, such as a

decline in our business volume and, consequently, our revenue, a delay in collecting our trade receivables,

and other liquidity issues. A continuation or worsening of the levels of market disruption and volatility

could also materially and adversely affect our access to capital and the market price of our Shares.

We have been involved, and may continue to be involved in legal proceedings or arbitration claims,and the court ruling or arbitration award may not be favorable to us.

We have been involved, and may continue to be involved, in legal proceedings or arbitration claims

during the ordinary course of our business, including those in relation to contractual disputes between us

and our streamers, live streaming platforms or other business partners. We may also bring legal proceedings

or arbitration claims against others. See “Business — Legal Proceedings and Compliance — Legal

Proceedings.” Such proceedings or claims, regardless of their outcomes, could harm our reputation, divert

our management’s attention and cause us to incur a substantial amount of legal expenses. If the outcomes of

these legal proceedings are unfavorable to us, we will face significant legal liabilities and suffer financial or

reputational damages, which could materially and adversely affect our business, results of operations and

financial condition.

The discontinuation of any preferential tax treatments available to us in China could adversely affectour results of operations and financial condition.

Under PRC tax laws and regulations, certain of our PRC subsidiaries and Consolidated Affiliated

Entities enjoyed, or are qualified to enjoy, certain preferential income tax benefits. The modified Enterprise

Income Tax Law, effective on December 29, 2018, or the EIT Law, and its implementation rules generally

impose a uniform income tax rate of 25% on all enterprises, but grant preferential treatment to small low-

profit enterprises to enjoy a reduced enterprise income tax rate of 20%. On January 27, 2019, the SAT of

the PRC jointly issued new preferential tax treatment available to small low-profit enterprises for the period

from January 1, 2019 to December 31, 2021. Under the new treatment, the small low-profit enterprises are

subject to a reduced enterprise income tax rate of 20%, and their first RMB1 million of the annual

assessable profits is eligible for a 75% deduction while the annual assessable profits between RMB1 million

and RMB3 million are eligible for a 50% deduction. During the Track Record Period, some of our

Consolidated Affiliated Entities and PRC subsidiaries were subject to a preferential income tax rate of 20%

and other preferential tax treatment as they were accredited as small low-profit enterprises. According to the

relevant administrative measures, to qualify as a “small low-profit enterprise,” they must meet certain

financial and non-financial criteria and complete verification procedures with the administrative authorities.

Continued qualification as a small low-profit enterprise is subject to a periodical review by the relevant

government authorities in China. In the event the preferential income tax treatment for these Consolidated

Affiliated Entities and PRC subsidiaries is discontinued or is not verified by the local tax authorities, and the

affected entity fails to obtain preferential income tax treatment based on other qualifications, it will become

subject to the standard PRC enterprise income tax rate of 25%.

The failure to comply with PRC property laws and relevant regulations regarding certain of ourleased properties may adversely affect our business, results of operations and financial condition.

According to the PRC Land Administration Law, land in urban districts is owned by the state. The

owner of a property built on state-owned land generally possesses the proper land and ownership certificate

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RISK FACTORS

or other legal documentations to demonstrate that it is the owner of the properties and that it has the right to

enter into lease agreements with the tenants or to authorize a third party to sublease the properties. As of the

Latest Practicable Date, lessors of some leased properties had not provided us with valid title certificates or

other ownership documents evidencing their legal rights to the relevant properties or their authorization

from the legal owners of the relevant properties to sublease such properties to us. If any of the lessors is not

the legal owner or had not been duly authorized by the legal owner, the relevant lease agreements may be

deemed invalid and, as a result, we may be challenged by the legal owners of the properties or other third

parties, and may be forced to vacate the relevant properties and relocate our offices.

Pursuant to the PRC Land Administration Law, the land should be used strictly in line with the

purposes of land use as defined. As of the Latest Practicable Date, the actual use of properties leased by

Nanjing Baihang and Juhe Huashe Entertainment as offices were inconsistent with such intended purposes

as stipulated in the title documents. As a result, should disputes arise due to title encumbrances to such

properties or government action, these leases could be invalidated, and we may encounter difficulties in

continuing to occupy such properties and may be required to relocate.

Under the applicable PRC laws and regulations, the parties to a lease agreement are required to

register and file such lease agreement with the relevant government authorities. As of the Latest Practicable

Date, none of our leased properties had been registered or filed. While as confirmed by our PRC Legal

Advisors, the lack of registration will not affect the validity of the lease agreements nor our rights to use or

occupy the leased properties under PRC laws and regulations, we may be ordered by the relevant

government authorities to register the relevant lease agreements within a prescribed period, failing which

we may be subject to a fine ranging from RMB1,000 to RMB10,000 for each non-registered lease.

Therefore, the failure to comply with PRC property laws and relevant regulations regarding certain of

our leased properties may cause us to make relocations and be subject to fines and suspension of business,

which may adversely affect our business, results of operations and financial condition. See “Business —

Real Properties” for details.

Failure to make adequate contributions to social insurance and housing provident fund for ouremployees as required by PRC regulations may subject us to penalties.

Pursuant to the relevant PRC laws and regulations, employers are obligated to directly and duly

contribute to the social insurance and housing provident funds for their employees. Employers are not

allowed to engage third parties to make such contributions.

During the Track Record Period, some of our PRC subsidiaries and Consolidated Affiliated Entities

had not made sufficient social insurance and housing provident fund contributions for some employees. In

addition, instead of making the contributions on their own for their employees, some of our PRC

subsidiaries and Consolidated Affiliated Entities engaged third-party agencies to make such contributions.

As advised by our PRC Legal Advisors, we may be required to make up the deficiencies and subject to late

fees and fines for our insufficient contributions to the social insurance and housing provident fund. With

respect to the use of third-party agencies to contribute the social insurance and housing provident fund, we

could have been subject to rectification and fines. As of the Latest Practicable Date, we had terminated the

agreements with local human resource service agencies and made direct social insurance and housing

provident funds contributions for all of our employees. As of the Latest Practicable Date, no material

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administrative action, fine or penalty had been imposed by the relevant regulatory authorities with respect to

our contributions to social insurance and housing provident funds, nor had we received any order or been

informed to settle the under-payments. However, we cannot assure you that the relevant government

authorities will not require us to pay the outstanding amount and impose late fees or fines on us, in which

case our business, results of operations and financial condition could be adversely affected.

We may need additional capital, and we may be unable to obtain such capital in a timely manner oron acceptable terms, or at all.

We may require additional capital beyond those generated by the [REDACTED] from time to time to

grow our business, including to recruit, cultivate and promote streamers, maintain and enlarge their fan

base, develop new monetization channels, improve our operating efficiency, lease infrastructure and

properties, or conduct acquisition of complementary businesses and technologies. Accordingly, we may

need to [REDACTED] additional equity or debt securities. [REDACTED] could significantly dilute our

existing Shareholders, and any new equity securities we issue could have rights, preferences and privileges

superior to those of holders of our ordinary shares. The incurrence of debt financing would result in

increased debt service obligations and could result in operating and financing covenants that would restrict

our operations or our ability to pay dividends to our Shareholders.

Our ability to obtain additional capital is subject to a variety of uncertainties, including:

• our market position and competitiveness in the live streaming industry;

• our future profitability, overall financial condition, results of operations and cash flows;

• general market conditions for capital raising activities by live streamer associations in China;

and

• economic, political and other conditions in China and internationally.

We may be unable to obtain additional capital in a timely manner or on acceptable terms or at all. If

we are unable to obtain adequate financing on terms satisfactory to us when we require it, our ability to

continue to support our business growth could be significantly impaired, and our business and prospects

could be materially and adversely affected.

Our limited insurance coverage could expose us to significant costs and business disruption.

Insurance companies in China generally do not offer as extensive an array of insurance products as

insurance companies do in countries with more developed economies. As of the Latest Practicable Date, we

did not maintain any business interruption insurance, product liability insurance or key man life insurance,

which are not mandatory under PRC laws. We do not maintain insurance policies covering damages to our

technology infrastructure or our properties. Any business disruption, litigation or natural disasters, or any

significant damages to our equipment or facilities may cause to incur substantial costs and divert our

resources, and we may have no insurance to cover such losses. As a result, our business, financial condition

and results of operations could be materially and adversely affected.

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Our Controlling Shareholders have substantial influence over our Company and their interests maynot be aligned with the interests of our other Shareholders.

As of the Latest Practicable Date, our Controlling Shareholders, Mr. Lu Ping (陸平) and his wholly

owned subsidiary Warm Current Investment Limited, legally and beneficially owned 38.99% of the total

issued share capital of our Company. Immediately after the completion of the [REDACTED] (assuming no

exercise of the [REDACTED]), our Controlling Shareholders will together legally and beneficially own

approximately [REDACTED]% of our then issued share capital. Our Controlling Shareholders have

substantial influence over our business, including matters relating to our management, policies and

decisions regarding mergers, expansion plans, consolidations and sales of all or substantially all of our

assets, election of directors and other significant corporate actions. See “Relationship with Our Controlling

Shareholders” for details. This concentration of ownership may discourage, delay or prevent a change in

control of our Company, which could deprive other Shareholders of an opportunity to receive a premium for

their Shares as part of a sale of our Company and might reduce the price of our Shares. These events may

occur even if they are opposed by our other Shareholders. In addition, our Controlling Shareholders may

exercise their substantial influence over us and cause us to enter into transactions or take, or fail to take,

actions or make decisions that conflict with the best interests of our other Shareholders.

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

The global macroeconomic environment is facing challenges, including the end of quantitative easing

by the U.S. Federal Reserve, the economic slowdown in the Eurozone since 2014 and uncertainties over the

impact of Brexit. The Chinese economy has shown slower growth compared to the previous decade since

2012 and the trend may continue. There is considerable uncertainty over the long-term effects of the

expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of

the world’s leading economies, including the United States and China. There have been concerns over

unrest and terrorist threats in the Middle East, Europe and Africa, which have resulted in market volatility.

There have also been concerns over the relationship between China and other countries, including the

surrounding Asian countries. Recent international trade disputes, including tariff actions announced by the

United States, China and certain other countries, and the uncertainties created by such disputes may cause

disruptions in the international flow of goods and services and may adversely affect the Chinese economy

as well as global markets and economic conditions. In addition, the recent market panics over the global

outbreak of COVID-19 and the drop of oil price materially and negatively affected the global financial

markets in March 2020, which may cause slowdown of the world’s economy. Economic conditions in

China are sensitive to global economic conditions, as well as changes in domestic economic and political

policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged

slowdown in the global or Chinese economy may materially and adversely affect our business, results of

operations, financial condition and prospects.

– 46 –


RISK FACTORS

RISKS RELATING TO OUR CONTRACTUAL ARRANGEMENTS

If the PRC government finds that the agreements that establish the structure for operating ourbusinesses in China do not comply with applicable PRC laws and regulations, or if these regulationsor their interpretations change in the future, we could be subject to severe consequences, includingthe nullification of the Contractual Arrangements and the relinquishment of our interest in ourConsolidated Affiliated Entities.

We are a company incorporated under the laws of the Cayman Islands, and WFOE, our wholly-owned

PRC subsidiary, is considered as a foreign-invested enterprise. To comply with PRC laws and regulations,

we conduct part of our business in China through the Consolidated Affiliated Entities based on the

Contractual Arrangements, which enable us to (1) have the power to direct the activities that most

significantly affect the economic performance of our Consolidated Affiliated Entities; (2) receive

substantially all of the economic benefits from our Consolidated Affiliated Entities in consideration for the

services provided by WFOE; and (3) have an exclusive option to purchase all or part of the equity interests

in our Consolidated Affiliated Entities when and to the extent permitted by PRC law, or request any

Registered Shareholders to transfer any or part of the equity interest in Happy Entertainment to another PRC

person or entity designated by us at any time at our discretion; and (4) have the pledged equity interests in

Happy Entertainment to ensure the performance of the above items. Because of these Contractual

Arrangements, we are the primary beneficiary of Happy Entertainment and hence treat Happy

Entertainment and its subsidiaries as our Consolidated Affiliated Entities, and consolidate their results of

operations into ours. Our Consolidated Affiliated Entities hold the licenses, approvals and key assets that

are essential for our business operations.

Our PRC Legal Advisors, based on its understanding of the relevant laws and regulations, are of the

opinion that our Contractual Arrangements do not violate, breach, contravene or otherwise conflict with any

explicit provisions of PRC laws, rules or regulation sand constitute valid and binding obligations against

each party to such agreements in accordance with their terms. However, our PRC Legal Advisors also

advised that as there are substantial uncertainties regarding the interpretation and application of the PRC

laws, rules and regulations, including those governing our business, or the enforcement and performance of

our Contractual Arrangements, there can be no assurance that the PRC government would ultimately take a

view that is consistent with the opinion of our PRC Legal Advisors. If the PRC government finds that our

Contractual Arrangements do not comply with its restrictions on foreign investment in businesses, or if the

PRC government otherwise finds that we, Happy Entertainment or any of its subsidiaries are in violation of

PRC laws or regulations or lack the necessary permits or licenses to operate our business, the relevant PRC

regulatory authorities, including the MOFCOM, the SAMR, MIIT and the Ministry of Culture, would have

broad discretion in dealing with such violations or failures, including, without limitation:

• revoking our business and operating licenses;

• discontinuing or restricting our operations;

• imposing fines or confiscating any of our income that they deem to have been obtained through

illegal operations;

• imposing conditions or requirements with which we or our subsidiaries and Consolidated

Affiliated Entities may not be able to comply;

– 47 –


RISK FACTORS

• requiring us or our subsidiaries and Consolidated Affiliated Entities to restructure the relevant

ownership structure or operations;

• restricting or prohibiting our [REDACTED] from the [REDACTED] or other of our financing

activities to finance the business and operations of our Consolidated Affiliated Entities and their

respective subsidiaries; or

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

Any of these actions could cause significant disruption to our business operations, and may materially

and adversely affect our business, financial condition and results of operations. In addition, it is unclear

what impact the PRC government actions would have on us and on our ability to consolidate the financial

results of any of our Consolidated Affiliated Entities in our consolidated financial statements, if the PRC

governmental authorities find our legal structure and Contractual Arrangements to be in violation of PRC

laws, rules and regulations. If any of these penalties results in our inability to direct the activities of Happy

Entertainment that most significantly impact its economic performance and/or our failure to receive the

economic benefits from Happy Entertainment, we may not be able to consolidate our Consolidated

Affiliated Entities into our consolidated financial statements in accordance with HKFRS.

Our Contractual Arrangements may not be as effective in providing operational control as directownership. Happy Entertainment or its Registered Shareholders may fail to perform their obligationsunder our Contractual Arrangements.

Due to the PRC restrictions or prohibitions on foreign ownership of Internet and other related

businesses in China, we operate a portion of our business in China through our Consolidated Affiliated

Entities, in which we have no ownership interest. We rely on the Contractual Arrangements with our

Consolidated Affiliated Entities and their respective Registered Shareholders to control and operate their

business. The Contractual Arrangements are intended to provide us with effective control over our

Consolidated Affiliated Entities and allow us to obtain economic benefits from them. See “Contractual

Arrangements” for details.

Although we have been advised by our PRC Legal Advisors that our Contractual Arrangements with

Happy Entertainment and its Registered Shareholders constitute valid and binding obligations enforceable

against each party of such agreements in accordance with their terms, these Contractual Arrangements may

not be as effective in providing control over Happy Entertainment as direct ownership. If Happy

Entertainment or its Registered Shareholders fail to perform their respective obligations under the

Contractual Arrangements, we may incur substantial costs and expend substantial resources to enforce our

rights. The Contractual Arrangements are governed by and interpreted in accordance with PRC laws, and

disputes arising from the Contractual Arrangements will be resolved through arbitration or litigation in

China. However, the legal system in China is not as developed as in other jurisdictions, such as the United

States. There are very few precedents and little official guidance as to how contractual arrangements in the

context of a variable interest entity should be interpreted or enforced under PRC law. There remain

significant uncertainties regarding the outcome of arbitration or litigation. These uncertainties could limit

our ability to enforce the Contractual Arrangements. In the event we are unable to enforce the Contractual

Arrangements or we experience significant delays or other obstacles in the process of enforcing the

Contractual Arrangements, we may not be able to exert effective control over our Consolidated Affiliated

– 48 –


RISK FACTORS

Entities and may lose control over the assets owned by our Consolidated Affiliated Entities. As a result, we

may be unable to consolidate our Consolidated Affiliated Entities in our consolidated financial statements,

and our ability to conduct our business may be adversely affected.

We may lose the ability to use and enjoy assets held by Happy Entertainment that are material to ourbusiness operations if Happy Entertainment were to declare bankruptcy or become subject to adissolution or liquidation proceeding.

If Happy Entertainment undergoes an involuntary liquidation proceeding, third-party creditors may

claim rights to some or all of its assets and we may not have priority against such third-party creditors on

the assets of our Consolidated Affiliated Entities. If our Consolidated Affiliated Entities liquidate, we may

take part in the liquidation procedures as a general creditor under the PRC Enterprise Bankruptcy Law and

recover any outstanding liabilities owed by Happy Entertainment to WFOE under the applicable service

agreement.

If the Registered Shareholders of Happy Entertainment were to attempt to voluntarily liquidate Happy

Entertainment without obtaining our prior consent, we could effectively prevent such unauthorized

voluntary liquidation by exercising our right to request the Registered Shareholders of Happy Entertainment

to transfer all of their respective equity ownership interests to a PRC entity or individual designated by us in

accordance with our exclusive option agreement with the Registered Shareholders of Happy Entertainment.

In addition, under the Contractual Arrangements, the Registered Shareholders of Happy Entertainment do

not have the right to issue dividends to themselves or otherwise distribute the retained earnings or other

assets of Happy Entertainment without our consent. In the event that the Registered Shareholders initiate a

voluntary liquidation proceeding without our authorization or attempts to distribute the retained earnings or

assets of Happy Entertainment without our prior consent, we may need to resort to legal proceedings to

enforce the terms of the Contractual Arrangements. Any such legal proceeding may be costly and may

divert our management’s time and attention away from the operation of our business, and the outcome of

such legal proceeding will be uncertain.

The ultimate shareholders of Happy Entertainment may have conflicts of interest with us, which maymaterially and adversely affect our business.

We have designated individuals who are PRC nationals to be the ultimate shareholders of Happy

Entertainment. These individuals may have conflicts of interest with us. In particular, Happy Entertainment

was approximately 45.0% owned by Mr. Lu Ping (陸平) as of the Latest Practicable Date. We rely on these

individuals to abide by the laws of the Cayman Islands which impose fiduciary duties upon directors and

officers of our company. Such duties include the duty to act bona fide in what they consider to be in the best

interest of our company as a whole and not to place themselves in a position in which there is a conflict

between their duties to our company and their personal interests. On the other hand, PRC laws also provide

that a director or a management officer owes a loyalty and fiduciary duty to the company he or she directs

or manages. We cannot assure you that when conflicts arise, ultimate shareholders of Happy Entertainment

will act in the best interest of our company or that conflicts will be resolved in our favor. These individuals

may breach or cause Happy Entertainment to breach the existing Contractual Arrangements. If we cannot

resolve any conflicts of interest or disputes between us and these shareholders, we would have to rely on

legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also

substantial uncertainty as to the outcome of any such legal proceedings.

– 49 –


RISK FACTORS

If we exercise the option to acquire equity ownership and assets of Happy Entertainment, theownership or asset transfer may subject us to certain limitations and substantial costs.

Pursuant to the Contractual Arrangements, WFOE or its designated person(s) has the exclusive right

to purchase all or any part of the equity interests in Happy Entertainment from its Registered Shareholders.

The equity transfer may be subject to the approvals from and filings with MOFCOM, the SAMR, the

NRTA, the MOC and/or their local competent branches. In addition, the equity transfer price may be subject

to review and tax adjustment by the relevant tax authority. The Registered Shareholders of Happy

Entertainment will pay the equity transfer price they receive to WFOE under the Contractual Arrangements.

The amount to be received by WFOE may also be subject to enterprise income tax, for which the amounts

could be substantial.

Uncertainties exist with respect to the interpretation and implementation of the newly enactedForeign Enterprise Investment Law and how it may impact the viability of our current corporatestructure, corporate governance, business, results of operations, financial condition and prospects.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which

comes into effect on January 1, 2020 and replace the trio of 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 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. The

current Foreign Investment Law does not mention concepts such as “actual control” and “controlling PRC

companies by contracts or trusts” that were included in the previous drafts, nor does it specify regulations

on controlling through contractual arrangements. As a result, this regulatory topic remains unclear under the

Foreign Investment Law. However, since the Foreign Investment Law is relatively new, uncertainties still

exist in relation to its interpretation and implementation, and failure to take timely and appropriate measures

to cope with the regulatory-compliance challenges could result in a material adverse effect on us. For

instance, though the Foreign Investment Law does not explicitly classify contractual arrangements as a form

of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which

includes investments made by foreign investors in China through means stipulated in laws or administrative

regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future

laws, administrative regulations or provisions promulgated by the Stale Council to provide for contractual

arrangements as a form of foreign investment, at which time it will be uncertain whether our Contractual

Arrangements will be deemed to be in violation of the market access requirements for foreign investment in

the PRC and if yes, how our Contractual Arrangements should be dealt with. In addition, if future laws,

administrative regulations or provisions prescribed by the State Council mandate further actions to be taken

by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to

whether we can complete such actions in a timely manner, or at all. In the worst-case scenario, we may be

required to unwind our existing Contractual Arrangements and/or dispose of the relevant business

operations, which could have a material adverse effect on our current corporate structure, corporate

governance, business, results of operations, financial condition and prospects.

– 50 –


RISK FACTORS

Our Contractual Arrangements may be subject to scrutiny by the PRC tax authorities, and a findingthat we owe additional taxes could substantially reduce our consolidated net income and the value ofyour [REDACTED].

Under PRC laws and regulations, arrangements and transactions among related parties may be subject

to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the

PRC tax authorities determine that the Contractual Arrangements between our WFOE and our Consolidated

Affiliated Entities do not represent an arms-length price and adjust our Consolidated Affiliated Entities’

income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other

things, result in a reduction, for PRC tax purposes, of expense deductions recorded by our Consolidated

Affiliated Entities, which could in turn increase their tax liabilities. In addition, the PRC tax authorities may

impose late payment fees and other penalties to our PRC variable interest entities for under-paid taxes. Our

results of operations may be materially and adversely affected if our tax liabilities increase or if we are

found to be subject to late payment fees or other penalties.

RISKS RELATING TO CONDUCTING BUSINESS IN CHINA

Adverse changes in the economic, political and social conditions of China could have a materialadverse effect our business, results of operations and financial condition.

We conduct our business operations primarily in China. Accordingly, our business, results of

operations, financial condition and prospects are, to a significant degree, subject to the economic, political

and social conditions in China. The Chinese economy differs from the economies of developed countries in

many respects, including the degree of government involvement, control of capital investment, as well as

the overall level of development. Although the PRC government has implemented measures since the late

1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of

productive assets and the establishment of improved corporate governance in business enterprises, a

substantial portion of productive assets in China is still owned by the PRC government. In addition, the

PRC government continues to play a significant role in regulating industry development by imposing

industrial policies. The PRC government also exercises significant control over China’s economic growth

through the allocation of resources, controlling payment of foreign currency denominated obligations,

setting monetary policy and providing preferential treatment to particular industries or companies. We

cannot predict future changes in China’s economic, political and social condition and the effect that new

government policies will have on our business and prospects. Any actions and policies adopted by the PRC

government, any changes in the tax regulations applicable to us, or any prolonged slowdown in China’s

economy, in particular the live streaming industry, could have a negative impact on our business, results of

operations and financial condition in a number of ways.

Uncertainties and changes in the Chinese legal system could materially and adversely affect ourbusiness.

Our business operations are based in China through WFOE and its subsidiaries and our Consolidated

Affiliated Entities, all of which are organized under PRC laws. Our business in China is governed by PRC

laws and regulations. The PRC legal system is based on written statutes. Prior court decisions may be cited

for reference but have limited precedential value.

– 51 –


RISK FACTORS

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations

governing economic matters in general, and forms of foreign investment (including wholly foreign-owned

enterprises and joint ventures) in particular. On March 15, 2019, the National People’s Congress

promulgated the Foreign Investment Law, which comes into effect on January 1, 2020 and replace the trio

of laws regulating foreign investment in China. These laws, regulations and legal requirements, including

those governing PRC tax matters, are relatively new and amended frequently, and their interpretation and

enforcement often raise uncertainties that could limit the reliability of the legal protections available to us.

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 violations of these policies and rules until the violations have occurred. Furthermore, the PRC

administrative and court authorities have significant discretions in interpreting and implementing or

enforcing statutory rules and contractual terms, and it may be more difficult to predict the outcome of

administrative and court proceedings and the level of legal protection we may enjoy in China versus other

more developed legal systems. These uncertainties may affect our judgment on the relevance of legal

requirements and our decisions on the measures and actions to be taken to fully comply therewith, and may

affect our ability to enforce our contractual or tort rights. Such uncertainties may result in substantial

operating expenses and costs, and any litigation in China may result in diversion of resources and

management’s attention, and therefore materially and adversely affect our business and results of

operations. We cannot predict future developments in the PRC legal system. We may be required to procure

additional permits, authorizations and approvals for our operations, which we may not be able to obtain.

Our inability to obtain such permits or authorizations may materially and adversely affect our business,

results of operations and financial condition.

Fluctuations in the value of the Renminbi and other currencies may have a material adverse impacton your [REDACTED].

As we expand our operations, we expect to incur more expenditures denominated in Renminbi, while

the [REDACTED] from the [REDACTED] and any dividends we pay on our Shares will be in Hong Kong

dollars. Fluctuations in the exchange rate between the Renminbi and the Hong Kong dollar or U.S. dollar

may affect the relative purchasing power in Renminbi terms of the [REDACTED] from the

[REDACTED]. Fluctuations in the exchange rate may also cause us to incur foreign exchange losses and

affect the relative value of any dividend issued by our PRC subsidiaries. In addition, appreciation or

depreciation in the value of the Renminbi relative to the Hong Kong dollar or U.S. dollar may affect our

financial results in Hong Kong dollar or U.S. dollar terms without giving effect to any underlying change in

our business or results of operations.

Movements in Renminbi exchange rates are affected by, among other things, changes in political and

economic conditions and China’s foreign exchange regime and policy. The Renminbi has been unpegged

from the U.S. dollar since July 2005 and, although the People’s Bank of China regularly intervenes in the

foreign exchange market to limit fluctuations in Renminbi exchange rate, the Renminbi may appreciate or

depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible

that the PRC authorities may lift restrictions on fluctuations in Renminbi exchange rates and lessen

intervention in the foreign exchange market in the future.

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

– 52 –


RISK FACTORS

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 currency.

The Chinese government’s control of foreign currency conversion may limit our foreign exchangetransactions, including dividend payments on our Shares.

Currently, the Renminbi cannot be freely converted into any foreign currency, and conversion and

remittance of foreign currencies are subject to PRC foreign exchange regulations. It cannot be guaranteed

that under a certain exchange rate, we will have sufficient foreign exchange to meet our foreign exchange

requirements. Under the current PRC foreign exchange control system, foreign exchange transactions under

the current account conducted by us, including the payment of dividends, do not require advance approval

from the SAFE, but we are required to present documentary evidence of such transactions and conduct such

transactions at designated foreign exchange banks within China that have the licenses to carry out foreign

exchange business. Foreign exchange transactions under the capital account conducted by us, however,

must be approved in advance by SAFE.

Under existing foreign exchange regulations, following the completion of the [REDACTED], we will

be able to pay dividends in foreign currencies without prior approval from SAFE by complying with certain

procedural requirements. However, we cannot assure you that these foreign exchange policies regarding

payment of dividends in foreign currencies will continue in the future. In addition, any insufficiency of

foreign exchange may restrict our ability to obtain sufficient foreign exchange for dividend payments to

Shareholders or to satisfy any other foreign exchange requirements. If we fail to obtain approval from SAFE

to convert Renminbi into any foreign exchange for any of the above purposes, our capital expenditure plans,

and even our business, results of operations and financial condition, may be materially and adversely

affected.

We may rely on dividends and other distributions from our PRC subsidiaries to fund our cash andfinancing requirements, and any limitation on the ability of our subsidiaries to make payments to uscould materially and adversely affect our ability to conduct our business.

As an offshore holding company, we may rely in part on dividends from our PRC subsidiaries for our

cash requirements, dividends payments and other distributions to our Shareholders, and to service any debt

that we may incur and pay our operating expenses. The payment of dividends by entities organized in China

is subject to limitations. In particular, PRC regulations permit our subsidiaries to pay dividends only out of

their accumulated profits, if any, as determined in accordance with Chinese accounting standards and

regulations. In addition, our PRC subsidiaries are required each year to set aside at least 10.0% of its annual

after-tax profits (as determined under PRC accounting standards) into its statutory reserve fund until the

aggregate amount of that reserve reaches 50.0% of such entity’s registered capital. These reserves are not

distributable as cash dividends.

If our PRC subsidiaries incur debt on their own behalf, the instruments governing the debt may restrict

its ability to pay dividends or make other distributions to us. Any limitation on the ability of our PRC

subsidiaries to distribute dividends or other payments to us could materially and adversely limit our ability

to grow, make investments or acquisitions, pay dividends to our Shareholders and otherwise fund and

conduct our business.

– 53 –


RISK FACTORS

PRC regulations over loans to and direct investments in PRC entities by offshore holding companiesmay delay or prevent us from using the [REDACTED] of the [REDACTED] to make loans oradditional capital contributions to our PRC subsidiaries.

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in

registered capital, are subject to approval by registration with relevant governmental authorities in China.

According to the relevant PRC regulations on foreign-invested enterprises, capital contributions by an

offshore holding company to its wholly-owned subsidiary in China shall register with the SAMR or its local

counterpart to make capital contributions to the foreign-invested enterprises. In addition, any foreign loan

procured by our PRC subsidiaries is required to be filed with SAFE or its local branches, and our PRC

subsidiaries may not procure loans exceeding the statutory limit. We may not obtain these government

approvals or complete such registrations on a timely basis, or at all, with respect to future capital

contributions or foreign loans by us to our PRC subsidiaries. If we fail to receive such approvals or

complete such registration, our ability to use the [REDACTED] of the [REDACTED] to fund our

operations in China may be negatively affected, which in turn could adversely affect our ability to finance

and expand our business.

Failure to comply with PRC regulations relating to the establishment of offshore special purposecompanies by PRC residents may subject our PRC resident Shareholders to personal liability, maylimit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, may limitthe ability of our PRC subsidiaries to distribute profits to us or may otherwise materially andadversely affect us.

Pursuant to the Circular on Relevant Issues concerning Foreign Exchange Administration of Overseas

Investment and Financing and Return Investments Conducted by Domestic Residents through Overseas

Special Purpose Vehicle (the “Circular 37”), which was promulgated by SAFE, and became effective on

July 4, 2014, (1) a PRC resident must register with the local SAFE branch before he or she contributes

assets or equity interests in an overseas special purpose vehicle, or an Overseas SPV, that is directly

established or indirectly controlled by the PRC resident for the purpose of conducting investment or

financing; and (2) following the initial registration, the PRC resident is also required to register with the

local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, a

change in the Overseas SPV’s PRC resident shareholder, name of the Overseas SPV, term of operation, or

any increase or reduction of the contributions by the PRC resident, share transfer or swap, and merger or

division. Additionally, pursuant to the Circular of SAFE on Further Simplifying and Improving the Direct

Investment-related Foreign Exchange Administration Policies (the “Circular 13”), which was promulgated

on February 13, 2015 and became effective on June 1, 2015, the aforesaid registration shall be directly

reviewed and handled by qualified banks in accordance with the Circular 13, and SAFE and its branches

shall perform indirect regulation over the foreign exchange registration via qualified banks.

As confirmed by our PRC Legal Advisors, each of Ms. Zhou, Ms. Hu Fang, Mr. Zhao Jian, Mr. Lu

Ping, Ms. Chen Hua, Ms. Xia Wenna, Mr. Li Xudong and Ms. Ma Shufen has completed the initial foreign

exchange registration as of the date of this document pursuant to Circular 37 and Circular 13. However, as

we have little control over either our present or prospective, direct or indirect Shareholders or the outcome

of relevant foreign exchange registration procedures, we cannot assure you that these Shareholders who are

PRC residents will amend or update their registration as required under Circular 37 and Circular 13 in a

timely manner or at all. Failure of our present or future Shareholders who are PRC residents to comply with

– 54 –


RISK FACTORS

Circular 37 and Circular 13 could subject these Shareholders to fines or legal sanctions, restrict our overseas

or cross-border investment activities, limit the ability of our PRC subsidiaries to make distributions or pay

dividends or affect our ownership structure, which could adversely affect our business and prospects.

We may be unable to complete a business combination transaction efficiently or on favorable termsdue to complicated merger and acquisition regulations.

On August 8, 2006, six PRC regulatory authorities, including MOFCOM, the State Assets Supervision

and Administration Commission, the SAT, the State Administration of Industry and Commerce (the

predecessor of the SAMR), China Securities Regulatory Commission and SAFE, jointly issued the

Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A

Rules”), which became effective on September 8, 2006 and was amended in June 2009. The M&A Rules,

governing the approval process by which a PRC company may participate in an acquisition of assets or

equity interests by foreign investors, requires the PRC parties to make a series of applications and

supplemental applications to the government agencies, depending on the structure of the transaction. In

some instances, the application process may require presentation of economic data concerning a transaction,

including appraisals of the target business and evaluations of the acquirer, which are designed to allow the

government to assess the transaction. Accordingly, due to the M&A Rules, our ability to engage in business

combination transactions has become significantly more complicated, time-consuming and expensive, and

we may not be able to negotiate a transaction that is acceptable to our Shareholders or sufficiently protect

their interests in a transaction.

Moreover, the Anti-Monopoly Law requires that the anti-monopoly authorities shall be notified in

advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security

review rules that became effective in September 2011 specify that mergers and acquisitions by foreign

investors that raise “national defense and security” concerns and mergers and acquisitions through which

foreign investors may acquire de facto control over domestic enterprises that raise “national security”

concerns are subject to strict review by the NDRC. In addition, the rules prohibit any activities attempting to

bypass a security review, including by structuring the transaction through a proxy or contractual control

arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying

with requirements set forth in the above-mentioned regulations and other relevant rules to complete mergers

and acquisitions could be time consuming, and any required approval processes, including obtaining

approval from MOFCOM, the SAMR and the NDRC or their respective 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 leadership. We face uncertainties with respect to indirect transfers of equity interests in

PRC resident enterprises by their non-PRC holding companies.

The SAT issued the Bulletin on Several Issues concerning the Enterprise Income Tax on the Indirect

Transfers of Properties by Non-resident Enterprises (the “Bulletin 7”), which became effective on

February 3, 2015. Under Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC

resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer

of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was

established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived

from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC

taxable assets” include assets attributed to an establishment in China, immoveable properties in China, and

equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC

– 55 –


RISK FACTORS

establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and

therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise

income tax at a rate of 25.0%. Where the underlying transfer relates to the immoveable properties in China

or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC

establishment of a non-resident enterprise, a PRC enterprise income tax at 10.0% would apply, subject to

available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who

is obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the

implementation details of Bulletin 7. If Bulletin 7 was determined by the tax authorities to be applicable to

some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant

transactions might be required to spend valuable resources to comply with Bulletin 7 or to establish that the

relevant transactions should not be taxed under Bulletin 7.

On October 17, 2017, the SAT issued the Bulletin on Issues Concerning the Source-based

Withholding of Enterprise Income Tax on Non-resident Enterprises (“Bulletin 37”), which became effective

on December 1, 2017. According to Bulletin 37, non-resident enterprises who voluntarily declare their

enterprise income tax shall at the same time confirm when they would make payments for the declared

amount of tax. If the withholding agent fails to or is unable to withhold the income tax in accordance with

the law, the non-resident enterprise will be deemed to have cleared its tax payment on time if it voluntarily

declares and pays the tax before or within the time limit the tax authority orders it to do so. If the taxable

income before withholding on a source-basis falls within the form of dividends or any equity investment

gains, the date of triggering obligations to settle such tax payments is the date of actual payment of the

dividends or other equity investment gains. In addition, on December 1, 2017, Bulletin 37 repealed the

Notice of the SAT on Strengthening the Administration over Enterprise Income Tax on Income of

Non-resident Enterprises from Equity Transfer and Notice of the SAT on Issuing the Interim Measures for

the Administration of Source-based Withholding of the Enterprise Income Tax of Non-resident Enterprises

issued by the SAT on December 10, 2009 and January 1, 2009, respectively.

As a result, we and our non-PRC Shareholders may have the risk of being taxed for the disposition of

our Shares and may be required to spend valuable resources to comply with Bulletin 7 and Bulletin 37 or to

establish that we or our non-PRC Shareholders should not be taxed as an indirect transfer, which may have

a material adverse effect on our results of operations and financial condition or the investment by non-PRC

investors in us.

In addition, since we may pursue acquisitions as one of our growth strategies, and may conduct

acquisitions involving complex corporate structures, the PRC tax authorities may, at their discretion, adjust

the capital gains or request that we submit additional documentation for their review in connection with any

potential acquisitions, which may cause us to incur additional acquisition costs or delay our acquisition

timetable.

We may be deemed to be a PRC tax resident under the Enterprise Income Tax Law of the PRC, andas a result, our global income could be subject to PRC withholding tax and enterprise income tax.

We are a holding company incorporated under the laws of the Cayman Islands and hold interests in a

BVI-incorporated subsidiary, which in turn directly or indirectly hold interests in our PRC subsidiaries

through a Hong Kong-incorporated subsidiary. Pursuant to the Enterprise Income Tax Law of the PRC (the

“EIT Law”), effective in January 2008 and subsequently amended on February 24, 2017 and December 29,

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RISK FACTORS

2018, and its implementation rules, dividends payable by a foreign-invested enterprise to its foreign

corporate investors who are not deemed a PRC resident enterprise are subject to a 10.0% withholding tax,

unless such foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a

different withholding tax arrangement. Under an arrangement between China and Hong Kong, effective in

January 2007, such dividend withholding tax rate is reduced to 5.0% for dividends paid by a PRC company

to a Hong Kong-resident enterprise if such Hong Kong entity is a “beneficial owner” and such entity

directly owns at least 25.0% of the equity interest of the PRC company. The Notice of the SAT on How to

Comprehend and Determine the “Beneficial Owners” in Tax Treaties, effective in October 2009, provides

certain conditions under which a company cannot be defined as a “beneficial owner” under the treaty, and

further provides that an agent or “conduit company” (defined as a company registered in the country of

domicile to satisfy the organizational form as required by law, but it does not engage in such substantial

business operations as manufacturing, distribution and management) shall not be deemed a “beneficial

owner.” If the PRC tax authorities determine that our Hong Kong subsidiary is a “conduit company,” we

may not be able to enjoy a preferential withholding tax rate of 5.0% and dividend payable by our PRC

subsidiaries to our Hong Kong subsidiary will be subject to withholding tax at the rate of 10.0%.

The EIT Law and its implementation rules also provide that if an enterprise incorporated outside

China has its “de facto management bodies” within China, such enterprise may be deemed a “PRC resident

enterprise” for tax purposes and be subject to an enterprise income tax rate of 25.0% on its global incomes.

“De facto management body” is defined as the body that has the significant and overall management and

control over the business, personnel, accounts and properties of an enterprise. In April 2009, SAT

promulgated a circular, known as Circular 82, and partially amended by Circular 9 promulgated in January

2014, to clarify the certain criteria for the determination of the “de facto management bodies” for foreign

enterprises controlled by PRC enterprises or PRC enterprise groups. Under Circular 82, a foreign enterprise

is considered a PRC resident enterprise if all of the following apply: (1) the senior management and core

management departments in charge of daily operations are located mainly within China; (2) decisions

relating to the enterprise’s financial and human resource matters are made or subject to approval by

organizations or personnel in China; (3) the enterprise’s primary assets, accounting books and records,

company seals, and board and shareholders’ meeting minutes are located or maintained in China; and (4)

50.0% or more of voting board members or senior executives of the enterprise habitually reside in China.

Further to Circular 82, the SAT issued a bulletin, known as Bulletin 45, effective in September 2011 and

amended on June 1, 2015 and October 1, 2016 to provide more guidance on the implementation of Circular

82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore incorporated

resident enterprises.” Bulletin 45 provides for, among other matters, procedures for the determination of

resident status and administration of post-determination matters. Although Circular 82 and Bulletin 45

explicitly provide that the above standards apply to enterprises that are registered outside China and

controlled by PRC enterprises or PRC enterprise groups, Circular 82 may reflect SAT’s criteria for

determining the tax residence of foreign enterprises in general.

We believe that our Company shall not be classified as a PRC resident enterprise for PRC tax

purposes. However, an enterprise’s tax resident status is subject to determination by PRC tax authorities and

uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC

authorities were to subsequently determine, or any future regulation provides, that we should be treated as a

PRC resident enterprise, we will be subject to the uniform 25.0% enterprise income tax on our global

incomes. In addition, although the EIT Law provides that dividend payments between qualified

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RISK FACTORS

PRC-resident enterprises are exempt from enterprise income tax, it remains unclear as to the detailed

qualification requirements for this exemption and whether dividend payments by our PRC subsidiaries to us

will meet such qualification requirements even if we are considered a PRC resident enterprise for tax

purposes.

There remains significant uncertainty as to the interpretation and application of applicable PRC tax

laws and rules by the PRC tax authorities, and the PRC tax laws, rules and regulations may also change. If

there is any change to applicable tax laws and rules and interpretation or application with respect to such

laws and rules, the value of your investment in our shares may be materially affected.

You may be subject to PRC income tax on dividends from us or on any gain realized on the transferof our Shares.

Under the EIT Law and its implementation rules, subject to any applicable tax treaty or similar

arrangement between the PRC and your jurisdiction of residence that provides for a different income tax

arrangement, PRC withholding tax at the rate of 10.0% is normally applicable to dividends from PRC

sources payable to investors that are non-PRC resident enterprises, which do not have an establishment or

place of business in China, or which have such establishment or place of business if the relevant income is

not effectively connected with the establishment or place of business. Any gain realized on the transfer of

shares by such investors is subject to 10.0% PRC income tax if such gain is regarded as income derived

from sources within China unless a treaty or similar arrangement otherwise provides. Under the PRC

Individual Income Tax Law and its implementation rules, dividends from sources within China paid to

foreign individual investors who are not PRC residents are generally subject to a PRC withholding tax at a

rate of 20.0% and gains from PRC sources realized by such investors on the transfer of shares are generally

subject to 20.0% PRC income tax, in each case, subject to any reduction or exemption set forth in applicable

tax treaties and PRC laws.

As described in the preceding risk factor, there is a risk that we will be treated by the PRC tax

authorities as a PRC tax resident enterprise. In that case, any dividends we pay to our Shareholders may be

regarded as income derived from sources within China and we may be required to withhold a 10.0% PRC

withholding tax for the dividends we pay to our investors who are non-PRC corporate Shareholders, or a

20.0% withholding tax for the dividends we pay to our investors who are non-PRC individual Shareholders,

including the holders of our Shares. In addition, our non-PRC Shareholders may be subject to PRC tax on

gains realized on the sale or other disposition of our Shares, if such income is treated as sourced from within

China. It is unclear whether our non-PRC Shareholders would be able to claim the benefits of any tax

treaties between their tax residence and China in the event that we are considered as a PRC resident

enterprise. If PRC income tax is imposed on gains realized through the transfer of our Shares or on

dividends paid to our non-resident investors, the value of your investment in our Shares may be materially

and adversely affected. Furthermore, our Shareholders whose jurisdictions of residence have tax treaties or

arrangements with China may not qualify for benefits under such tax treaties or arrangements.

You may experience difficulties in effecting service of legal process and enforcing judgments againstus and our management.

We are incorporated in the Cayman Islands, and conduct all of our business operations in China. In

addition, all of our assets and substantially all of the assets of our Directors are located in China. Therefore,

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RISK FACTORS

it may not be possible for [REDACTED] to effect service of process upon us or those persons inside China.

China has not entered into treaties or arrangements providing for the recognition and enforcement of

judgments made by courts of most other jurisdictions. On July 14, 2006, the PRC Supreme Court and the

Hong Kong government signed the Arrangement on Reciprocal Recognition and Enforcement of Judgments

in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special

Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned. Under such

arrangement, where any designated people’s court of the PRC or any designated Hong Kong court has made

an enforceable final judgment requiring payment of money in a civil and commercial case pursuant to a

choice of court agreement in writing by the parties, any party concerned may apply to the relevant people’s

court of the PRC or Hong Kong court for recognition and enforcement of the judgment. The arrangement

came into effect on August 1, 2008, but the outcome and enforceability of any action brought under the

arrangement is still uncertain. In addition, China is not a party to any treaties providing for the reciprocal

recognition and enforcement of judgments of courts with the United States, the United Kingdom, most other

Western countries or Japan, and therefore enforcement in China of judgments of a court in any of these

jurisdictions may be difficult or impossible.

Inflation in China could negatively affect our profitability and growth.

Economic growth in China has, in the past, been accompanied by periods of high inflation, and the

PRC government has implemented various policies from time to time to control inflation, including

imposing various corrective measures designed to restrict the availability of credit or regulate growth. High

inflation in the future may cause the PRC government to once again impose controls on credit and/or price

of commodities, or to take other actions, which could inhibit economic activities in China. Any action on

the part of the PRC government that seeks to control credit and/or price of commodities may adversely

affect our business operations, causing negative impact on our profitability and growth.

RISKS RELATING TO THE [REDACTED]

There has been no prior public market for our Shares, and the liquidity and market price of ourShares following the [REDACTED] may be volatile.

Prior to the [REDACTED], there has been no public market for our Shares. The [REDACTED] for

our Shares was the result of negotiations among us and the [REDACTED] (for itself and on behalf of the

[REDACTED]) and the [REDACTED] may differ significantly from the market price for the Shares

following the [REDACTED]. We have applied to [REDACTED] and deal in the Shares on the Stock

Exchange. We cannot assure you that the [REDACTED] will result in the development of an active, liquid

public trading market for the Shares. In addition, the price and trading volumes of the Shares may be

volatile. The following factors may affect the trading volume and market price of our Shares:

• actual or anticipated fluctuations in our operating and financial results, such as turnovers,

earnings and cash flow;

• loss of top streamers;

• news regarding the recruitment or loss of key personnel by us or our competitors;

• announcement of competitive developments, acquisitions or strategic alliances in our industry;

– 59 –


RISK FACTORS

• changes in earnings estimate or recommendations by financial analysts;

• potential litigation or regulatory investigations;

• general market conditions or other developments affecting us or our industry;

• the operating and stock price performance of other companies, other industries and other events

or factors beyond our control; and

• the release of lock-up or other transfer restrictions on our outstanding Shares or sales or

perceived sales of additional Shares by us or other Shareholders.

Moreover, the securities market has from time to time experienced significant price and volume

fluctuations that were unrelated or not directly related to the operating performance of the underlying

companies. For example, the recent political unrest and the ongoing and occasionally violent protests

ensuing the Hong Kong Legislative Council’s proposed amendments to the Fugitive Offenders Ordinance

and the Mutual Legal Assistance in Criminal Matters Ordinance and the relevant developments have

apparently impacted market sentiment in the Hong Kong capital market. Hang Seng Indexes have

experienced significant fluctuations since July 2019. Such fluctuations, whether caused by market, industry

or political factors, may have a material and adverse effect on the market price and trading volume of our

Shares.

Since there will be a gap of several days between pricing and trading of our Shares, holders of ourShares are subject to the risk that the price of our Shares could fall during the period before tradingof our Shares begins.

The [REDACTED] of our Shares is expected to be determined on the [REDACTED] Date.

However, our Shares will not commence trading on the Stock Exchange until [REDACTED] Hong Kong

business days after the [REDACTED]. Accordingly, holders of our Shares are subject to the risk that the

price of our Shares could fall before trading begins as a result of adverse market conditions or other adverse

development which could occur between the time of sale and the time trading begins.

[REDACTED] will experience immediate dilution to their attributable net tangible book value as the[REDACTED] of our Shares is higher than our [REDACTED] book value per Share immediatelyprior to the [REDACTED].

The [REDACTED] of the Shares is higher than the [REDACTED] book value per Share

immediately prior to the [REDACTED]. Therefore, [REDACTED] of the Shares in the [REDACTED]will experience an immediate dilution in pro forma [REDACTED] book value, and our existing

Shareholders will receive an increase in the [REDACTED] per Share of their Shares. In addition, holders

of our Shares may experience further dilution of their interests if the [REDACTED] exercise the

[REDACTED] or if we obtain additional capital in the future through [REDACTED].

We have significant discretion as to how we will use the [REDACTED] of the [REDACTED], and youmay not necessarily agree with how we use them.

Our management may spend the [REDACTED] from the [REDACTED] in ways you may not agree

with or that do not yield a favorable return. For details of our intended [REDACTED], see “Future Plans

– 60 –


RISK FACTORS

and [REDACTED] However, our management will have discretion as to the actual application of our

[REDACTED]. You are entrusting your funds to our management, upon whose judgment you must

depend, for the specific use we will make of the [REDACTED] from this [REDACTED].

Any future sales, or perceived sale, of a substantial amount of our Shares in the public market couldhave a material adverse effect on the prevailing market price of our Shares and our ability to raisecapital in the future.

Future sales of a substantial amount of our Shares by our existing Shareholders, or the possibility of

such sales, could negatively impact the market price of our Shares from time to time. See [REDACTED]for a more detailed discussion of restrictions that may apply to future sales of our Shares. After these

restrictions lapse, the market price of our Shares may decline as a result of future sales of a substantial

amount of our Shares or other securities relating to our Shares in the public market, the issuance of new

Shares or other securities relating to our Shares, or the perceptions that such sales or issuances may occur.

This could negatively affect the market price of our Shares and our ability to raise equity capital in the

future.

We may not be able to pay any dividends on our Shares.

We cannot guarantee when and in what form dividends will be paid on our Shares following the

[REDACTED]. The declaration of dividends is proposed by the Board and is based on, and limited by,

various factors, including without limitation, our business and financial performance, capital and regulatory

requirements, and general business conditions. We may not have sufficient or any profits to enable us to

make dividend distributions to our Shareholders in the future, even if our financial statements indicate that

our operations have been profitable. For details, see “Financial Information — Dividends.”

Shareholders and [REDACTED] could face difficulties in protecting their interests because ourCompany was incorporated under the laws of the Cayman Islands and these laws could providedifferent protections to minority Shareholders than the laws of Hong Kong.

Our corporate affairs are governed by the Memorandum and the Articles and by the Cayman

Companies Law and common law of the Cayman Islands. The laws of the Cayman Islands relating to the

protection of the interests of minority shareholders could differ in some respects from those established

under statutes or judicial precedent in existence in Hong Kong. Such differences could mean that the

minority Shareholders could have different protections than they would have under the laws of Hong Kong.

If securities or industry analysts do not publish research reports about our business, or if theyadversely change their recommendations regarding our Shares, the market price and trading volumeof our Shares may decline.

The trading market of our Shares may be influenced by research reports that industry or securities

analysts publish about us or our business. If one or more analysts who cover us downgrade our Shares or

publish negative opinions about us, the market price of our Shares would likely decline regardless of the

accuracy of the information. If one or more of these analysts cease coverage of us or fail to regularly

publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the

market price or trading volume of our Shares to decline.

– 61 –


RISK FACTORS

There can be no assurance of the accuracy or completeness of certain facts, forecasts and otherstatistics obtained from official government publications, market data providers and otherindependent third-party sources, including the industry expert reports, contained in this document.

Certain facts, forecasts and other statistics in this document relating to various countries and regions

and the equity [REDACTED] industry are derived from various official government publications, market

data providers and other independent third-party sources, including the F&S report, which we generally

believe to be reliable. However, we cannot guarantee the quality or reliability of such source materials.

They have not been prepared or independently verified by us, [REDACTED] or any of their respective

affiliates or advisers and, therefore, we make no representation as to the accuracy of such facts and

statistics, which may not be consistent with other information compiled within or outside China.

We have, however, taken reasonable care in the reproduction or extraction of the official government

publications and reports of other market data providers and other independent third-party sources for the

purpose of disclosure in this document. Due to possibly flawed or ineffective collection methods or

discrepancies between published information and market practice, these facts and statistics in this document

may be inaccurate or may not be comparable to facts and statistics produced with respect to other

economies. Further, we cannot assure you that they are stated or compiled on the same basis or with the

same degree of accuracy as the case may be in other jurisdictions. In all cases, [REDACTED] should give

consideration as to how much weight or importance they should attach to or place on such facts and

statistics.

You should read the entire document carefully and should not rely on any information contained inpress articles or other media regarding us and the [REDACTED].

We strongly caution you not to rely on any information contained in press articles or other media

regarding us and the [REDACTED]. Prior to the publication of this document, there had been press and

media coverage regarding us and the [REDACTED]. Such press and media coverage may include

references to certain information that does not appear in this document, including certain operating and

financial information and projections, valuations and other information. We have not authorized the

disclosure of any such information in the press or media and do not accept any responsibility for any such

press or media coverage or the accuracy or completeness of any such information or publication. We make

no representation as to the appropriateness, accuracy, completeness or reliability of any such information or

publication. To the extent that any such information is inconsistent or conflicts with the information

contained in this document, we disclaim responsibility for it and you should not rely on such information.

– 62 –

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